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 September 30, 2003
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)
Lakepointe Centre I,
300 E. Mallard, Suite 300
Boise, Idaho 83706
------------ -----
(Address of principal executive offices) (Zip Code)
(208) 331-8400
--------------
(Registrant's telephone number, including area code)
Indicate by a check mark whether the 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
At November 12, 2003 Registrant had outstanding 16,972,946 shares of its Common
Stock.
AMERICAN ECOLOGY CORPORATION
QUARTERLY REPORT ON FORM 10-Q FOR THE
THREE MONTHS ENDED SEPTEMBER 30, 2003
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements
Consolidated Balance Sheets
(Unaudited) 4
Consolidated Statements of Operations
(Unaudited) 5
Consolidated Statements of Cash Flows
(Unaudited) 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 28
Item 4. Controls and Procedures 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 2. Changes in Securities and Use of Proceeds 30
Item 3. Defaults Upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Information 30
Item 6. Exhibits and Reports on Form 8-K 31
Signatures 31
2
OFFICERS
- --------
Stephen A. Romano
Chief Executive Officer, President and Chief Operating Officer
James R. Baumgardner
Senior Vice President, Chief Financial Officer
Treasurer and Secretary
Michael J. Gilberg
Vice President and Controller
DIRECTORS
- ---------
Roger P. Hickey, Chairman
President, Chicago Partners
David B. Anderson
Principal, Lochborn Partners LLC
Rotchford L. Barker
Independent Businessman
Roy C. Eliff
Independent Businessman
Edward F. Heil
Sole Member
E.F. Heil, LLC
Stephen A. Romano
Chief Executive Officer, President and Chief Operating Officer
Stephen M. Schutt
Vice President
Nuclear Fuel Services, Inc.
CORPORATE OFFICE
- ----------------
Lakepointe Centre I
American Ecology Corporation
300 East Mallard Drive, Suite 300
Boise, Idaho 83706
(208) 331-8400
(208) 331-7900 (fax)
www.americanecology.com
- -----------------------
COMMON STOCK
- ------------
American Ecology Corporation's common stock trades on the Nasdaq National Market
under the symbol ECOL.
FINANCIAL REPORTS
- -----------------
A copy of American Ecology Corporation Annual and Quarterly Reports, as filed on
Form 10-K and 10-Q with the Securities and Exchange Commission, may be obtained
by writing:
Lakepointe Centre I
300 E. Mallard, Suite 300
Boise, Idaho 83706
or at www.americanecology.com
-----------------------
TRANSFER AGENT
- --------------
Mellon Investor Services LLC
Overpeck Centre
85 Challenger Road
Ridgefield Park, New Jersey 07660
(201) 296-4000
or at www.mellon-investor.com
-----------------------
AUDITOR
- -------
Moss Adams LLP
1001 Fourth Avenue, Suite 2900
Seattle, WA 98154
3
PART I. FINANCIAL INFORMATION
- -----------------------------
ITEM 1. FINANCIAL STATEMENTS.
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
($ IN 000'S EXCEPT PER SHARE AMOUNTS)
September 30,2003 December 31, 2002
------------------- -------------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 6,503 $ 135
Receivables, net 13,425 10,460
Income taxes receivable 1 740
Prepayments and other 1,257 498
Deferred income taxes -- 2,745
Assets held for sale or closure 1,845 10,722
------------------- -------------------
Total current assets 23,031 25,300
Cash and investment securities, pledged 244 244
Property and equipment, net 28,017 26,998
Facility development costs 6,478 27,430
Deferred income taxes 8,284 5,539
Other assets 53 129
Assets held for sale or closure 2,254 1,485
------------------- -------------------
Total Assets $ 68,361 $ 87,125
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long term debt $ 1,494 $ 1,985
Accounts payable 3,599 2,192
Accrued liabilities 6,080 4,166
Accrued closure and post closure obligation, current portion 882 882
Income taxes payable -- 23
Current liabilities of assets held for sale or closure 3,662 7,965
------------------- -------------------
Total current liabilities 15,717 17,213
Revolving line of credit -- 603
Long term accrued liabilities 470 2,372
Long term debt 4,567 5,972
Accrued closure and post closure obligation, excluding current portion 9,364 9,318
Liabilities of assets held for sale or closure, excluding current portion 5,114 5,699
------------------- -------------------
Total liabilities 35,232 41,177
------------------- -------------------
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, 1,000,000 shares authorized,
Designated as follows:
Series D cumulative convertible preferred stock, $.01 par value,
0 and 100,001 shares issued and outstanding; -- 1
Common stock, $.01 par value, 50,000,000 authorized, 16,967,946
and 14,539,264 shares issued and outstanding 170 145
Additional paid-in capital 54,686 55,789
Accumulated deficit (21,727) (9,987)
------------------- -------------------
Total stockholders' equity 33,129 45,948
------------------- -------------------
Total Liabilities and Stockholders' Equity $ 68,361 $ 87,125
=================== ===================
See notes to consolidated financial statements.
4
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
($ IN 000'S EXCEPT PER SHARE AMOUNTS)
Three Months Ended Sept 30, Nine Months Ended Sept 30,
2003 2002 2003 2002
---------------- --------------- --------------- ---------------
(Restated) (Restated)
Revenue $ 17,324 $ 11,048 $ 40,115 $ 35,077
Direct operating costs 10,383 6,417 22,423 18,433
---------------- --------------- --------------- ---------------
Gross profit 6,941 4,631 17,692 16,644
Selling, general and administrative expenses 3,302 2,691 11,088 8,439
---------------- --------------- --------------- ---------------
Income from operations 3,639 1,940 6,604 8,205
Interest income 312 7 334 31
Interest expense 60 221 219 726
Loss on write off of Ward Valley facility development costs -- -- 20,951 --
Other income (loss) 20 35 113 (290)
---------------- --------------- --------------- ---------------
Net income (loss) before income tax, discontinued
operations, and cumulative effect of change in accounting
principal 3,911 1,761 (14,119) 7,220
Income tax expense (benefit) 18 (226) 73 (226)
---------------- --------------- --------------- ---------------
Net income (loss) before discontinued operations and
cumulative effect of change in accounting principal 3,893 1,987 (14,192) 7,446
Gain (loss) from discontinued operations -
El Centro Landfill (15) 178 4,945 497
(Loss) from discontinued operations - Oak Ridge
LLRW Facility (400) (1,099) (2,429) (1,898)
---------------- --------------- --------------- ---------------
Net Income (loss) before cumulative effect of change in
accounting principle 3,478 1,066 (11,676) 6,045
Cumulative effect of change in accounting principle -- -- -- 13,141
---------------- --------------- --------------- ---------------
Net income (loss) 3,478 1,066 (11,676) 19,186
Preferred stock dividends -- 100 64 297
---------------- --------------- --------------- ---------------
Net income (loss) available to common shareholders $ 3,478 $ 966 $ (11,740) $ 18,889
================ =============== =============== ===============
Basic earnings (loss) from continuing operations .23 .12 (.86) .51
Basic earnings (loss) from discontinued operations (.02) (.06) .15 (.10)
Basic earnings from cumulative effect of
accounting change -- -- -- .92
---------------- --------------- --------------- ---------------
Basic earnings (loss) per share $ .21 $ .06 $ (.71) $ 1.33
================ =============== =============== ===============
Diluted earnings (loss) from continuing operations .22 .12 (.86) .45
Diluted earnings (loss) from discontinued operations (.02) (.06) .15 (.09)
Diluted earnings from cumulative effect of
accounting change -- -- -- .83
---------------- --------------- --------------- ---------------
Diluted earnings (loss) per share $ .20 $ .06 $ (.71) $ 1.19
================ =============== =============== ===============
Dividends paid per common share $ -- $ -- $ -- $ --
================ =============== =============== ===============
See notes to consolidated financial statements.
5
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, $ IN 000'S)
Nine Months Ended September 30,
-------------------------------------
2003 2002
----------------- ------------------
Cash flows from operating activities: (Restated)
Net income (loss) $ (11,676) $ 19,186
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation, amortization and accretion 5,324 4,480
(Income) loss from discontinued operations (2,516) 1,401
Cumulative effect of change in accounting principle -- (13,141)
Write off of Ward Valley project 20,951 --
Changes in assets and liabilities:
Receivables (2,907) 167
Other assets (758) (287)
Accounts payable and accrued liabilities 3,011 (4,076)
Closure and post closure obligation (803) (789)
Income taxes payable 716 (230)
----------------- ------------------
Net cash provided by operating activities 11,342 6,711
Cash flows from investing activities:
Capital expenditures (4,941) (2,469)
----------------- ------------------
Net cash used by investing activities (4,941) (2,469)
Cash flows from financing activities:
Payments of indebtedness (2,667) (6,072)
Retirement of series D preferred stock (6,406) --
Stock options and warrants exercised 3,671 1,133
----------------- ------------------
Net cash provided by (used in) financing activities (5,402) 4,939
----------------- ------------------
Increase (Decrease) in cash and cash equivalents 999 (697)
Net cash provided by (used in) discontinued operations 5,369 (335)
Cash and cash equivalents at beginning of period 135 4,217
----------------- ------------------
Cash and cash equivalents at end of period $ 6,503 $ 3,185
================= ==================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 219 $ 726
Income taxes paid 96 4
Non-cash investing and financing activities:
Stock issuance-director's compensation 30 44
Assets acquired through capital lease 167 --
Preferred stock dividends accrued -- 297
Transfer of prepaid assets to settle closure liability -- 462
See notes to consolidated financial statements.
6
AMERICAN ECOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments and disclosures necessary to present fairly
the financial position, results of operations, and cash flows of American
Ecology Corporation and its wholly-owned subsidiaries (the "Company"). These
financial statements and notes should be read in conjunction with the financial
statements and notes included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2002, filed with the Securities and Exchange
Commission.
The previously reported 2002 quarterly information has been restated. See Note
9.
Certain reclassifications of prior quarter amounts have been made to conform to
current quarter presentation, none of which affect previously recorded net
income.
NOTE 2. EARNINGS PER SHARE
Basic earnings per share are computed based on net income available to common
stockholders and the weighted average number of common shares outstanding during
the quarter. Diluted earnings per share reflect the assumed issuance of common
shares for outstanding options and conversion of warrants. The computation of
diluted earnings per share does not assume exercise or conversion of securities
whose exercise price is greater than the average common share market price as
the assumed conversion of these securities would increase earnings per share.
The computation of diluted loss per share does not assume exercise or conversion
of any securities as the assumed conversion of securities would decrease loss
per share.
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------ -----------------------
($in thousands except per share amounts) 2003 2002 2003 2002
----------- ----------- ---------- -----------
(Restated) (Restated)
Income (loss) before discontinued operations and cumulative
effect of accounting change $ 3,893 $ 1,987 $ (14,192) $ 7,446
Income (loss) from operations of discontinued segments (415) (921) 2,516 (1,401)
Cumulative effect of accounting change -- -- -- 13,141
----------- ----------- ---------- -----------
Net income (loss) 3,478 1,066 (11,676) 19,186
Preferred stock dividends -- 100 64 297
----------- ----------- ---------- -----------
Net income (loss) available to common shareholders $ 3,478 $ 966 $ (11,740) $ 18,889
=========== =========== ========== ===========
Weighted average shares outstanding-
Common shares 16,974 14,518 16,473 14,236
Effect of dilutive shares
Series E Warrants -- 1,015 -- 948
Chase Bank Warrants 732 583 -- 544
Stock Options 172 120 -- 109
----------- ----------- ---------- -----------
Average shares 17,878 16,236 16,473 15,837
=========== =========== ========== ===========
Basic earnings (loss) per share from continuing operations $ .23 $ .12 $ (.86) $ .51
Basic earnings (loss) per share from discontinued operations (.02) (.06) .15 (.10)
Basic earnings per share from cumulative effect of accounting change -- -- -- .92
----------- ----------- ---------- -----------
Basic earnings (loss) per share $ .21 $ .06 $ (.71) $ 1.33
=========== =========== ========== ===========
Diluted earnings (loss) per share from continuing operations $ .22 $ .12 $ (.86) $ .45
Diluted earnings (loss) per share from discontinued operations (.02) (.06) .15 (.09)
Diluted earnings per share from cumulative effect of accounting change -- -- -- .83
----------- ----------- ---------- -----------
Diluted earnings (loss) per share $ .20 $ .06 $ (.71) $ 1.19
=========== =========== ========== ===========
7
NOTE 3. EQUITY
In 1996, the Company issued 300,000 shares of Series E Redeemable Convertible
Preferred Stock ("Series E Preferred Stock") that were later retired in 1998.
The Series E Preferred Stock carried warrants ("Series E Warrants") to purchase
3,000,000 shares of common stock with a $1.50 per share exercise price. In April
2002 one Series E holder exercised 650,000 warrants, then in February 2003, the
remaining 2,350,000 Series E Warrants were exercised. The Company issued
2,350,000 shares of common stock and received $3,525,000 in cash. No Series E
warrants are now outstanding.
In September 1995, the Board of Directors authorized issuance of 105,264 shares
of preferred stock designated as 8 3/8% Series D Cumulative Convertible
Preferred Stock ("Series D Preferred Stock"), which were sold in a private
offering to present and past members of the Board of Directors. In 1999, one
Series D holder converted 5,263 preferred shares to 69,264 common shares. Each
of the remaining 100,001 shares of Series D Preferred Stock was convertible at
any time at the option of the holder into 17.09 shares of common stock, which
was equivalent to a conversion price of $3.71 per share due to dilution by
subsequent sales of common stock.
In January 2003, the Company offered to repurchase all outstanding Series D
Preferred Stock for the original sales price of $47.50 a share plus accrued but
unpaid dividends. Repurchase was subject to approval by the Company's Board of
Directors and primary bank. The offer was accepted by all Series D holders and
approved by the Board of Directors and the bank. On February 28, 2003, the
Company repurchased the remaining 100,001 shares of Series D Preferred Stock for
$47.50 a share plus accrued but unpaid dividends of $16.56 a share, for a total
payment of $6,406,000.
NOTE 4. OPERATING SEGMENTS
The Company operates with two segments based on its internal reporting structure
and nature of services offered, Operating Disposal Facilities and Non-Operating
Disposal Facilities. The Operating Disposal Facility segment includes facilities
accepting industrial, hazardous and radioactive waste. The Non-Operating
Disposal Facility segment includes facilities that are no longer accepting
waste, no longer owned by the Company, or represent proposed new disposal site
development projects presently under litigation.
On December 27, 2002, the Company discontinued commercial operations in its Low
Level Radioactive Waste ("LLRW") Processing and Field Services segment which
aggregated, volume-reduced, and performed remediation and other services on
radioactive material. All prior segment information has been restated in order
to present the operations at the Oak Ridge facility, including the former Field
Services division, as discontinued operations.
Effective December 31, 2002, the Company classified the El Centro municipal
landfill as an asset held for sale due to the expected sale of the facility,
which occurred on February 13, 2003. All prior segment information has been
restated in order to present the El Centro landfill as a discontinued operation.
Income taxes are assigned to Corporate, but all other items are included in the
segment where they originated. Inter-company transactions have been eliminated
from the segment information and are not significant between segments.
8
Summarized financial information concerning the Company's reportable segments is
shown in the following table ($ in thousands).
Operating Non-Operating Discontinued
Disposal Disposal Processing and
Facilities Facilities Field Services Corporate Total
- -----------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, 2003
- -------------------------------------
Revenue $ 17,319 $ 5 $ -- $ -- $ 17,324
Direct operating cost 10,260 123 -- -- 10,383
--------------- ---------------- ---------------- ----------- ---------
Gross profit (loss) 7,059 (118) -- -- 6,941
S,G&A 1,820 1 -- 1,481 3,302
--------------- ---------------- ---------------- ----------- ---------
Income (loss) from operations 5,239 (119) -- (1,481) 3,639
Interest expense (income) 1 -- -- (253) (252)
Other income (1) 21 -- -- 20
--------------- ---------------- ---------------- ----------- ---------
Income (loss) before income tax
and discontinued operations 5,237 (98) -- (1,228) 3,911
Income tax expense -- -- -- 18 18
Discontinued operations (15) -- (400) -- (415)
--------------- ---------------- ---------------- ----------- ---------
Net Income (loss) 5,222 (98) (400) (1,246) 3,478
=============== ================ ================ =========== =========
Depreciation, amortization, and accretion $ 1,495 $ 4 $ -- $ 10 $ 1,509
Capital Expenditures $ 1,790 $ -- $ -- $ -- $ 1,790
Total Assets $ 41,021 $ 6,517 $ 4,099 $ 16,724 $ 68,361
- -----------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, 2002 (RESTATED)
- ------------------------------------------------
Revenue $ 10,954 $ 94 $ -- $ -- $ 11,048
Direct operating cost 5,953 464 -- -- 6,417
--------------- ---------------- ---------------- ----------- ---------
Gross profit (loss) 5,001 (370) -- -- 4,631
S,G&A 1,560 (42) -- 1,089 2,691
--------------- ---------------- ---------------- ----------- ---------
Income (loss) from operations 3,441 (412) -- (1,089) 1,940
Interest expense (income) 214 -- -- -- 214
Other income (expense) 32 2 -- 1 35
--------------- ---------------- ---------------- ----------- ---------
Income (loss) before income tax
and discontinued operations 3,259 (410) -- (1,088) 1,761
Income tax expense (benefit) -- -- -- (226) (226)
Discontinued operations 273 -- (1,194) -- (921)
--------------- ---------------- ---------------- ----------- ---------
Net Income (loss) $ 3,532 $ (410) $ (1,194) $ (862) $ 1,066
=============== ================ ================ =========== =========
Depreciation, amortization, and
accretion $ 1,571 $ 114 $ 137 $ 17 $ 1,839
Capital Expenditures $ 708 $ 6 $ 79 $ 30 $ 823
Total Assets $ 46,214 $ 27,544 $ 7,840 $ 5,823 $ 87,421
Operating Non-Operating Discontinued
Disposal Disposal Processing and
Facilities Facilities Field Services Corporate Total
- -----------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 2003
- ------------------------------------
Revenue $ 40,055 $ 60 $ -- $ -- $ 40,115
Direct operating cost 22,071 352 -- -- 22,423
--------------- ---------------- ---------------- ----------- ---------
Gross profit (loss) 17,984 (292) -- -- 17,692
S,G&A 5,477 1,802 -- 3,809 11,088
--------------- ---------------- ---------------- ----------- ---------
Income (loss) from operations 12,507 (2,094) -- (3,809) 6,604
Interest expense (income) 39 -- -- (154) (115)
Other Income (expense) 28 85 -- -- 113
9
Write off of Ward Valley facility -- 20,951 -- -- 20,951
--------------- ---------------- ---------------- ----------- ---------
Income (loss) before income tax
and discontinued operations 12,496 (22,960) -- (3,655) (14,119)
Income tax expense (benefit) -- -- -- 73 73
Discontinued operations 4,945 -- (2,429) -- 2,516
--------------- ---------------- ---------------- ----------- ---------
Net Income (loss) 17,441 (22,960) (2,429) (3,728) (11,676)
=============== ================ ================ =========== =========
Depreciation, amortization, and accretion $ 5,398 $ 6 $ -- $ 30 $ 5,434
Capital Expenditures $ 5,853 $ 23 $ 451 $ -- $ 6,327
Total Assets $ 41,021 $ 6,517 $ 4,099 $ 16,724 $ 68,361
- -----------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 2002 (RESTATED)
- -----------------------------------------------
Revenue $ 34,803 $ 274 $ -- $ -- $ 35,077
Direct operating cost 17,389 1,044 -- -- 18,433
--------------- ---------------- ---------------- ----------- ---------
Gross profit (loss) 17,414 (770) -- -- 16,644
S,G&A 5,656 97 -- 2,686 8,439
--------------- ---------------- ---------------- ----------- ---------
Income (loss) from operations 11,758 (867) -- (2,686) 8,205
Interest expense 655 -- -- 40 695
Other income (expense) 67 (485) -- 128 (290)
--------------- ---------------- ---------------- ----------- ---------
Income (loss) before income tax,
discontinued operations and
cumulative effect of change in
accounting principle 11,170 (1,352) -- (2,598) 7,220
Income tax expense (benefit) -- -- -- (226) (226)
Discontinued operations 497 -- (1,898) -- (1,401)
Cumulative effect of change in
accounting principle $ 14,983 $ 1,548 $ (3,390) $ -- $ 13,141
--------------- ---------------- ---------------- ----------- ---------
Net Income (loss) $ 26,650 $ 196 $ (5,288) $ (2,372) $ 19,186
=============== ================ ================ =========== =========
Depreciation, amortization, and
accretion $ 4,689 $ 343 $ 406 $ 49 $ 5,487
Capital Expenditures $ 2,279 $ 6 $ 314 $ 30 $ 2,629
Total Assets $ 46,214 $ 27,544 $ 7,840 $ 5,823 $ 87,421
NOTE 5. STOCK OPTION PLANS
The Company has two stock-based compensation plans, which are accounted for
under the recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees and related Interpretations. No
stock-based employee compensation cost is reflected in net income. The following
table illustrates the effect on net income and earnings per share if the Company
applied the fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation, to stock-based compensation for the
three and nine months ended September 30, 2003 and 2002:
Three Months Ended Nine Months Ended
----------------------- -----------------------
2003 2002 2003 2002
---------- ----------- ---------- -----------
Net income (loss), as reported $ 3,478 $ 1,066 $ (11,676) $ 19,186
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net of
related tax effects (127) (47) (885) (283)
---------- ----------- ---------- -----------
Pro forma net income (loss) $ 3,351 $ 1,019 $ (12,561) $ 18,903
========== =========== ========== ===========
EARNINGS (LOSS) PER SHARE:
Basic - as reported $ .21 $ .06 $ (.71) $ 1.33
========== =========== ========== ===========
Basic - pro forma $ .20 $ .06 $ (.77) $ 1.31
========== =========== ========== ===========
Diluted - as reported $ .20 $ .06 $ (.71) $ 1.19
========== =========== ========== ===========
Diluted - pro forma $ .19 $ .06 $ (.77) $ 1.17
========== =========== ========== ===========
10
The stock option plan summary and changes during the three and nine months ended
September 30 are as follows:
Three Months Ended Nine Months Ended
------------------------ ------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Options outstanding, beginning of period 1,470,724 954,150 753,150 1,128,650
Granted -- 17,500 813,724 147,500
Exercised -- (105,500) (68,500) (107,500)
Canceled (2,000) (101,000) (29,650) (403,500)
----------- ----------- ----------- -----------
Options outstanding, end of period 1,468,724 765,150 1,468,724 765,150
=========== =========== =========== ===========
Weighted average exercise price of options, beginning of period $ 3.90 $ 3.08 $ 3.42 $ 2.90
Weighted average exercise price of options granted $ -- $ 2.66 $ 4.30 $ 1.92
Weighted average exercise price of options exercised $ -- $ 1.27 $ 1.68 $ 1.29
Weighted average exercise price of options canceled $ 2.30 $ 1.27 $ 7.35 $ 2.16
Weighted average exercise price of options, end of period $ 3.90 $ 3.56 $ 3.90 $ 3.56
Options exercisable at end of period 936,692 764,650 936,692 764,650
=========== =========== =========== ===========
Options available for future grant at end of period 418,776 1,191,850 418,776 1,191,850
=========== =========== =========== ===========
The following table summarizes stock options outstanding under the Company's
option plans as of September 30, 2003:
Weighted
average Weighted Weighted
remaining average average
Range of exercise contractual life Number exercise price Number exercise price
price per share (years) outstanding per share exercisable per share
- ------------------ ----------------- ----------- --------------- ----------- ---------------
$1.00 - $1.47 3.7 119,500 $ 1.33 119,500 $ 1.33
$1.60 - $2.25 6.4 127,000 $ 1.99 127,000 $ 1.99
$2.42 - $3.50 8.6 461,329 $ 2.94 271,769 $ 2.89
$3.75 - $5.00 7.6 532,884 $ 4.30 311,731 $ 4.15
$6.50 9.4 173,011 $ 6.50 51,692 $ 6.50
$10.13 0.7 55,000 $ 10.13 55,000 $ 10.13
----------- -----------
1,468,724 936,692
=========== ===========
As of September 30, 2003, the 1992 Stock Option Plan for Employees had options
outstanding to purchase 943,724 common shares with 98,076 shares remaining
available for issuance under option grants. The 1992 Stock Option Plan for
Directors had options outstanding to purchase 525,000 common shares with 320,700
shares remaining available for issuance under option grants. The fair value of
each option grant is estimated using the Black-Scholes option-pricing model with
2003 assumptions of a ten year option term, volatility of 83-105% and a
discount rate of 3.75-4.25%.
NOTE 6. INCOME TAXES
Income tax expense differs from that calculated using applicable income tax
11
rates to pretax income due primarily to the presence of net operating loss
carry-forwards and a valuation allowance.
The Company has historically recorded a valuation allowance for certain deferred
tax assets due to inherent uncertainties regarding future operating results, and
limitations on utilization of acquired net operating loss carry forwards for tax
purposes. The realization of a significant portion of net deferred tax assets
is based in part on the Company's estimates of the timing of reversals of
certain temporary differences and on the generation of taxable income before
such reversals. During 2002, the Company reevaluated the deferred tax asset
valuation allowance and determined it was "more likely than not" that a portion
of the deferred tax asset would be realizable. Consequently, the Company
decreased the portion of the valuation allowance related to its operating
facilities.
The Company's net operating loss ("NOL") carry forward is approximately
$44,000,000 at September 30, 2003. Of this carry forward, approximately
$2,745,000 is limited pursuant to the net operating loss limitation rules of
Internal Revenue Code Section 382 and begins to expire in 2006. The remaining
unrestricted net operating loss carry forward expires at various dates between
2010 and 2020
At September 30, 2003, the Company had approximately $24,000,000 of deferred tax
assets and a corresponding valuation allowance of $15,761,000, leaving a net
deferred tax asset of $8,284,000 representing the expected utilization of
deferred tax assets in the foreseeable future.
On March 26, 2003, the Company wrote off $20,951,000 in Ward Valley, California
disposal site development costs and therefore does not expect to realize
previously estimated taxable income in 2003. Management expects the $8,284,000
of deferred tax asset to be realized in years subsequent to 2003, and has
classified the total net deferred tax asset as a long term asset on its balance
sheet.
NOTE 7. LITIGATION
Significant developments have occurred on the following legal matters since
December 31, 2002:
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, subsidiary US Ecology, Inc., sued the State of California, et. al.
("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. California law requires the state to build a disposal site for
LLRW produced in California, Arizona, North Dakota and South Dakota; member
states of the Southwestern Compact. 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 State and entered a ground lease.
The State successfully defended the license against court challenges and, until
Governor Gray Davis took office, actively pursued conveyance of the site from
the federal government. In September 2000, the Superior Court granted
California's motion to dismiss all causes of action, which the Company appealed.
In September 2001, the California Fourth Appellate District Court remanded the
case for trial on promissory estoppel grounds. The case was tried in Superior
Court for the County of San Diego during February and March 2003.
On March 26, 2003, the Superior Court issued a Statement of Decision finding
that the Company failed to establish causation and that its claim is further
barred by the doctrine of unclean hands. The latter finding was based on actions
the Court concluded had created obstacles to an agreement between the federal
government and the State to convey the site. The Court also found that key
elements of the Company's promissory estoppel claim had been proven at trial.
Specifically, the Court ruled that the State made a clear and unambiguous
promise to US Ecology in 1988 to use its best efforts to acquire the site, that
Governor Davis' administration abandoned this promise, and that the Company's
reliance on the State's promise was reasonable and foreseeable. However, the
Court found that the State's breach of its best efforts promise was not a
substantial factor in causing damages to US Ecology since the federal government
had continued to resist the land transfer.
Based on the uncertainty of recovery following the trial court's adverse
12
decision, the Company wrote off the $20,951,000 deferred site development asset
at March 31, 2003.
On May 2, 2003, the Company filed a motion to vacate and enter new judgment with
the trial court, arguing that the March 26 decision misapplied the law to the
facts. On May 30, 2003, this motion was denied without comment. On June 26,
2003, the Company filed a notice of appeal with the California Fourth Appellate
District Court.
The Company's financial interest in the pending claim against the State was
improved by an amendment to the November 13, 1998 Ward Valley Interest Agreement
and Assignment entered into by American Ecology and its former primary lender.
This June 27, 2003 amendment, entered into by the Company and the successor in
interest to that lender, provides that any monetary damages obtained shall first
be allocated to the Company to recover past and future litigation fees and
expenses relating to the case. Thereafter, any remaining amount recovered shall
be divided equally between the Company and the former lender. The 1998 agreement
had provided that the first $29.6 million less up to $1.0 million in legal fees
and expenses would be owed to the former lender, with any remaining recovery
reserved to the Company.
In early July, the Company engaged the law firm of Cooley Godward on a fixed
price plus contingency basis to pursue the appeal, paying the fixed fee at the
time of engagement. A briefing schedule has not been set. No assurance can be
given that the Company will prevail on appeal or reach a settlement to recover
any portion of its investment.
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 sought
unspecified damages for infringement, treble damages, interest, costs and
attorney fees. 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. Manchak
appealed; however, plaintiff failed to timely file its appellant's brief and the
Company moved to dismiss the appeal. On July 2, 2003, the US Court of Appeals
for the Federal Circuit granted the Company's motion to dismiss, and denied
plaintiff's request for an extension of time and relief from page/word brief
limitations. On July 20, 2003 the plaintiff filed a motion for reconsideration
with the appellate court and later filed for en banc review by the Court of
Appeals for the Federal Circuit. Both the motion for reconsideration and en banc
review were denied by the Court of Appeals on September 3, 2003. The Company
considers the matter closed.
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 of approximately $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.
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 $6.2 million contribution is included in the balance sheet amount
of $6,478,000 of capitalized facility development costs. 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
13
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.
The case was argued before the Eighth Circuit on June 12, 2003. 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.
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. In November 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. The
Company subsequently filed a motion for summary judgment seeking dismissal
against all of the adult plaintiffs on statute of limitations grounds. On March
26, 2003, the court granted this motion and dismissed the adult plaintiffs.
Seven minors and one intervenor remain party to the lawsuit. 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 in prior periods.
NOTE 8. COMMITMENTS AND CONTINGENCIES
Effective January 1, 2003, the Company established the American Ecology
Corporation Management Incentive Plan. The Plan provides for selected
participants to receive bonuses based on pre-tax operating income levels.
Bonuses under the plan are to be paid out over three years with maximum bonus
payments in any one year of $1,125,000 if pre-tax operating income exceeds
$12,000,000.
In February 2003, the Company entered into employment agreements with four
executive employees. The agreements expire December 31, 2004 and 2005, and
provided for aggregate minimum annual salaries of $639,000. On September 30,
2003, the Company terminated the employment of one of the four executives and
recognized $235,000 in expenses for payroll and related benefits. At September
30, 2003 the commitment for the three remaining employment contracts is for
aggregate minimum annual salaries of $484,000.
The Company's primary financial assurance policies expired on September 27,
2003, but were extended to December 19, 2003. As part of the extension, the
Company was required to increase the collateral for the policies from $1,150,000
to $3,258,000. The Company issued an irrevocable standby letter of credit in
favor of the insurance company to meet its collateral obligation. The Company is
negotiating with the insurance company to extend the financial policies. If the
current policies are not renewed or replaced by December 19, 2003, the insurance
company may require additional collateral. No assurance can be given that the
Company will reach agreement with the insurance company.
While the Company has been negotiating with the insurance company for renewal of
the financial assurance policies, the total value of the policies has decreased
from $51,000,000 at December 31, 2002 to $32,000,000 at September 30, 2003 due
to the sale of the Company's El Centro Municipal Landfill, and performance of
closure work at several Company facilities covered by the financial assurance.
The Company's contract with the US Army Corps of Engineers (USACE) expires
during the second quarter of 2004 unless extended for an additional 5 years at
the option of the USACE. While the Company believes that the USACE will extend
the contract for an additional 5 years, there is no assurance that the contract
will be extended.
NOTE 9. ACCOUNTING CHANGES AND RESTATEMENT
Effective January 1, 2002, the Company implemented Statement of Financial
14
Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" (FAS
143) under the early adoption provisions. FAS 143 requires a liability to be
recognized as part of the fair value of future asset retirement obligations, and
an associated asset to be recognized as part of the carrying amount of the
underlying asset. Previously the Company recorded a closure and post closure
obligation for the pro-rata amount of space used of the total permitted space
available. On January 1, 2002, in accordance with FAS 143, this obligation was
valued at the current closure cost, increased by a cost of living adjustment for
the estimated time of payment, and discounted back to its present value.
In further accordance with FAS 143, upon calculation of the asset retirement
obligation the Company also recorded an associated asset for the retirement
obligation. This asset is amortized over the estimated useful life of the
related long-lived asset. FAS 143 allows aggregation of certain assets in
calculating and subsequently amortizing this asset. During the fourth quarter of
2002, the Company reassessed its methodology for applying FAS 143 and
disaggregated certain individual facility assets. In recalculating the overall
asset under the revised methodology, the Company recorded a $3,182,000 reduction
with no corresponding change in the recorded liability. Consequently, the
initial 2002 gain on implementation of the new accounting standard recorded in
the first quarter of 2002 was reduced by $3,182,000, and the amortization
associated with the asset was reduced from what was previously recorded during
the first three quarters of 2002. The following restatements were made to
account for this change in FAS 143 implementation methodology (in thousands):
3 Months Ending Nine Months Ending
September 30, 2002 September 30, 2002
------------------- --------------------
Reported Net Income $ 1,032 $ 22,284
Effect of Restatement:
Cumulative Effect of Accounting Change -- (3,182)
Amortization 34 84
------------------- --------------------
Restated Net Income $ 1,066 $ 19,186
=================== ====================
Reported Diluted EPS $ .06 $ 1.39
Effect of Restatement:
Cumulative Effect of Accounting Change -- (.20)
Amortization -- .01
------------------- --------------------
Restated EPS $ .06 $ 1.20
=================== ====================
NOTE 10. CLOSURE AND POST CLOSURE OBLIGATIONS
Closure and post closure obligations are recorded when environmental assessments
and/or remedial actions are probable, and the costs can be reasonably estimated
consistent with Statement of Financial Accounting Standards No. 5. The Company
performs periodic reviews of both non-operating and operating facilities and
revises its accruals for estimated post-closure, remediation and other costs
when necessary. The Company's recorded liabilities are based on best estimates
of current costs and are updated periodically to reflect current technology,
laws and regulations, inflation and other economic factors. Changes to reported
closure and post closure obligations were as follows (in thousands):
Accrued Closure and Closure Obligation of Assets Total Closure and Post
Post Closure Obligation Held for Sale or Closure Closure Obligations
------------------------- ------------------------------ ------------------------
December 31, 2002 obligation $ 10,200 $ 6,560 $ 16,760
Accretion of obligation 716 85 801
Payment of obligation (803) (461) (1,264)
Adjustment of obligation 133 (1,107) (974)
------------------------- ------------------------------ ------------------------
September 30, 2003 obligation $ 10,246 $ 5,077 $ 15,323
========================= ============================== ========================
On February 13, 2003, the Company sold substantially all of the assets of the El
Centro landfill. The sale included transfer of the accrued landfill closure and
post closure obligation, which was $1,107,000 at the date of the sale.
15
At September 30, 2003, $244,000 of pledged cash and investment securities were
legally restricted. The pledged cash has been set aside to settle any closure
and post closure obligations that are not directly paid by the Company.
NOTE 11. OPERATING LEASE BUY OUT
On August 3, 2000, the Company entered into a $2,000,000 equipment sale and
leaseback transaction based on the sale of specified equipment and rolling stock
to a third party lessor. The Company received $2,000,000 in proceeds from the
asset sale and entered into an operating lease for the use of the equipment
beginning August 8, 2000 with monthly payments scheduled through September 8,
2006. The Company realized a $1,098,000 gain on the sale of the equipment to be
amortized over the life of the lease.
On March 28, 2003 the Company exercised an early buyout of the operating lease
for $1,159,000 and recorded equipment purchases with a book value of $702,000
along with a reduction in the deferred gain of $457,000. In conjunction with the
early buyout, the Company recorded an impairment charge of $225,000 on certain
equipment at the discontinued Oak Ridge facility.
NOTE 12. DISCONTINUED OPERATIONS
As of September 30, 2003, "Assets held for sale or closure" consisted of certain
assets at the El Centro municipal waste disposal facility (which the Company
sold to a wholly-owned subsidiary of Allied Waste Industries, Inc. on February
13, 2003), and the assets and liabilities of the discontinued Oak Ridge
processing and field services operations classified as "Held for sale or
closure". Accordingly, the revenue, costs and expenses and cash flows for each
of these operations have been excluded from continuing operations results and
reported as "Income (loss) from discontinued operations" and "Net cash used by
discontinued operations". Prior periods have been restated to reflect the
discontinued operations. The assets and liabilities of discontinued operations
included within the consolidated balance sheet as of September 30, 2003 are as
follows (in thousands):
Processing and Field El Centro Disposal Total Assets Held
Services Facility Facility for Sale or Closure
--------------------- ------------------- --------------------
Current assets
- --------------
Current assets $ 1,058 $ 235 $ 1,293
Property & equipment, net 552 -- 552
--------------------- ------------------- --------------------
1,610 235 1,845
===================== =================== ====================
Non-current assets
- ------------------
Property, plant & equipment, net 1,509 -- 1,509
Other 48 697 745
--------------------- ------------------- --------------------
1,557 697 2,254
===================== =================== ====================
Current liabilities
- -------------------
Accounts payable & accruals 3,624 -- 3,624
Current portion long term debt 38 -- 38
--------------------- ------------------- --------------------
3,662 -- 3,662
===================== =================== ====================
Non-current liabilities
- -----------------------
Closure/post closure obligations 5,077 -- 5,077
Long-term debt 33 -- 33
Other 4 -- 4
--------------------- ------------------- --------------------
5,114 -- 5,114
===================== =================== ====================
Operating results for the discontinued operations were as follows for three and
nine months ending September 30:
Processing and Field El Centro Disposal Total Discontinued
($in thousands) Services Operations Facility Operations
---------------------- -------------------- --------------------
Three Months Ending September 30, 2003
- --------------------------------------
Revenues, net $ (22) $ (7) $ (29)
Operating income (loss) (556) (15) (571)
Net income (loss) (400) (15) (415)
16
Basic earnings (loss) per share (.02) -- (.02)
Diluted earnings (loss) per share (.02) -- (.02)
Three Months Ending September 30, 2002
- --------------------------------------
Revenues, net $ 4,105 $ 620 $ 4,725
Operating income (loss) (614) 188 (426)
Net income (loss) (1,194) 273 (921)
Basic earnings (loss) per share (.08) .02 (.06)
Diluted earnings (loss) per share (.08) .02 (.06)
Nine Months Ending September 30, 2003
- -------------------------------------
Revenues, net $ 1,997 $ 462 $ 2,488
Operating income (loss) (2,349) 59 (1,719)
Net income (loss) (2,429) 4,945 2,931
Basic earnings (loss) per share (.14) .29 .18
Diluted earnings (loss) per share (.14) .29 .18
Nine Months Ending September 30, 2002
- -------------------------------------
Revenues, net $ 14,018 $ 1,836 $ 15,854
Operating income (loss) (1,093) 483 (610)
Net income (loss) (1,898) 497 (1,401)
Basic earnings (loss) per share (.12) .03 (.09)
Diluted earnings (loss) per share (.12) .03 (.09)
El Centro Disposal Facility. On February 13, 2003, the Company sold its 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. Under the Agreement, Allied will pay the Company
minimum royalties of at least $215,000 annually. Once Allied has paid the
Company $14,000,000 in royalties, it will no longer be obligated to pay minimum
annual royalties, but will still be required to pay royalties if disposal
volumes exceed the minimum volume threshold. The Purchase Agreement provides
incentives for Allied to bring Texas Class 1 industrial waste to the Company's
adjacent hazardous waste facility.
The Company sold $7,047,000 of property and equipment in exchange for
$10,000,000 of cash, royalties valued at $858,000, and the assumption by Allied
of $1,098,000 of closure liabilities. A gain of $4,909,000 was recognized in
discontinued operations related to this sale.
The royalties, valued at $858,000, represent the present value of 5 years of
minimum royalty payments. Annual payments in excess of $215,000 or payments
subsequent to 2007 would be included in Other Income at the time of receipt.
This royalty represents substantially all of the assets held by the discontinued
El Centro disposal facility. Royalty payments are expected to be received for
at least five years. After fiscal year 2003, the El Centro disposal facility
should realize interest income and other income from the royalty payments which
would not be classified as discontinued operations due to their recurring
nature. The $92,000 in royalties received since the sale has been recorded as a
reduction in the royalties due.
For segment reporting purposes, El Centro landfill operating results were
previously classified as "Operating Disposal Facilities".
Oak Ridge Processing Facility and Field Services. During 2002, the Company
- -----------------------------------------------------
offered for sale its LLRW Processing Facility and Field Services operations
based in Oak Ridge, TN, but was unable to consummate a sale based on continued
commercial operations. On December 27, 2002, the Company discontinued commercial
waste processing. Since then, the Company has removed accumulated waste from the
facility and undertaken extensive radiological surveys to improve the facility's
marketability. All customer waste was removed by July 2003. Radiological survey
work was nearing completion at September 30, 2003. Detailed information on the
17
amount and character of waste removed was used to refine initial cost estimates.
This resulted in an additional accrual of $911,000 for the three months ending
March 31, 2003, $465,000 for the three months ending June 30, 2003 and $0 for
the three months ending September 30, 2003.
On June 10, 2003, the Company entered into a non-binding letter of intent with a
potential buyer based on sale of the Oak Ridge facility's assets, including
certain licenses, buildings and equipment, for a nominal sales price along with
buyer assumption of specified liabilities. On November 3, 2003 the parties
extended the non-binding letter of intent until December 3, 2003. There is no
assurance that the Company will be able to sell the Oak Ridge facility on terms
favorable to the Company.
On March 28, 2003, the Company recorded an additional impairment charge of
$225,000 on certain Oak Ridge equipment acquired under the early buyout of an
operating lease.
On December 27, 2002, management informed all employees that the Company was
discontinuing commercial processing at the Oak Ridge facility and implemented a
substantial reduction in the facility's labor force. Terminated union employees
were compensated for prior service, provided health coverage through January 31,
2003, and presented with a proposed severance package. Terminated non-union
employees were paid severance in accordance with written Company policy. For
employees covered under the collective bargaining agreement, the Company entered
into good faith severance negotiations with union representatives. Both sides
amended their original proposals during these negotiations. On July 16, 2003, a
final severance agreement was executed with the union providing $152,000 of
severance to the terminated union employees and a release from all claims
related to their employment with the Company. During the third quarter of 2003,
the Company paid and recognized this obligation and associated payroll taxes in
the amount of approximately $175,000.
Costs incurred at the Oak Ridge facility to prepare the facility for sale during
the three and nine months ended September 30, 2003 are summarized as follows:
(in thousands $000)
Three Months Nine Months
------------- ------------
Net operating costs in excess of previous accrual $ 400 $ 828
Additional impairment of property and equipment -- 225
Increase in estimated cost for disposal of waste at facility -- 1,376
------------- ------------
Disposal costs for the period ended September 30, 2003 $ 400 $ 2,429
============= ============
Cost changes for Oak Ridge facility on-site activities and disposal liabilities
for removed wastes are as follows:
($in thousands) December 31, 2002 Cash Payments Adjustments September 30, 2003
----------------- -------------- ----------- ------------------
Waste disposal liability 1,827 (3,089) 3,923 2,661
On-site discontinued
operation cost liability 1,800 (2,296) 828 332
The adjustments represent differences between the estimated costs accrued at
December 31, 2002, actual costs incurred during 2003, and changes in estimated
future costs for waste disposition. The adjustment amounts in the above roll
forward analysis do not directly correspond to the Income statement due to the
offsetting impact of revenue recognized from discontinued operations for
customer waste shipments.
NOTE 13. FACILITY DEVELOPMENT COSTS
The Company is involved in litigation requiring estimates of timing and loss
potential whose disposition is controlled by the judicial process. During the
quarter ended March 31, 2003, the Company wrote off its entire $20,951,000 Ward
Valley deferred site development asset following an adverse trial court decision
which cast substantial doubt on the Company's ability to recover its investment.
Decisions to accrue costs or write off assets are based on specific facts and
circumstances pertaining to each case and management's evaluation of present
circumstances. See Note 7.
18
The Company continues to believe that the facility development costs which were
capitalized for development of the proposed Butte, Nebraska disposal facility
will be realized, although no assurance can be given that a favorable trial
court decision will be affirmed on appeal. See Note 7.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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, the ability to sell Oak Ridge processing facility assets, compliance
with and changes to applicable laws, regulations and permits, exposure to
litigation, access to capital, access to insurance and financial assurances, new
technologies, competitive environment, labor disputes, general economic
conditions, and loss or diminution of major contracts. The Form 10-K for the
year ending December 31, 2002 contains additional risk factors and an expanded
disclosure of these risks. When the Company uses words like "will", "may,"
"believes," "expects," "anticipates," "should," "estimates," "project," "plans,"
their opposites and similar expressions, the Company is making forward-looking
statements. These terms 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 stockholders and the public informed about
our business based on management's 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, our business is
subject to uncertainties, risks and other influences, many of which the Company
has no control over. 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 turns out 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
the audited consolidated financial statements and the notes thereto filed on
Form 10-K for the year ending December 31, 2002.
Unless otherwise described, changes discussed relate to the increase or decrease
from the three and nine month period ended September 30, 2002 to the three and
nine month period ended September 30, 2003.
INTRODUCTION
- ------------
The Company is a hazardous, PCB, industrial and radioactive waste management
company providing transportation, treatment and disposal services 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
its revenues are derived from fees charged for use of the Company's four fixed
waste disposal facilities. The Company and its predecessors have been in
business for 51 years.
OVERALL COMPANY PERFORMANCE
- ---------------------------
The Company's financial performance for the three and nine months ended
September 30, 2003 was substantially different than the first three and nine
months of 2002. Quarter to quarter comparisons are difficult and are materially
affected by a series of events that include a large single event project
undertaken in early 2002 at the Company's Richland, Washington facility, a
large, single event project started in August 2003 at the Company's Grand View,
Idaho facility, unusually high litigation expenses in early 2003 and related
write off, costs to discontinue the Company's Oak Ridge, Tennessee low-level
radioactive waste processing businesses, a gain on sale of the El Centro
landfill assets in early 2003, and changes in accounting standards. These events
are discussed in more detail below.
Ward Valley Litigation Expenses: Due to the adverse California state court
- ----------------------------------
decision on March 26, 2003, the Company wrote off $20,951,000 of facility
development costs for the Ward Valley project. This is reported as Loss on write
off of Ward Valley facility development costs in the Consolidated Statement of
Operations. Litigation and related costs totaling $0 and $1,786,000 were
incurred and included in SG&A during the three and nine months, respectively,
ending September 30, 2003. The Company has appealed the Ward Valley ruling.
Minimal future costs are expected based on a fixed price legal representation
agreement entered and paid in July, 2003 for this appeal.
19
Army Corps of Engineers Fort Greely, Alaska Project: The Company performed a
- -------------------------------------------------------
large waste packaging and disposal project at its Richland, Washington facility
during the quarter ended March 31, 2002. This represented 29% of first quarter
2002 revenues and produced significantly higher quarterly earnings for the
Richland operation.
New Jersey PCB Clean-up Project: The Company's Grand View, Idaho facility is
- --------------------------------
performing an approximately $10,000,000 transportation and disposal project in
the third and fourth quarters of 2003. This project represented $5,400,000 or
31% of third quarter 2003 revenues.
FAS 143: The Company implemented FAS 143 on January 1, 2002. FAS 143 requires a
- --------
liability to be recognized as part of the fair value of future asset retirement
obligations and an associated asset to be recognized as part of the carrying
amount of the underlying asset. The implementation of FAS 143 resulted in a
$13,141,000 cumulative effect of change in accounting principle gain during the
quarter ended March 31, 2002.
Sale of El Centro: On February 13, 2003, the Company sold the El Centro
- ---------------------
municipal waste landfill to Allied Waste and recognized a $4,909,000 gain on
sale. This gain was included in discontinued operations during the quarter ended
March 31, 2003.
Oak Ridge Disposal Plan: On December 27, 2002, the Company discontinued
- ---------------------------
operations at the Oak Ridge facility and recognized $7,018,000 of additional
estimated costs to implement its asset and liability disposal plan. During the
three and nine months ended September 30, 2003, the Company identified and
incurred an additional $400,000 and $2,429,000, respectively, in costs to remove
waste from the facility and prepare the facility for sale. This primarily
reflects pricing information on the specific quantity and type of waste which
became known when the wastes were prepared for shipment to off-site service
providers.
The Company's contract with the US Army Corps of Engineers (USACE) expires
during the second quarter of 2004 unless extended for an additional 5 years at
the option of the USACE. While the Company believes that the USACE will extend
the contract for an additional 5 years, there is no assurance that the contract
will be extended.
A significant portion of the Company's revenue is attributable to discrete waste
clean-up projects ("Event Business"). The one-time nature of Event Business
necessarily creates variability in revenue and earnings. This can produce large
quarter to quarter swings. Management's strategy is to continue expanding its
recurring customer business ("Base Business") while simultaneously securing
Event Business. When the Company's Base Business covers fixed costs, much of the
Event Business revenue falls through to the bottom line. This strategy, which
takes advantage of the high fixed cost nature of the business, was demonstrated
in the three months ending September 30, 2003 when the large event project
undertaken by the Company's Grand View, Idaho facility contributed significantly
to earnings.
CRITICAL ACCOUNTING POLICIES
- ------------------------------
In preparing the financial statements, management makes many estimates and
assumptions that affect the Company's financial position and results of
operations. Disposal Facility Accounting, Accounting for Discontinued
Operations, Litigation, Income Taxes, and Project Accounting involve subjective
judgments, estimates and assumptions that would likely produce a materially
different financial position and result of operations if different judgments,
estimates, or assumptions were used. These matters are discussed below.
DISPOSAL FACILITY ACCOUNTING
In general terms, a disposal cell development asset exists for the cost of
building usable disposal space and a closure liability exists for closing,
maintaining and monitoring the disposal unit once this space has been filled.
Major assumptions and judgments used to calculate cell development assets and
closure liabilities are as follows:
- - Personnel and equipment costs incurred to construct disposal cells are
capitalized as a cell development asset.
- - The cell development asset is amortized as each available cubic yard of
disposal space is filled. Periodic independent engineering survey and
inspection reports are used to determine the remaining volume available.
These reports take into account waste volume, compaction rates and space
reserved for capping filled cells. Additionally, changes in the estimated
useful lives of the cells or related expansion plans have a direct effect
on the amortization expense related to those cells during future periods.
20
- - The closure liability is the present value based on a current cost estimate
prepared by an independent engineering firm of the costs to close, maintain
and monitor filled disposal units. Management estimates the timing of
payment, accretes the current cost estimate by an estimated cost of living
(1.5%), and then discounts (9.3%) the accreted current cost estimate back
to a present value. The final payments of the closure liability are
estimated as being paid in 2056 based upon current permitted capacity and
estimated annual usage.
ACCOUNTING FOR DISCONTINUED OPERATIONS
Accounting for discontinued operations requires numerous subjective and complex
judgments, estimates and assumptions that materially affect financial results
and position of discontinued operations.
At December 27, 2002, the Company discontinued operation of its former
Processing and Field Services segment in Oak Ridge, Tennessee facility. The
discontinued operations were accounted for under Emerging Issues Task Force
("EITF") Issue No. 94-3 Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring), which requires a liability to be recognized when the
decision to exit the segment was made. EITF 94-3 was chosen as the guiding
literature rather than Statement of Financial Accounting Standards No. 146
Accounting for Costs Associated with Exit or Disposal Activities (FAS 146),
which requires a liability to be recognized at the time that the liability is
incurred. FAS 146 is required for exit activities entered into after December
31, 2002 but was optional for exit activities prior to December 31, 2002.
Approximately $1,800,000 of liabilities was recognized as of December 31, 2002
under EITF 94-3 that would not have been recognized until incurred had the
Company adopted FAS 146 prior to December 27, 2002.
The Company recognized $400,000 and $1,204,000 in incremental liabilities and $0
and $225,000 for impairment of equipment as of the three and nine months ending
September 30, 2003, respectively, for discontinuation of its Oak Ridge LLRW
Processing and Field Services operations. The Oak Ridge facility completed
removal of customer waste in July 2003. Due to the ongoing nature of efforts to
prepare the facility for sale, the cost estimate to exit from the segment may
change further, potentially by a material amount.
LITIGATION
The Company is involved in litigation requiring estimates of timing and loss
potential whose disposition is controlled by the judicial process. During the
quarter ended March 31, 2003, the Company wrote off $20,951,000 due to an
adverse trial court decision which cast substantial doubt on the Company's
ability to recover its investment in the Ward Valley, California disposal
project. The decision to accrue costs or write off assets is based on specific
facts and circumstances pertaining to each case and management's evaluation of
present circumstances.
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 $6.2 million contribution is included in the balance sheet amount
of $6,478,000 of capitalized facility development costs. The State appealed the
judgment to the Eighth Circuit Court of Appeals.
The case was argued before the Eighth Circuit on June 12, 2003. 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.
INCOME TAXES
The Company has historically recorded a valuation allowance against its deferred
tax assets in accordance with FAS 109, Accounting for Income Taxes. This past
valuation allowance reflected management's past belief that due to a history of
tax losses and prospects for the Company's business, it would likely not utilize
portions of the deferred tax assets prior to their expiration. The valuation
allowance is based on management's contemporaneous evaluation of whether it is
more likely than not that the Company will be able to utilize some, or all of
the deferred tax assets. During 2002, the Company assessed the valuation
21
allowance and reversed approximately $8,284,000 of the valuation allowance that
the Company expected to utilize in the foreseeable future. During the three
months ended March 31, 2003, the Company reclassified the entire net deferred
tax asset as long term, given that no taxable income is expected during 2003
following write off of the Ward Valley project.
RESULTS OF OPERATIONS
- -----------------------
The following table presents, for the periods indicated, the operating costs as
a percentage of revenues in the consolidated income statement:
Three Months Ended Nine Months Ended
------------------ -----------------
(Restated) (Restated)
---------- ----------
($ in 000's) September 30, 2003 September 30, 2002 September 30, 2003 September 30, 2002
---------------------- ----------------------- ----------------------- -----------------------
$ % $ % $ % $ %
--------- ----------- ---------- ----------- ---------- ----------- ---------- -----------
Revenue 17,324 11,048 40,115 35,077
Direct operating costs 10,383 59.9% 6,417 58.1% 22,423 55.9% 18,433 52.6%
--------- ---------- ---------- ----------
Gross profit 6,941 40.1% 4,631 41.9% 17,692 44.1% 16,644 47.4%
SG & A 3,302 19.1% 2,691 24.4% 11,088 27.6% 8,439 24.1%
--------- ---------- ---------- ----------
Income from operations 3,639 21.0% 1,940 17.6% 6,604 16.5% 8,205 23.4%
Interest income 312 1.8% 7 0.1% 334 0.8% 31 0.1%
Interest expense 60 0.3% 221 2.0% 219 0.5% 726 2.1%
Loss on write off of
Ward Valley -- 0.0% -- 0.0% 20,951 52.2% -- 0.0%
Other income (expense) 20 0.1% 35 0.3% 113 0.3% (290) -0.8%
--------- ---------- ---------- ----------
Net income (loss) before
income taxes 3,911 22.6% 1,761 15.9% (14,119) -35.2% 7,220 20.6%
Income tax expense 18 0.1% (226) -2.0% 73 0.2% (226) -0.6%
--------- ---------- ---------- ----------
Net income (loss) before
discontinued operations and
cumulative effect of
accounting change 3,893 22.5% 1,987 18.0% (14,192) -35.4% 7,446 21.2%
========= ========== ========== ==========
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
- ------------------------------------------------------------
REVENUE
- -------
For the three months ended September 30, 2003, the Company reported consolidated
revenue of $17,324,000, a 57% increase from the $11,048,000 reported for the
same period in 2002. During the three months ending September 30, 2003 and 2002,
$4,225,000 and $3,853,000 or 24% of revenue, represented work performed under
contract with the U.S. Army Corps of Engineers. The Army and other federal
agencies continue to ship waste under this contract to the Company's Grand View,
Idaho facility. During the three months ending September 30, 2003, $5,400,000 or
31% of revenue, represented work performed under one contract for a New Jersey
PCB clean-up project.
Operating Disposal Facilities
- -------------------------------
The Richland, Washington LLRW disposal facility's revenue increased
substantially for the three months ended September 30, 2003 above the same
period in 2002. This increase in revenue was due to receipts of relatively
higher levels of radiation in the waste shipments received. Also, while a
significant portion of the Richland facility's revenue is regulated by the
Washington Utilities and Transportation Commission, the facility accepts certain
wastes that are not subject to rate regulation. Revenues from this non rate
regulated waste increased.
At the Grand View, Idaho disposal facility, revenue increased 96% from the same
period last year. During the third quarter of 2003, the facility disposed of 77%
more tons than the same period last year. Management expects the Army Corps of
Engineers and other federal agencies to continue shipping to the facility under
these contracts facility through the fourth quarter of 2003 and beyond. The New
22
Jersey PCB clean-up contract is expected to result in an additional $4,600,000
of revenue during the fourth quarter of 2003.
At the Beatty, Nevada hazardous treatment and disposal facility, revenue
decreased $538,000 for the three months ended September 30, 2003 from the same
period in 2002, although revenue did increase from the second quarter of 2003.
The lower revenue was primarily due to decreased waste volumes caused by general
economic weakness and fewer projects to bid. However, the Company and the site
did experience an increase in bid activity in the quarter. No assurance can be
given that these bids will result in increased revenue in future periods At the
Robstown, Texas hazardous treatment and disposal facility, revenue increased
$440,000 for the three months ended September 30, 2003 over the same period in
2002. The increase in revenue and waste volume resulted from an increase in both
Base and Event work performed during the quarter, as the Company began to see
increased volume from remediation projects and increased activity from existing
customers.
DIRECT OPERATING COSTS
- ----------------------
For the three months ended September 30, 2003, consolidated direct operating
costs increased 62% to $10,383,000 (60% of revenue) compared to $6,417,000 (58%
of revenue) for the same period in 2002. The relatively higher direct operating
costs reflect the low margin revenue on the New Jersey PCB clean-up project
which was still very beneficial to the Company due to the size of the project.
The Company continues its efforts to minimize direct costs through operational
improvements.
Operating Disposal Facilities
- -------------------------------
Direct costs at the Richland, Washington; Robstown, Texas; and Beatty, Nevada
facilities essentially remained flat. The increase in consolidated direct
operating costs for the Company were driven by an increase in direct costs at
the Grand View, Idaho facility of $4,244,000. This increase was due to increased
volumes of waste received and related transportation costs. Approximately
$3,300,000 of the increase in direct operating costs at Grand View was for
transportation costs related to the New Jersey PCB clean-up project.
Non Operating Disposal Facilities
- ------------------------------------
Non Operating Disposal Facilities incur primarily engineering, laboratory and
other contractor expenses and labor costs required to meet the Company's
obligations subsequent to operational use. For the three months ended September
30, 2003 and 2002, the Company reported $8,000 and $344,000 of expenses related
to litigation on proposed development projects, and $114,000 and $58,000 of
costs in 2003 and 2002 to remediate or close facilities subsequent to use.
GROSS PROFIT
- -------------
For the quarter, the significantly higher revenue allowed the Company to
generate a 50% increase in gross profit, pushing quarterly gross profit to
$6,941,000 compared with a gross profit of $4,631,000 last year. The increased
disposal revenue at the Grand View, Richland, and Robstown facilities allowed
the Company to take advantage of the relatively high fixed cost nature of the
business and realize more fall through to the bottom line. Relative to revenue,
gross margin declined slightly to 40% of revenue compared to 42% of revenue
during the same quarter last year due to the New Jersey PCB project's low but
still significant margin.
SELLING, GENERAL AND ADMINISTRATIVE COSTS (SG&A)
- ------------------------------------------------
For the three months ended September 30, 2003, the Company reported SG&A of
$3,302,000 (19% of revenue), a 23% increase in absolute dollars from the
$2,691,000 (24% of revenue) for the same three months of 2002, but a decrease
relative to revenue. The increase in SG&A resulted from a number of factors
including $235,000 accrued for payroll and benefits on an employment contract
terminated on September 30, 2003, and an additional $50,000 of costs associated
with the Company's financial assurance program.
23
Non Operating Disposal Facilities
- ------------------------------------
Non Operating Disposal Facilities incur primarily legal costs to protect the
Company's investment in disposal site development projects in Ward Valley,
California and Butte, Nebraska. For the three months ended September 30, 2003
and 2002, the Company reported $1,000 and $42,000 of SG&A expenses,
respectively, at Non Operating Disposal Facilities. Substantially all 2002
expenses were legal costs associated with the Nebraska litigation.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
- -----------------------------------------------------------
REVENUE
- -------
For the nine months ended September 30, 2003, the Company reported consolidated
revenue of $40,115,000, 14% higher than the $35,077,000 reported for the same
period in 2002. During the nine months ending September 30, 2003 and 2002,
$12,083,000 and $10,724,000 or 30% and 21% of revenue, respectively, represented
work performed under contract with the U.S. Army Corps of Engineers. During the
nine months ending September 30, 2003, $5,400,000 or 14% of revenue, represented
work performed for the New Jersey PCB clean-up project.
Operating Disposal Facilities
- -------------------------------
At the Company's Grand View, Idaho disposal facility, revenue increased 68% over
the same nine months last year. During the first nine months of 2003, the
facility disposed of substantially increased waste volumes, mostly under the
Army Corps of Engineers contract, due to increased shipments from both the Army
and other federal agencies utilizing the contract. It is expected that the
federal government will continue to ship significant volumes of waste to the
facility for the remainder of 2003 and in 2004.
The Richland, Washington facility's revenue decreased $1,890,000 for the nine
months ended September 30, 2003 from the same period in 2002. The decrease in
revenue was primarily due to a large clean-up project performed for the Army
Corps of Engineers (Fort Greely, Alaska Project), unrelated to the Company's
Idaho site contract, during the first quarter of 2002. This business was not
replaced in 2003. A majority of the Richland facility's revenue is controlled by
a stipulated rate agreement with the Washington Utility and Transportation
Commission that caps annual rate regulated revenue at $5,438,000 in 2003.
In the nine months ending September 30, 2003, revenue at the Beatty, Nevada
disposal facility was $657,000 lower than the same nine months in 2002,
primarily due to decreased waste volumes received for treatment and disposal.
General economic weakness resulted in reduced waste production and fewer
remedial projects. The Beatty site continues to experience transportation and
state tax disadvantages in competing for business in the California industrial
waste market.
At the Robstown, Texas hazardous treatment and disposal facility, revenue
decreased $1,999,000 for the nine months ended September 30, 2003 from the same
period in 2002. This decrease was due to reduced event business. Like Richland,
a large first half 2002 event project was not replaced in 2003. General economic
weakness was also a factor.
DIRECT OPERATING COSTS
- ----------------------
For the nine months ended September 30, 2003, consolidated direct operating
costs increased 22% to $22,423,000 (60% of revenue) compared to $18,433,000 (58%
of revenue) in the same period in 2002. The relatively higher direct operating
costs reflect the significant amount of low margin revenue realized on the New
Jersey PCB clean-up project during the period. The Company continues its
efforts to minimize direct costs through improved operational efficiency.
Operating Disposal Facilities
- -------------------------------
Direct costs at the Richland, Washington; Robstown, Texas and Beatty, Nevada
facilities essentially remained flat. The increase in direct operating costs was
caused by increases in direct cost at the Grand View, Idaho facility of
24
$4,743,000 due to increased waste volumes and related transportation costs.
Approximately $3,300,000 of the increase in direct operating costs at Grand View
was for New Jersey PCB clean-up project transportation costs which are variable
in nature.
Non Operating Disposal Facilities
- ------------------------------------
Non Operating Disposal Facilities incur primarily engineering, laboratory and
other contractor expenses and labor costs required to meet the Company's
obligations subsequent to operational use. For the nine months ended September
30, 2003 and 2002, the Company reported $32,000 and $814,000 of expenses related
to licensing facilities for initial use and $320,000 and $233,000 in 2003 and
2002 to remediate or close facilities subsequent to use.
GROSS PROFIT
- -------------
For the nine months ending September 30, 2003 gross profit increased $1,048,000
to $17,692,000 (44% of revenue) from $16,644,000 million (47% of revenue) during
the same nine months last year. The increased gross profit in the first nine
months of 2003 reflect a large project, increased shipments under the Army Corps
of Engineers contract at the Grand View facility, and the fixed cost nature of
the Company's disposal facilities.
SELLING, GENERAL AND ADMINISTRATIVE COSTS (SG&A)
- ------------------------------------------------
For the nine months ended September 30, 2003, the Company reported SG&A of
$11,088,000 (28% of revenue), a 31% increase from the $8,439,000 (24% of
revenue) for the same nine months of 2002. The primary increase in SG&A is due
to $1,790,000 in 2003 legal and related fees associated with the Ward Valley
trial. Also contributing to the higher SG&A were higher insurance costs, costs
to upgrade accounting and information systems, and costs associated with
staffing changes, including relocation and the buyout of an executive contract.
While spending on information systems was higher in the nine months 2003 than
the same nine months of 2002, management expects that the investment in
information systems infrastructure will improve efficiencies and not be
recurring in future periods.
COMPARISON OF THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
- ---------------------------------------------------------------------
INTEREST INCOME
- ---------------
For the nine months ended September 30, 2003, the Company earned $334,000 of
interest income, an increase from $31,000 in the same period of 2002. During the
three months ended September 30, 2003, the Company received the remaining
$95,000 in 1996 Federal Income Tax refunds plus interest of $302,000. Interest
income is earnings on tax refunds, cash balances, restricted investments, and
notes receivable of which the Company traditionally maintains minimal amounts
and are a function of prevailing market rates. The Company received
approximately $10,000,000 from the February 13, 2003 sale of the El Centro
municipal waste landfill. This cash was utilized to support operations, for
capital expenditures and to fund retirement of Series D Preferred Stock and
accrued dividends. The balance has been maintained in very short term
investments. Based on anticipated cash balances and low interest rates, the
Company does not anticipate significant interest income in the future.
INTEREST EXPENSE
- -----------------
For the three months ended September 30, 2003, the Company reported interest
expense of $60,000, a decrease of $161,000 from the corresponding period in
2002. The primary cause of this decrease was the refinancing of the $8,500,000
industrial revenue bond ("IRB") for the Grand View, Idaho facility, which bore
an interest rate of 8.25%. The IRB was substantially refinanced in November,
2002 through a $7,000,000, five year, fully amortizing term loan from the
Company's primary lender, Wells Fargo Bank. The term loan provides a variable
interest rate at either the bank's prime rate or an offshore rate plus an
applicable margin based upon the Company's performance. For the three and nine
months ended September 30, 2003, the interest rate paid on the majority of the
outstanding term loan was 3.5%. Additional reductions in interest expense
reflect management's initiative to retire high cost debt and incur no new debt
25
other than periodic short term borrowings under the Company's line of credit. At
September 30, 2003, the line of credit had a zero balance.
OTHER INCOME (LOSS)
- -------------------
Other Income is composed of the following ($ in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2003 2002 2003 2002
---------------- ------------------ ---------------- ------------------
Litigation accrual related to GM settlement $ -- $ -- $ -- $ (740)
Payment received, National Union settlement -- -- -- 250
Other litigation related settlements -- -- -- 100
Insurance claim refunds -- -- -- 27
Data processing services -- 28 8 55
Cash receipts for sale or rent of property rights 20 -- 100 --
Other miscellaneous income, net -- 7 5 18
---------------- ------------------ ---------------- ------------------
Total other income (loss) $ 20 $ 35 $ 113 $ (290)
================ ================== ================ ==================
INCOME TAXES
- ------------
The components of the income tax provision (benefit) were as follows (in
thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2003 2002 2003 2002
----------------- ------------------ ---------------- ------------------
State tax expense (benefit) $ 18 $ (226) $ 73 $ (226)
================= ================== ================ ==================
The tax effects of temporary differences between income for financial reporting
and taxes give rise to deferred tax assets and liabilities. The Company has
historically recorded a valuation allowance for certain deferred tax assets due
to uncertainties regarding future operating results, and for limitations on
utilization of acquired net operating loss carry forwards for tax purposes. The
potential realization of a significant portion of net deferred tax assets is
based in part on the Company's estimates of the timing of reversals of certain
temporary differences and on the generation of taxable income before such
reversals. In 2002, the Company reevaluated the deferred tax asset valuation
allowance, determined it was then "more likely than not" that a portion of the
deferred tax asset would be realizable, and decreased the portion of the
valuation allowance related to its operating facilities.
During the quarter ended March 31, 2003, the Company wrote off its entire
$20,951,000 Ward Valley asset. This large write off effectively assures the
Company of a tax loss in 2003. Due to this expected loss, the $8,284,000 net
deferred tax asset has been classified as long term. Management expects to
realize a portion of this asset in 2004.
The net operating loss carry forward was approximately $44,000,000 at September
30, 2003. Of this carry forward, approximately $2,745,000 is limited pursuant to
the net operating loss limitation rules of Internal Revenue Code Section 382 and
begins to expire in 2006. The remaining unrestricted net operating loss carry
forward expires at various dates between 2010 and 2020.
SEASONAL EFFECTS
- ----------------
Operating revenues are generally lower in the winter months than the warmer
summer months when more short duration, one-time remediation projects tend to
occur. However, both disposal and processing revenue are more affected by
market conditions than seasonality.
26
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
At September 30, 2003, cash and cash equivalents totaled $6,503,000, an increase
of $6,368,000 from December 31, 2002. The increase in cash was primarily due to
the sale of El Centro for $10,000,000 in cash. The Company expects the primary
uses of cash balances during the remainder of 2003 to be for disposition of
waste removed from the Oak Ridge, Tennessee facility. In September of 2003, the
Company's insurance policy for financial assurance at its hazardous waste
disposal facilities was extended to December 19, 2003. This required the Company
to post additional collateral through a standby letter of credit. It is expected
that the cost and cash collateral requirements to renew this insurance will
increase. Depending on collateral requirements, the new terms could have a
material, adverse impact on the Company's available cash.
On February 28, 2003, the Company repurchased all 100,001 shares of Series D
Preferred Stock outstanding for a net cash outflow of $2,800,000 after netting
out $3,525,000 in cash received for 2,350,000 common shares issued for exercise
of the Series E Warrants. Repurchase of the Series D Preferred Stock eliminated
an 8 3/8% debt instrument due to the preferred stockholders, and removed the
potential dilution that the conversion of these shares would have had on common
stockholders. In addition to regularly scheduled debt payments, the Company
early retired $1,014,000 of relatively high cost debt in the first nine months
of 2003 and retired an additional $658,000 of debt secured by equipment included
in the sale of the El Centro landfill. These preferred stock and debt reduction
actions reflect continuing management initiatives to improve the Company's
balance sheet and maximize asset utilization.
On March 28, 2003 the Company exercised an early buyout of an operating lease
for $1,159,000 and recorded equipment purchases with a book value of $702,000
along with a reduction in the deferred gain of $457,000. In conjunction with the
early buyout, the Company recorded an impairment charge of $225,000 on certain
equipment utilized at the discontinued Oak Ridge operation which was included in
the early lease buyout. The early lease buyout accomplished a primary objective
of repaying Wells Fargo Bank $500,000 required by the Bank as a condition of
approving the Company's repurchase of the Series D Preferred Stock. In addition,
the Company cleared title to certain leased equipment at the Oak Ridge facility
to support ongoing efforts to sell the facility. Lastly, buyout of the operating
lease eliminated an expensive source of capital, improving the Company's overall
cost of capital.
During the first nine months of 2003, the Company's days sales outstanding
("DSO") decreased at September 30, 2003, compared to December 31, 2002.
Continued improvement in cash and receivable balances is a priority. Management
expects that implementation of its new information system and hiring of a credit
and collections manager will continue to improve DSO.
As of September 30, 2003 and December 31, 2002, the Company's liquidity, as
measured by the current ratio, remained at 1.5 to 1.0. The primary changes to
working capital were earnings, the sale of El Centro for $10,000,000,
repurchase of the Series D Preferred Stock which resulted in a net cash outflow
of $2,800,000, debt retirement, and $4,941,000 in capital expenditures paid with
cash. The majority of these capital expenditures were for construction of new
disposal capacity at the Grand View, Idaho facility.
The debt to equity ratio increased to 1.1:1.0 at September 30, 2003, compared to
0.9:1.0 at fiscal year-end 2002. The increase in the Company's debt to equity
ratio reflects the $20,951,000 write off of the Ward Valley asset. This
outweighed the Company's operating earnings and repayment of approximately
$5,900,000 in liabilities during the first nine months of 2003. The debt to
equity ratio is defined as total liabilities divided by stockholders equity
On September 30, 2003, the Company had a $6,000,000 revolving line of credit in
place with Wells Fargo Bank in Boise, Idaho maturing June 15, 2004. The line of
credit is secured by the Company's accounts receivable. At September 30, 2003
and December 31, 2002, the outstanding balance on the revolving line of credit
was $0 and $603,000, respectively. The Company borrows and repays according to
business demands and availability of cash. It currently reserves $3,508,000 as a
letter of credit used as collateral for an insurance policy and a lien bond.
A $4,500,000 disposal capacity expansion at the Grand View, Idaho facility was
completed in the third quarter of 2003. The Company expects higher capital
spending at its Robstown, Texas facility as efforts continue to upgrade the
facility and increase operational efficiency.
The Company's Oak Ridge facility continues to require cash. Usage of cash is
expected to increase as waste shipped off site is managed and billed. At
September 30, 2003, the Company's Oak Ridge facility had liabilities expected to
be paid in 2003 of $3,700,000.
27
The Company believes that cash on hand and cash flow from operations, augmented
as needed by periodic borrowings under the line of credit, will be sufficient to
meet the Company's cash needs for the foreseeable future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company does not maintain equities, commodities, derivatives, or any other
instruments for trading or any other purposes, and does not enter into
transactions denominated in currencies other than the U.S. Dollar.
The Company has minimal interest rate risk on investments or other assets as the
amount held is traditionally the minimum requirement imposed by insurance or
government agencies. At September 30, 2003, $244,000 is held in short term
pledged investment accounts. An additional $4,500,000 is held in short term
investments available for utilization by the Company in 2003 for capital
expenditures and payment of accrued liabilities. Together these items earn
interest at approximately 2%, and comprise 7% of assets.
The Company has interest rate risk on debt instruments. On October 28, 2002,
the Company substantially refinanced the 8.25% fixed rate $8,500,000 Industrial
Revenue Bond with a $7,000,000 five year term loan from the Company's primary
lender. The term loan provides for a variable interest rate of the bank's prime
rate or an offshore rate plus an applicable margin that is based upon the
Company's performance. At September 30, 2003 the interest rate incurred by the
Company was 3.5% on the outstanding term loan balance of $5,833,000. As of
September 30, 2003, each 1% change in the term loan interest rate would result
in an annual $51,000 change in interest expense.
ITEM 4. CONTROLS AND PROCEDURES.
(a) As of the end of the quarter prior to the filing of this report,
Company management, under the direction of the Chief Executive Officer and Chief
Financial Officer, carried out an evaluation of the effectiveness of the design
and operation of the Company's disclosure controls and procedures pursuant to
Rule 13a-14 of the Securities Exchange Act of 1934 (Exchange Act). Based upon
that evaluation, the Chief Executive Officer and Chief Financial Officer believe
that the Company's disclosure controls and procedures are effective in timely
alerting them to material information required to be disclosed in the Company's
Exchange Act filings.
(b) The Company maintains a system of internal controls that is designed to
provide reasonable assurance that its records and filings accurately reflect the
transactions engaged in. For the quarter ending September 30, 2003, there were
improvements to the Company's systems used to record and summarize transactions.
The improvements have enabled the Company to identify and modify internal
controls as well as operational procedures.
PART II OTHER INFORMATION.
- --------------------------
ITEM 1. LEGAL PROCEEDINGS.
Significant developments have occurred on the following legal matters since
December 31, 2002:
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, subsidiary US Ecology, Inc., sued the State of California, et. al.
("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. California law requires the state to build a disposal site for
LLRW produced in California, Arizona, North Dakota and South Dakota; member
states of the Southwestern Compact. 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 State and entered a ground lease.
The State successfully defended the license against court challenges and, until
Governor Gray Davis took office, actively pursued conveyance of the site from
the federal government. In September 2000, the Superior Court granted
California's motion to dismiss all causes of action, which the Company appealed.
In September 2001, the California Fourth Appellate District Court remanded the
28
case for trial on promissory estoppel grounds. The case was tried in Superior
Court for the County of San Diego during February and March 2003.
On March 26, 2003, the Superior Court issued a Statement of Decision finding
that the Company failed to establish causation and that its claim is further
barred by the doctrine of unclean hands. The latter finding was based on actions
the Court concluded had created obstacles to an agreement between the federal
government and the State to convey the site. The Court also found that key
elements of the Company's promissory estoppel claim had been proven at trial.
Specifically, the Court ruled that the State made a clear and unambiguous
promise to US Ecology in 1988 to use its best efforts to acquire the site, that
Governor Davis' administration abandoned this promise, and that the Company's
reliance on the State's promise was reasonable and foreseeable. However, the
Court found that the State's breach of its best efforts promise was not a
substantial factor in causing damages to US Ecology since the federal government
had continued to resist the land transfer.
Based on the uncertainty of recovery following the trial court's adverse
decision, the Company wrote off the $20,951,000 deferred site development asset
at March 31, 2003.
On May 2, 2003, the Company filed a motion to vacate and enter new judgment with
the trial court, arguing that the March 26 decision misapplied the law to the
facts. On May 30, 2003, this motion was denied without comment. On June 26,
2003, the Company filed a notice of appeal with the California Fourth Appellate
District Court.
The Company's financial interest in the pending claim against the State was
improved by an amendment to the November 13, 1998 Ward Valley Interest Agreement
and Assignment entered into by American Ecology and its former primary lender.
This June 27, 2003 amendment, entered into by the Company and the successor in
interest to that lender, provides that any monetary damages obtained shall first
be allocated to the Company to recover past and future litigation fees and
expenses relating to the case. Thereafter, any remaining amount recovered shall
be divided equally between the Company and the former lender. The 1998 agreement
had provided that the first $29.6 million less up to $1.0 million in legal fees
and expenses would be owed to the former lender, with any remaining recovery
reserved to the Company.
In early July, the Company engaged the law firm of Cooley Godward on a fixed
price plus contingency basis to pursue the appeal, paying the fixed fee at the
time of engagement. A briefing schedule has not been set. No assurance can be
given that the Company will prevail on appeal or reach a settlement to recover
any portion of its investment.
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 sought
unspecified damages for infringement, treble damages, interest, costs and
attorney fees. 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. Manchak
appealed; however, plaintiff failed to timely file its appellant's brief and the
Company moved to dismiss the appeal. On July 2, 2003, the US Court of Appeals
for the Federal Circuit granted the Company's motion to dismiss, and denied
plaintiff's request for an extension of time and relief from page/word brief
limitations. On July 20, 2003 the plaintiff filed a motion for reconsideration
with the appellate court and later filed for en banc review by the Court of
Appeals for the Federal Circuit. Both the motion for reconsideration and en banc
review were denied by the Court of Appeals on September 3, 2003. The Company
considers the matter closed.
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
29
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 of approximately $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.
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 $6.2 million contribution is included in the balance sheet amount
of $6,478,000 of capitalized facility development costs. 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.
The case was argued before the Eighth Circuit on June 12, 2003. 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.
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. In November 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. The
Company subsequently filed a motion for summary judgment seeking dismissal
against all of the adult plaintiffs on statute of limitations grounds. On March
26, 2003, the court granted this motion and dismissed the adult plaintiffs.
Seven minors and one intervenor remain party to the lawsuit. 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 in prior periods.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On February 28, 2003, the Company repurchased all 100,001 shares of Series D
Preferred Stock for the original sales price of $47.50 a share plus accrued but
unpaid dividends of $16.56 a share. A total cost of $6,406,000 was incurred to
complete the repurchase.
During February, 2003, three remaining Series E warrant holders exercised
2,350,000 Series E warrants with an exercise price of $1.50 per share.
Consequently, the Company issued 2,350,000 shares of common stock and received
$3,525,000 in cash. There are no Series E warrants outstanding.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
NONE
ITEM 5. OTHER INFORMATION.
NONE
30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are filed as part of this report:
Exhibit 31.1 Certification of September 30, 2003 Form 10-Q by Chief Executive
Officer dated November 12, 2003
Exhibit 31.2 Certification of September 30, 2003 Form 10-Q by Chief Financial
Officer dated November 12, 2003
Exhibit 32.1 Certification of September 30, 2003 Form 10-Q by Chief Executive
Officer dated November 12, 2003
Exhibit 32.2 Certification of September 30, 2003 Form 10-Q by Chief Financial
Officer dated November 12, 2003
(b) Reports on Form 8-K.
On July 28, 2003, the Company issued an 8-K to announce second
quarter 2003 earnings.
On October 23, 2003, the Company issued an 8-K to announce third
quarter 2003 earnings.
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: November 12, 2003 By: /s/ Stephen A. Romano
-------------------------------
Stephen A. Romano
President, Chief Executive Officer and
Chief Operating Officer
Date: November 12, 2003 By:/s/ James R. Baumgardner
-------------------------------
James R. Baumgardner
Senior Vice President, Chief Financial
Officer, Secretary and Treasurer
31
EXHIBIT INDEX
Exhibit Description
- ------- -----------
Exhibit 31.1 Certification of September 30, 2003 Form 10-Q by Chief Executive
Officer dated November 12, 2003
Exhibit 31.2 Certification of September 30, 2003 Form 10-Q by Chief Financial
Officer dated November 12, 2003
Exhibit 32.1 Certification of September 30, 2003 Form 10-Q by Chief Executive
Officer dated November 12, 2003
Exhibit 32.2 Certification of September 30, 2003 Form 10-Q by Chief Financial
Officer dated November 12, 2003
32