<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------- --------------------
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 Number)
805 W. Idaho
Suite #200
Boise, Idaho 83702-8916
(Address of principal executive offices) (Zip Code)
(208) 331-8400
(Registrants telephone number, including area code)
Indicate by a check mark whether Registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES |X| NO |_|
At August 13, 1998 Registrant had outstanding 13,498,429 shares
of its Common Stock.
<PAGE> 2
AMERICAN ECOLOGY CORPORATION
QUARTERLY REPORT FORM 10-Q FOR THE
THREE MONTHS ENDED JUNE 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements PAGE
<S> <C>
Consolidated Balance Sheet 3
(Unaudited)
Consolidated Statements of Operations 4
(Unaudited)
Consolidated Statements of Cash Flows 5
(Unaudited)
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of
Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
</TABLE>
2
<PAGE> 3
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
($ IN 000'S EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- -----------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 246 $ 366
Receivables ( trade and other), net of allowance for
doubtful accounts of $1,623 and $1,440,respectively 7,482 7,929
Income tax receivable 740 740
Prepayments and other 903 877
-------- --------
Total current assets 9,371 9,912
Cash and investment securities, pledged 13,104 14,287
Property and equipment, net 12,103 13,004
Deferred site development costs 61,719 58,890
Intangible assets relating to acquired businesses, net 426 438
Other assets 2,063 1,900
-------- --------
Total assets $ 98,786 $ 98,431
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt $ 86 111
Accounts payable 7,842 8,997
Accrued liabilities 14,312 14,801
Deferred site maintenance, current portion 1,524 2,842
Income taxes payable 270 91
-------- --------
Total current liabilities 24,034 26,842
Long term debt, excluding current portion 41,288 39,872
Deferred site maintenance, excluding current portion 18,155 18,337
Commitments and contingencies
Shareholders' equity:
Convertible preferred stock, $.01 par value,
1,000,000 shares authorized, 405,264 issued and outstanding --
Series D cumulative convertible preferred stock, $.01 par value,
105,264 authorized, 105,264 shares issued and outstanding 1 1
Series E redeemable convertible preferred stock, $10.00 par value,
300,000 authorized, 300,000 shares converted and retired -- 3,000
Common stock, $.01 par value, 25,000,000 authorized, 13,498,429
and 8,462,533 shares issued and outstanding, respectively 135 85
Additional paid-in capital 52,646 47,701
Retained earnings (deficit) (37,473) (37,407)
-------- --------
Total shareholders' equity 15,309 13,380
-------- --------
Total Liabilities and Shareholders' Equity $ 98,786 $ 98,431
======== ========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
($ IN 000'S EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---------------------- ----------------------
<S> <C> <C> <C> <C>
Revenues $ 10,230 $ 10,702 $ 19,874 $ 20,331
Operating costs 5,787 6,714 11,867 13,308
-------- -------- -------- --------
Gross profit 4,443 3,988 8,007 7,023
Selling, general and administrative expenses 4,800 3,902 8,844 7,929
Income (loss) from operations (357) 86 (837) (906)
Investment (income) (84) (328) (394) (286)
Gain on sale of assets (37) (107) (72) (107)
Other income (499) (963) (698) (1,046)
-------- -------- -------- --------
Net income before income taxes 263 1,484 327 533
Income tax expense 37 163 181 120
-------- -------- -------- --------
Net income 226 1,321 146 413
Preferred stock dividends 107 189 212 375
-------- -------- -------- --------
Net income (loss) available to common
shareholders $ 119 $ 1,132 $ (66) $ 38
======== ======== ======== ========
Basic earnings per share $ .01 $ .14 $ (.01) $ .01
======== ======== ======== ========
Diluted earnings per share $ .01 $ .13 $ (.01) $ .00
======== ======== ======== ========
Dividends paid per common share $ -- $ -- $ -- $
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
($ in 000's)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 146 $ 413
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,564 1,877
Deferred income tax provision -- 88
Gain on sale of assets (72) (107)
Loss on sale of securities -- 59
Changes in assets and liabilities:
Receivables 447 1,327
Investment securities classified as trading (1,126) 267
Other assets (450) 65
Accounts payable and accrued liabilities (2,770) (2,497)
Deferred site maintenance (201) (500)
-------- --------
Total adjustments (2,608) 579
-------- --------
Net cash provided by (used in) operating activities (2,462) 992
-------- --------
Cash flows from investing activities:
Capital expenditures (522) (646)
Site development costs, including capitalized interest (919) (1,332)
Proceeds from sales of property and equipment -- --
Proceeds from sales of investment securities 2,309 1,660
Transfers from cash and investment securities, pledged -- 745
-------- --------
Net cash used in investing activities 868 427
-------- --------
Cash flows from financing activities:
Proceeds from issuance of indebtedness 8,690 11,123
Proceeds from rights offering 1,996 --
Repayments of indebtedness (9,212) (12,273)
-------- --------
Net cash provided by (used in) financing activities 1,474 (1,150)
-------- --------
Increase (decrease) in cash and cash equivalents (120) 269
Cash and cash equivalents at beginning of period 366 185
-------- --------
Cash and cash equivalents at end of period $ 246 $ 454
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period
for:
Interest, net of amounts capitalized $ 109 $ --
Income taxes 184 --
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
AMERICAN ECOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION.
The accompanying unaudited financial statements have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, all adjustments and disclosures
necessary to a fair presentation of these financial statements have been
included. These financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's 1997 Annual
Report on Form 10-K for the year ended December 31, 1997, as filed with the
Securities and Exchange Commission.
Certain reclassifications and other corrections for rounding have been made in
prior period financial statements to conform to the current period presentation.
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant inter-company transactions and
balances have been eliminated in consolidation.
NOTE 2. TERM LOAN AND LONG-TERM DEBT.
Long term debt at June 30, 1998 and March 31, 1998 consisted of the following
(in thousands):
<TABLE>
<CAPTION>
June 30, March 31,
1998 1998
-------- --------
<S> <C> <C>
Secured bank credit facility $ 40,701 $ 39,922
Capital lease obligations and other 673 700
-------- --------
41,374 40,622
Less: Current maturities (86) (111)
-------- --------
Long-term debt $ 41,288 $ 40,511
</TABLE>
Aggregate maturities of long-term debt and the future minimum payments under
capital leases are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended
December 31,
-----------
<S> <C>
1998 $ 86
1999 5,000
2000 36,288
--------
Total $ 41,374
</TABLE>
On October 31, 1996 the Company renegotiated its prior bank debt under the terms
of a Third Amended and Restated Credit Agreement ("Credit Agreement"). No
amendments to this Credit Agreement have been made since that time.
At June 30, 1998 the outstanding balance of the Term Loan was $40,700,597. Since
October 31, 1996, total interest accrued at 7% in the of amount of $4,347,615
has been capitalized into the Term Loan. Prior to October 31, 1996, interest
accrued at 7% in the amount of $1,244,019 and professional fees in the amount
$289,724 has been capitalized into the Term Loan. Additionally, interest accrued
at an incremental rate of 3% on the entire amount of the debt outstanding since
October 31, 1996 amounted to $1,863,658 at June 30, 1998.
The new term loans, subject to satisfaction of certain conditions, extend the
maturity of the Company's existing bank debt to December 31, 2000 (the maturity
date). Interest on this debt will accrue at a rate of 7% through 1998.
Thereafter, interest is to be paid quarterly at the rate of 10% or prime,
whichever is greater. Principal repayments will commence on December 31, 1999
with $5,000,000 due on that date and quarterly payments of $250,000 thereafter.
The total debt balance remaining at the maturity date will be due and payable on
that date. The secured
6
<PAGE> 7
debt now consists solely of a Term Loan and a Revolving Credit Loan. Subject
to the terms and conditions of the Credit Agreement, the Company's bank agrees
to lend the Company an advancing term loan, in a series of advances, up to a
maximum of $38,000,000. The Revolving Credit Loan portion of this loan is
represented by a single revolving promissory note in the original principal sum
of $5,000,000 (the Revolver). No further advances of any Revolving Credit Loans
shall occur after the Maturity Date. The agreement to lend the Company up to a
maximum of $38,000,000 does not constitute new debt, but is a restructuring of
existing debt plus some additional availability solely for the capitalization
of accrued interest and certain fees.
At June 30, 1998 the Company had issued letters of credit and a performance bond
with an outstanding face value of $4,174,575 including $1,674,575 issued under
the bank credit facility, of which the most significant relate to site operating
permits for the Company's sites. The issued letters of credit and performance
bond are secured by cash and investment securities. The Company is required to
pay fees ranging from 1/2 of one percent to one percent on letters of credit
drawn. The letters of credit and performance bond expire no more than one year
after December 31, 1998.
Based on the final financial results at June 30, 1998 the Company was in
compliance with all of its bank covenants. For the months of January, February,
and April 1998, the Company was in default of certain of its bank covenants, as
described in the Third Amended and Restated Credit Agreement. These defaults
were as follows:
Section 7.01(c) Borrowing Base Certificate & A/R and A/P Summary Schedules:
Submit Borrowing Base Certificates and a summary report of all Accounts
Receivable and Accounts Payable within 15 business days of the end of each
month.
Section 8.08 Minimum EBITDA: Maintain Consolidated EBITDA on the last day of
each calendar quarter in 1998 to be $1,000,000 or more, and on the last day of
each month in 1998 to be $250,000 or more.
<TABLE>
The following occurred at:
<S> <C>
January 31, 1998 $ 65,000 in default of monthly bank covenant
February 28, 1998 $ 299,000 in default of monthly bank covenant
April 30, 1998 $ 104,000 in default of monthly bank covenant
</TABLE>
Section 8.09 Minimum Net Worth: Maintain a minimum net worth of $11,380,000 in
1997 and $13,380,000 in 1998.
The following occurred at:
<TABLE>
<S> <C>
January 31, 1998 $ 69,000 in default of monthly bank covenant
</TABLE>
The Company received a waiver from its bank for all of the defaults in covenant
provisions, through June 30, 1998. The Company continues to be unsure about its
future financial position and cannot assert that it will not be in default of
certain covenant provisions again in the future.
During the month ended May 31, 1998, the Company experienced a shortfall in the
availability under it's Revolving Credit Loan, as determined by the Borrowing
Base Certificate (calculation). Since the Company would have experienced
difficulty in meeting it's ongoing obligations and commitments if it could not
access the full availability of $5,000,000 under the Revolver, the bank agreed
to accept a portion of pledged collateral as security in advancing the full
availability under the Revolver. This security constituted the form of one of
the two allowable payments (dividends payable to the parent) from the Company's
wholly owned subsidiary, American Liability and Excess Insurance Company only to
be paid in the event of a default by the Company. The bank issued a Waiver to
the Credit Agreement allowing this scheduled payment in an amount to approximate
$500,000, be included as supplemental support in the formula used to calculate
the Borrowing Base.
NOTE 3. DEFERRED SITE DEVELOPMENT COSTS
The Company has been selected to locate, develop and operate the low-level
radioactive waste ("LLRW") facilities for the Southwestern Compact in California
("Ward Valley facility") and the Central Interstate Compact in Nebraska ("Butte
facility"). The license application for the Southwestern Compact was approved by
the California Department of Health Services ("DHS") in September 1993. All
costs related to the development of the Ward Valley facility have been paid and
capitalized by the Company. As of June 30, 1998, the Company had deferred
7
<PAGE> 8
$53,976,000 (55% of total assets), of pre-operational facility development costs
of which $11,773,000 was capitalized interest. These deferred costs relating to
the development of the Ward Valley facility are expected to be recovered during
the facility's first 30 years of operating from future waste disposal revenues
based upon disposal fees approved by the DHS in accordance with existing state
rate-base regulations. The disposal fee approval process is expected to include
an independent prudence review of all the pre-operational costs incurred by the
Company prior to their inclusion in the rate-base. The Company expects all of
the costs that it has deferred for this facility, plus additional, unrecognized
project interest costs to be included as a component of the rate-base; however,
there can be no assurance that any or all of the costs will be recovered.
Allowable costs incurred by the Company for development of the Butte facility
are reimbursed under a contract with the Central Interstate LLRW Compact
Commission ("CIC") and are recognized as revenues. Substantially all development
funding is being provided by the major generators of waste-nuclear utilities- in
the CIC. As of June 10, 1998 approximately $84.8 million had been expended. In
June 1998 the CIC and the major generators approved Amendment 7 to their
contract, committing an additional $6.1 million. The Company had contributed and
deferred, as of June 30, 1998, approximately $7.7 million (8% of total assets),
including $1.7 million in capitalized interest. No further capital investment is
expected to be required from the Company prior to the granting of a license. The
Company expects all deferred cost for this facility, plus additional
unrecognized project interest of approximately $15 million, to be included as a
component of the rate base and recovered during facility operations. The
Company, however, would lose all claims and rights to reimbursement of its
contributions and accrued interest if the CIC chooses not to go forward with the
project and exercises it's conditional option to terminate the contract. The CIC
may terminate the contract upon ten (10) days written notice if all project
funds are expended prior to a licensing decision by the State of Nebraska, or if
the major generators have either ceased funding the project or notified the CIC
of their intention to cease funding pursuant to Amendment 7 of their contract.
The construction and operation of the Ward Valley and Butte facilities are still
being delayed by various political and environmental opposition toward the
development of the sites and by various legal proceedings. These issues were
discussed in detail in the 1997 Form 10-K under Part I, Item I, "Business -
Low-Level Radioactive Waste Services - Disposal Services - Proposed Ward Valley,
California Facility" and "-Proposed Butte, Nebraska Facility". At this time, it
is not possible to predict with certainty the length of these delays or when, or
if, the Butte facility license will be granted, and when, or if, the land for
the Ward Valley facility will be obtained. Although the timing and outcome of
the proceedings referred to above are not presently determinable, the Company
continues to actively urge the conveyance of the land from the federal
government to the State of California so that construction may begin, and to
actively pursue licensing of the Butte facility. The Company believes that the
Butte facility license will be granted, operations of both facilities will
commence and that the deferred site development costs for both facilities will
be realized. In the event the Butte facility license is not granted, operations
of either facility do not commence or the Company is unable to recoup its
investments through legal recourse, the Company would suffer losses that would
have a material adverse effect on its financial position and results of
operations. In 1994, the Company began to capitalize interest in accordance with
Statement of Financial Accounting Standards No. 34, Capitalization of Interest
Cost, on the site development projects while the facilities being developed are
undergoing activities to ready them for their intended use. Interest capitalized
during the six month periods ended June 30, 1998 and 1997 was $1,910,000 and
$1,834,000, respectively.
NOTE 4. EARNINGS PER SHARE.
Net Income (Loss) Per Share. In February 1997, the Financial Accounting
Standards Board issued SFAS No. 128 "Earnings Per Share," which supercedes APB
Opinion 15. This statement, with new standards became effective for annual
periods ending after December 15, 1997. The adoption of SFAS No. 128 by the
Company did not have a material effect on earnings per share.
SFAS 128 changes the manner in which earnings per share (EPS) amounts are
calculated and presented. Under the new rules, two EPS amounts are required: (1)
basic EPS; and (2) diluted EPS. Basic EPS is simply the per share allocation of
income available to common stockholders based only on the weighted average
number of common shares actually outstanding during the period. Diluted EPS
represents the per share allocation of income attributable to common
stockholders based on the weighted average number of common shares actually
outstanding plus all diluted potential common shares outstanding during the
period.
8
<PAGE> 9
The calculation of net loss per common share for the three and six months ended
June 30, 1998 and 1997, respectively, is as follows:
<TABLE>
<CAPTION>
(000'S EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------- -------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net earnings (loss) available to common shareholders $ 119 $ 1,132 $ (66) $ 38
======== ======== ======== ========
Weighted average shares outstanding:
Common shares outstanding at end of period 13,498 8,113 11,768 8,113
Shares used in computing earnings (loss) per share 13,498 8,113 11,768 8,113
Basic EPS $ .01 $ .14 $ (.01) $ .01
======== ======== ======== ========
Diluted EPS $ .01 $ .13 $ .00 $ .00
======== ======== ======== ========
</TABLE>
The Financial Accounting Standards Board recently issued Standard No. 128
Earnings Per Share, effective December 15, 1997. If, FAS 128 were applied, there
would be no difference between the above calculated earnings per share amounts
or the FAS 128 calculated basic and diluted earnings per share amounts.
NOTE 5. COMMITMENTS AND CONTINGENCIES.
Other than the information set forth in Part II, Item I, herein, there have been
no other significant changes to any commitments and contingencies as described
in Note 13 to the financial statements included in the Company's 1997 Annual
Report on Form 10-K.
NOTE 6. PREFERRED STOCK.
In November 1996, the Company issued 300,000 shares of Series E Redeemable
Convertible Preferred Stock ("Series E") in a private offering to four of its
directors for $3,000,000 in cash. The Series E bore an 11.25% annual dividend,
paid quarterly in shares of the Company's common stock. The Series E was issued
to fulfill a requirement of the Third Amended and Restated Credit Agreement with
Chase Bank of Texas ("Bank Agreement") to raise $3 million of new equity by
year-end 1996. There were no voting rights or powers attached to this 11.25%
Series E Preferred Stock.
The Company sold 3,912,936 shares of its common stock in the rights offering;
2,912,936 for cash at $1.00 each and 1,000,000 by tender of 100,000 shares of
Series E preferred stock in lieu of cash payment in accordance with the terms of
the Series E. Of the remaining 200,000 shares of Series E, 91,294 were redeemed
at $10.00 each and 108,706 were converted into 1,087,060 shares of common stock
of the Company. The partial redemption and mandatory conversion of the remaining
Series E at the conclusion of the rights offering was a term of the Series E
Designation Certificate. As a result of the rights offering and Series E
conversion, the Company now has approximately 13,498,429 shares of common stock
outstanding at June 30, 1998.
In September 1995, the Board of Directors of the Company authorized 105,264
shares of preferred stock designated as 8 3/8% Series D Cumulative Convertible
Preferred Stock ("8 3/8% Preferred Stock") and authorized the issuance of
105,264 of such shares and warrants to purchase 1,052,640 shares of the
Company's common stock. During September through December 1995, the Company sold
105,264 of 8 3/8% Preferred Stock with warrants in a private offering to a group
comprised principally of members of the company's directors ("the Investing
Group") and received cash proceeds of $4,759,000 which is net of offering
expenses of $101,000 and $140,000 in settlement of liabilities to two members of
the Investing Group. Each 8 3/8% Preferred Stock share is convertible at any
time at the option of the holder into 8.636 shares of the Company's common
stock, equivalent to a conversion price of $5.50 on the $47.50 total per share
offering price. Dividends on the 8 3/8% Preferred Stock are cumulative from the
date of issuance and payable quarterly commencing on October 15, 1995. Accrued
unpaid dividends totaled
9
<PAGE> 10
$1,039,000 and $934,000 at March 31, 1998 and December 31, 1997, respectively.
The 8 3/8% Preferred Stock shares are not redeemable and the liquidation
preference is $47.50 per share plus unpaid dividends. Each share of the 8 3/8%
Preferred Stock issued includes ten warrants to purchase shares of the Company's
common stock. Each warrant entitles the holder to purchase one share of common
stock for an exercise price of $4.75. The $4.75 warrants can be exercised at any
time and expire September 12, 1999. No value was assigned to the warrants in the
accompanying consolidated financial statements as the value is deemed to be de
minimus.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion contains trend information and other forward-looking
statements that involve a number of risks and uncertainties. The Company's
actual results could differ materially from the Company's historical results of
operations and those discussed in the forward-looking comments. Factors that
could cause actual results to differ materially are included, but are not
limited to, those identified in the Notes to the Consolidated Financial
Statements herein, Part II, Item 1. Legal Proceedings, and the discussion below.
Certain matters that we discuss in this report are "forward-looking statements"
intended to qualify for the safe harbor from liability. Such statements address
future plans, objectives, expectations, and events or conditions concerning
various matters such as capital expenditures, earnings, litigation, rate and
other regulatory matters, liquidity and capital resources, and accounting
matters. Actual results in each case could differ materially from those
currently anticipated in such statements, by reason of factors including without
limitations, ongoing state and federal activities; future economic conditions;
legislation; regulation; competition; and other circumstances affecting
anticipated rates, revenues and costs. Any forward-looking statement speaks only
as of the date on which such statement is made, and we undertake no obligation
to update any forward-looking statement.
CAPITAL RESOURCES AND LIQUIDITY
The Company has continued to make improvement in the reduction of costs and
therefore, a steady improvement in net income. For the six months ended June 30,
1998 the Company was profitable with a net income of $146,000 before preferred
stock dividends. Management has improved the Company's financial performance
since 1994, and plans to continue reducing the working capital deficit. The
improvement resulted in working capital deficits of $14,663,000 and $15,678,000
at June 30, 1998 and 1997.
In the last three years the Company has incurred losses from operations. These
losses have been reduced each year and while some areas of business remain
uncertain, management is continuing its efforts to improve the financial
position of the company. The Company has had continuing difficulty in generating
enough cash to meet the obligations of doing business. In 1995, and then again
in 1996, the Board of Directors provided a capital infusion, in exchange for
preferred stock of American Ecology Corporation. In February 1998, the Company
completed a Rights Offering which generated over $2 million of new working
capital. These capital contributions since 1995, have totaled about $10 million.
The Company cannot be certain about its ability to improve short-term operating
results. The Company's financial statements as of June 30, 1998, contain no
adjustments to the asset carrying amounts but, certain reserves have been made
for litigation issues. Management's actions and plans to address these issues
are as follows:
CREDIT AGREEMENT
On October 31, 1996 the Company signed a letter of intent setting forth the
negotiated terms of its secured debt with its bank. The Third Amended and
Restated Credit Agreement was filed as exhibit 10.45 with the Securities
Exchange Commission on February 18, 1997.
During the month ended May 31, 1998, the Company experienced a shortfall in the
availability under it's Revolving Credit Loan, as determined by the Borrowing
Base Certificate. Since the Company would have experienced difficulty in meeting
it's ongoing obligations and commitments if it could not access the full
availability of $5,000,000 under the Revolver, the bank agreed to accept a
portion of pledged collateral as security in advancing the full availability
under the Revolver. This security constituted the form of one of the two
allowable payments (dividends payable to the parent) from the Company's wholly
owned subsidiary, American Liability and Excess Insurance Company only to be
paid in the event of a default by the Company. The bank issued a Waiver to the
10
<PAGE> 11
Credit Agreement allowing this scheduled payment to be included as supplemental
support in the formula used to calculate the Borrowing Base.
MEASURES TO REDUCE COSTS
Management has continued to implement a very aggressive financial and operating
plan since 1995. The Company has evaluated its position to the surrounding
market, customer potentials have been measured, and operating results have
improved as a result. One unprofitable division was eliminated and others were
reorganized to be more efficient and effective. The results are beginning to
appear. Operating costs have declined by 50% as compared to one year ago. The
reorganized divisions have been dissected and analyzed to measure break-even
points, then analyzed further to determine optimum operating levels for maximum
profitability. These variables of operation for the Company have been adjusted
and measured to fit the changing times of the environmental industry. Waste
generators are generating less waste now, due to both Federal and State agencies
constricting regulations in areas that generators were relaxed about disposal
practices. These environmental proceedings and regulations have forced all of
the environmental companies to evaluate their part in the industry. The outcome
in many areas is difficult to forecast, but management continues to modify the
strategic plans to include flexibility.
The Company continues to evaluate the viability of certain other operations, and
their current potential to perform at an acceptable level of profitability.
In the plan, capital expenditures for 1998 are limited to the development of the
Ward Valley Project, operational repairs and certain regulatory obligations.
The Company believes its plan has improved both cost structure and operating
results. However, considering the Company's recent losses and insufficient cash
flow from operations, there can be no assurance that this plan will continue to
resolve the Company's liquidity problem in a timely fashion. The Company is
currently reviewing opportunities that may prove invaluable to improving the
liquidity position as well as reducing the working capital deficit. There can be
no assurance, however, that any such effort will provide an opportunity to
support operations. In any event, the Company may experience increasing cash
flow problems that could cause the Company to materially reduce the current
level of its operating activities.
CASH FLOW
For the six months ended June 30, 1998, the Company had a deficit in cash from
operations of $2,462,000. The Company used $2,770,000 of cash in operations to
reduce outstanding accounts payable and for payment of burial fees, much of what
was generated by the Rights Offering. The Company spent $522,000 for capital
expenditures excluding site development costs, invested $919,000 in site
development costs for the Ward Valley facility and incurred capitalized interest
of $1,910,000 related to the Ward Valley and Butte facilities. The Company
raised capital of $1,996,000 through a Rights Offering which concluded on
February 10, 1998. See Note 6., to the financial statements for more details.
FUTURE CONSIDERATIONS
As previously reported in the December 31, 1997 and 1996, Form 10-K, the Company
continues to have discussion with the Tennessee Department of Environment and
Conservation division of Radiological Health. These ongoing discussions include
the proposal for an extension of time to complete the disposal of the legacy
waste at the Oak Ridge, Tennessee facility. The cost for this disposal is
estimated at $5.4 million, and declining.
For the Company's Central Interstate Compact LLRW site at Butte, Nebraska,
commissioners from the member states have extended the US Ecology Nuclear's
contract for an additional $6,100,000 in project funding and commitment to a
plan for funding the remainder of the pre-construction.
At the Robstown, Texas TECO facility the Company has submitted an application
for the permit renewal for industrial hazardous waste.
Also, at the Robstown, Texas facility the Company has a separate and independent
project, called El Centro, for which an application has been completed for the
municipal solid waste landfill. The El Centro project is on an adjacent joining
160 acres of land.
11
<PAGE> 12
YEAR 2000 COSTS
The Year 2000 issue is the result of potential problems with computer systems or
any equipment with computer chips that use dates where the year has been stored
as just two characters (e.g. 98 for 1998). These systems may incorrectly
evaluate dates beyond the year 1999, potentially causing system failure and
disruption of operations which could affect our business. The Company believes
that its computer systems are currently in compliance with the Year 2000
requirement for date changes. Our concern is some of the companies we do
business with may not be compliant. The Company has implemented a Year 2000 Plan
that addresses traditional hardware and software systems, embedded systems, and
service providers. The plan includes identification and coordination with
external interfacing systems. The Company expects to be compliant with these
issues by mid-year 1999.
RESULTS OF OPERATIONS-
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
The Company reported net income of $226,000 for the three months ended June 30,
1998, compared to a net income of $1,321,000 for the three months ended June 30,
1997. This is a decrease in overall performance but, is isolated to areas from
other income. The other income category includes items like insurance claim
reimbursements and income tax refunds. During the three months ended June 30,
1997 the Company received an unexpected insurance claim for $795,000. The
company did not receive any unexpected refunds or claims during the three months
ended June 30, 1998. American Ecology Environmental Services Corporation
(AEESC), continues to due business through SureCycle(R) as a brokerage operation
for chemical waste, and generates revenue, classified as other income, from
timber, gravel, and petroleum sales.
REVENUES
Revenues for the second quarter of 1998 decreased $472,000, a 4% decline,
compared to the second quarter of 1997. The Company's revenue performance has
stabilized over the last six quarters with an average quarter of revenue being
$10,232,000. For the three months ended June 30, 1998 the Company's revenue
performance was right on the average mark with $10,230,000. The Company is
continuing efforts to increase revenues by seeking out new markets, derivative
lines of business, and serving more customers.
Low-Level radioactive waste ("LLRW") revenues were $6,662,000 for the three
months ended June 30, 1998, a 1% increase from the same period in 1997. LLRW
project revenues remain strong but the Chemical division continues to have
difficulties. The Chemical waste revenues were $4,002,000 for the three months
ended June 30, 1998 compared to $4,425,000 for the same period in 1997. This is
almost a 10% decline from last year but is reflective of the overall slow down
of Chemical disposal. This is also a nation wide trend that has been apparent
over the last two years.
OPERATING COSTS
For the three months ended June 30, 1998 the Company reported total operating
costs of $5,787,000 a 14% decrease from one year ago. Total operating costs
decreased $927,000 for the second quarter of 1998 as compared to the second
quarter of 1997 for a variety of reasons. While most of the cost reduction has
taken place in the Chemical division, some cost reductions are not favorable.
Unfavorable cost reductions have been viewed by management to include: AET
transportation division decreased by 30-35% when the Winona facility closed, and
the Oak Ridge facility has been faced with several problems including a union
labor dispute and strike, delays and shortage of working capital. The many
efforts to conserve on costs by both Chemical and LLRW divisions should allow
for improved performance in the future, providing there is an increase in
revenues and other items remain constant. The Company as a whole is
demonstrating a positive trend in operating results by recapturing a portion of
the market share. In addition to regaining some market share, the Company has
been making every effort to analyze each aspect of the two operating divisions
to determine how they can best maximize operating performance.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
For the second quarter ended June 30, 1998 selling, general and administrative
expenses ("SG&A") increased $898,000 as compared to the quarter ended June 30,
1997, with a major component being an adjustment for insurance premiums
previously classified as operating costs.
12
<PAGE> 13
During the same period, corporate overhead remained fairly flat, increasing only
$7,000. For the three months ended June 30, 1998 and 1997 corporate overhead was
$1,093,000 and $1,086,000 respectively. The Company has attempted to be very
conservative in cost saving measures like travel expense, entertainment,
seminars, other employee benefits, and other extraneous activities. Management
believes that it has applied good cost saving measures and implementation of the
plan it began in 1995.
INCOME TAXES
For the three months ended June 30, 1998, the Company reported an effective
income tax rate of 14% . The Company is not recognizing any deferred tax
benefits for net operating loss carryforwards from prior years, due to the
Company's full valuation allowance provided for these deferred taxes.
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
The Company reported a net income of $146,000 for the six months ended June 30,
1998 compared to a net income of $413,000 for the six months ended June 30,
1997. The 1998 results include lower operating costs, an area the Company has
continued to improve upon since 1996. The overall 1998 performance for the six
months ended June 30, 1998 is very similar to the same period for 1997, except
1997 results include non-recurring income from an insurance claim for $795,000.
REVENUES
Revenues for the six months ended June 30, 1998 decreased $457,000, or 2%
compared to the six months ended June 30, 1997. The decline in revenues is a
result of the decline in operations for the Chemical Division, while revenues of
the LLRW division remained relatively constant for the same period. The Chemical
Division continues to have difficulty in Texas. The loss of customers at
Robstown's TECO chemical disposal facility has reduced revenues. The Robstown
facility is working hard to rebuild its customer base.
Low-level radioactive waste ("LLRW") revenues remained relatively unchanged with
a decrease of $243,000 to $12,461,000 from $12,704,000 for the periods ending
June 30, 1998 and 1997. During this same period Chemical waste revenues declined
$214,000, or 3%.
OPERATING COSTS
Total operating costs as a percentage of revenues for the six months ended June
30, 1998 and 1997, were 59% and 65%, respectively. During this six month period
LLRW experienced a 5 % increase in operating costs while revenues declined by
5%. Chemical Division operating costs declined $780,000 or 13%. This decrease is
mainly from reduction of activity in transportation and the SureCycle(R)
business.
Management has made considerable improvement in the area of cost control. While
certain business lines have declined management has been successful in
stabilizing revenue and costs for the Company as a whole. The operating costs
were $11,867,000 and $13,308,000 for the six months ended June 30, 1998 and
1997, respectively. This is a decrease in operating costs of 11% while revenues
for the same period declined by only 2%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") for the six months ended
June 30, 1998 and 1997, were $8,844,000 compared to $7,929,000 respectively.
Legal fees continue to be very high in relation to the total of SG&A at about
5%. For the comparative periods of June 30, 1998 and 1997, the increase in 1998
is mainly due to the reclassification of certain insurance premiums that had
been previously classified as operating costs. For the six months ended June 30,
1998 the SG&A costs were 44.5% of revenue compared to the 1997 annual
performance of 52.8%. Management continues in its efforts to reduce unnecessary
SG&A costs and to increase new market strategies that are profitable to offset
certain SG&A costs that can not be completely eliminated.
13
<PAGE> 14
INVESTMENT INCOME
Investment income is comprised principally of interest income earned on various
investments in letters of credit and money market investments, dividend income,
and capital gains and losses earned on the Company's stock portfolio classified
as trading securities. As of June 30, 1998, the Company reported investment
income of $394,000.
INCOME TAXES
For the six months ended June 30, 1998, the Company reported an effective income
tax rate of 55%. It is estimated that the Company will not have a Federal tax
liability for 1998. The Company is not recognizing any deferred tax benefits for
net operating loss carryforwards from prior years, due to the Company's full
valuation allowance provided for these deferred taxes.
14
<PAGE> 15
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company's business inherently involves risks of unintended or unpermitted
discharge of materials into the environment. In the ordinary course of
conducting its business activities, the Company becomes involved in judicial and
administrative proceedings involving governmental authorities at the federal,
state and local levels. In the majority of the situations where regulatory
enforcement proceedings are commenced by governmental authorities, the matters
involved relate to alleged technical violations of licenses or permits pursuant
to which the Company operates; of laws and regulations to which its operations
are subject; or are the result of different interpretations of the applicable
requirements.
In addition to previously reported litigation, the Company and certain of its
subsidiaries are involved in other civil litigation and administrative matters,
including permit application proceedings in connection with the established
operation, closure and post-closure activities of certain sites.
Management has established reserves for certain matters previously reported and
for certain anticipated legal fees, based on management's estimates of the
outcome. During the course of legal proceedings, estimates with respect to the
matters may change. While the outcome of any particular action or administrative
proceeding cannot be predicted with certainty, management is unable to conclude
that the ultimate outcome, if unfavorable, of the litigation and other matters
previously reported, will not have a material adverse effect on the operations
or financial condition of the Company.
Except for the matter discussed below, there were no material developments with
respect to previously reported legal proceedings.
AMERICAN ECOLOGY ENVIRONMENTAL SERVICES CORPORATION, ET AL V. MILDRED KRUEGER,
ET AL, U.S. DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS, DALLAS DIVISION,
CIVIL ACTION NO. 3-96-CV2670-D. On July 27, 1998, the U.S. District Court
ordered the above entitled case dismissed with prejudice, each party to bear its
own costs and attorneys fees. The dismissal was based on a Settlement Agreement
and Release entered into among all parties to the case earlier in July. In
accordance with the Settlement Agreement and Release, no party recovered damages
from any other and all parties released the others from claims asserted in this
action.
ITEM 2. CHANGES IN SECURITIES.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
15
<PAGE> 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its Annual Meeting of Stockholders on May 14, 1998. At the
meeting, Rotchford D. Barker, Paul C. Bergson, Keith D. Bronstein, Patricia M.
Eckert, Edward F. Heil, Jack K. Lemley, Paul F. Schutt, and John J. Scoville
were elected to serve as directors of the Company for the next year. In
addition, the 1992 Directors' Stock Option Plan was amended to increase the
shares available for grant, and the appointment of Balukoff, Lindstrom & Co.,
P.A. as independent public accountants for the year ending December 31, 1998 was
ratified.
The voting on such items were as follows:
(1) Election of Directors
<TABLE>
<CAPTION>
Voted Against or
For Withheld Authority
------- ------------------
<S> <C> <C>
Rotchford D. Barker 11,320,519 45,040
Paul C. Bergson 11,324,156 41,403
Keith D. Bronstein 11,324,206 41,353
Patricia M. Eckert 11,322,629 42,930
Edward F. Heil 11,325,055 40,504
Jack K. Lemley 11,325,139 40,420
Paul F. Schutt 11,325,944 39,615
John J. Scoville 11,322,991 42,568
</TABLE>
(2) Amend the 1992 Directors' Stock Option Plan and increase the shares
available for grant:
<TABLE>
<CAPTION>
For Against Abstain
------ ------- -------
<S> <C> <C>
10,955,883 265,140 81,775
</TABLE>
(3) Ratify Appointment of Independent Auditors of Balukoff, Lindstrom & Co.,
P.A.
<TABLE>
<CAPTION>
For Against Abstain
------ ------- -------
<S> <C> <C>
11,333,357 17,367 14,835
</TABLE>
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits
27 Financial Data Schedule
b. Reports on Form 8-K
None
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN ECOLOGY CORPORATION
(REGISTRANT)
Date: August 12, 1998 By: /s/ JACK K. LEMLEY
----------------------------
Jack K. Lemley
Chief Executive Officer
Date: August 12, 1998 By: /s/ R. S. THORN
----------------------------
R. S. Thorn
Vice President of Administration
Chief Accounting Officer
17
<PAGE> 18
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 246
<SECURITIES> 0
<RECEIVABLES> 9,105
<ALLOWANCES> 1,623
<INVENTORY> 0
<CURRENT-ASSETS> 9,371
<PP&E> 40,815
<DEPRECIATION> 28,712
<TOTAL-ASSETS> 98,786
<CURRENT-LIABILITIES> 24,034
<BONDS> 0
0
1
<COMMON> 135
<OTHER-SE> 15,309
<TOTAL-LIABILITY-AND-EQUITY> 98,786
<SALES> 19,874
<TOTAL-REVENUES> 19,874
<CGS> 11,867
<TOTAL-COSTS> 8,844
<OTHER-EXPENSES> (1,164)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 327
<INCOME-TAX> 181
<INCOME-CONTINUING> 146
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
