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 March 31, 2004
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 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 Exchange Act).
Yes [ ] No [X]
At April 30, 2004 Registrant had outstanding 17,209,150 shares of its Common
Stock.
AMERICAN ECOLOGY CORPORATION
QUARTERLY REPORT ON FORM 10-Q FOR THE
THREE MONTHS ENDED MARCH 31, 2004
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 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
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
Steven D. Welling
Vice President, Sales & Marketing
John M. Cooper
Vice President and Chief Information Officer
DIRECTORS
- ---------
Roger P. Hickey, Chairman
President, Chicago Partners
David B. Anderson
President, Highland Capital Enterprises Corp.
Rotchford L. Barker
Independent Businessman
Roy C. Eliff
Independent Businessman
Edward F. Heil
Independent Businessman
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 (UNAUDITED)
($ IN 000'S EXCEPT PER SHARE AMOUNTS)
MARCH 31,2004 December 31,2003
--------------- ------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 10,771 $ 6,674
Receivables, net 8,576 12,596
Income taxes receivable 52 2
Prepayments and other 861 1,049
Deferred income taxes 2,057 3,222
Assets held for sale or closure 735 938
--------------- ------------------
Total current assets 23,052 24,481
Cash and investment securities, pledged 131 170
Property and equipment, net 27,500 28,317
Facility development costs 6,478 6,478
Other assets 565 561
Deferred income taxes 5,062 5,062
Assets held for sale or closure 1,557 1,557
--------------- ------------------
Total assets $ 64,345 $ 66,626
=============== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long term debt $ 1,474 $ 1,475
Accounts payable 1,605 1,678
Accrued liabilities 6,501 4,788
Accrued closure and post closure obligation, current portion 1,828 1,828
Liabilities of assets held for sale or closure, current portion 928 1,907
--------------- ------------------
Total current liabilities 12,336 11,676
Long term debt 3,835 4,200
Long term accrued liabilities 513 454
Accrued closure and post closure obligation, excluding current portion 9,405 9,296
Liabilities of assets held for sale or closure, excluding current portion 4,608 4,649
--------------- ------------------
Total liabilities 30,697 30,275
--------------- ------------------
Commitments and contingencies
Shareholders' equity:
Convertible preferred stock, 1,000,000 shares authorized
Common stock, $.01 par value, 50,000,000 authorized, 17,175,150
and 17,033,118 shares issued and outstanding 172 170
Additional paid-in capital 49,681 54,824
Accumulated deficit (16,205) (18,643)
--------------- ------------------
Total shareholders' equity 33,648 36,351
--------------- ------------------
Total Liabilities and Shareholders' Equity $ 64,345 $ 66,626
=============== ==================
<FN>
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
MARCH 31, 2004 March 31, 2003
--------------- ----------------
Revenue $ 13,905 $ 10,771
Direct operating costs 7,612 5,984
--------------- ----------------
Gross profit 6,293 4,787
Selling, general and administrative expenses 2,872 4,497
--------------- ----------------
Operating income 3,421 290
Interest income 36 --
Interest expense 49 121
Loss on write off of Ward Valley facility development costs -- 20,951
Other income 45 --
--------------- ----------------
Income (loss) before income tax and discontinued operations 3,453 (20,782)
Income tax expense (benefit) 1,164 (8)
--------------- ----------------
Income (loss) before discontinued operations 2,289 (20,774)
Gain from discontinued operations - El Centro Landfill -- 4,944
Gain (loss) from discontinued operations - Oak Ridge LLRW Facility 149 (1,337)
--------------- ----------------
Net income (loss) 2,438 (17,167)
Preferred stock dividends -- 64
--------------- ----------------
Net income (loss) available to common shareholders $ 2,438 $ (17,231)
=============== ================
Basic earnings (loss) from continuing operations .13 (1.34)
Basic earnings from discontinued operations .01 .23
--------------- ----------------
Basic earnings (loss) per share $ .14 $ (1.11)
=============== ================
Diluted earnings (loss) from continuing operations .13 (1.34)
Diluted earnings from discontinued operations .01 .23
--------------- ----------------
Diluted earnings (loss) per share $ .14 $ (1.11)
=============== ================
Dividends paid per common share $ -- $ --
=============== ================
<FN>
See notes to consolidated financial statements.
5
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, $ IN 000'S)
Three Months Ended March 31,
----------------------------
2004 2003
-------- ---------
Cash flows from operating activities:
Net income (loss) $ 2,438 $(17,167)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, amortization, and accretion 1,488 1,707
Income from discontinued operations (149) (3,607)
Write off of Ward Valley project -- 20,951
Changes in assets and liabilities:
Receivables 4,020 3,211
Other assets 173 131
Closure and post closure obligation (148) (204)
Income taxes payable 1,115 (10)
Accounts payable and accrued liabilities 1,699 875
-------- ---------
Net cash provided by operating activities 10,636 5,887
Cash flows from investing activities:
Capital expenditures (513) (2,277)
Proceeds from sale of assets 110 --
Transfers from cash and investment securities, pledged 39 --
-------- ---------
Net cash used in investing activities (364) (2,277)
Cash flows from financing activities:
Payments of indebtedness (366) (1,531)
Retirement of series D preferred stock -- (6,406)
Retirement of common stock warrants (5,500) --
Stock options exercised 359 3,650
-------- ---------
Net cash used in financing activities (5,507) (4,287)
-------- ---------
Increase (decrease) in cash and cash equivalents 4,765 (677)
Net cash provided by (used in) discontinued operations (668) 7,676
Cash and cash equivalents at beginning of period 6,674 135
-------- ---------
Cash and cash equivalents at end of period $10,771 $ 7,134
======== =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 49 $ 121
Income taxes paid 50 2
Non-cash investing and financing activities:
<FN>
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 2003 Annual Report on Form 10-K
for the year ended December 31, 2003, filed with the Securities and Exchange
Commission.
Certain reclassifications of prior quarter amounts have been made to conform
with 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
shareholders 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 March 31,
($in thousands except per share amounts) 2004 2003
------- ---------
Income (loss) before discontinued operations $ 2,289 $(20,774)
Income from operations of discontinued segments 149 3,607
------- ---------
Net income (loss) 2,438 (17,167)
Preferred stock dividends -- 64
------- ---------
Net income (loss) available to common shareholders $ 2,438 $(17,231)
======= =========
Weighted average shares outstanding-
Common shares 17,090 15,476
Effect of dilutive shares
Stock options 525 --
------- ---------
Average shares 17,615 15,476
======= =========
Basic earnings (loss) per share from continuing operations .13 $ (1.34)
Basic earnings (loss) per share from discontinued operations .01 .23
------- ---------
Basic earnings (loss) per share $ .14 $ (1.11)
======= =========
Diluted earnings (loss) per share from continuing operations .13 $ (1.34)
Diluted earnings (loss) per share from discontinued operations .01 .23
------- ---------
Diluted earnings (loss) per share $ .14 $ (1.11)
======= =========
NOTE 3. EQUITY
On February 17, 2004 the Company redeemed a warrant to purchase 1,349,843 shares
of common stock at $1.50 a share for $5,500,000. The closing market price of the
Company's common stock of February 17, 2004 was $6.99. The warrant had been
issued in 1998 to its former bank as part of a debt restructuring agreement. The
redeemed
7
warrant, which represented approximately 8% of the Company's shares outstanding,
has been surrendered and will not be reissued. The warrant redemption reduced
the Company's cash on hand by $5,500,000 and reduced additional paid-in-capital
by a like amount, with no effect on the Statement of Operations.
NOTE 4. OPERATING SEGMENTS
The Company operates within two segments, Operating Disposal Facilities and
Non-Operating Disposal Facilities, based on its internal reporting structure and
nature of services offered. The Operating Disposal Facility segment represents
facilities accepting hazardous and radioactive waste. The Non-Operating Disposal
Facility segment represents facilities that are not accepting hazardous and/or
radioactive waste or are awaiting approval to open.
On December 27, 2002, the Company committed to discontinue commercial operations
within its Processing and Field Services segment which aggregated,
volume-reduced, and performed remediation and other services on radioactive
material, but excluded processing performed at its disposal facilities. All
prior segment information has been restated in order to present the operations
at the Oak Ridge facility, including the Field Services division, as
discontinued operations.
Effective December 31, 2002, the Company classified the El Centro municipal
landfill as an asset held for sale due to the expected sale of the facility
which occurred on February 13, 2003. All prior segment information has been
restated in order to present the operations of the El Centro landfill as
discontinued operations.
Income taxes are assigned to Corporate, but all other items are included in the
segment where they originated. Inter-company transactions have been eliminated
from the segment information and are not significant between segments.
8
Summarized financial information concerning the Company's reportable segments is
shown in the following table ($ in thousands).
Operating Non-Operating Discontinued
Disposal Disposal Processing and
Facilities Facilities Field Services Corporate Total
- -------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 2004
- ---------------------------------
Revenue $ 13,891 $ 14 $ -- $ -- $ 13,905
Direct operating cost 7,503 109 -- -- 7,612
----------------- --------------- ---------------- ---------------- -----------
Gross profit (loss) 6,388 (95) -- -- 6,293
S,G&A 1,224 5 -- 1,643 2,872
----------------- --------------- ---------------- ---------------- -----------
Income (loss) from operations 5,164 (100) -- (1,643) 3,421
Interest and other income/(expense) 25 17 -- (10) 32
----------------- --------------- ---------------- ---------------- -----------
Income (loss) before income tax and
discontinued operations 5,189 (83) -- (1,653) 3,453
Income tax expense (benefit) -- -- -- 1,164 1,164
Discontinued operations -- -- 149 -- 149
----------------- --------------- ---------------- ---------------- -----------
Net Income (loss) $ 5,189 $ (83) $ 149 $ (2,817) $ 2,438
================= =============== ================ ================ ===========
Depreciation and accretion $ 1,478 $ 2 $ -- $ 8 $ 1,488
Capital Expenditures $ 481 $ -- $ -- $ 32 $ 513
Total Assets $ 36,307 $ 6,529 $ 2,292 $ 19,217 $ 64,345
- -------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 2003
- ---------------------------------
Revenue $ 10,767 $ 4 $ -- $ -- $ 10,771
Direct operating cost 5,882 102 -- -- 5,984
----------------- --------------- ---------------- ---------------- -----------
Gross profit (loss) 4,885 (98) -- -- 4,787
S,G&A 1,826 1,517 -- 1,154 4,497
----------------- --------------- ---------------- ---------------- -----------
Income (loss) from operations 3,059 (1,615) -- (1,154) 290
Interest and other income/(expense) (44) -- -- (77) (121)
Write off of Ward Valley facility -- 20,951 -- -- 20,951
----------------- --------------- ---------------- ---------------- -----------
Income (loss) before income tax and
discontinued operations 3,015 (22,566) -- (1,231) (20,782)
Income tax expense (benefit) -- -- -- (8) (8)
Discontinued operations 4,944 -- (1,337) -- 3,607
----------------- --------------- ---------------- ---------------- -----------
Net Income (loss) $ 7,959 $ (22,566) $ (1,337) $ (1,223) $ (17,167)
================= =============== ================ ================ ===========
Depreciation and accretion $ 1,802 $ 1 $ -- $ 11 $ 1,814
Capital Expenditures $ 2,614 $ 23 $ 473 $ -- $ 3,110
Total Assets $ 36,230 $ 6,519 $ 4,231 $ 16,910 $ 63,890
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
quarters ended March 31, 2004 and 2003:
($in thousands, except per share amounts) 2004 2003
------- ---------
Net income (loss), as reported $2,438 $(17,167)
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects (94) (525)
------- ---------
Pro forma net income (loss) $2,344 $(17,692)
======= =========
9
EARNINGS (LOSS) PER SHARE:
Basic - as reported $ .14 $ (1.11)
======= =========
Basic - pro forma $ .14 $ (1.14)
======= =========
Diluted - as reported $ .14 $ (1.11)
======= =========
Diluted - pro forma $ .13 $ (1.14)
======= =========
The stock option plan summary and changes during quarters ended March 31 are as
follows:
2004 2003
----------- -----------
Options outstanding, beginning of quarter 1,266,281 753,150
Granted -- 758,724
Exercised (141,100) (67,500)
Canceled -- (9,500)
----------- -----------
Options outstanding, end of quarter 1,125,181 1,434,874
=========== ===========
Weighted average exercise price of options, beginning of quarter $ 3.90 $ 3.42
Weighted average exercise price of options granted $ 4.42
Weighted average exercise price of options exercised $ 2.49 $ 1.68
Weighted average exercise price of options canceled $ 3.12
Weighted average exercise price of options, end of quarter $ 4.08 $ 4.03
Options exercisable at end of quarter 819,841 865,831
=========== ===========
Options available for future grant at end of quarter 509,676 453,626
=========== ===========
The following table summarizes information about the stock options outstanding
under the Company's option plans as of March 31, 2004:
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 3.5 67,500 $ 1.32 67,500 $ 1.32
1.60 - $2.25 5.7 84,000 $ 2.04 84,000 $ 2.04
2.42 - $3.50 8.4 354,582 $ 2.92 245,791 $ 2.89
3.75 - $5.00 7.1 424,846 $ 4.30 297,923 $ 4.22
6.50 8.9 139,253 $ 6.50 69,627 $ 6.50
10.13 0.9 55,000 $ 10.13 55,000 $ 10.13
----------- -----------
1,125,181 819,841
=========== ===========
As of March 31, 2004, the 1992 Stock Option Plan for Employees had options
outstanding to purchase 701,681 common shares with 188,976 shares remaining
available for issuance under option grants. The 1992 Stock Option Plan for
Directors had options outstanding to purchase 423,500 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 the following weighted-average assumptions used for
grants during the quarter ended March 31 2003, with no options being granted
during the quarter ended March 31, 2004:
10
2004 2003
---------- ----------
Expected volatility -- 105%
Risk-free interest rates -- 4.25%
Expected lives -- 10 years
Dividend yield -- 0%
Weighted-average fair value of options granted
during the quarter (Black-Scholes) -- $ 2.68
NOTE 6. INCOME TAXES
The Company recognized $1,164,000 of income tax expense during the quarter ended
March 31, 2004 and reduced the current deferred tax asset a corresponding
amount.
At March 31, 2004, the Company has approximately $23,000,000 of deferred tax
assets and a corresponding $15,900,000 valuation allowance which reduces the net
deferred tax asset to $7,119,000. $7,119,000 represents the expected
utilization of deferred tax assets in the foreseeable future.
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. The Company will continue to assess the valuation allowance at
least annually.
NOTE 7. LITIGATION
Significant developments have occurred on the following legal matters since
December 31, 2003:
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 stemming from the
State's alleged abandonment of the Ward Valley low-level radioactive waste
("LLRW") disposal project. The case was tried in Superior Court for the County
of San Diego ("the Superior Court") during February and March 2003. On March 26,
2003, the Superior Court issued a decision against the Company.
Based on the uncertainty of recovery following the Superior Court's adverse
decision, the Company wrote off the $20,951,000 deferred site development asset
on March 31, 2003.
On June 26, 2003, the Company filed a notice of appeal with the California
Fourth Appellate District Court. The opening appellate brief was filed March 15,
2004. The State's opposition brief is due June 14, 2004. The Company's reply
brief will be filed July 5, unless extended by the Appellate Court. The Company
expects oral arguments in the 2nd half of 2004 or early 2005.
No assurance can be given that the Company will prevail on appeal or reach a
settlement to recover any portion of its investment.
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") and seeks declaratory
relief and damages.
11
In September 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 $6.2 million plus $6.1 million for prejudgment interest. The Company
carries $6.5 million on its balance sheet for capitalized facility development
costs. The State of Nebraska subsequently appealed this judgment. On February
18, 2004, the Eighth U.S. Circuit Court of Appeals affirmed the District Court
ruling in its entirety. On March 3, 2004, the State of Nebraska filed a
petition for rehearing by the full Eighth U.S. Circuit Court of Appeals (en
banc). On April 21, 2004, the Eighth Circuit Court of Appeals denied Nebraska's
petition for rehearing. The State of Nebraska may petition the U.S. Supreme
Court to review the matter.
No assurance can be given that the trial and appellate court judgments will be
affirmed on appeal or that US Ecology will recover its contributions or interest
thereon.
NOTE 8. COMMITMENTS AND CONTINGENCIES
Effective January 1, 2003, the Company established the American Ecology
Corporation Management Incentive Plan ("MIP"). 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 a maximum in any
one year of $1,125,000 in bonuses if pre-tax operating income exceeds
$12,000,000 including all costs for the MIP. During the quarter ended March 31,
2004, the Company accrued $292,000 for the Management Incentive Plan which would
be paid to the selected participants if the Company's pre-tax operating income
exceeds $12,000,000 for 2004.
The Company's contract with the US Army Corps of Engineers (USACE) expires
during the second quarter of 2004 unless extended for an additional 5 years at
the option of the USACE. The Company has been notified in writing by the USACE
that it intends to exercise its five year renewal option.
NOTE 9. CLOSURE AND POST CLOSURE OBLIGATIONS
Closure and post closure obligations are recorded when environmental assessments
and/or remedial efforts are probable, and the costs can be reasonably estimated
consistent with Statement of Financial Accounting Standards No. 5. The Company
performs periodic reviews of both non-operating and operating facilities and
revises accruals for estimated post-closure, remediation and other costs when
necessary. The Company's recorded liabilities are based on best estimates of
current costs and are updated periodically to reflect current technology, laws
and regulations, inflation and other economic factors.
Changes to reported closure and post closure obligations were as follows ($ 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, 2003 obligation $ 11,124 $ 4,621 $ 15,745
Accretion of obligation 257 17 274
Payment of obligation (148) (44) (192)
Adjustment of obligation -- -- --
------------------------- ------------------------------ ------------------------
March 31, 2004 obligation $ 11,233 $ 4,594 $ 15,827
========================= ============================== ========================
At March 31, 2004, $131,000 of pledged cash and investment securities were
legally restricted for purposes of settling the closure and post closure
obligation.
NOTE 10. DISCONTINUED OPERATIONS
As of March 31, 2004, "Assets held for sale or closure" consisted of the assets
and liabilities of the discontinued Oak Ridge processing and field services
operations. Accordingly, the revenue, costs and expenses and cash flows for the
Oak Ridge operation have been excluded from continuing operations results and
reported as "Gain (loss) from discontinued operations" and "Net cash provided by
(used in) discontinued operations". Prior periods have been restated to reflect
the discontinued operations. The assets and liabilities of discontinued
operations included within
12
the consolidated balance sheet as of March 31, 2004 are as follows ($ in
thousands):
Processing and Field
Services Facility
---------------------
Current assets
--------------
Current assets $ 183
Property & equipment, net 552
---------------------
735
=====================
Non-current assets
------------------
Property, plant & equipment, net 1,509
Other 48
---------------------
1,557
=====================
Current liabilities
-------------------
Accounts payable & accruals 890
Current portion long term debt 38
---------------------
928
=====================
Non-current liabilities
-----------------------
Closure/post closure obligations 4,593
Long-term debt 10
Other 5
---------------------
4,608
=====================
Operating results for the discontinued operations were as follows for three
months ending March 31:
Processing and Field El Centro Disposal Total Discontinued
($in thousands) Services Operations Facility Operations
2004
----
Revenues, net $ -- $ -- $ --
Operating income (loss) 149 -- 149
Net income (loss) 149 -- 149
Basic earnings (loss) per share .01 .-- .01
Diluted earnings (loss) per share .01 .-- .01
2003
----
Revenues, net $ 779 $ 469 $ 1,248
Operating income (loss) (1,316) 78 (1,238)
Net income (loss) (1,337) 4,944 3,607
Basic earnings (loss) per share (.09) .32 .23
Diluted earnings (loss) per share (.09) .32 .23
On December 27, 2002, the Company discontinued commercial waste processing at
its LLRW Processing Facility and Field Services operations based in Oak Ridge,
Tennessee. During 2003, the Company removed all accumulated customer waste from
the facility and obtained extensive radiological surveys to improve the
facility's marketability.
On March 12, 2004, the Company entered into a non-binding letter of intent with
a potential buyer to acquire the assets held for sale in Oak Ridge, Tennessee.
The potential sale, as contemplated by the letter of intent, would require the
Company to provide cash, defined assets, including certain land, buildings and
equipment, in exchange for the buyer assuming specified liabilities. The
non-binding letter of intent expires May 31, 2004, unless extended by both
parties in writing. While active discussions continue with the potential buyer,
there is no assurance that the Company will be able to sell the Oak Ridge
facility on terms favorable to the Company.
Costs incurred at the Oak Ridge facility to prepare the facility for sale during
the three months ended March 31 are summarized as follows: ($ in thousands)
13
2004 2003
------ ------
Net operating costs in excess of previous accruals $ 34 $ 201
Additional impairment of property and equipment -- 225
Accounts receivable collected in excess of valuation allowance (207) --
Increase in estimated cost to dispose of removed waste 24 911
------ ------
Net Income for the period ended March 31, 2004 $ 149 $1,337
====== ======
Cost changes for Oak Ridge facility on-site activities and disposal liabilities
for removed wastes are as follows:
($in thousands) December 31, 2003 Cash Payments Adjustments March 31, 2004
----------------- -------------- -------------- --------------
Waste disposal liability 623 (139) 24 508
On-site discontinued
operation cost liability 442 (221) 34 255
December 31, 2002 Cash Payments Adjustments March 31, 2003
Waste disposal liability 1,827 (29) 1,596 3,394
On-site discontinued
operation cost liability 1,800 (800) 201 1,201
The adjustments represent differences between the estimated costs accrued at
December 31, actual costs incurred during the first quarter, and changes in
estimated future costs for removed waste disposition.
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, 2003 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, 2003.
Unless otherwise described, changes discussed relate to the increase or decrease
from the three month period ended March 31, 2003 to the three month period ended
March 31, 2004.
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,
refineries, chemical manufacturing plants, steel mills, the U.S. Department of
Defense, biomedical facilities,
14
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 52 years.
A significant portion of the Company's revenue is attributable to discrete waste
clean-up projects ("Event Business") which vary substantially in size and
duration. 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 both large and small Event
Business projects. When the Company's Base Business covers fixed costs, much of
the Event Business revenue falls through to the bottom line. This strategy takes
advantage of the largely fixed cost nature of the business.
OVERALL COMPANY PERFORMANCE
- -----------------------------
The Company's financial performance for the three months ended March 31, 2004
was substantially improved over the first three months of 2003. Quarter to
quarter comparisons are difficult and are materially affected by several events
including high litigation expenses in early 2003 and a related asset write off,
costs to prepare the Company's Oak Ridge, Tennessee discontinued low-level
radioactive waste processing operation for sale, a gain on sale of the El Centro
landfill assets in early 2003 and the recognition of income tax expense in 2004.
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 $1,498,000 were incurred and
included in SG&A during the three months ending March 31, 2003. The Company has
appealed the Ward Valley ruling. Minimal future legal costs are expected based
on a fixed price plus success contingency legal representation agreement entered
and paid in July, 2003 for the appeal.
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.
During the three months ended March 31, 2003, the Company identified and
incurred an additional $1,337,000 in costs to remove waste from the facility and
prepare the facility for sale. This primarily reflected improved information on
the cost to remove specific wastes which became known when the wastes were
prepared for shipment to off-site service providers.
Income Tax Expense: During 2002 the Company evaluated the deferred tax asset and
- -------------------
offsetting valuation allowance and determined that it was probable that
sufficient taxable income would be generated to utilize $8,284,000 of the
deferred tax asset in the foreseeable future. During 2003, the $20,951,000
write-off of Ward Valley facility development costs resulted in a book as well
as tax loss for 2003 and no portion of the deferred tax asset was utilized.
Based on the Company's $3,453,000 first quarter 2004 pre-tax income and
expectation of continued profitability, $1,164,000 of income tax expense was
recognized for the three months ended March 31, 2004.
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, and Income Taxes 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
15
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.
- - 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 $442,000 of expenses were recognized as of December 31, 2003 under
EITF 94-3 that would not have been recognized until incurred had the Company
adopted FAS 146 prior to December 27, 2002. During the three months ended March
31, 2004, the Company incurred $188,000 of the expenses recognized under EITF
94-3 as of December 31, 2003.
During the three months ended March 31, 2003, the Company reduced the allowance
for doubtful accounts of its former Processing and Field Services segment by
$207,000 due to the collection of accounts receivable in excess of previous
allowances for doubtful accounts. At March 31, 2004 the Company was continuing
its efforts to collect the remaining $101,000 of accounts receivable, all of
which is included in its allowance for doubtful accounts.
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 Company has appealed the trial court's ruling.
The US District Court for the District of Nebraska entered judgment against the
State of Nebraska in favor of the Central Interstate Compact and other
plaintiffs including the Company. The Company's share of the judgment was $12.3
million. The Company carries $6.5 million on its balance sheet for capitalized
facility development costs. The State of Nebraska subsequently appealed this
judgment. On February 18, 2004, the Eighth U.S. Circuit Court of Appeals
affirmed the District Court ruling in its entirety. On March 3, 2004, the State
of Nebraska filed a petition for rehearing by the full Eighth U.S. Circuit Court
of Appeals (en banc). On April 21, 2004 the Eighth Circuit Court of Appeals
denied Nebraska's request for full Court of Appeals rehearing. The State of
Nebraska may seek review by the U.S. Supreme Court.
16
No assurance can be given that the Company will prevail in the above litigation
or otherwise recover its investment in the California or Nebraska projects. 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.
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 at that time, 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 allowance and reversed approximately $8,284,000 of the
valuation allowance that the Company expected to utilize in the foreseeable
future. During 2003, the Company did not have tax or book income due to the
write-off of the Ward Valley facility development asset and therefore did not
utilize the deferred tax asset. The Company continues to carry a $15,900,000
valuation allowance against an approximately $23,000,000 deferred tax asset.
During the three months ended March 31, 2004, the Company recognized
approximately 34% of pre-tax income as income tax expense of $1,164,000. The
Company will continue to assess the valuation allowance at least annually.
RESULTS OF OPERATIONS
- -----------------------
The following table presents, for the periods indicated, the operating costs as
a percentage of revenues in the consolidated income statement:
Three Months Ended
----------------------------------
($ in 000's) March 31, 2004 March 31, 2003
-------------- ------------------
$ % $ %
------- ----- --------- -------
Revenue 13,905 10,771
Direct operating costs 7,612 54.7% 5,984 55.6%
------- ---------
Gross profit 6,293 45.3% 4,787 44.4%
SG & A 2,872 20.7% 4,497 41.8%
------- ---------
Operating income 3,421 24.6% 290 2.7%
Interest income 36 0.3% -- 0.0%
Interest expense 49 0.4% 121 1.1%
Loss on write off of Ward Valley -- 0.0% 20,951 194.5%
Other income (expense) 45 0.3% -- 0.0%
------- ---------
Net income (loss) before income taxes 3,453 24.8% (20,782) -192.9%
Income tax expense (benefit) 1,164 8.4% (8) -0.1%
------- ---------
Net income (loss) before discontinued operations 2,289 16.5% (20,774) -192.9%
======= =========
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2004 AND 2003
- -----------------------------------------------------------------
REVENUE
- -------
For the three months ended March 31, 2004, the Company reported consolidated
revenue of $13,905,000, a 29% increase over the $10,771,000 reported for the
same period in 2003. All four operating disposal sites generated higher revenue
during the first quarter of 2004. The higher quarterly revenue resulted from a
combination of increased waste volume and higher average selling price ("ASP")
for the Company's treatment and disposal services. At the 3 hazardous waste
disposal facilities volumes and ASP for services each increased 5% over the same
quarter last year. The increase in waste volume resulted from an increase in
both recurring (or "Base") business and project (or "Event") work performed
during the quarter. The increase in ASP reflected a favorable mix of niche
treatment and disposal business. The balance of the increase in consolidated
revenue resulted from increased transportation
17
revenue as the Company employed its strategy of selective bundling disposal and
transportation to secure targeted disposal contracts. During the three months
ending March 31, 2004 and 2003, revenue from a contract with the U.S. Army Corps
of Engineers accounted for $3,991,000 and $4,156,000 or 29% and 39% of revenue,
respectively. The Army and other federal agencies continue to ship waste under
this contract to the Company's Grand View, Idaho facility. Also during the first
quarter of 2004, one contract for a New York clean-up project represented
$1,438,000 or 10% of revenue.
Operating Disposal Facilities
- -------------------------------
The Richland, Washington LLRW disposal facility's revenue increased
substantially for the three months ended March 31, 2004 above the same period in
2003. This increase in revenue was due to approximately 50% increased receipts
of both rate-regulated and non rate regulated wastes. For 2004, the Washington
Utilities and Transportation Commission have approved a revenue requirement of
$5,476,000 for the Richland facility's rate-regulated low-level radioactive
waste interstate compact business. $1,443,000 of this revenue was recorded in
the three months ended March 31, 2004.
At the Company's Grand View, Idaho disposal facility, higher waste volumes more
than offset slightly lower ASPs, allowing the site to increase revenue 29% from
the same quarter last year. During the first quarter of 2004, the facility
disposed of 21% more tons than the same period last year. Management expects the
U.S. Army Corps of Engineers and other federal agencies to continue shipping to
the facility, and that the Army will renew its contact with the Company for
these services for an additional five years. A privately funded clean-up in New
York also contributed to first quarter revenue growth, but is not expected to
result in significant revenue during the second quarter of 2004.
At the Beatty, Nevada hazardous treatment and disposal facility, revenue
increased 32% for the three months ended March 31, 2004 from the same period in
2003. The increased revenue was due to both waste volumes increasing by 14% as
well as by average prices increasing by 16%. The increased volume was from both
remediation projects and increased activity from existing customers. The higher
ASP resulted from a higher percentage of waste requiring specialized treatment
services.
At the Robstown, Texas hazardous treatment and disposal facility, revenue
increased 5% for the three months ended March 31, 2004 from the same period in
2003. The increased revenue reflected a better mix of wastes received at the
site, driving ASP up 80%. This much higher ASP more than offset a 40% reduction
in waste volumes received at the site compared to the first quarter of 2003.
During the first quarter of 2003, the site received a high volume, low-priced
project at the site that did not recur in the first quarter of 2004.
DIRECT OPERATING COSTS
- ------------------------
For the three months ended March 31, 2004, consolidated direct operating costs
increased 27% to $7,612,000 (55% of revenue) compared to $5,984,000 (56% of
revenue) for the same period in 2003 primarily reflecting increased waste
volumes. Relative to revenue, direct operating costs dropped slightly reflecting
the largely fixed cost nature of the Company's business. The Company continues
its efforts to minimize direct costs through operational improvements and
efficiencies.
Operating Disposal Facilities
- -------------------------------
Direct costs at the Richland, Washington; Robstown, Texas; and Beatty, Nevada
facilities essentially remained flat from the same quarter last year. The
increase in consolidated direct operating costs for the Company was largely
driven by an increase in direct costs at the Grand View, Idaho facility of
$1,504,000. This increase was due to increased waste volumes and related
transportation costs. Approximately $1,474,000 of the increase in direct
operating costs at Grand View was for transportation costs primarily related to
the New York clean-up project. During the quarter ended March 31, 2004 the
Company was able to reduce the costs of reagents and other additives used to
treat waste, resulting in lower variable costs for certain waste streams.
18
Non Operating Disposal Facilities
- ------------------------------------
Non Operating Disposal Facilities incur current period expenses for the
accretion of 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 March 31, 2004 and 2003, the Company reported $10,000
and $-0- of expenses on proposed development projects, and $109,000 and $102,000
of costs in 2004 and 2003 to remediate or close facilities subsequent to use.
GROSS PROFIT
- -------------
Significantly higher quarterly revenue allowed the Company to generate a 31%
increase in gross profit, pushing quarterly gross profit to $6,293,000 compared
with a gross profit of $4,787,000 for the same quarter last year. Increased
disposal revenue at all operating disposal facilities produced more fall through
due to the largely fixed cost nature of the business. Gross margin increased
slightly to 45% of revenue compared to 44% of revenue despite an increase,
quarter over quarter, in lower margin transportation revenue.
SELLING, GENERAL AND ADMINISTRATIVE COSTS (SG&A)
- -----------------------------------------------------
For the three months ended March 31, 2004, the Company reported SG&A of
$2,872,000 (21% of revenue), a 36% decrease from the $4,497,000 (42% of revenue)
for the same three months of 2003. The decrease in SG&A primarily resulted from
a $1,520,000 decrease in legal expenses quarter to quarter. Legal expenses for
the first quarter of 2004 dropped to $84,000 compared to $1,604,000 in the first
quarter of 2003. The Company has resolved multiple lawsuits, reducing legal fees
and freeing up management time and resources to focus on growing the business.
The Company incurred costs during 2003 to upgrade and centralize information and
accounting systems. The cost of these business system upgrades was largely born
in 2003, while the savings and efficiencies are being realized in 2004. The
primary benefit is management access to more timely and detailed information on
operations.
Operating Disposal Facilities
- -------------------------------
During the quarter ended March 31, 2004, Operating Disposal Facilities SG&A
decreased $602,000 due to business reorganizations, cost containment efforts and
centralization of accounting at Corporate.
Corporate
- ---------
During the quarter ended March 31, 2004, Corporate SG&A increased $489,000. This
includes $292,000 accrued for the Management Incentive Plan which would be paid
to selected participants if the Company's pre-tax operating income exceeds
$12,000,000 including all costs associated with the Management Incentive Plan
for 2004. The remaining increase in Corporate SG&A represents costs that were
previously borne by the Operating Disposal Facilities, but are now assigned to
Corporate.
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 March 31, 2004 and
2003, the Company reported $5,000 and $1,517,000 of SG&A expenses, respectively,
at Non Operating Disposal Facilities. The majority of 2003 expenses were legal
costs associated with the Ward Valley, California litigation.
INTEREST INCOME
- ----------------
For the three months ended March 31, 2004, the Company earned $36,000 of
interest income, an increase from $-0- in the same period of 2003 due to
substantially higher cash balances. Interest income is earnings on tax refunds,
cash balances, restricted investments, and notes receivable. The Company
typically maintains minimal amounts, for which income is a function of
prevailing market rates. Based on anticipated low interest rates, the Company
does not anticipate significant interest income in 2004.
19
INTEREST EXPENSE
- -----------------
For the three months ended March 31, 2004, the Company reported interest expense
of $49,000, a decrease of $72,000 from the corresponding period in 2003. The
primary cause of this decrease was the reduction in average debt outstanding by
$2,000,000 from March 31, 2003 to 2004. For the three months ending March 31,
2004, the interest rate paid on its single outstanding term loan was 3.38%.
Additional reductions in interest expense could occur as debt balances continue
to be paid down, however the Company will experience increased interest expense
should interest rates increase. At March 31, 2004, the line of credit had a zero
balance.
OTHER INCOME (LOSS)
- ---------------------
Other Income is composed of the following ($ in thousands):
Three Months Ended March 31,
2004 2003
--------------- ---------------
Data processing services $ 20 $ --
Cash receipts for sale or rent of property rights 16 --
Other miscellaneous income, net 9 --
--------------- ---------------
Total other income (loss) $ 45 $ --
=============== ===============
INCOME TAXES
- -------------
The components of the income tax provision (benefit) were as follows (in
thousands):
Three Months Ended March 31,
2004 2003
------------- -----------------
Federal tax expense $ 1,164 $ --
State tax expense (benefit) -- (8)
------------- -----------------
Income tax expense $ 1,164 $ (8)
============= =================
The tax effects of temporary differences between income for financial reporting
and income 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 2003, the $20,951,000 write-off of Ward Valley facility development costs
resulted in a book as well as tax loss for 2003 and no portion of the deferred
tax asset was utilized. Based on the Company's $3,453,000 first quarter 2004
pre-tax income and the expectation of continued profitability for the year,
$1,164,000 of income tax expense was recognized during the three months ended
March 31, 2004.
The net operating loss carry forward at March 31, 2004 was approximately
$41,000,000. Of this net operating loss 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. Due to the Company's net operating loss carry forwards, income
tax expense of approximately 2% of pretax income tax expense is expected to be
paid in cash, while the other approximately 32% of pretax income tax expense
will be offset against the net operating loss carry forwards.
The Company will continue to assess the deferred tax asset and related valuation
allowance as circumstance dictate, but at least annually.
20
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 generally more
affected by market conditions than seasonality.
CAPITAL RESOURCES AND LIQUIDITY
- ----------------------------------
At March 31, 2004, cash and cash equivalents totaled $10,771,000, an increase of
$4,097,000 from December 31, 2003. The increase in cash reflects collection of
accounts receivable and continued profitability.
During the first three months of 2004, the Company's days sales outstanding
("DSO") decreased at March 31, 2004, to 56 days compared to December 31, 2003 at
68 days. Continued improvement in cash and receivable balances is a priority.
Management expects that new information systems and appointment of a corporate
credit and collections manager will allow the Company to maintain DSO at
approximately 60 days.
As of March 31, 2004 the Company's liquidity, as measured by the current ratio,
was 1.9 to 1.0. The debt to equity ratio decreased to 0.9:1.0 at March 31, 2004.
The primary changes to working capital as well as the debt to equity ratio were
caused by the $5,500,000 in cash paid to redeem a common stock warrant,
partially offset by first quarter 2004 earnings. The debt to equity ratio is
defined as total liabilities divided by stockholders equity.
SOURCES OF CASH
On March 31, 2004, the Company had a $8,000,000 revolving line of credit in
place with Wells Fargo Bank in Boise, Idaho maturing June 15, 2005. The line of
credit is secured by the Company's accounts receivable. At March 31, 2004, the
outstanding balance on the revolving line of credit was $-0-. The Company
borrows and repays according to business demands and availability of cash. It
currently reserves $3,508,000 for a letter of credit used as collateral for an
insurance policy and a lien bond.
Company operations have produced an average of almost $2,500,000 a quarter in
cash flow over the past three years. Management expects 2004 quarterly cash flow
from operations to, on average, be higher. The $10,771,000 in cash on hand at
December 31, 2003 was comprised of short term investments which were not
required for operations of $10,959,000, and a net checks outstanding amount of
($188,000).
USES OF CASH
On February 17, 2004 the Company redeemed a warrant to purchase 1,349,843 shares
of common stock at $1.50 a share for $5,500,000. The closing market price of the
Company's common stock of February 17, 2004 was $6.99. The warrant had been
issued in 1998 to its former bank as part of a debt restructuring agreement. The
redeemed warrant, which represented approximately 8% of the Company's shares
outstanding, has been surrendered and will not be reissued. The warrant
redemption reduced the Company's cash on hand by $5,500,000 and reduced
additional paid-in-capital by a like amount, with no effect on the Statement of
Operations.
Management currently expects its capital spending needs to be between $5,500,000
and $6,500,000 in 2004. It is expected that $3.7 million of 2004 capital
spending will be allocated to the Texas hazardous waste facility for treatment
capacity expansion, disposal cell construction, future disposal cell
engineering, equipment, and development of a rail transfer facility. The
Company also intends to make capital improvements at its Grand View, Idaho
facility to increase throughput.
The Company's Oak Ridge facility continues to require cash, though at a much
lower level than in 2003. Use of cash at Oak Ridge is expected to decrease since
waste shipped off site has largely been processed and disposed. If the Company
is unable to sell the facility and is required to commence closure activities,
cash use could increase later in 2004 or 2005. Also, a substantial amount of
cash or payment of liabilities may be required to complete a sale. At March 31,
2004, the Company's Oak Ridge facility had liabilities (excluding the estimated
cost to close the facility)
21
expected to be paid in 2004 of $735,000. The Company is attempting to sell the
Oak Ridge facility, but would expect to spend the estimated $4,594,000 accrued
in long term liabilities to close the facility over time if a sale is not
completed.
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 typically the minimum requirement imposed by insurance or
government agencies. At March 31, 2004, $131,000 was held in short term pledged
investment accounts and approximately $11,000,000 was held in investments whose
terms ranged from overnight to one week. Together these items earn interest at
approximately 1%, and comprise 17% of assets.
The Company does have 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 based on the
Company's performance. At March 31, 2004 the interest rate incurred on the term
loan was 3.38% on the outstanding term loan balance of $5,133,000. A
hypothetical increase of 1% in interest rates would increase annual interest
expense paid by the Company by approximately $44,000.
ITEM 4. CONTROLS AND PROCEDURES.
(a) Within the 90 day period 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 are designed to
provide reasonable assurance that its records and filings accurately reflect the
transactions engaged in. For the quarter ending March 31, 2004, there were no
significant changes to internal controls or in other factors that could
significantly affect these internal controls.
PART II OTHER INFORMATION.
- -----------------------------
ITEM 1. LEGAL PROCEEDINGS.
Significant developments have occurred on the following legal matters since
December 31, 2003:
US ECOLOGY, INC. V. THE STATE OF CALIFORNIA, ET AL., CASE NO.GIC747562, SUPERIOR
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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 stemming from the
State's alleged abandonment of the Ward Valley low-level radioactive waste
("LLRW") disposal project. The case was tried in Superior Court for the County
of San Diego ("the Superior Court") during February and March 2003. On March 26,
2003, the Superior Court issued a decision against the Company.
Based on the uncertainty of recovery following the Superior Court's adverse
decision, the Company wrote off the $20,951,000 deferred site development asset
on March 31, 2003.
On June 26, 2003, the Company filed a notice of appeal with the California
Fourth Appellate District Court. The
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opening appellate brief was filed March 15, 2004. The State's opposition brief
is due June 14, 2004. The Company's reply brief will be filed July 5, unless
extended by the Appellate Court. The Company expects oral arguments in the 2nd
half of 2004 or early 2005.
No assurance can be given that the Company will prevail on appeal or reach a
settlement to recover any portion of its investment.
ENTERGY ARKANSAS, INC. ET AL, CENTRAL INTERSTATE LOW-LEVEL RADIOACTIVE WASTE
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COMMISSION AND US ECOLOGY, INC. ("PLAINTIFFS") V. STATE OF NEBRASKA, ET AL.,
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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") and seeks declaratory
relief and damages.
In September 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 $6.2 million plus $6.1 million for prejudgment interest. The Company
carries $6.5 million on its balance sheet for capitalized facility development
costs. The State of Nebraska subsequently appealed this judgment. On February
18, 2004, the Eighth U.S. Circuit Court of Appeals affirmed the District Court
ruling in its entirety. On March 3, 2004, the State of Nebraska filed a
petition for rehearing by the full Eighth U.S. Circuit Court of Appeals (en
banc). On April 21, 2004, the Eighth Circuit Court of Appeals denied Nebraska's
petition for rehearing. The State of Nebraska may petition the U.S. Supreme
Court to review the matter.
No assurance can be given that the trial and appellate court judgments will be
affirmed on appeal or that US Ecology will recover its contributions or interest
thereon.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On February 17, 2004 the Company redeemed a warrant to purchase 1,349,843 shares
of common stock at $1.50 a share for $5,500,000. The warrant had been issued in
1998 to its former bank as part of a debt restructuring agreement. The redeemed
warrant, which represented approximately 8% of the Company's shares outstanding,
has been surrendered and will not be reissued.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
If at June 30, 2004, the Company's unaffiliated market capitalization is
greater than $75,000,000, the Company will become an accelerated filer effective
January 1, 2005. As of April 30, 2004, the Company's unaffiliated market
capitalization was approximately $101,000,000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are filed as part of this report:
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Exhibit No. Description
------------ ------------------------------------------------------------
31.1 Certifications of March 31, 2004 Form 10-Q by Chief
Executive Officer dated April 30, 2004
------------ ------------------------------------------------------------
31.2 Certifications of March 31, 2004 Form 10-Q by Chief
Financial Officer dated April 30, 2004
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23
---------------------------------------------------------------------------
32.1 Certifications of March 31, 2004 Form 10-Q by Chief
Executive Officer dated April 30, 2004
------------ ------------------------------------------------------------
32.2 Certifications of March 31, 2004 Form 10-Q by Chief
Financial Officer dated April 30, 2004
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(b) Reports on Form 8-K.
Press Release, dated February 17, 2004, entitled "AMERICAN
ECOLOGY POSTS SOLID FOURTH QUARTER EARNINGS OF $3.1 MILLION"
Press Release, dated February 18, 2004, entitled "AMERICAN
ECOLOGY REDEEMS COMMON STOCK WARRANT FOR $5.5 MILLION "
Press Release, dated February 19, 2004, entitled "U.S. Court
of Appeals Affirms Judgment against Nebraska in Low-Level
Radioactive Waste Lawsuit"
Press Release, dated April 20, 2004, entitled "AMERICAN
ECOLOGY POSTS $3.4 MILLION FIRST QUARTER OPERATING INCOME"
SIGNATURES
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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: April 30, 2004 By:/s/ Stephen A. Romano
------------------------
Stephen A. Romano
President, Chief Executive Officer and Chief Operating
Officer
Date: April 30, 2004 By:/s/ James R. Baumgardner
---------------------------
James R. Baumgardner
Senior Vice President, Chief Financial Officer,
Secretary and Treasurer
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EXHIBIT INDEX
Exhibit Description
- ------- -----------
31.1 Certifications of March 31, 2004 Form 10-Q by Chief Executive Officer
dated April 30, 2004
31.2 Certifications of March 31, 2004 Form 10-Q by Chief Financial Officer
dated April 30, 2004
32.1 Certifications of March 31, 2004 Form 10-Q by Chief Executive Officer
dated April 30, 2004
32.2 Certifications of March 31, 2004 Form 10-Q by Chief Financial Officer
dated April 30, 2004
25