SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED DECEMBER 31, 2002 COMMISSION FILE NUMBER 0-11688
AMERICAN ECOLOGY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-3889638
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
300 E. MALLARD, SUITE 300, BOISE, IDAHO 83706
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (208) 331-8400
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
At February 10, 2003, Registrant had outstanding 14,546,764 shares of its Common
Stock and the aggregate market value of the Registrant's voting stock held by
non-affiliates was approximately $25,448,000 based on the closing price of $3.00
per share. The aggregate market value of the Registrant's voting stock held by
non-affiliates on June 28, 2002 was approximately $48,748,000 based on the
closing price of $4.55 per share as reported on the NASDAQ Stock Market, Inc.'s
National Market System. For purposes of the foregoing calculation, all
directors and executive officers of the Registrant have been deemed to be
affiliates, but the Registrant disclaims that any of such directors or executive
officers is an affiliate.
Documents Incorporated by Reference
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be
held May 29, 2003. Part III
TABLE OF CONTENTS
Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . .
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . .
PART II
Item 5. Market for Registrants Common Equity and Related
Stockholders Matters . . . . . . . . . . . . . . . . . . . . . . .
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . .
Management's Discussion and Analysis of
Financial Condition and Results. . . . . . . . . . . . . . . . . .
Item 7. of Operation . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . .
Item 8. Financial Statements and Supplementary Data. . . . . . . . . . . .
Changes in and Disagreements with Accountants on Accounting and. .
Item 9. Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . .
PART III
Items 10, 11, 12 and 13 are incorporated by reference from the
definitive proxy statement . . . . . . . . . . . . . . . . . . . .
Item 14. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . .
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
2
DEFINITIIONS
TERM MEANING
---- -------
AEC or the Company. . . . . . American Ecology Corporation and its subsidiaries
CERCLA or "Superfund" . . . . Comprehensive Environmental Response,
Compensation and Liability Act of 1980
FUSRAP. . . . . . . . . . . . U.S. Army Corps of Engineers Formerly Utilized Site
Remedial Action Program
LLRW. . . . . . . . . . . . . Low-level radioactive waste processing.
NORM/NARM . . . . . . . . . . Naturally occuring and accelerator produced
radioactive material
NRC . . . . . . . . . . . . . U.S. Nuclear Regulatory Commission
PCBs. . . . . . . . . . . . . Polychlorinated biphenyls
RCRA. . . . . . . . . . . . . Resource Conservation and Recovery Act of 1976
SEC . . . . . . . . . . . . . Securities and Exchange Commission
TCEQ. . . . . . . . . . . . . Texas Commission on Environmental Quality
TSCA. . . . . . . . . . . . . Toxic Substance Control Act of 1976
USACE . . . . . . . . . . . . U.S. Army Corps of Engineers
US EPA. . . . . . . . . . . . U.S. Environmental Protection Agency
WUTC. . . . . . . . . . . . . Washington Utilities and Transportation Commission
3
PART I
ITEM 1. BUSINESS
The Company provides radioactive, hazardous and industrial waste management
services to commercial and government entities, such as nuclear power plants,
medical and academic institutions, steel mills and petro-chemical facilities.
Headquartered in Boise, Idaho, the Company is one of the nation's oldest
providers of radioactive and hazardous waste services. AEC and its predecessor
companies have been in business for more than 50 years. AEC operates nationally
and currently employs 199 people.
The Company's official website can be found at www.americanecology.com. Company
filings with the SEC are posted on the website subsequent to the official
filing.
AEC was most recently incorporated as a Delaware corporation in May 1987. The
Company's wholly owned subsidiaries are US Ecology, Inc., a California
corporation ("US Ecology"); Texas Ecologists, Inc., a Texas corporation wholly
owned by US Ecology ("Texas Ecologists"); American Ecology Recycle Center, Inc.,
a Delaware corporation ("AERC"); American Ecology Environmental Services
Corporation, a Texas corporation ("AEESC"); and US Ecology Idaho, Inc., a
Delaware corporation ("USEI") wholly owned by AEESC.
The Company operates within two business segments: Operating Disposal
Facilities and Non-Operating Disposal Facilities. These segments reflect AEC's
internal reporting structure and the nature of services offered by each. The
Operating Disposal Facilities are currently accepting hazardous and low-level
radioactive waste and include the Company's hazardous waste treatment and
disposal facilities in Beatty, Nevada; Grand View, Idaho; and Robstown, Texas;
and its LLRW and NORM/NARM disposal facility in Richland, Washington. The
Non-Operating Disposal Facilities segment includes non-operating disposal
facilities in Sheffield, Illinois; Beatty, Nevada; and Bruneau, Idaho; a closed
hazardous waste processing and deep-well injection facility in Winona, Texas;
and two proposed new disposal facilities. Income taxes are assigned to
Corporate, but all other items are included in the segment where they
originated. Inter-company transactions have been eliminated from the segment
information and are not significant between segments. See Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operation for
information concerning the revenues, income (loss) from operations and total
assets attributable to the Company's operating segments.
On December 27, 2002, the Company announced its LLRW Processing and Field
Services business was eliminated as an operating segment, at which time
employees were notified that processing operations had been discontinued. The
Company is marketing the Oak Ridge, Tennessee LLRW processing facility for sale
to qualified buyers. The Processing and Field Services operations have been
reported as discontinued operations. See DISCONTINUED OPERATIONS and Item 8.
Financial Statements and Supplemental Data, Note 19 for information concerning
discontinued operations.
In mid-2002 the Company entered into discussions regarding the potential sale of
the Company's El Centro solid waste landfill located in Robstown, Texas. On
February 13, 2003, the Company announced the sale of the El Centro municipal and
industrial waste landfill to a wholly-owned subsidiary of Allied Waste
Industries, Inc. ("Allied") for $10 million cash at closing and future
volume-based royalty payments. The El Centro landfill is located adjacent to
Company subsidiary Texas Ecologists' hazardous and industrial waste treatment
and disposal facility. Under the Agreement, Allied will pay American Ecology
minimum royalties of at least $215,000 annually. Once Allied has paid the
Company $14,000,000 it no longer has an obligation to pay annual minimum
royalties but will still be required to pay royalties based on waste volumes
received at El Centro. The Purchase Agreement also provides incentives for
Allied to bring certain industrial waste to the Texas Ecologists hazardous waste
facility, and for the Company to utilize the El Centro landfill. Opened in July
2000, the El Centro solid waste landfill was carried on the Company's books at
approximately $7 million prior to sale. When combined with reductions in
liabilities and the recognition of certain future minimum royalties, the sale
should result in a gain of approximately $5 million, which will be recognized
during the first quarter of 2003.
The following table summarizes each segment:
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SUBSIDIARY LOCATION SERVICES
- ---------- -------- --------
OPERATING DISPOSAL FACILITIES
-----------------------------
USEI Grand View, Idaho Hazardous, PCB and NRC-exempt radioactive and mixed
waste treatment and disposal, rail transfer station
Texas Ecologists Robstown, Texas Hazardous, non-hazardous industrial and NRC-exempt
radioactive and mixed waste treatment and disposal
US Ecology Beatty, Nevada Hazardous, Thermal, and PCB waste treatment and disposal
US Ecology Richland, Washington Low-Level Radioactive and NORM/NARM waste disposal
NON-OPERATING DISPOSAL FACILITIES
---------------------------------
US Ecology Beatty, Nevada Closed LLRW disposal facility: State of Nevada is licensee
US Ecology Sheffield, Illinois Closed LLRW disposal facility: State of Illinois is licensee
US Ecology Sheffield, Illinois Non-operating hazardous waste disposal facility: US
Ecology is permittee
AEESC Winona, Texas Non-operating hazardous waste treatment and deep well
facility: AEESC is permittee
USEI Bruneau, Idaho Closed hazardous waste disposal facility: US Ecology Idaho
is permittee
US Ecology Ward Valley, California Proposed LLRW disposal facility: in litigation
US Ecology Butte, Nebraska Proposed LLRW disposal facility: in litigation
DISCONTINUED OPERATIONS
-----------------------
AERC Oak Ridge, Tennessee Idle low-level radioactive waste volume reduction and
processing and related Field Services
Texas Ecologists Robstown, Texas Municipal and industrial solid waste sold February 13, 2003
OPERATING DISPOSAL FACILITIES
A significant portion of the Company's revenue from operating disposal
facilities is attributable to discrete, one-time clean-up projects ("Event
Business"). The project-specific nature of the Event Business necessarily
creates variability in revenue and earnings. This can produce large quarter to
quarter swings, depending on the relative contribution from single Event
Business projects. Management's strategy is to expand its recurring business
("Base Business"), while opportunistically and simultaneously securing both
large and small Event Business opportunities. Management believes that by
controlling and structuring its operating costs so that the Company's Base
Business covers fixed costs, an increased amount of the Event Business revenue
will fall through to the bottom line. This strategy takes advantage of the
inherently high fixed cost nature of waste disposal operations.
Grand View, Idaho Facility. Located on 1,760 acres of Company-owned land about
60 miles southeast of Boise, Idaho in the Owyhee Desert, this operation was
acquired in February 2001. During 2001, the new subsidiary's name was changed
from Envirosafe Services of Idaho to US Ecology Idaho. The acquired assets
included a rail transfer station located approximately 30 miles northeast of the
disposal site. As part of the acquisition, the Company also obtained rights to
a patented, U.S. Environmental Protection Agency ("US EPA") approved technology
to stabilize and delist certain steel mill hazardous wastes, allowing more
economical disposal as non-hazardous waste. The facility is also permitted to
accept certain naturally occurring and accelerator produced radioactive
material, source material, and certain mixed wastes from commercial and
government customers, including materials received under a contract with the
U.S. Army Corps of Engineers. The facility is regulated under a joint permit
issued by the Idaho
5
Department of Environmental Quality and the US EPA, and State law and
regulations governing NRC-exempt radioactive materials.
Robstown, Texas Facility. Texas Ecologists operates on 240 acres of land near
Robstown, Texas about 10 miles west of Corpus Christi. The facility, opened to
accept waste in 1973, is regulated under a permit issued by the Texas Commission
on Environmental Quality ("TCEQ") and has been in operation for 30 years. The
site is also subject to US EPA regulations and is permitted to accept certain
radioactive materials and mixed wastes pursuant to its TCEQ permit.
Beatty, Nevada Facility. US Ecology leases approximately 80 acres from the
State of Nevada on which operations are conducted. The Company's lease was
renewed for ten years in 1997. Opened to receive hazardous waste in 1970, the
site is located in the Amargosa Desert approximately 100 miles northwest of Las
Vegas, Nevada and 30 miles east of Death Valley, California. The facility is
regulated under permits issued by the Nevada Department of Conservation and
Natural Resources and the US EPA.
Richland, Washington Facility. In operation since 1965, this US Ecology
facility is located on 100 acres of leased land on the U.S. Department of Energy
Hanford Reservation approximately 35 miles west of Richland, Washington. The
lease between the State of Washington and the Federal government expires in
2061. The Company intends to renew its sublease with the State, which expires in
2005. The facility is licensed by the Washington Department of Health for
health and safety purposes, and is also regulated by the Washington Utilities
and Transportation Commission ("WUTC"), which sets disposal rates for low-level
radioactive wastes. Rates are set at an amount sufficient to cover the costs of
operations and provide the Company with a reasonable profit. A new rate
agreement was established in 2001 and expires January 1, 2008. The State also
assesses facility user fees for local economic development, State regulatory
agency expenses, and a dedicated trust account to pay for long-term care and
maintenance after the facility closes.
NORM/NARM Services: The US Ecology NORM/NARM Services group capabilities have
been expanded to offer additional site characterization, contamination studies,
decontamination, waste removal and off-site shipment services. These services
are similar to, but distinctly different from, services previously provided by
the Company's Oak Ridge Field Services group, which primarily involved LLRW
fixed facility processing at AERC's Oak Ridge facility. During 2003, Norm/Narm
Services employees will reposition the business to focus on remediation projects
involving wastes accepted at the Company's operating disposal facilities.
NON-OPERATING DISPOSAL FACILITIES
Beatty, Nevada Facility. Operated by the Company from 1962 to 1993, the Beatty
site was the nation's first commercial facility licensed to dispose of LLRW. In
1997, it became the first LLRW disposal facility to successfully complete
closure and post-closure stabilization and to transfer its license to the
government for long-term institutional control. Since that time, the Company
has performed maintenance and surveillance under a contract with the State of
Nevada, drawing on a State-controlled fund contributed during facility
operations.
Bruneau, Idaho Facility. This remote 88 acre desert site, acquired along with
the Grand View, Idaho disposal operation in February 2001, was closed under an
approved RCRA plan. Post closure monitoring will continue for approximately 25
years in accordance with permit and regulatory requirements.
Sheffield, Illinois Facility. The Company previously operated this LLRW disposal
facility on a 5-acre, State-owned site from 1968 to 1978. After performing
closure work under a 1988 Settlement Agreement with the State of Illinois, the
Company monitored and maintained the site until mid-2001, when the LLRW license
was transferred to the State. Like Beatty, the Company has a contract with the
State to perform long-term monitoring and maintenance.
Sheffield, Illinois Facility. The Company previously operated two hazardous
waste disposal facilities adjacent to the Sheffield LLRW disposal area. One
hazardous waste site was opened in 1974 and ceased accepting waste in 1983. The
second accepted hazardous waste from 1968 through 1974. In January 2003, the
Company renegotiated its corrective measures agreement, allowing the Company to
reduce its financial assurance requirement to $800,000. The Company continues
to perform remediation activities at the facility under regulation by the US
EPA.
6
Winona, Texas Facility. From 1980 to 1994, Gibraltar Chemical Resources
operated the Winona hazardous waste processing and deep well facility, at which
time AEC purchased the facility. Solvent recovery, deep well injection and
waste brokerage operations were conducted on an eight acre site until March
1997, when the Company ceased operations. The Company is proceeding with an
Agreed Order entered with the State of Texas for closure, including posting a
$1,300,000 financial assurance. State action is pending on a Closure
Certification Report submitted in 1999. The Company owns an additional 587 acres
contiguous to the permitted site. Efforts are underway to sell the excess
property.
Ward Valley, California Proposed Facility. In 1993, the Company received a
State of California license to construct and operate a LLRW disposal facility in
a remote, Mojave Desert location to serve the Southwestern LLRW Compact. The
license remains valid. The Company alleges the State of California has abandoned
its duty to acquire the project property from the U.S. Department of the
Interior. The Company filed suit against the State to recover monetary damages
in excess of $162 million. The matter is scheduled for trial in February 2003.
Additional discussion of this litigation is presented under Item 3. Legal
Proceedings of this Form 10-K.
Butte, Nebraska, Proposed Facility. The Company submitted an application to the
State of Nebraska to construct and operate this facility, developed under
contract to the Central Interstate LLRW Compact Commission ("CIC"). Following
proposed license denial by the State of Nebraska, the CIC, the Company and a
number of nuclear power utilities funding the project sued the State of Nebraska
alleging bad faith in the license review process. A federal court order was
issued enjoining the State license review process. On September 30, 2002, the
federal district court awarded plaintiffs $153 million in damages, including
approximately $12 million based on the Company's contributions to the project.
The State's appeal of this ruling is pending. Additional discussion of this
litigation is presented under Item 3. Legal Proceedings of this Form 10-K.
DISCONTINUED OPERATIONS
Oak Ridge, Tennessee Facility. AERC, acquired from Quadrex Corp. in 1994,
processed LLRW to reduce the volume of waste requiring disposal at licensed
radioactive waste facilities. On December 27, 2002, the Company announced the
cessation of LLRW services and operations. The plant, situated on 16 acres of
Company property in Oak Ridge, Tennessee, primarily served the commercial
nuclear power industry, but also accepted brokered waste from biomedical,
academic and non-utility industry customers. On October 18, 2002, the Company
announced its intent to actively market the facility and exit the LLRW
processing business. While a number of potential buyers were identified, no
acceptable offers were received to acquire the facility. After concluding it
would not be possible to sell the business as a going concern, management
discontinued AERC's commercial services. AERC's processing services had never
been successfully integrated with the Company's core disposal business, and
management was unable to identify a viable business strategy to reverse the
recurring losses that have occurred at the facility since its acquisition in
1994. The discontinuance of commercial operations resulted in the dismissal of
63 employees. Seventeen employees are presently engaged in removal of LLRW from
the facility, maintaining the facility's radioactive materials licenses and
preparing the facility for sale. It is expected that removal of waste will take
most of 2003, although staffing requirements will diminish over time. The
Company intends to maintain the facility's existing radioactive materials
operating licenses pending a possible sale.
Robstown, Texas Municipal Solid Waste Landfill. In July 2000, the Company began
operation of a municipal and industrial waste landfill on 160 acres of land
immediately adjacent to its hazardous waste facility. On February 13, 2003, the
Company announced the sale of the El Centro municipal and industrial waste
landfill to a subsidiary of Allied Waste Industries, Inc. ("Allied") for $10
million cash at closing and future volume-based royalty payments. The El Centro
landfill is located adjacent to Company subsidiary Texas Ecologists' hazardous
and industrial waste treatment and disposal facility. Under the Agreement,
Allied will pay American Ecology minimum royalties of at least $215,000
annually. Once Allied has paid the Company $14,000,000 it no longer has an
obligation to pay annual minimum royalties, but will still be required to pay
royalties based on waste volumes received at El Centro. The Purchase Agreement
also provides incentives for Allied to bring certain industrial waste to the
Texas Ecologists hazardous waste facility, and for the Company to utilize the El
Centro landfill. Opened in July 2000, the El Centro solid waste landfill was
carried on the Company's books at approximately $7 million prior to sale and,
when combined with reductions in liabilities and the recognition of certain
future minimum royalties, should result in a gain on sale of approximately $5
million, which will be recognized during the first quarter of 2003.
7
INDUSTRY
In 2002, the hazardous waste industry trend of reduced waste volumes and
consolidation and restructuring underway since the mid-1990s continued. This
maturation period followed rapid expansion in the 1970s and 1980s driven by new
environmental laws and actions by federal and state agencies to regulate
existing hazardous waste management facilities and to direct the clean up of
contaminated sites under the federal Superfund law.
By the early 1990s, excess hazardous waste management capacity had been
constructed and permitted by the waste services industry. At the same time, to
better manage risk and reduce expenses, many waste generators also instituted
industrial process changes and other methods to minimize their waste production.
The volume of waste shipped for disposal from Superfund and other properties
also diminished as the many contaminated sites were cleaned up. Improved waste
management by generators coupled with excess commercial disposal capacity and a
maturing federal Superfund program created highly competitive market conditions
that still apply today.
Management believes that the hazardous waste business will continue to
consolidate, but that a baseline demand for services will remain. Management
further believes that the ability to deliver specialized services, while
aggressively competing for non-specialized, commodity business, will set apart
successful from unsuccessful companies going forward. The Company's 2001
acquisition of Envirosafe Services of Idaho and its patented hazardous steel
mill waste treatment technology, the expanded handling capabilities for certain
radioactive and mixed waste materials at its Idaho and Texas hazardous waste
facilities, and the installation of patented thermal treatment units at its
Beatty, Nevada hazardous waste facility reflect successful initiatives by the
Company to increase market share profitability under present market conditions.
The commercial LLRW business is also experiencing significant change. This is
primarily due to the failure of the LLRW Policy Act of 1980 ("Policy Act") and
interstate Compacts encouraged by the Policy Act to provide any new disposal
sites and a series of market responses to that failure. The Company's efforts to
site new disposal facilities in Ward Valley, California and Butte, Nebraska have
been delayed by litigation. Management believes that both of these proposed
facilities are safe and environmentally sound, and that the States of California
and Nebraska have abandoned their duties under existing law. Management
believes the Company is entitled to substantial compensation for its past
investments in these statutorily-required site development processes. See Item
3. Legal Proceedings of this Form 10-K.
The Company's Richland, Washington disposal facility, serving the Northwest and
Rocky Mountain Compacts, is one of only two operating Compact disposal
facilities in the nation. Both were in full operation for many years before
passage of the LLRW Policy Act. While the Richland site has substantial unused
capacity, it can only accept LLRW from the eleven western states comprising the
two Compacts served. The Barnwell, South Carolina site, owned by a competitor,
is located in the Atlantic Compact. The Barnwell site is open to the entire
nation but has limited remaining service capacity (in terms of space and years
of availability) and imposes much higher state fees.
Restricted access to the Company's Richland, Washington facility, Barnwell's
limited capacity and high state fees and the failure of the Compacts to
establish new disposal facilities created a market opportunity for a privately
held Utah disposal company. The Utah facility is licensed to accept a
substantial subset of the LLRW, which Congress assigned as a state
responsibility under the Policy Act. Increased disposal prices also induced a
number of businesses to offer LLRW processing and volume reduction services. The
Company purchased its Oak Ridge facility in 1994 to participate in this market,
along with other new market entrants. The LLRW volume reduction business has
experienced heavy price competition and a number of companies have ceased
operations and/or declared bankruptcy. This heavy competition and the Oak Ridge
facility's reliance on disposal facilities operated by competitors to ship
processed waste produced substantial losses leading to the Company's decision to
discontinue commercial LLRW processing operations in December 2002.
The significant increase in radioactive waste disposal prices has also
encouraged a search for more cost-effective disposal methods for soil, debris,
consumer products, industrial wastes and other materials containing very low
concentrations of radioactive contamination, and mixed wastes exhibiting both
hazardous and radioactive properties. Management believes the expanded use of
permitted hazardous waste disposal facilities to dispose of such these materials
is a safe, environmentally sound market response. The Company's Grand View,
Idaho facility has
8
significantly increased waste volume throughput in both 2001 and 2002 based in
large part on this growing demand. The Company's Texas Ecologists disposal
facility is positioned to serve a more limited portion of this demand.
PERMITS, LICENSES AND REGULATORY REQUIREMENTS
The Company's hazardous, industrial, non-hazardous, and radioactive materials
business is subject to extensive environmental, health, safety, and
transportation laws, regulations, permits and licenses. These requirements are
administered by federal, state and local agencies. The responsible agencies
regularly inspect the Company's operations to monitor compliance. They have
authority to enforce compliance through the suspension of operating licenses and
permits and the imposition of civil or criminal penalties in case of violations.
This body of law and regulations contribute to the demand for Company services
and represent a significant obstacle to new market entrants.
RCRA provides a comprehensive framework for regulating hazardous waste handling,
transportation, treatment, storage, and disposal. RCRA regulation and permitting
is the responsibility of the US EPA and state agencies delegated such authority.
Listed chemical compounds and residues derived from listed industrial processes
are subject to RCRA standards unless they are delisted through a formal
rulemaking process such as the patented steel mill treatment employed at the
Company's Grand View, Idaho facility. RCRA liability may be imposed for improper
waste management or for failure to take corrective action to address releases of
hazardous substances. To the extent waste can be recycled or beneficially
reused, regulatory controls under RCRA diminish.
CERCLA and its amendments ("Superfund") impose strict, joint and several
liability on owners or operators of facilities where a release of hazardous
substances has occurred, on parties who generated hazardous substances released
at such facilities, and on parties who arranged for the transportation of
hazardous substances. Liability under Superfund may be imposed if releases of
hazardous substances occur at treatment, storage, or disposal sites used or
operated by the Company. Since customers of the Company face the same
liabilities, Superfund incentivizes potential Company customers to minimize the
number of commercial disposal sites utilized and to manage their own wastes when
feasible. Commercial disposal facilities require authorization from the US EPA
to receive Superfund clean-up wastes. The Company's three hazardous waste
disposal facilities each have this authorization.
TSCA establishes a comprehensive regulatory program for treatment, storage and
disposal of PCBs. Regulation and licensing of PCB wastes is the responsibility
of the US EPA. The Company's Grand View, Idaho and Beatty, Nevada disposal
facilities have TSCA permits.
The Atomic Energy Act of 1954 ("AEA") and the Energy Reorganization Act of 1974
assign the NRC regulatory authority for the receipt, possession, use and
transfer of specified radioactive materials including disposal. The NRC has
adopted regulations for licensing commercial LLRW processing and disposal sites,
and may delegate regulatory and licensing authority to individual states. The
U.S. Department of Transportation regulates the transport of radioactive
materials. Shippers and carriers of radioactive materials must comply with both
the general requirements for hazardous materials transportation and with
specific requirements for radioactive materials.
The AEA does not authorize the NRC to regulate NORM/NARM; however, individual
states may assume regulatory jurisdiction. Many states, including Idaho and
Texas, where the Company operates facilities, have chosen to do so.
The process of applying for and obtaining licenses and permits to construct and
operate a radioactive, hazardous or industrial waste facility is lengthy and
complex. Management believes it has significant knowledge and expertise
regarding environmental laws and regulations. The Company also believes it
possesses all permits, licenses and regulatory approvals currently required to
maintain regulatory compliance and safely operate its facilities, and has the
specialized expertise required to secure additional approvals to grow its
business in the future.
9
INSURANCE, FINANCIAL ASSURANCE AND RISK MANAGEMENT
The Company carries a broad range of insurance coverage, including general
liability, automobile liability, real and personal property, workers'
compensation, directors' and officers' liability, environmental impairment
liability, and other coverage customary to the industry. Except as discussed in
Item 3. "Legal Proceedings" section of this report, the Company does not expect
the impact of any known casualty, property, environmental insurance or other
contingency to be material to its financial condition, results of operations or
cash flows.
Existing regulations require financial assurance to cover the cost of final
closure and/or post-closure obligations at the Company's processing and disposal
facilities. Acceptable forms of financial assurance include escrow-type
accounts funded by revenue during the operational life of a facility, letters of
credit from third parties, surety bonds, and traditional insurance. States may
also require facilities to fund escrow type or trust accounts during the
operating life of the facility.
Through December 31, 2002, the Company had not experienced significant
difficulty obtaining insurance. However, the Company's insurer for its closure
and post-closure financial assurance obligations has notified the Company to
expect significantly increased premiums and collateral requirements at renewal
of its current financial assurance policies on September 27, 2003. Although the
Company expects to renew these insurance policies, if the Company were unable to
obtain adequate closure, post-closure or environmental insurance in the future,
any partially or completely uninsured claim against the Company, if successful
and of sufficient magnitude, could have a material adverse effect on the
Company's financial condition, results of operations and cash flows.
Additionally, continued access to casualty and pollution legal liability
insurance with sufficient limits, at acceptable terms, is important to obtaining
new business and revenue-producing waste service contracts. Failure to maintain
adequate financial assurance could also result in regulatory action being taken
against the Company that could include the unplanned closing of certain
facilities.
As of December 31, 2002, the Company provided letters of credit of $1,150,000 as
collateral for insurance policies of approximately $50,231,000 for performance
of facility final closure and post-closure requirements. Management believes
the Company will be able to maintain the requisite financial assurance policies,
though at an increased cost. Management believes that increased premiums and
cash collateral requirements to meet financial assurance obligations could
create a significant impediment to new market entrants. These conditions also
present an added challenge for financially struggling competitors. While the
Company has not experienced difficulty in obtaining financial assurance for its
current operations, the cost of maintaining surety bonds, letters of credit and
insurance policies in sufficient amounts will be more expensive in the future
than in the recent past.
Primary casualty insurance programs do not generally cover accidental
environmental contamination losses. To provide insurance protection for such
environmental claims, the Company maintains environmental impairment liability
insurance and professional environmental consultants liability insurance for
non-nuclear occurrences. For nuclear liability coverage, the Company maintains
so-called Facility Form nuclear liability insurance provided under the federal
Price Anderson Act. This insurance covers the operations of its facilities,
suppliers and transporters. The Company has also purchased primary property,
casualty and excess liability policies through traditional third party
insurance.
CUSTOMERS
The Company manages the disposal of CERCLA and other environmental remediation
waste under a contract with the U.S. Army Corps of Engineers Formerly Utilized
Site Remedial Action Program ("FUSRAP"), and the disposal of steel mill air
pollution control dust (KO61) under various contracts. The following customers
accounted for more than 10% of the Company's revenue during 2002, 2001 and 2000:
% OF REVENUE FOR YEAR ENDING
CUSTOMER 2002 2001 2000
---- ---- ----
U.S. Army Corps of Engineers 27 15 -
Nucor Steel Company 13 11 -
Tamco Steel Company - - 20
10
MARKETS
Disposal Services. The hazardous waste treatment and disposal business is
generally highly competitive and sensitive to transportation costs. Specialized
niche service offerings are less sensitive to these factors. Wastes transported
by rail is less expensive, on a per mile basis, than wastes transported by
truck.
The Company's Robstown, Texas hazardous waste facility is geographically well
positioned to serve petro-chemical plants and other industries concentrated
along the Texas Gulf coast. The facility is also permitted to accept limited
concentrations of certain NRC-exempt radioactive materials and mixed wastes, and
can compete over a much larger area for these wastes.
The Company's Beatty, Nevada facility primarily competes for business in the
California, Arizona and Nevada markets. Due to the site's superior geologic and
climate conditions in the Amargosa Desert, the Nevada facility can compete for
wastes shipped from more distant locations. The Nevada facility also competes
over a broader geographic area for PCB waste due to the more limited number of
TSCA disposal facilities nationwide. The Beatty facility also offers thermal
treatment services to customers in its western service region.
The Company's Grand View, Idaho facility accepts wastes from across the United
States and operates a Company-owned rail transfer station located adjacent to a
main east-west rail line, generally allowing much lower cost transportation than
by truck. The Idaho facility's two primary markets are for steel mill air
pollution control dust, and NRC-exempt radioactive materials and mixed wastes in
concentrations specified by permit. Substantial waste volumes are received under
a five-year, renewable contract with the U.S. Army Corps of Engineers that is
also utilized by other federal agencies. Recent permit modifications have
expanded disposal capabilities at the Idaho facility. In late 2002, the site's
rail transfer station throughput capabilities were more than doubled by the
addition of 3,000 feet of track and another switch on Company property.
Waste stabilization, encapsulation, chemical oxidation and other treatment
technologies are available at the Company's Idaho, Nevada and Texas facilities
to meet US EPA land disposal restrictions. This capability allows all three
sites to manage a significantly broader spectrum of wastes than if pre-disposal
treatment was not offered.
The Richland, Washington disposal facility serves LLRW producers in the eight
States that are members of the Northwest Compact. The three Rocky Mountain
Compact States are also eligible to use the facility subject to annual volume
limits. Since US Ecology is a monopoly LLRW service provider, the State of
Washington approves the facility's LLRW disposal rates. The site competes for
NORM/NARM from customers across the country. These NORM/NARM rates are not
regulated, since a monopoly does not exist.
COMPETITION
The Company competes with large and small companies in each of the markets in
which it operates. The radioactive, hazardous and non-hazardous industrial waste
management industry is highly competitive. Management believes that its
principal disposal competitors are Chemical Waste Management, The EQ Company,
Heritage, Clean Harbors, Envirocare of Utah, and Waste Control Specialists.
Management believes that the principal competitive factors applicable to its
radioactive and hazardous waste management business are:
- - Price
- - Specialized "niche" service offerings
- - Customer service reputation
- - Five decades of experience and technical proficiency
- - Compliance and positive working relations with regulatory agencies
- - Brand name recognition
Management believes the Company is competitive based on these factors. The
Company further believes that it offers a nationally unique mix of services,
including specialized "niche" services, which distinguish it from
11
competitors. The Company's understanding of the industry, strong "brand" name
recognition from 50 years of industry experience in the business, excellent
compliance record and customer service reputation, and long established
relationships with customers, regulators, and the local communities bolster
these advantages.
While the Company is competitive, advantages exist for certain competitors with
technology, permits, and equipment enabling them to accept additional wastes
streams, who have greater resources, who are sited in jurisdictions that impose
lower disposal taxes, or are sited closer to waste generating customers.
PERSONNEL
Since October, 2001, a new executive management team has implemented fundamental
changes to the Company's organizational structure and management, including a
large reduction in force following a December 2002 decision to exit the LLRW
processing business.
On February 4, 2002, the Company's Board of Directors appointed Michael J.
Gilberg as Vice President and Controller.
On March 15, 2002, the Company's Board of Directors appointed Stephen A. Romano
as Chief Executive Officer in addition to his duties as President and Chief
Operating Officer.
On December 27, 2002, the Company notified the majority of its workforce in Oak
Ridge, Tennessee of the Company's intent to discontinue operations and terminate
their employment effective January 1, 2003. Severance was paid, consistent with
Company policy, to non-union employees. Severance was not specified in the
collective bargaining agreement previously entered into with the Paper,
Allied-Industrial, Chemical and Energy Workers International Union AFL-CIO-CLC
("PACE" or the "Union"). The Company has met on two occasions with the Union to
negotiate severance; however, no agreement has been reached, despite the
Company's best efforts to reach a mutually acceptable separation package. On
February 3, 2003 the Company extended another severance package to Union
employees, which was not accepted. The declined offer would have resulted in a
charge of approximately $168,000 in 2003 to discontinued operations. If the
former Union employees and the Company do not reach a mutually agreeable
settlement, these employees or the Union may take legal action to secure greater
severance.
On February 10, 2003, the Company had 199 full time employees, of which 11 were
members of PACE at its Richland, Washington site.
12
ITEM 2. PROPERTIES
The Company believes that its property and equipment are well maintained, in
good operating condition, and suitable for the Company's current and projected
needs. Company headquarters are located in Boise, Idaho in leased office space.
AEC also leases sales and administrative offices in Washington and Kentucky. The
following table describes the principal properties and facilities owned or
leased by the Company.
CORPORATE FUNCTION ACREAGE OWN/LEASE
- --------- -------- ------- ---------
Boise, Idaho Corporate office 8,572 sq. ft. Lease
OPERATING DISPOSAL FACILITIES
- -----------------------------
Beatty, Nevada Treatment and disposal facility 80 acres Lease
Grand View, Idaho Treatment and disposal facility,
and approved expansion area 1,760 acres Own
Elmore County, Idaho Rail transfer station 110 acres Own
Robstown, Texas Treatment and disposal facility 240 acres Own
Richland, Washington Disposal facility 100 acres Lease
NON-OPERATING DISPOSAL FACILITIES
- ---------------------------------
Bruneau, Idaho Closed disposal facility 88 acres Own
Sheffield, Illinois Closed disposal facility 204 acres Own
Sheffield, Illinois Closed disposal facility 170 acres Own
Winona, Texas Non-operating treatment and deep
well facility 620 acres Own
DISCONTINUED OPERATIONS
- -----------------------
Oak Ridge, Tennessee Processing facility 16 acres Own
Robstown, Texas Municipal landfill 200 acres Own
The principal properties of the Company make up less than 10% of the total
assets. The properties utilized are sufficient and suitable for the Company's
needs.
13
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
ONGOING LITIGATION
- ------------------
MANCHAK V. US ECOLOGY, INC., U.S. DISTRICT COURT FOR THE DISTRICT OF NEVADA,
- ------------------------------
CIVIL ACTION NO. 96-494.
In March 1996, Frank Manchak, Jr. ("Plaintiff" or "Manchak") filed suit alleging
infringement of a sludge treatment patent to stabilize hazardous waste at the
Company's Beatty, Nevada hazardous waste disposal facility. Plaintiff seeks
unspecified damages for infringement, treble damages, interest, costs and
attorney fees. In August 2001, the trial court disqualified the Company's
original counsel based on failure to identify a conflict. The Company engaged
new counsel and obtained a fee disgorgement and settlement of $155,000 from the
previous counsel on July 3, 2002. On October 17, 2002, the US District Court for
the District of Nevada granted the Company's motion for summary judgment to
dismiss the suit. Manchak's motion for reconsideration was denied on January 8,
2003. Previous to the court's denial of reconsideration, Manchak filed an
appeal. The Company does not believe it infringed any Manchak patent, will
continue to vigorously defend the case, and has filed a claim to recover
attorney fees and costs.
ENTERGY ARKANSAS, INC., ET AL, CENTRAL INTERSTATE LOW-LEVEL RADIOACTIVE WASTE
- --------------------------------------------------------------------------------
COMMISSION AND US ECOLOGY, INC. ("PLAINTIFFS") V. STATE OF NEBRASKA, ET AL.,
- ------------------------------------------------------------------------------
CASE NO. 4:98CV3411, U.S. DISTRICT COURT, DISTRICT OF NEBRASKA
This action was brought in federal court in December of 1999 by electric
utilities that generate low-level radioactive waste ("LLRW") within the Central
Interstate Low-Level Radioactive Waste Compact (CIC). CIC member states are
Nebraska, Kansas, Oklahoma, Arkansas, and Louisiana. The action seeks
declaratory relief and damages for bad faith in the State of Nebraska's
processing and ultimate denial of US Ecology's application to site, develop and
operate a LLRW disposal facility near Butte, Nebraska. US Ecology is the CIC's
contractor and developer. The CIC was originally named as a defendant and
subsequently realigned as a plaintiff. US Ecology intervened as a plaintiff.
The CIC sought to recover contributions made by the utilities and US Ecology to
the CIC for pre-licensing project costs in the approximate amounts of $95
million and $6.2 million, respectively, and removal of the State of Nebraska
from the licensing process. The Eighth Circuit Court of Appeals subsequently
dismissed the utilities' and US Ecology's independent claims against Nebraska
for breach of the good faith provision of the Compact, and for denial of due
process based on sovereign immunity. The utilities and US Ecology subsequently
filed cross claims against the CIC for breach of contract and the imposition of
a constructive trust.
In June 2002, a 42 day bench trial began. On September 30, 2002, the US District
Court for the District of Nebraska entered judgment against Nebraska in favor of
the CIC for $153 million, including approximately $50 million for prejudgment
interest. Of this amount, US Ecology's share was for a $6.2 million
contribution and $6.1 for prejudgment interest. The Court also dismissed the
utilities' and US Ecology's cross claims for breach of contract and imposition
of a constructive trust, finding that it was premature to decide the merits of
these claims and leaving the question open for future resolution if necessary.
The State appealed the judgment to the Eighth Circuit Court of Appeals. It is
expected that the case will be argued in the fall of 2003 with a decision around
the end of 2003. Among the issues raised by the State on appeal are the trial
court's failure to grant the State a jury trial and its failure to dismiss the
CIC's claim on sovereign immunity grounds. If the Eighth Circuit affirms the
trial court's decision, Nebraska may seek review by the US Supreme Court.
Management believes the Company is entitled to any money that the CIC recovers
based on US Ecology contributions. No assurance can be given that the trial
court's decision will be affirmed on appeal or that US Ecology will recover its
contributions or interest thereon.
US ECOLOGY, INC. V. THE STATE OF CALIFORNIA, ET AL., CASE NO.GIC747562, SUPERIOR
- ---------------------------------------------------
COURT OF THE STATE OF CALIFORNIA FOR THE COUNTY OF SAN DIEGO
In May 2000, the Company's subsidiary, US Ecology, Inc., sued the State of
California, its Governor, Gray Davis, and the Director of its Department of
Health Services (DHS) and other State agencies ("the State") for monetary
damages exceeding $162 million. The suit stems from the State's abandonment of
the Ward Valley low-level radioactive waste ("LLRW") disposal project. Laws on
the books since the 1980s require the state to build a disposal site for LLRW
produced in California, Arizona, North Dakota and South Dakota; member states of
the Southwestern Compact. In keeping with these laws, US Ecology was selected
in 1985 to locate and license the site using its own funds on a reimbursable
basis. In 1993, US Ecology obtained a license from the DHS that it continues to
14
hold and entered a ground lease.
The State successfully defended the license against court challenges and, until
Governor Davis took office, actively pursued conveyance of the site from the
federal government as required by law and its contractual obligations to US
Ecology. In September 2000, the Superior Court granted California's motion to
dismiss all causes of action. The Company appealed this decision to the
California Court of Appeal Fourth Appellate District in November 2000. In
September 2001, the Appellate Court upheld the trial court's decision in part
and denied it in part, remanding the case for trial based on the Company's
promissory estoppel claim. In December 2001, the California Supreme Court denied
review. Counsel for the Company filed a peremptory writ seeking appointment of a
new trial court judge to hear the case, which was granted. On November 20, 2002,
the Superior Court denied the State's motions for summary judgment as well as a
protective order seeking to prevent production of certain documents and
deposition of persons most knowledgeable in the Governor's staff. A settlement
conference was held without result on December 9, 2002. Discovery is complete
and the trial is scheduled to begin on February 24, 2003. The Company intends to
continue prosecuting this claim vigorously; however, no assurance can be given
that the Company will recover any damages.
MATTIE CUBA, ET AL. V. AMERICAN ECOLOGY ENVIRONMENTAL SERVICES CORPORATION, ET
- --------------------------------------------------------------------------------
AL.,CAUSE NO. 2000-092, 4TH JUDICIAL DISTRICT COURT, RUSK COUNTY, TEXAS
- ---
This suit was brought in November 2000 by 28 named plaintiffs against the
Company and named subsidiaries, the former owners and approximately 60 former
customers of its Winona, Texas facility. Plaintiffs seek recovery for personal
injuries, property damages and exemplary damages based on negligence, gross
negligence, nuisance and trespass. The Company filed a motion for summary
judgment in July 2002 based on lack of evidence. On November 27, 2002, the trial
court granted partial summary judgment, dismissing certain causes of action and
reducing the number of plaintiffs, but preserving other causes of action.
Counsel for the Company subsequently filed a motion for summary judgment seeking
dismissal against all of the adult plaintiffs on statute of limitations grounds.
At a February 6, 2003 hearing, the court took the motion under advisement. If
the Company's motion is granted, six plaintiffs will remain. The Company
believes plaintiffs' remaining case is without merit and will continue to
vigorously defend the matter. No assurance can be given that the Company will
prevail or that the matter can be favorably resolved. The Company's current
insurance carrier is paying for defense of this matter, subject to the Company's
$250,000 deductible which has been fully accrued.
RESOLVED LITIGATION
- --------------------
DAVID DUPUY AND RICHARD HAMMOND V. AMERICAN ECOLOGY ENVIRONMENTAL SERVICES
- --------------------------------------------------------------------------------
CORPORATION, ET AL., CAUSE NO. 98-1304-C, 241ST JUDICIAL DISTRICT COURT, SMITH
- ---------------------
COUNTY, TEXAS
Plaintiffs sought unspecified damages, alleging personal injury as the result of
negligence by the Company for failure to warn and protect plaintiffs from
alleged hazardous conditions while plaintiffs were performing work at the
Winona, Texas facility. The Company's insurance carrier assumed defense costs
subject to the Company's $250,000 deductible. In June 2000, the Company's
attorneys filed a motion for costs due to lack of diligence by plaintiffs'
attorneys in pursuing the case. The court awarded costs in accordance with the
motion and plaintiffs paid $4,000. On January 31, 2001, the court granted the
Company's summary judgment motion and dismissed the case with prejudice. In May
of 2002, this dismissal ruling was sustained on appeal. This matter is now fully
resolved.
FEDERAL RCRA INVESTIGATION AT THE AMERICAN ECOLOGY RECYCLE CENTER, INC. OAK
- --------------------------------------------------------------------------------
RIDGE, TENNESSEE FACILITY
- ---------------------------
In September 1999, investigators associated with the FBI, US EPA and the
Tennessee Valley Authority initiated an investigation and obtained records at
the Company's Oak Ridge, Tennessee subsidiary under a search warrant issued by
the U.S. District Court, Eastern District of Tennessee. In October 2001, the
Company responded to a subpoena for additional records through September 2001.
On August 8, 2002, counsel for the Company's wholly-owned subsidiary, American
Ecology Recycle Center, Inc., entered a guilty plea in US District Court for the
Eastern District of Tennessee to a single felony count of storing hazardous
waste without the necessary permit at AERC from 1997 to 2000, and paid a $10,000
fine. The plea agreement recognized the subsidiary's voluntary contributions of
15
$12,500 to the Tennessee Wildlife Resources Agency and $12,500 to the Tennessee
Valley Authority Police to support environmental training and enforcement. The
matter is now fully resolved.
ZURICH AMERICAN INSURANCE COMPANY V. NATIONAL UNION FIRE INSURANCE COMPANY OF
- --------------------------------------------------------------------------------
PITTSBURGH, ET AL INCL. AEC, AEESC, AEMC AND AESC; SUPREME COURT OF STATE OF NEW
- -------------------------------------------------
YORK, COUNTY OF NEW YORK; CASE NO. 604662/99
In October 1999, plaintiff Zurich American Insurance Co. (Zurich) filed suit
seeking declaratory and other relief against National Union Fire Insurance
Company of Pittsburgh (National Union), the Company and subsidiaries AEESC, AESC
and AEMC (AEC Defendants) and Doe Insurers 1-50 relating to Zurich's defense
coverage in the Virgie Adams matter. In October 2001, the Company received a
payment of $250,000 from Zurich finalizing settlement of Zurich's claims. By
this settlement, the Company relinquished future rights to seek defense and
indemnity from Zurich for the following Adams, Cuba, Dupuy, and GM matters. The
----- ---- ----- --
Company also agreed to assume defense costs as of April 2001. Settlement with
the Mobley entities was reached on February 12, 2002, resolving the matter with
Zurich and National Union. On March 15, 2002, the Company received $250,000 from
the Mobley Entities based on dismissal of all claims by the Company against
National Union and Mobley, and vice versa. This matter is now fully resolved.
GENERAL MOTORS CORPORATION V. AMERICAN ECOLOGY ENVIRONMENTAL SERVICES CORP., ET
- --------------------------------------------------------------------------------
AL., CASE NO. 3-99CV2626-L, U.S. DISTRICT COURT, NORTHERN DISTRICT OF TEXAS.
- ---
General Motors ("GM") filed suit naming the Company, its subsidiaries, the
former owner of the Winona Facility and its associated business entities seeking
contribution and indemnity, including reimbursement of defense costs and
attorneys' fees, incurred by GM in the Virgie Adams matter and this case. The
claims, based on a waste disposal contract between GM and the Winona Facility
from 1989 to 1997, were brought on breach of contract, contribution, and common
law indemnity grounds. Claims included a demand for reimbursement of a
$1,500,000 third party settlement paid by GM plus legal fees. In August 2001,
the Court found that the Company owed GM a defense and indemnity under GM's
contract with the Winona Facility's former owner. After settling with the Mobley
entities, GM made a settlement demand to the Company for $1,400,000 based in
part on GM's receipt of $960,000 from the Mobley entities. Without admitting
fault or wrongdoing, the Company paid GM $1,040,000 on May 16, 2002 of which
$740,000 had not been previously accrued. This matter is now fully resolved.
U.S. ECOLOGY CORPORATION [SIC] AND OIL, CHEMICAL & ATOMIC WORKERS INTERNATIONAL
- --------------------------------------------------------------------------------
UNION, AFL-CIO, CASES 10-CA-30847 AND 10-CA-31149
- ---------------
This matter, filed by Oil, Chemical & Atomic Workers International Union,
AFL-CIO (the "Union") in March 1998 and amended in May 1998, alleged unfair
labor practices. In May 1999, an administrative law judge ("ALJ") ruled against
the Company. In May 2000, the National Labor Relations Board (NLRB) affirmed
this decision. The Company appealed to the US Sixth Circuit Court of Appeals in
May 2000. The Court of Appeals affirmed the NLRB ruling in December 2001. In
June 2002, the Company reached settlement with the Union for $1,027,000 for back
wages and benefits of which $156,000 had not been previously accrued. This
matter is now fully resolved.
US ECOLOGY, INC. V. DAMES & MOORE, INC., CASE NO. CV OC 0101396D, FOURTH
- -----------------------------------------------------
JUDICIAL DISTRICT COURT, ADA COUNTY, IDAHO
DAMES & MOORE, INC. V. US ECOLOGY, INC., ET AL.,INDEX NO. 602567-01, SUPREME
- ----------------------------------------------------
COURT OF NEW YORK, NEW YORK COUNTY, NEW YORK
These two cases relate to a project for work performed in 2000-01 and the
failure to be paid under a subcontract to Dames & Moore, a wholly-owned
subsidiary of URS Corporation and prime contractor to Brookhaven Science
Associates, LLC. The project involved removal, decontamination and disposal of
above-ground cement ducts at Brookhaven National Laboratory ("BNL") in Upton,
New York. In February 2001, subsidiary US Ecology filed a breach of contract
suit in Idaho state court seeking (1) damages and reformation of the contract
between US Ecology and Dames & Moore; (2) indemnification from Dames & Moore for
negligence; and (3) a declaratory judgment declaring the "pay-if-paid" clause in
the contract void and unenforceable. Dames & Moore filed a motion to dismiss the
16
Idaho action, and a counter claim in New York state trial court. The New York
action alleged, among other things, negligence by US Ecology and certain crane
companies providing services at the job site.
On May 3, 2002, the Company entered into a Settlement Agreement with Dames &
Moore, Inc.\URS and received cash of $700,000. On March 20, 2002, BNL entered an
agreement to pay the Company $86,000. The Idaho suit has been dismissed. Dames
& Moore has been requested to dismiss the New York case based on the terms of
the Settlement Agreement. If this is not forthcoming, a dismissal motion will
be filed.
INTERNAL REVENUE SERVICE DISPUTE
- -----------------------------------
In 1996, the Company filed an amended federal income tax return claiming a
refund of approximately $740,000. In September 1999, the Internal Revenue
Service ("IRS") proposed to deny this claim, sought to recover portions of
tentative refunds previously received by the Company and proposed to reduce
Company net operating loss carry forwards. In November 1999, the Company
protested this denial. The Company tentatively settled this claim in 2000;
however, settlement was rejected by the Congressional Joint Committee on
Taxation pending US Supreme Court consideration of a germane issue. This issue
was later resolved in favor of the Company's position. On December 4, 2002, the
IRS approved a settlement to pay the Company $605,000 plus interest and
confirmed the Company's net operating loss carry forward after 1995. Payment is
pending.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's security holders during the fourth
quarter of 2002.
PART II
ITEM 5. MARKET FOR AMERICAN ECOLOGY CORPORATION COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
American Ecology Corporation common stock is currently listed on the NASDAQ
National Market System under the symbol ECOL. As of February 10, 2003, there
were approximately 639 record holders of common stock. The high and low sales
prices for the common stock on the NASDAQ and the dividends paid per common
share for each quarter in the last two years are shown below:
2002 2001 Dividends Per Share
---- ---- -------------------
PERIOD High Low High Low 2002 2001
----- ----- ----- ----- ----- -----
1st Quarter $1.98 $1.25 $3.00 $2.06 $ -- $ --
2nd Quarter 4.85 1.66 2.70 2.20 -- --
3rd Quarter 4.50 2.10 2.95 1.84 -- --
4th Quarter 3.23 2.31 2.25 1.50 -- --
In August of 2000, the Company established a credit facility with Wells Fargo
Bank. This credit facility currently provides the Company with $6.0 million of
borrowing capacity, but prohibits cash dividends on any of the Company's
outstanding capital stock while the credit facility is in place. The credit
facility matures on June 15, 2004.
On January 14, 2003, the Company extended an offer to the holders of the
Company's Series D Cumulative Convertible Preferred Stock to repurchase their
stock for the original sales price of $47.50 a share plus accrued but unpaid
dividends. The offer was subject to approval of the Company's Board of
Directors, Wells Fargo Bank, and requires a minimum of 67% of the Series D stock
to be tendered by the stockholders. All Series D stockholders have accepted the
offer granting the Company the right to repurchase their Series D. If the
Company does not repurchase the offered shares prior to July 31, 2003 the
Company's right to repurchase will expire.
17
ITEM 6 SELECTED FINANCIAL DATA
This summary should be read in conjunction with the consolidated financial
statements and related notes.
(Dollars in thousands, except per share amounts)
YEARS ENDED DECEMBER 31, 2002 2001 2000 1999 1998
- ------------------------ --------- -------- -------- -------- --------
Revenue $ 46,789 $40,175 $27,054 $20,830 $29,877
Income tax benefit from reversal of valuation allowance $ 8,284 $ -- $ -- $ -- $ --
Income from continuing operations $ 16,094 $ 2,991 $ 5,510 $ 4,301 $ 2,853
Cumulative effect of change in accounting principal $ 13,141 $ -- $ -- $ -- $ --
(Loss) from discontinued operations $(10,464) $(2,189) $ (813) $ 108 $(2,091)
Net Income $ 18,771 $ 802 $ 4,697 $ 4,409 $ 762
Preferred stock dividends accrued $ 398 $ 398 $ 398 $ 398 $ 398
Basic earnings per share from continuing operations $ 1.09 $ .19 $ .37 $ .29 $ .19
Shares used to compute income (loss) per share (000's) 14,311 13,738 13,711 13,585 12,772
Total assets $ 87,125 $86,824 $65,750 $58,459 $61,800
Long-term debt, net of current portion $ 8,344 $ 4,436 $10,775 $ 3,569 $ 2,223
Shareholders' equity $ 45,948 $26,416 $25,984 $21,582 $17,460
Current ratio (current assets divided by current liabilities) 1.47:1 0.65:1 1.17:1 0.9:1 0.7:1
Return on average equity (net income divided by average
equity) 51.9% 3.1% 19.7% 22.6% 4.9%
Dividends declared per common share $ -- $ -- $ -- $ -- $ --
Capital expenditures $ 2,737 $ 4,009 $ 3,267 $ 3,740 $ 2,128
Depletion, depreciation and amortization expense $ 6,604 $ 4,076 $ 1,899 $ 1,498 $ 2,565
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
- ---------------------------
This document contains forward-looking statements that involve known and unknown
risks and uncertainties which may cause actual results in future periods to
differ materially from those indicated herein. These risks include, but are not
limited to:
- - compliance with and changes in applicable laws and regulations
- - exposure to litigation,
- - access to capital,
- - access to insurance and financial assurances,
- - new technologies,
- - competitive environment,
- - general economic conditions
- - potential loss of major contracts, and
- - costs of discontinuing operations at the Oak Ridge facility.
18
When the Company uses words like "may," "believes," "expects," "anticipates,"
"should," "estimate," "project," "plan," their opposites and similar
expressions, the Company is making forward-looking statements. These expressions
are most often used in statements relating to business plans, strategies,
anticipated benefits or projections about the anticipated revenues, earnings or
other aspects of our operating results. The Company makes these statements in an
effort to keep shareholders and the public informed about its business based on
its current expectations about future events. Such statements should be viewed
with caution and are not guarantees of future performance or events.
As noted elsewhere in this report, the Company's business is subject to
uncertainties, risks and other influences, many of which are not within the its
control. Additionally, these factors, either alone or taken together, could have
a material adverse effect on the Company and could change whether any
forward-looking statement ultimately proves to be true. The Company undertakes
no obligation to publicly release updates or revisions to these statements. The
following discussion should be read in conjunction with audited consolidated
financial statements and the notes thereto for the year ending December 31,
2002, included elsewhere in this Form 10-K.
General
- -------
The Company is a hazardous, industrial, non-hazardous, and radioactive waste
management company providing treatment and disposal service to commercial and
government entities, including but not limited to nuclear power plants,
petro-chemical refineries, steel mills, the U.S. Department of Defense,
biomedical facilities, universities and research institutions. The majority of
revenues are derived from fees charged for use of the Company's waste disposal
facilities. Fees are also charged for field investigations, waste removal and
transportation to fixed facilities operated by others. The Company and its
predecessors have been in business for more than 50 years.
In late 2001, the Board of Directors appointed a new executive team that
reorganized the Company with the objectives of optimizing performance of its
core waste treatment and disposal assets and exiting non-core businesses.
Management believes that this restructuring has yielded benefits, including
improved market penetration, clearer organizational accountability, cost
savings, and improved utilization of operating assets. Management further
believes that actions to resolve a number of long-standing lawsuits, sell its El
Centro municipal solid waste landfill, and discontinue its unprofitable LLRW
processing operations provide a solid foundation to expand the Company's
profitable hazardous and low-level radioactive waste disposal business.
On July 1, 2002, the Company moved into a new corporate headquarters located at
300 E. Mallard Drive, Suite 300, Lakepointe Centre I, Boise, ID 83706.
Overall Company Performance
- -----------------------------
On a consolidated basis, the Company's financial performance for the
twelve-months ended December 31, 2002, as measured by income from continuing
operations, showed material improvement over 2001. Management believes this
improvement is due to the turn-around plan and restructuring actions implemented
since late 2001. These actions have focused on increasing waste throughput at
the Company's disposal facilities, expanding higher margin "niche" services,
controlling costs, streamlining reporting, implementing new information systems,
and restructuring the sales function to increase revenue and earnings. The
improvements resulting from the execution of management's plan in 2002 were
offset, in part, by continued losses from the Company's Oak Ridge, Tennessee
based subsidiary, AERC.
On December 27, 2002, the Company announced the discontinuance of LLRW
processing services and operations at AERC, resulting in a $7,000,000
restructuring charge. Management believes the cessation of LLRW processing
operations and timely removal of waste will reduce liabilities and improve the
Company's opportunity to sell AERC or its assets. However, uncertainties exist
regarding the cost required to remove remaining waste from the premises. The
Company has accounted for these expected costs consistent with Statement of
Financial Accounting Standard ("FAS") No. 144 and Emerging Issues Task Force
Issue No. 94-3, which are discussed and included elsewhere in this Form 10-K.
19
FACTORS THAT MAY AFFECT FUTURE RESULTS
Compliance and Changes with Applicable Laws and Regulations
- -----------------------------------------------------------
The changing regulatory framework governing the Company's business creates
significant risks, including potential liabilities from violations of
environmental statutes and regulations. Failure to timely obtain, or to comply
with the conditions of applicable federal, state and local governmental
licenses, permits or approvals for our waste treatment and disposal facilities
could prevent or inhibit the Company from operating its facilities and providing
services, resulting in a significant loss of revenue and earnings. Changes in
laws or regulations or changes in the enforcement or interpretation of existing
laws and regulations may require the Company to modify existing operating
licenses or permits, or obtain additional approvals if new environmental
legislation or regulations are enacted or existing legislation or regulations
are amended, reinterpreted or enforced differently than in the past. Any new
governmental requirements that raise compliance standards or require changes in
operating practices or technology requirements may impose significant costs upon
the Company. The Company's failure to comply with applicable statutes, and
regulations, licenses and permits may result in the imposition of substantial
fines and penalties and could adversely affect the Company's ability to carry on
its business as presently constituted.
While management believes the nation's basic framework of environmental laws and
regulations are broadly accepted as a matter of sound public policy, a
substantial relaxation of these requirements or a substantial reduction of
enforcement activities by governmental agencies could materially reduce the
demand for the Company's services. Large portions of the Company's revenues are
generated as a result of requirements arising under federal and state laws,
regulations and programs to protect the environment. If requirements to comply
with environmental laws and regulations were substantially relaxed in the future
or were less vigorously enforced, particularly those relating to the treatment,
storage or disposal of hazardous and low-level radioactive waste, the demand for
the Company's services could decrease and revenues could be significantly
reduced.
Exposure to Litigation
- ------------------------
Since Company personnel routinely handle radioactive and hazardous materials,
the Company may be subject to liability claims by employees, customers and third
parties. There can be no assurance that the Company's existing liability
insurance is adequate to cover claims asserted against the Company or that the
Company will be able to maintain such insurance in the future. Management
believes the Company has adopted prudent risk management programs to reduce
these risks and potential liabilities; however, there can be no assurance that
such programs will fully protect the Company. Adverse rulings in ongoing legal
matters, including but not limited to litigation brought to protect the
Company's investment in the proposed Ward Valley, California disposal project,
Butte, Nebraska disposal project and other matters could have a material adverse
effect on the Company. See Item 3. Legal Proceedings of this Form 10-K.
Access to Capital
- -------------------
The Company requires cost effective access to capital to implement its strategic
and financial plan. If the Company cannot maintain access to capital or raise
additional capital, the Company may need to curtail or scale back planned
infrastructure improvements and disposal capacity expansions, which could
negatively impact the Company's ability to generate earnings. Although the
Company expects to maintain access to cost effective capital, no assurance can
be given that the Company will continue to have cost-effective access to the
capital markets.
Access to Insurance and Financial Assurances
- --------------------------------------------
The Company is required by license, permit and prudence to maintain a variety of
insurance instruments and financial assurances. Since early 2001, there has been
a tightening in the insurance markets, decreasing access to cost-effective
insurance. This market tightness was exacerbated by the terrorist attacks
against the United States on September 11, 2001 and the claims resulting from
those attacks. Without cost effective access to insurance and/or financial
assurance markets, the Company's ability to operate its facilities would be
materially and adversely affected. In September of 2003, the Company's primary
financial assurance insurance for its hazardous waste disposal facilities
expires. The Company has been and continues to be in negotiations with the
20
insurance provider, but it is likely that the cost and cash collateral
requirements of this insurance will increase. Although the Company expects to be
able to renew these policies, no guarantee can be given that the Company will be
able to renew or procure new financial assurance insurance on terms favorable to
the Company. Inability to obtain cost effective insurance and/or financial
assurance could have a material adverse effect on the Company
New Technologies
- -----------------
The Company expects to increase its utilization of thermal treatment and to
adopt other technologies from time to time. The Company has experienced
difficulties implementing new technologies in the past. The Company's future
growth, particularly at its Beatty, Nevada facility, is partially tied to its
ability to improve its knowledge and implementation of treatment technologies.
If the Company cannot successfully implement commercially viable treatment
technologies in response to market conditions in a manner that is responsive to
the clients' requirements, the business could be adversely affected.
Competitive Environment
- ------------------------
The Company faces competition from companies with much greater resources and
potentially more cost-effective waste treatment and disposal services. An
increase in the number of commercial treatment or disposal facilities for
hazardous or radioactive waste in the United States, or a decrease in the
treatment or disposal fees charged by competitors could reduce or eliminate the
competitive advantage of the Company's facilities and services.
General Economic Conditions
- -----------------------------
The Company's hazardous waste facilities serve steel mills, petro-chemical
plants and other basic industries that are, or may be affected by general
economic conditions. During periods of economic weakness, these industries may
cut back production activities producing waste and/or delay spending on plant
maintenance, waste clean-ups and other discretionary projects. Management
believes the Company's business was adversely affected by the general economic
conditions in 2002 and that these conditions will exist through 2003.
Potential Loss of Major Contracts
- -------------------------------------
A loss on one or more of the Company's larger contracts could significantly
reduce the Company's revenues and negatively impact earnings. Discontinuation of
the Grand View, Idaho site's contract with the Army Corps of Engineers, for
example, could have a material adverse impact on Company operations given the
significant revenue from that contract.
Cost of Discontinuing Operations at Oak Ridge
- ---------------------------------------------
On December 27, 2002, the Company announced the discontinuance of LLRW
processing services and operations at its wholly-owned subsidiary, AERC.
Associated with these decisions, the Company has made assumptions about future
costs. Developing these estimates required numerous subjective and complex
judgments, estimates, and assumptions that may or may not ultimately prove
accurate. No assurance can be given that the Company's estimates are accurate
or complete.
RESULTS OF OPERATIONS
Operating Disposal Facilities, Non-operating Disposal Facilities, the
discontinued Processing and Field Services operations and Corporate must be
included in order to arrive at consolidated income. The Operating Disposal
Facility segment is the only segment to report revenue and profits. Revenue,
costs and profits or losses in the discontinued Processing and Field Services
segment are reflected in the consolidated financial statements in a single line
item. The Non-operating Disposal Facility segment generates minimal revenues and
does not generate profits. The Corporate segment generates no revenue and
provides administrative, managerial and support services for the other segments.
21
Summarized financial information concerning the Company's reportable segments is shown in the following
table.
Operating Non-Operating Discontinued
Disposal Disposal Processing and
Facilities Facilities Field Services Corporate Total
2002
- ----
Revenue $ 46,494 $ 295 $ -- $ -- $ 46,789
Direct operating cost 23,436 1,787 -- -- 25,223
------------ --------------- ---------------- ----------- ---------
Gross profit 23,058 (1,492) -- 21,566
S,G&A 8,000 103 -- 4,528 12,631
------------ --------------- ---------------- ----------- ---------
Income (loss) from operations 15,058 (1,595) -- (4,528) 8,935
Investment income 13 -- -- 18 31
Gain (loss) on sale of assets (20) 4 -- 1 (15)
Interest expense 711 -- -- 109 820
Other income (expense) 78 (389) -- (231) (542)
------------ --------------- ---------------- ----------- ---------
Income before income tax,
discontinued operations and
cumulative effect 14,418 (1,980) -- (4,849) 7,589
Income tax benefit -- -- -- 8,505 8,505
------------ --------------- ---------------- ----------- ---------
Income before discontinued
operations and cumulative effect 14,418 (1,980) -- 3,656 16,094
Gain (loss) from discontinued
operations 466 -- (10,930) -- (10,464)
------------ --------------- ---------------- ----------- ---------
Income before cumulative effect 14,884 (1,980) (10,930) 3,656 5,630
Cumulative effect of change in
accounting principle 14,983 1,548 (3,390) -- 13,141
------------ --------------- ---------------- ----------- ---------
Net income $ 29,867 $ (432) $ (14,320) $ 3,656 $ 18,771
============ =============== ================ =========== =========
Depreciation and accretion $ 6,443 $ 458 $ 518 $ 361 $ 7,780
Capital Expenditures $ 3,010 $ 6 $ 300 $ 30 $ 3,346
Total Assets $ 44,832 $ 27,467 $ 4,649 $ 10,177 $ 87,125
2001
- ----
Revenue $ $40,088 $ 87 $ -- $ -- $ 40,175
Direct operating cost 21,637 1,141 -- -- 22,778
------------ --------------- ---------------- ----------- ---------
Gross profit 18,451 (1,054) -- -- 17,397
S,G&A 8,287 556 -- 5,431 14,274
------------ --------------- ---------------- ----------- ---------
Income from operations 10,164 (1,610) -- (5,431) 3,123
Investment income 188 -- -- 58 246
Gain (loss) on sale of assets (8) -- -- -- (8)
Interest expense 746 -- -- 265 1,011
Other income (expense) 450 (286) -- 663 827
------------ --------------- ---------------- ----------- ---------
Income before income tax and
discontinued operations effect 10,048 (1,896) -- (4,975) 3,177
Income tax benefit (expense) -- -- -- (186) (186)
------------ --------------- ---------------- ----------- ---------
Income before discontinued
operations 10,048 (1,896) -- (5,161) 2,991
Gain (loss) from discontinued
operations 378 -- (2,567) -- (2,189)
------------ --------------- ---------------- ----------- ---------
Net Income $ 10,426 $ (1,896) $ (2,567) $ (5,161) $ 802
============ =============== ================ =========== =========
Depreciation Expense $ 4,285 $ 2 $ 684 $ 59 $ 5,030
Capital Expenditures $ 2,865 $ 3 $ 557 $ 31 $ 3,456
Total Assets $ 43,371 $ 27,482 $ 9,892 $ 6,079 $ 86,824
2000
- ----
Revenue $ 27,013 $ 41 $ -- $ -- $ 27,054
Direct operating cost 11,507 916 -- -- 12,423
------------ --------------- ---------------- ----------- ---------
22
Gross profit 15,506 (875) -- -- 14,631
S,G&A 4,691 (119) -- 5,812 10,384
------------ --------------- ---------------- ----------- ---------
Income (loss) from operations 10,815 (756) -- (5,812) 4,247
Investment income 53 293 -- 89 435
Gain on sale of assets 11 -- -- -- 11
Interest expense 77 -- -- 183 260
Other income 472 -- -- 593 1,065
------------ --------------- ---------------- ----------- ---------
Income before income tax and
discontinued operations 11,274 (463) -- (5,313) 5,498
Income tax benefit (expense) -- -- -- 12 12
------------ --------------- ---------------- ----------- ---------
Income before discontinued
operations 11,274 (463) -- (5,301) 5,510
Discontinued operations (641) -- (172) -- (813)
------------ --------------- ---------------- ----------- ---------
Net Income $ 10,633 $ (463) $ (172) $ (5,301) $ 4,697
============ =============== ================ =========== =========
Depreciation Expense $ 1,397 $ 2 $ 571 $ 58 $ 2,028
Capital Expenditures $ 5,469 $ -- $ 904 $ 69 $ 6,442
Total Assets $ 23,119 $ 27,442 $ 9,034 $ 6,155 $ 65,750
The following table sets forth items in the Statements of Operations for
Continuing Operations the three years ended December 31, 2002, as a percentage
of revenue:
Percentage of Revenues for the
Year Ended December 31,
----------------------
2002 2001 2000
------ ------ ------
Revenue 100.0% 100.0% 100.0%
Operating costs 53.9 56.7 45.9
------ ------ ------
Gross profit 46.1 43.3 54.1
------ ------
Selling, general and administrative expenses 27.0 35.5 38.4
------ ------ ------
Income from operations 19.1 7.8 15.7
Other income (expense), net (2.9) 0.1 3.9
------ ------ ------
Income from continuing operations before income taxes 16.2 7.9 19.6
Income tax benefit (expense) 18.2 (0.5) --
------ ------ ------
Income from continuing operations 34.4 7.4 19.6
====== ====== ======
23
RESULTS OF OPERATING DISPOSAL FACILITY SEGMENT OPERATIONS
The following discussion and analysis reflects the Company's Operating Disposal
facility operations and does not include the results of Discontinued Operations,
Non-Operating Facilities or Corporate for the 12 months ended December 31, 2000,
2001 and 2002.
Revenue
- -------
During the 12 months ended December 31, 2002, revenue from Operating Disposal
Facilities reached $46,494,000 or 16% higher than the $40,088,000 posted in
2001, and 72% higher than the $27,013,000 in 2000 revenue. The $6,406,000
increase in Operating Disposal Facility revenue from 2001 to 2002 was driven by
higher waste volumes at the Company's Texas, Washington and Idaho disposal
facilities. Revenue and volume growth in Texas during 2002 was the result of
winning two large Event Business contracts with waste shipped from Florida. In
Washington, a large packaging and disposal project for the USACE accounted for
almost 50% of the 2002 site revenue. Revenue and volume growth at the Company's
Idaho facility increased 26% and 29%, respectively. Growth at the Idaho facility
was principally the result of increased utilization of a contract with USACE for
disposal services provided to the USACE and other federal agencies. Revenue at
the Company's Nevada facility slipped by nearly 9% during the year as the
Company replaced site management, upgraded compliance and worked to resolve a
large thermal treatment backlog. Overall, the significant growth in revenue from
2000 to 2002 was principally the result of the February 2001 acquisition of the
Idaho hazardous waste disposal facility.
Direct Operating Costs
- ------------------------
Direct operating costs represent costs at the disposal facilities that are
directly involved in the disposal of waste. They include transportation, labor,
equipment depreciation, fuel, re-agents, testing and analysis, and amortization
of disposal cell "airspace" costs. Most of these costs are fixed and do not
materially vary with changes in volume. From 2001 to 2002, direct operating
costs from continuing operations increased 8%, reaching $23,436,000, up from the
$21,637,000 in 2001. Since 2000, direct operating costs from continuing
operations have increased by over 100%, principally as the result of the
acquisition of the Idaho facility acquisition in early 2001. In 2002, the higher
direct operating cost reflected higher aggregate waste volumes at the disposal
facilities. Relative to revenue, direct cost decreased from 54% of revenue in
2001 to 50% in 2002 resulting in a 4% increase in gross margin and a $4,607,000
increase in gross profit from Operating Disposal facility operations in 2002.
Selling, General and Administrative Expenses ("SG&A")
- -----------------------------------------------------
During late 2001, management began concerted efforts to control and reduce SG&A.
As a result of management's cost control initiatives, SG&A associated with
Operating Disposal facility operations declined by 4%, dropping to $8,000,000 in
2002 from $8,287,000 in 2001. SG&A decreases occurred at the Texas and Grand
View facilities. However, these decreases in SG&A were offset by increases in
SG&A in Nevada and Washington. The increased SG&A in Nevada was principally the
result of higher costs associated with upgraded regulatory compliance and a
mid-2002 restructuring of management at the site. In Washington, the higher SG&A
was the direct result of higher State usage and volume taxes. SG&A in 2002 was
$3,309,000 higher than in 2000. The majority of the increase ($2,521,000) over
2000 is attributable to the acquisition of the Idaho facility in 2001. Relative
to revenue, SG&A decreased in 2002, dropping to 17% of revenue, from 21% in 2001
and 17% in 2000.
Operating Income
- -----------------
For the 12 months ended December 31, 2002, operating income from the Operating
Disposal facility segment reached $15,058,000 or a 48% increase from the
$10,164,000 posted during 2001 and 39% higher than the $10,815,000 of operating
income in 2000. The higher revenue combined with the relatively lower direct
costs and lower SG&A allowed the Company to generate an operating margin of 32%
in 2002. This compared favorably to the 25% operating margin posted in 2001, but
was lower than the 40% operating margin from continuing operations in 2000.
RESULTS FROM NON-OPERATING DISPOSAL FACILITIES
24
Revenue
- -------
Revenue generated by Non-Operating Disposal facilities represents amounts that
are billable to third parties for services performed by the Company's
non-operating sites. In Nebraska, the Company is paid by the Central Interstate
Compact ("Compact") for certain specified costs the Company incurs for providing
technical support to the Compact and maintaining the proposed Butte, Nebraska
disposal site for potential use. In Illinois, the Company is paid by the State
for maintenance and monitoring associated with a closed low-level radioactive
waste site that was returned to the state for perpetual care and maintenance.
Generally speaking, these revenue amounts are immaterial. For the 12 months
ended December 31, 2002, revenue generated from closed sites reached $295,000,
which was a $208,000 and $254,000 increase over revenue generated in 2001 and
2000, respectively.
Operating Costs and SG&A
- ---------------------------
Non-Operating Disposal Facilities incur primarily legal and consulting costs
required to protect or license the facilities for initial use, and labor costs
in order to properly maintain the Company's facilities. For the years ended
December 31, 2002, 2001 and 2000, the Company reported $1,595,000, $1,610,000
and $756,000, respectively, of operating losses for the two proposed disposal
site development projects and to closing and maintaining existing facilities
subsequent to use. In 2002, 76% of these costs pertained to legal fees for
lawsuits in Nebraska and California. Refer to Item 3. LEGAL PROCEEDINGS for a
description of these cases. In 2003, it is expected that spending in support of
the Nebraska lawsuit will decrease; however, spending on the California case
could increase over the $1,217,000 spent in 2002, as the trial in the case is
scheduled to begin February 24, 2003. During the 4th quarter of 2002, $652,000
of legal fees were incurred related to the California case.
RESULTS FOR CORPORATE
- -----------------------
SG&A
- ----
During late 2001, management undertook concerted efforts to control and reduce
SG&A across the Company, particularly at its corporate office in Boise, Idaho
where spending declined by $903,000 or 16% in 2002. The majority, or $539,000 of
the decrease in Corporate SG&A was due to the resolution of multiple
longstanding lawsuits and the resulting decreased reliance on law firms
litigating these issues.
RESULTS OF DISCONTINUED OPERATIONS
During 2002, the Company entered into discussions with various parties
potentially interested in purchasing its municipal solid waste landfill in Texas
and with other parties regarding potential sale of its LLRW processing business
in Tennessee. Accordingly, the Company has reclassified these business
operations as discontinued operations consistent with Generally Accepted
Accounting Principles ("GAAP") and specifically, in accordance with FAS No. 144
"Accounting for the Impairment or Disposal of Long Lived Assets" and Emerging
Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity."
El Centro Solid Waste Landfill, Robstown, Texas
- -----------------------------------------------
In mid-2002 the Company entered into discussions with several parties regarding
the potential sale of the Company's El Centro municipal solid waste disposal
facility near Robstown, Texas. On February 13, 2003, the Company announced the
sale of the El Centro municipal and industrial waste landfill to a wholly-owned
subsidiary of Allied Waste Industries, Inc. ("Allied") for $10 million cash at
closing and future volume-based royalty payments. The El Centro landfill is
located adjacent to Company subsidiary Texas Ecologists' hazardous and
industrial waste treatment and disposal facility. Under the Agreement, Allied
will pay American Ecology minimum royalties of at least $215,000 annually. Once
Allied has paid the Company $14,000,000 it no longer has an obligation to pay
annual minimum royalties but will still be required to pay royalties based on
waste volumes received at El Centro. The Purchase Agreement also provides
incentives for Allied to bring certain industrial waste to the Texas Ecologists
hazardous waste facility, and for the Company to utilize the El Centro landfill.
Opened in July 2000, the El Centro solid waste landfill was carried on the
Company's books at approximately $7 million prior to sale and, when combined
with reductions in liabilities and the recognition of a portion of future
25
minimum royalties, should result in a gain on sale of approximately $5 million,
which will be recognized during the first quarter of 2003. The table below
provides financial information on the operations of the El Centro landfill
included in discontinued operations as of December 31, 2002:
$ in Thousands
Year Ended December 31,
2002 2001 2000
------ ------ ------
Revenue $2,563 $2,450 $ 398
Direct Operating costs 1,351 1,480 490
------ ------ ------
Gross profit 1,212 970 (92)
Selling, general and administrative expenses 705 538 506
------ ------ ------
Income (loss) from operations 507 432 (598)
Other expenses 41 54 43
------ ------ ------
Gain (loss) from discontinued operations $ 466 $ 378 $(641)
====== ====== ======
Despite the Company's expertise in operating disposal facilities, the business
model and marketplace for solid waste services is significantly different from
that of the Company's core hazardous and radioactive waste business. Management
believes that by exiting this business and monetizing its investment in the
solid landfill, the Company will obtain resources with which the Company will be
able to grow its core business and/or improve its capital structure.
Low-level Radioactive Waste Processing and Field Services, Oak Ridge Tennessee
- ------------------------------------------------------------------------------
Oak Ridge, Tennessee Facility. AERC, acquired from Quadrex Corp. in 1994,
processed LLRW to reduce the volume of waste requiring disposal at licensed
radioactive waste facilities. On December 27, 2002, the Company announced the
cessation of LLRW services and operations. The plant, situated on 16 acres of
Company property in Oak Ridge, Tennessee, primarily served the commercial
nuclear power industry, but also accepted brokered waste from biomedical,
academic and non-utility industry customers. On October 18, 2002, the Company
announced its intent to actively market the facility and exit the LLRW
processing business. While a number of potential buyers were identified, no
acceptable offers were received to acquire the facility. After concluding it
would not be possible to sell the business as a going concern, management
discontinued AERC's commercial services. AERC's processing services had not been
successfully integrated with the Company's core disposal business, and
management was unable to identify a viable business strategy to reverse the
recurring losses that have occurred at the facility since its acquisition in
1994. The discontinuance of commercial operations resulted in the dismissal of
63 employees. Less than 20 employees are presently engaged in removal of LLRW
from the facility, maintaining the facility's radioactive materials licenses and
preparing the facility for sale. It is expected that removal of waste and
related clean-up work will take most of 2003, although staffing requirements
will diminish over time. The Company intends to maintain the facility's existing
radioactive materials and operating license pending a possible sale.
The Company has retained a limited number of AERC employees to oversee the
removal of stored waste from the site, and to maintain compliance with its
radioactive materials license, and prepare the facility for sale. The Company is
also working with certain former competitors to expedite waste removal on
commercially favorable terms. The Company's Field Services division also
suspended operations at this time due to its connection and dependence upon the
LLRW processing facility and focused efforts on prompt completion of existing
projects. These existing AERC Field Services projects are presently at or near
completion.
During 2002, the Company invested substantially in the removal of accumulated
customer and Company waste inventory, non-revenue producing material and
facility upgrades to prepare the Oak Ridge-based subsidiary for sale. Despite
the efforts to improve the facility's appearance, upgrade efficiency and a
decision to increase prices on services, the subsidiary continued to operate
with significant losses. Since purchasing AERC in 1994, the subsidiary has lost
$56 million, including substantial operating and net losses in 2001 and 2002.
Management concluded that a lack of core business integration and AERC's highly
26
competitive market environment would continue to prevent AERC from achieving
profitability in the foreseeable future. Accordingly, action was taken to
discontinue commercial operations and prepare the facility for sale.
The table below provides financial information on the combined operations of the
LLRW processing facility and Field Services included in discontinued operations
as of December 31, 2002:
$ in thousands Year Ended December 31,
2002 2001 2000
--------- -------- --------
Revenue $ 17,018 $13,391 $14,506
Direct Operating costs 16,687 12,086 10,025
--------- -------- --------
Gross profit 331 1,305 4,481
Selling, general and administrative expenses 3,627 4,465 4,602
--------- -------- --------
(Loss) from operations (3,296) (3,160) (121)
Other expenses (gains) 616 (593) 51
Accrued charges 7,018 -- --
--------- -------- --------
(Loss) from discontinued operations $(10,930) $(2,567) $ (172)
========= ======== ========
Management does not believe that the Oak Ridge processing business is consistent
with the Company's core treatment and disposal business model and has assigned
priority attention to removing accumulated waste and marketing the remaining
assets to potentially interested buyers identified after the Company announced
its intentions to exit the LLRW processing business in October 2002. Management
considers the timely and orderly disposition of that business as critical to the
ability of the Company to meet its future growth objectives.
RESULTS OF CONSOLIDATED OPERATIONS
Revenue
- -------
During the 12 months ended December 31, 2002, consolidated revenue reached
$46,789,000 which was 16% and 73% higher than consolidated revenue achieved
during 2001 and 2000, respectively. The acquisition of the Idaho hazardous waste
facility in 2001 combined with higher waste volumes pushed revenue higher.
Direct Operating Costs
- ------------------------
Consolidated direct operating costs were $25,223,000 in the year ended December
31, 2002. This was $2,445,000 or 11% higher than consolidated direct operating
costs incurred in 2001 and $12,800,000 or 103% higher than direct costs in 2000.
Like revenue, the higher direct costs in 2002 were primarily driven by the
acquisition of the Idaho hazardous waste facility and substantially increasing
waste volumes. Relative to revenue, consolidated direct operating costs were
54%, 57% and 46%. As a result of higher revenue in 2002 and relatively lower
direct operating costs, gross profit reached $21,566,000 or 46% of revenue
compared to gross profit of $17,397,000 or 43% of revenue in 2001 and
$14,631,000 or 54% of revenue in 2000.
SG&A
- ----
During late 2001, management began concerted efforts to control and reduce SG&A
across the Company. As a result of management's cost control initiatives SG&A
spending decreased at each operating segment. Corporate SG&A spending decreased
significantly with the majority of the decrease resulting from the reduction in
litigation. Moderate reductions in SG&A were experienced by the remaining
segments as higher costs associated with upgraded regulatory compliance and
higher state usage and volume taxes limited the net reductions in SG&A spending.
In 2002, consolidated SG&A dropped by 12% to $12.6 million compared to $14.3
million in 2001. Relative to revenue, SG&A showed even greater improvement,
dropping to 27% of revenue compared to 36% of revenue last year. SG&A was 22%
in 2002 than in 2000. The majority of the increase ($2,247,000) over 2000 is
attributable to the acquisition of the Idaho facility in 2001.
27
Operating Income
- -----------------
Consolidated operating income reached $8,935,000 or a 187% increase from the
$3,123,000 posted during 2001 and 110% higher than operating income of
$4,247,000 posted in 2000. The higher revenue and the relatively lower direct
costs and lower SG&A allowed the Company to generate a consolidated operating
margin of 19%. This compared favorably to the 8% operating margin posted in
2001 and the 16% operating margin posted in 2000.
Interest Income
- ----------------
Interest income represents earnings on cash balances, restricted investments and
notes receivable, as to which the Company currently maintains minimal amounts.
Interest income in 2002 was only $31,000. The $246,000 of interest income in
2001 was primarily earnings on investments acquired on February 1, 2001 as part
of the Envirosource of Idaho acquisition. These investments were subsequently
converted to cash and used in operations. The $435,000 of interest income in
2000 was primarily earnings on investments used as collateral for insurance
policies. The policies were subsequently restructured, which enabled the
Company to convert the investments to cash for use in operations.
Gain on Sale of Fixed Assets
- ----------------------------
The Company has realized minimal gains or losses on the sale of fixed assets.
The Company purchases fixed assets when necessary. Fixed assets are replaced at
the end of their useful life.
Interest Expense
- -----------------
Interest expense was $820,000, $1,011,000 and $260,000 in 2002, 2001 and 2000,
respectively. Interest expense increased substantially in 2001 due to the
assumption of an 8.25%, $8,500,000 industrial revenue bond assumed as part of
the February 2001 acquisition of the Grand View, Idaho facility. On October 28,
2002, the Company refinanced the industrial revenue bond with a variable rate
$7,000,000, 5-year amortizing term loan. As of December 31, 2002, the interest
rate on the new term loan was 3.7%. Also contributing to the lower interest
expense in 2002 was the retirement of additional debt of $6,628,000 as part of
management initiatives to more efficiently utilize cash, improve the Company's
balance sheet and reduce higher cost debt. Interest expense is expected to
decrease further in 2003 due to less debt and lower interest rates.
Other Income (Expense)
- ------------------------
Other income (expense) was $(542,000), $827,000 and $859,000 for 2002, 2001 and
2000, respectively. Other income is the account used to record various business
activities that are not a part of the Company's current year ordinary and usual
revenues and expenses.
The following table summarizes the business transactions from outside the
Company's current year normal business scope.
($ in thousands)
As of December 31,
OTHER INCOME 2002 2001 2000
- --------------------------------------------------------------- ------ ------ ------
State tax adjustments $ -- $ 106 $ 7
Correction of expensed debt payments -- 177 112
Insurance claim refunds 31 172 24
Payment on sales invoices previously written off