UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended June 30, 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 August 3, 2004 Registrant had outstanding 17,229,718 shares of its Common
Stock.
AMERICAN ECOLOGY CORPORATION
QUARTERLY REPORT ON FORM 10-Q FOR THE
THREE MONTHS ENDED JUNE 30, 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 26
Item 4. Controls and Procedures 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 2. Changes in Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 29
Signatures 29
2
OFFICERS
- --------
Stephen A. Romano CORPORATE OFFICE
Chief Executive Officer, President and Chief ----------------
Operating Officer Lakepointe Centre I
American Ecology Corporation
300 East Mallard Drive, Suite 300
James R. Baumgardner Boise, Idaho 83706
Senior Vice President, Chief Financial Officer (208) 331-8400
Treasurer and Secretary (208) 331-7900 (fax)
www.americanecology.com
-----------------------
Michael J. Gilberg
Vice President and Controller
COMMON STOCK
------------
Steven D. Welling American Ecology Corporation's common stock
Vice President, Sales & Marketing trades on the Nasdaq National Market under the
symbol ECOL.
John M. Cooper
Vice President and Chief Information Officer
FINANCIAL REPORTS
-----------------
A copy of American Ecology Corporation
DIRECTORS Annual and Quarterly Reports, as filed on Form 10-K
- --------- and 10-Q with the Securities and Exchange
Rotchford L. Barker, Chairman Commission, may be obtained by writing:
Independent Businessman Lakepointe Centre I
300 E. Mallard, Suite 300
David B. Anderson Boise, Idaho 83706
President, Highland Capital Enterprises Corp. or at www.americanecology.com
-----------------------
Roy C. Eliff
Independent Businessman
TRANSFER AGENT
--------------
Edward F. Heil American Stock Transfer & Trust Company
Independent Businessman 59 Maiden Lane
New York, New York 10038
Stephen A. Romano (718) 921-8289
Chief Executive Officer, President and Chief or at www.amstock.com
Operating Officer ---------------
General Jimmy D. Ross AUDITOR
U.S. Army, Retired -------
Moss Adams LLP
1001 Fourth Avenue, Suite 2900
Stephen M. Schutt Seattle, WA 98154
Vice President, Nuclear Fuel Services, Inc.
3
PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS.
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
($ IN 000'S EXCEPT PER SHARE AMOUNTS)
June 30, 2004 December 31, 2003
--------------- -------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 3,201 $ 6,674
Short term investments 6,398 --
Receivables, net 9,537 12,596
Prepaid income taxes 53 2
Prepayments and other 1,780 1,049
Deferred income taxes 2,229 3,222
Assets held for sale or closure -- 938
--------------- -------------------
Total current assets 23,198 24,481
Property and equipment, net 28,102 28,317
Facility development costs 6,478 6,478
Other assets 673 731
Prepaid income taxes 150 --
Deferred income taxes 16,226 5,062
Assets held for sale or closure -- 1,557
--------------- -------------------
Total assets $ 74,827 $ 66,626
=============== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long term debt $ 1,455 $ 1,475
Accounts payable 2,022 1,678
Accrued liabilities 5,890 4,788
Accrued closure and post closure obligation, current portion 1,828 1,828
Current liabilities of assets held for sale or closure 398 1,907
--------------- -------------------
Total current liabilities 11,593 11,676
Long term debt 3,462 4,200
Long term accrued liabilities 502 454
Accrued closure and post closure obligation, excluding current portion 9,428 9,296
Liabilities of assets held for sale or closure, excluding current portion -- 4,649
--------------- -------------------
Total liabilities 24,985 30,275
--------------- -------------------
Commitments and contingencies
Shareholders' equity:
Convertible preferred stock, 1,000,000 shares authorized
Common stock, $.01 par value, 50,000,000 authorized, 17,212,218
and 17,033,118 shares issued and outstanding 172 170
Additional paid-in capital 49,833 54,824
Accumulated deficit (163) (18,643)
--------------- -------------------
Total shareholders' equity 49,842 36,351
--------------- -------------------
Total Liabilities and Shareholders' Equity $ 74,827 $ 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 Six Months Ended
June 30, June 30,
2004 2003 2004 2003
----------- ----------- ---------- ----------
Revenue $ 13,795 $ 12,020 $ 27,700 $ 22,791
Direct operating costs 7,449 6,056 15,061 12,040
----------- ----------- ---------- ----------
Gross profit 6,346 5,964 12,639 10,751
Selling, general and administrative expenses 2,578 3,289 5,450 7,786
----------- ----------- ---------- ----------
Operating income 3,768 2,675 7,189 2,965
Interest income 45 22 81 22
Interest expense 49 38 98 159
Loss on write off of Ward Valley facility development costs -- -- -- 20,951
Other income 20 93 65 93
----------- ----------- ---------- ----------
Income (loss) before income tax and discontinued operations 3,784 2,752 7,237 (18,030)
Income tax (benefit) expense (11,338) 63 (10,174) 55
----------- ----------- ---------- ----------
Income (loss) before discontinued operations 15,122 2,689 17,411 (18,085)
Gain from discontinued operations - El Centro Landfill -- 16 -- 4,960
Gain (Loss) from discontinued operations - Oak Ridge Facility 920 (692) 1,069 (2,029)
----------- ----------- ---------- ----------
Net income (loss) 16,042 2,013 18,480 (15,154)
Preferred stock dividends -- -- -- 64
----------- ----------- ---------- ----------
Net income (loss) available to common shareholders $ 16,042 $ 2,013 $ 18,480 $ (15,218)
=========== =========== ========== ==========
Basic earnings (loss) from continuing operations .88 .16 1.02 (1.12)
Basic earnings (loss) from discontinued operations .05 (.04) .06 .18
----------- ----------- ---------- ----------
Basic earnings (loss) per share $ .93 $ .12 $ 1.08 $ (.94)
=========== =========== ========== ==========
Diluted earnings (loss) from continuing operations .85 .15 .98 (1.12)
Diluted earnings (loss) from discontinued operations .05 (.04) .06 .18
----------- ----------- ---------- ----------
Diluted earnings (loss) per share $ .90 $ .11 $ 1.04 $ (.94)
=========== =========== ========== ==========
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)
Six Months Ended June 30,
-------------------------
2004 2003
---------- ----------
Cash flows from operating activities:
Net income (loss) $ 18,480 $ (15,154)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, amortization, and accretion 3,029 3,704
Income from discontinued operations (1,069) (2,931)
Deferred tax asset (10,171) --
Write off of Ward Valley project -- 20,951
Changes in assets and liabilities:
Receivables 3,059 1,351
Other assets (685) (161)
Closure and post closure obligation (382) (449)
Income taxes payable (201) (4)
Accounts payable and accrued liabilities 1,494 (198)
---------- ----------
Net cash provided by operating activities 13,554 7,110
Cash flows from investing activities:
Capital expenditures (2,394) (3,151)
Proceeds from sale of assets 106 --
Transfers from cash to short tem investment (6,398) --
---------- ----------
Net cash used in investing activities (8,686) (3,151)
Cash flows from financing activities:
Payments of indebtedness (758) (2,295)
Retirement of series D preferred stock -- (6,406)
Retirement of common stock warrants (5,500) --
Stock options exercised 511 3,664
---------- ----------
Net cash used in financing activities (5,747) (5,037)
---------- ----------
Increase (decrease) in cash and cash equivalents (879) (1,078)
Net cash provided by (used in) discontinued operations (2,594) 5,693
Cash and cash equivalents at beginning of period 6,674 135
---------- ----------
Cash and cash equivalents at end of period $ 3,201 $ 4,750
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 98 $ 159
Income taxes paid 201 59
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 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
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 Six Months Ended
----------------------- ---------------------
June 30, June 30,
----------------------- ---------------------
($in thousands except per share amounts) 2004 2003 2004 2003
---------- ----------- --------- ----------
Income (loss) before discontinued operations $ 15,122 $ 2,689 $ 17,411 $ (18,085)
Income (loss) from operations of discontinued segments 920 (676) 1,069 2,931
---------- ----------- --------- ----------
Net income (loss) 16,042 2,013 18,480 (15,154)
Preferred stock dividends -- -- -- 64
---------- ----------- --------- ----------
Net income (loss) available to common shareholders $ 16,042 $ 2,013 $ 18,480 $ (15,218)
========== =========== ========= ==========
Weighted average shares outstanding-
Common shares 17,202 16,969 17,146 16,223
Effect of dilutive shares
Chase Bank Warrants -- 629 -- --
Stock Options 641 112 584 --
---------- ----------- --------- ----------
Average shares 17,843 17,710 17,730 16,223
========== =========== ========= ==========
Basic earnings (loss) per share from continuing operations $ .88 $ .16 $ 1.02 $ (1.12)
Basic earnings (loss) per share from discontinued operations .05 (.04) .06 .18
---------- ----------- --------- ----------
Basic earnings (loss) per share $ .93 $ .12 $ 1.08 $ (.94)
========== =========== ========= ==========
Diluted earnings (loss) per share from continuing operations $ .85 $ .15 $ .98 $ (1.12)
Diluted earnings (loss) per share from discontinued operations .05 (.04) .06 .18
---------- ----------- --------- ----------
Diluted earnings (loss) per share $ .90 $ .11 $ 1.04 $ (.94)
========== =========== ========= ==========
NOTE 3. EQUITY
On June 29, 2004 an affiliate of the Company covered under Section 16 of the
1934 Securities and Exchange Act (the "Act") and covered by the Company's
Insider Trading Policy (the "Policy") engaged in an open market stock
7
transaction (the "Transaction") prohibited by the Act under Section 16(b),
commonly referred to as the "short swing profit rule" and in violation of the
Policy. Upon notification of the stock sale on June 29, the Company determined
the Transaction was in violation of Section 16(b), notified the affiliated party
on the same day and, consistent with the remedies prescribed by Section 16(b),
sought disgorgement of the short-swing profit realized on the Transaction. On
July 9, 2004 the Company received and deposited approximately $45,000
representing full disgorgement. These funds were recorded as Additional Paid in
Capital as of July 9, 2004.
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 $5,500,000 and reduced
Additional Paid in Capital by a like amount, with no effect on the Statement of
Operations.
NOTE 4. OPERATING SEGMENTS
The Company operates within two segments, Operating Disposal Facilities and
Non-Operating Disposal Facilities, based on its internal reporting structure and
nature of services offered. The Operating Disposal Facility segment represents
facilities accepting hazardous and radioactive waste. The Non-Operating Disposal
Facility segment represents facilities that are not accepting hazardous and/or
radioactive waste or are proposed new disposal facilities that are now in
litigation.
On December 27, 2002, the Company discontinued commercial operations at its Oak
Ridge Processing and Field Services segment, which aggregated, volume-reduced,
and performed remediation and other services on radioactive material. This
segment excludes processing at the Company's disposal facilities. All prior
segment information has been restated in order to report results as discontinued
operations. On June 30, 2004 the Company sold substantially all of the
Processing and Field Services assets to Toxco, Inc. who also assumed the related
environmental liabilities.
Effective December 31, 2002, the Company classified the El Centro municipal
landfill as an asset held for sale due to the expected sale of the facility
which occurred on February 13, 2003. All prior segment information has been
restated in order to present the operations of the El Centro landfill as
discontinued operations.
Income taxes are assigned to Corporate, but all other items are included in the
segment where they originated. Inter-company transactions have been eliminated
from the segment information and are not significant between segments.
8
Summarized financial information concerning the Company's reportable segments is
shown in the following table ($ in thousands).
Operating Non-Operating Discontinued
Disposal Disposal Processing and
Facilities Facilities Field Services Corporate Total
THREE MONTHS ENDED JUNE 30, 2004
- --------------------------------
Revenue $ 13,762 $ 33 $ -- $ -- $ 13,795
Direct operating cost 7,335 114 -- -- 7,449
------------ --------------- ---------------- ----------- ---------
Gross profit (loss) 6,427 (81) -- -- 6,346
S,G&A 1,147 19 -- 1,412 2,578
------------ --------------- ---------------- ----------- ---------
Income (loss) from operations 5,280 (100) -- (1,412) 3,768
Interest expense (income) (14) -- -- 18 4
Other income 4 2 -- 14 20
------------ --------------- ---------------- ----------- ---------
Income (loss) before income tax
and discontinued operations 5,298 (98) -- (1,416) 3,784
Income tax expense (benefit) -- -- -- (11,338) (11,338)
Discontinued operations -- -- 920 -- 920
------------ --------------- ---------------- ----------- ---------
Net Income (loss) 5,298 (98) 920 9,922 16,042
============ =============== ================ =========== =========
Depreciation, amortization, and accretion $ 1,531 $ 2 $ -- $ 8 $ 1,541
Capital Expenditures $ 1,427 $ -- $ -- $ 32 $ 1,427
Total Assets $ 37,150 $ 6,539 $ -- $ 31,138 $ 74,827
THREE MONTHS ENDED JUNE 30, 2003
- --------------------------------
Revenue $ 11,969 $ 51 $ -- $ -- $ 12,020
Direct operating cost 5,929 127 -- -- 6,056
------------ --------------- ---------------- ----------- ---------
Gross profit (loss) 6,040 (76) -- -- 5,964
S,G&A 1,831 284 -- 1,174 3,289
------------ --------------- ---------------- ----------- ---------
Income (loss) from operations 4,209 (360) -- (1,174) 2,675
Interest -- -- -- 16 16
Other income 26 67 -- -- 93
------------ --------------- ---------------- ----------- ---------
Income (loss) before income tax
and discontinued operations 4,235 (293) -- (1,190) 2,752
Income tax expense -- -- -- 63 63
Discontinued operations 16 -- (692) -- (676)
------------ --------------- ---------------- ----------- ---------
Net Income (loss) 4,251 (293) (692) (1,253) 2,013
============ =============== ================ =========== =========
Depreciation, amortization, and
accretion $ 1,990 $ 1 $ -- $ 9 $ 2,000
Capital Expenditures $ 1,881 $ -- $ -- $ -- $ 1,881
Total Assets $ 37,119 $ 6,546 $ 5,274 $ 15,183 $ 64,122
Operating Non-Operating Discontinued
Disposal Disposal Processing and
Facilities Facilities Field Services Corporate Total
SIX MONTHS ENDED JUNE 30, 2004
- ------------------------------
Revenue $ 27,653 $ 47 $ -- $ -- $ 27,700
Direct operating cost 14,838 223 -- -- 15,061
------------ --------------- ---------------- ----------- ---------
Gross profit (loss) 12,815 (176) -- -- 12,639
S,G&A 2,371 24 -- 3,055 5,450
------------ --------------- ---------------- ----------- ---------
Income (loss) from operations 10,444 (200) -- (3,055) 7,189
Interest expense (income) (25) -- -- 42 17
Other Income (expense) 18 19 -- 28 65
------------ --------------- ---------------- ----------- ---------
9
Income (loss) before income tax
and discontinued operations 10,487 (181) -- (3,069) 7,237
Income tax expense (benefit) -- -- -- (10,174) (10,174)
Discontinued operations -- -- (1,069) -- 1,069
------------ --------------- ---------------- ----------- ---------
Net Income (loss) 10,487 (181) (1,069) 7,105 18,480
============ =============== ================ =========== =========
Depreciation, amortization, and accretion $ 3,009 $ 4 $ -- $ 16 $ 3,029
Capital Expenditures $ 2,362 $ -- $ -- $ 32 $ 2,394
Total Assets $ 37,150 $ 6,539 $ -- $ 31,138 $ 74,827
SIX MONTHS ENDED JUNE 30, 2003
- ------------------------------
Revenue $ 22,736 $ 55 $ -- $ -- $ 22,791
Direct operating cost 11,811 229 -- -- 12,040
------------ --------------- ---------------- ----------- ---------
Gross profit (loss) 10,925 (174) -- -- 10,751
S,G&A 3,657 1,801 -- 2,328 7,786
------------ --------------- ---------------- ----------- ---------
Income (loss) from operations 7,268 (1,975) -- (2,328) 2,965
Interest 38 -- -- 99 137
Other Income (expense) 29 64 -- -- 93
Write off of Ward Valley facility -- 20,951 -- -- 20,951
------------ --------------- ---------------- ----------- ---------
Income (loss) before income tax
and discontinued operations 7,259 (22,862) -- (2,427) (18,030)
Income tax expense (benefit) -- -- -- 55 55
Discontinued operations 4,960 -- (2,029) -- 2,931
------------ --------------- ---------------- ----------- ---------
Net Income (loss) 12,219 (22,862) (2,029) (2,482) (15,154)
============ =============== ================ =========== =========
Depreciation, amortization, and
accretion $ 3,793 $ 2 $ -- $ 20 $ 3,814
Capital Expenditures $ 4,063 $ 23 $ 451 $ -- $ 4,537
Total Assets $ 37,119 $ 6,546 $ 5,274 $ 15,183 $ 64,122
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 six months ended June 30, 2004 and 2003:
Three Months Ended Six Months Ended
------------------------ ---------- ------------
2004 2003 2004 2003
----------- ----------- ---------- ----------
Net income (loss), as reported $ 16,042 $ 2,013 $ 18,480 $ (15,154)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net (520) (237) (614) (630)
----------- ----------- ---------- ----------
of related tax effects
Pro forma net income (loss) $ 15,522 $ 1,776 $ 17,866 $ (15,784)
=========== =========== ========== ==========
EARNINGS (LOSS) PER SHARE:
Basic - as reported $ .93 $ .12 $ 1.08 $ (.94)
=========== =========== ========== ==========
Basic - pro forma $ .90 $ .10 $ 1.04 $ (.98)
=========== =========== ========== ==========
Diluted - as reported $ .90 $ .11 $ 1.04 $ (.94)
=========== =========== ========== ==========
Diluted - pro forma $ .87 $ .10 $ 1.00 $ (.98)
=========== =========== ========== ==========
The stock option plan summary and changes during the three and six months ended
June 30 are as follows:
10
Three Months Ended Six Months Ended
------------------------ ------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Options outstanding, beginning of period 1,125,181 1,434,874 1,266,281 753,150
Granted 57,500 55,000 57,500 813,724
Exercised (36,400) (1,000) (177,500) (68,500)
Canceled (55,000) (18,150) (55,000) (27,650)
----------- ----------- ----------- -----------
Options outstanding, end of period 1,091,281 1,470,724 1,091,281 1,470,724
=========== =========== =========== ===========
Weighted average exercise price of options, beginning of period $ 4.08 $ 4.03 $ 3.90 $ 3.42
Weighted average exercise price of options granted $ 9.20 $ 2.60 $ 9.20 $ 4.30
Weighted average exercise price of options exercised $ 3.95 $ 1.60 $ 2.79 $ 1.68
Weighted average exercise price of options canceled $ 10.13 $ 10.13 $ 10.13 $ 7.72
Weighted average exercise price of options, end of period $ 4.05 $ 3.90 $ 4.05 $ 3.90
Options exercisable at end of period 785,941 901,681 785,941 901,681
=========== =========== =========== ===========
Options available for future grant at end of period 507,176 416,776 507,176 416,776
=========== =========== =========== ===========
The following table summarizes information about the stock options outstanding
under the Company's option plans as of June 30, 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 3.2 67,500 $ 1.32 67,500 $ 1.32
1.60 - $2.25 5.3 78,500 $ 2.07 78,500 $ 2.07
2.42 - $3.50 8.2 343,682 $ 2.91 234,891 $ 2.87
3.75 - $5.00 7.1 404,846 $ 4.27 277,923 $ 4.16
6.50 8.6 139,253 $ 6.50 69,627 $ 6.50
9.20 10.0 57,500 $ 9.20 57,500 $ 9.20
----------- -----------
1,091,281 785,941
=========== ===========
As of June 30, 2004, the 1992 Stock Option Plan for Employees had options
outstanding to purchase 665,281 common shares with 188,976 shares remaining
available for issuance under option grants. As of June 30, 2004 the 1992 Stock
Option Plan for Directors had options outstanding to purchase 426,000 common
shares with 318,200 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 three months ended June 30:
2004 2003
---------- ----------
Expected volatility 73% 83%
Risk-free interest rates 4.72% 3.75%
Expected lives 10 years 10 years
Dividend yield 0% 0%
Weighted-average fair value of options granted
during the quarter (Black-Scholes) $ 7.42 $ 2.18
11
NOTE 6. INCOME TAXES
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 estimate of the timing of reversals of certain
temporary differences and on the generation of taxable income before such
reversals.
Following the June 30, 2004 sale of the discontinued Oak Ridge Processing
Facility, management reassessed the valuation allowance and determined that all
of the Company's deferred tax assets would likely be utilized prior to
expiration. The following income tax (benefit) expense was recognized for the
three and six months ended June 30, 2004:
Three Months Ended Six Months Ended
----------------------- ---------------------
2004 2003 2004 2003
----------- ---------- ---------- ---------
State income tax expense $ -- $ 63 $ -- $ 55
Federal income tax expense 1,716 -- 2,880 --
Reversal of deferred tax asset valuation allowance (13,054) -- (13,054) --
----------- ---------- ---------- ---------
Income tax (benefit) expense $ (11,338) $ 63 $ (10,174) $ 55
=========== ========== ========== =========
The Company's deferred tax asset is primarily composed of net operating loss
carryforwards of approximately $44,000,000.
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. 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.
In June 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 was granted an extension to file its opposition brief. The Company
expects this brief and its subsequent reply brief to be filed in 2004, and that
oral arguments will be held in early to mid 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.
12
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 April 21, 2004, the Eighth Circuit Court of Appeals
denied Nebraska's petition for rehearing en banc. On July 16, 2004, the State of
Nebraska petitioned the U.S. Supreme Court to review the Court of Appeals'
judgment.
No assurance can be given that the U.S. Supreme Court will deny the petition for
review, that if the case is heard by the U.S. Supreme Court the plaintiffs will
prevail, 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 three and six months
ended June 30, 2004, the Company accrued $322,000 and $614,000 for the MIP to be
paid to the selected participants if pre-tax operating income exceeds
$12,000,000 for 2004.
NOTE 9. CLOSURE AND POST CLOSURE OBLIGATIONS
Closure and post closure obligations are recorded when environmental assessments
and/or remedial efforts are probable, and the costs can be reasonably estimated
consistent with Statement of Financial Accounting Standards ("SFAS") No. 5 with
the liability calculated in accordance with SFAS No. 143. The Company performs
periodic reviews of both non-operating and operating facilities and revises
accruals for estimated post-closure, remediation and other costs when necessary.
The Company's recorded liabilities are based on best estimates of current costs
and are updated periodically to reflect current technology, laws and
regulations, inflation and other economic factors.
Changes to reported closure and post closure obligations were as follows ($ in
thousands):
Accrued Closure and Closure Obligation of Assets Total Closure and Post
Post Closure Obligation Held for Sale or Closure Closure Obligations
------------------------- ------------------------------ ------------------------
January 1, 2004 obligation $ 11,124 $ 4,621 $ 15,745
Accretion of obligation 515 34 549
Payment of obligation (383) (44) (427)
Adjustment of obligation -- (4,611) (4,611)
------------------------- ------------------------------ ------------------------
June 30, 2004 obligation $ 11,256 $ -- $ 11,256
========================= ============================== ========================
At June 30, 2004, $103,000 of pledged cash and investment securities were
legally restricted for purposes of meeting closure and post closure obligations.
NOTE 10. DISCONTINUED OPERATIONS
On June 30, 2004, the Company transferred substantially all the primary assets
and liabilities of its discontinued Oak Ridge Tennessee processing and field
services operations to Toxco, Inc ("Toxco"). The Company transferred $2,060,000
in Property and $1,650,000 in Cash to Toxco in exchange for Toxco's assumption
of $4,640,000 of Closure and Other Liabilities. The Company recorded a $930,000
gain on the sale which is included as a Gain from discontinued operations in the
Consolidated Statements of Operations.
As of June 30, 2004, "Assets held for sale or closure" consisted of those assets
and liabilities (e.g. trade payables and accrued liabilities) of the
discontinued Oak Ridge operations which were retained by the Company subsequent
to the
13
June 30, 2004 sale. Accordingly, the revenue, costs and expenses and cash flows
for the Oak Ridge operation have been excluded from results of continuing
operations results and reported as "Gain (loss) from discontinued operations"
and "Net cash provided by (used in) discontinued operations". Prior periods have
been restated to reflect the discontinued operations. The assets and liabilities
of discontinued operations included within the consolidated balance sheet as of
June 30, 2004 are as follows ($ in thousands):
Discontinued Operations
June 30, 2004 December 31, 2003
Current assets
- --------------
Current assets $ -- $ 386
Property & equipment, net -- 552
-------------- ------------------
-- 938
============== ==================
Non-current assets
- ------------------
Property, plant & equipment, net -- 1,508
Other -- 49
-------------- ------------------
-- 1,557
============== ==================
Current liabilities
- -------------------
Accounts payable & accruals 398 1,870
Current portion long term debt -- 37
-------------- ------------------
398 1,907
============== ==================
Non-current liabilities
- -----------------------
Closure/post closure obligations -- 4,621
Long-term debt -- 23
Other -- 5
-------------- ------------------
-- 4,649
============== ==================
Operating results for the discontinued operations were as follows for three and
six months ending June 30:
($in thousands) Processing and Field El Centro Disposal Total Discontinued
Services Operations Facility Operations
Three months ending June 30, 2004
- ---------------------------------
Revenues, net $ -- $ -- $ --
Operating income (loss) (10) -- (10)
Net income (loss) 920 -- 920
Basic earnings (loss) per share .05 .-- .05
Diluted earnings (loss) per share .05 .-- .05
Three months ending June 30, 2003
- ---------------------------------
Revenues, net $ 1,240 $ -- $ 1,240
Operating income (loss) (690) (3) (693)
Net income (loss) (692) 16 (676)
Basic earnings (loss) per share (.04) -- (.04)
Diluted earnings (loss) per share (.04) -- (.04)
Six months ending June 30, 2004
- -------------------------------
Revenues, net $ -- $ -- $ --
Operating income (loss) 139 -- 139
Net income (loss) 1,069 -- 13
Basic earnings (loss) per share .06 .-- .06
Diluted earnings (loss) per share .06 .-- .06
Six months ending June 30, 2003
- -------------------------------
Revenues, net $ 2,019 $ 469 $ 2,488
Operating income (loss) (1,793) 74 (1,719)
Net income (loss) (2,029) 4,960 2,931
Basic earnings (loss) per share (.12) .30 .18
Diluted earnings (loss) per share (.12) .30 .18
14
Costs incurred at the Oak Ridge facility during the three and six months ended
June 30 are summarized as follows: ($ in thousands)
Three Months Six Months
---------------- ----------------
2004 2003 2004 2003
------- ------- -------- ------
Net operating costs in excess of previous accruals $ 108 $ 227 $ 142 $ 428
Additional impairment of property and equipment -- -- -- 225
Accounts receivable collected in excess of valuation allowance (58) -- (265) --
Gain on sale of facility (930) -- (930) --
Increase (decrease) in estimated cost to dispose of removed waste (40) 465 (16) 1,376
------- ------- -------- ------
Net (income) loss for the three and six months ended June 30 $ (920) $ 692 $(1,069) $2,209
======= ======= ======== ======
Cost changes for Oak Ridge facility on-site activities and disposal liabilities
for removed wastes are as follows:
($in thousands) December 31, 2003 Cash Payments Adjustments June 30, 2004
----------------- -------------- ------------ -------------
Waste disposal liability 623 (358) (16) 249
On-site discontinued
operation cost liability 442 (448) 6 --
December 31, 2002 Cash Payments Adjustments June 30, 2003
----------------- -------------- ------------ -------------
Waste disposal liability 1,827 (1,301) 3,703 4,229
On-site discontinued
operation cost liability 1,800 (1,509) 428 719
The adjustments represent differences between the estimated costs accrued at
December 31, actual costs incurred during the first and second quarters, and
changes in estimated future costs for disposition of previously removed waste.
NOTE 11. SHORT TERM INVESTMENTS
During April 2004 the Company began investing cash not needed in operations in
quasi governmental securities such as securities issued by the Federal Home Loan
Bank. The Company classifies investments with a maturity on the date of
purchase greater than 30 days but less than one year as Short term investments.
NOTE 12. SUBSEQUENT EVENT - PARTIAL SERVICE INTERRUPTION AT ROBSTOWN, TEXAS
FACILITY
Hazardous waste treatment operations at the Company's Robstown Texas facility
were suspended following a July 1, 2004 fire in the facility's permitted
containment building. Treatment performed in the containment building represents
approximately 50% of the Texas facility's year-to-date revenue. Direct disposal
operations continue without interruption and generate the balance of the
facility's revenue. While the Company is insured for property and equipment
damage and business interruption, insurance deductibles, operational upgrades,
loss of customers and potential regulatory agency fines will negatively impact
the Texas facility's second half financial performance. The Company is assessing
the costs and time required to bring treatment services back on line on a
priority basis. It cannot, however, estimate the cost of the fire and insurance
amounts payable at this time.
Unrelated to the fire, the Robstown facility received a June 2004 notice of
enforcement from the Texas regulatory agency regarding its operations. Based on
a meeting with Texas officials attended by senior management, the
15
Company expects this notice of enforcement and the fire incident to be
consolidated for enforcement purposes. . The amount of this expected fine is not
yet known.
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 impact of the fire at the Robstown, Texas facility, compliance
with and changes to applicable laws, regulations and permits, enforcement
actions, exposure to and results of 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 and six month periods ended June 30, 2003 to the three and six
month periods ended June 30, 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, oil
refineries, chemical manufacturing plants, 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 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 and six months ended June 30,
2004 was substantially improved over the first three and six months of 2003.
Management believes this is the result of the Company's execution of its
business plan and a generally stronger economy. Quarter to quarter comparisons
are difficult and are materially affected by several events including
significant litigation expenses in early 2003 and a related asset write off,
costs to prepare and sell the Company's Oak Ridge, Tennessee discontinued
low-level radioactive waste processing operation, a related gain on the
subsequent Oak Ridge asset sale in 2004, a gain on sale of the El Centro
landfill
16
assets in early 2003 and the recognition of income tax expense and reversal of
the valuation allowance on the Company's deferred tax assets in 2004. These
events are discussed in more detail below.
Ward Valley Litigation Expenses: Following an adverse California state court
- -----------------------------------
decision in March 2003, the Company wrote off $20,951,000 of facility
development costs. 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 $288,000 and $1,786,000 were incurred and included in
SG&A during the three and six months ending June 30, 2003. The Company has
appealed the Ward Valley ruling. Minimal appeal costs are expected based on a
fixed price plus success contingency legal representation agreement entered into
and paid in July 2003.
Sale of El Centro: In February 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 Asset Disposition: In December 2002, the Company discontinued
- -------------------------------
operations at the Oak Ridge facility. During the three and six months ended June
30, 2003, the Company incurred $692,000 and $2,029,000, respectively, for costs
to remove waste from the facility and prepare the facility for sale in excess of
prior reserves. This primarily reflected actual costs which became known when
specific wastes were shipped off-site to third-party service providers.
On June 30, 2004 the Company sold substantially all of its assets and related
environmental liabilities associated with its Oak Ridge operations to Toxco, Inc
("Toxco"). Toxco received $1,650,000 in cash and $2,060,000 in property and
equipment. In return, Toxco assumed $4,625,000 in estimated environmental and
other liabilities. The Company recorded a $930,000 gain on sale of the facility
which is included in the results of discontinued operations for the three months
ending June 30, 2004.
Income Tax Expense: During 2002, the Company evaluated its 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 re-evaluation of year-to-date 2004 pre-tax income,
expectations of continued profitability, and disposition of the Oak Ridge
facility, the remaining valuation allowance was reversed at June 30, 2004. This
resulted in an income tax benefit of $11,338,000 and $10,174,000 for the three
and six months ended June 30, 2004. As of June 30, 2004, the Company's balance
sheet reflects $18,455,000 in deferred tax assets.
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 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. Periodically updated 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.
17
- - 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 future 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 commercial operation of its
former Processing and Field Services business segment in Oak Ridge, Tennessee.
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). EITF 94-3 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). The
latter 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 and six months
ended June 30, 2004, the Company incurred $152,000 and $340,000 of the expenses
recognized under EITF 94-3 as of December 31, 2003.
During the three and six months ended June 30, 2004, the Company reduced the
allowance for doubtful accounts of its discontinued Oak Ridge business by
$58,000 and $265,000. This reflected collection of accounts receivable in
excess of previous allowances for doubtful accounts. At June 30, 2004 the
Company was continuing efforts to collect the remaining $40,000 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 State 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 U.S. 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 April 21, 2004 the Eighth
Circuit Court of Appeals denied Nebraska's subsequent request for a Court of
Appeals rehearing en banc. On July 16, 2004 the State of Nebraska petitioned the
U.S. Supreme Court to review the Court of Appeals judgment.
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, uncertainty regarding the disposition of the Oak Ridge assets, 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 was 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
18
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. As a result, the Company did not utilize
the deferred tax asset. At June 30, 2004, the Company reassessed the valuation
allowance based on the sale of its Oak Ridge assets, 2004 year-to-date pretax
income, and projections of continued profitability and reversed the remaining
valuation allowance. This reversal resulted in an income tax benefit of
$11,338,000 and $10,174,000 for the three and six months ended June 30, 2004.
RESULTS OF OPERATIONS
- -----------------------
The following table presents, for the periods indicated, the operating costs as
a percentage of revenues in the consolidated income statement:
Three Months Ended Six Months Ended
------------------ ----------------
($in 000's) June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
------------------ ----------------- ------------------ ------------------
$ % $ % $ % $ %
--------- ------- -------- ------- --------- ------- --------- -------
Revenue 13,795 12,020 27,700 22,791
Direct operating costs 7,449 54.0% 6,056 50.4% 15,061 54.4% 12,040 52.8%
--------- -------- --------- ---------
Gross profit 6,346 46.0% 5,964 49.6% 12,639 45.6% 10,751 47.2%
SG & A 2,578 18.7% 3,289 27.4% 5,450 19.7% 7,786 34.2%
--------- -------- --------- ---------
Income from operations 3,768 27.3% 2,675 22.3% 7,189 26.0% 2,965 13.0%
Investment income 45 0.3% 22 0.2% 81 0.3% 22 0.1%
Interest expense 49 0.4% 38 0.3% 98 0.4% 159 0.7%
Loss on write off of Ward Valley -- 0.0% -- 0.0% -- 0.0% 20,951 91.9%
Other income (expense) 20 0.1% 93 0.8% 65 0.2% 93 0.4%
--------- -------- --------- ---------
Net income (loss) before income
taxes and discontinued operations 3,784 27.4% 2,752 22.9% 7,237 26.1% (18,030) -79.1%
Income tax (benefit) expense (11,338) -82.2% 63 0.5% (10,174) -36.7% 55 0.2%
--------- -------- --------- ---------
Net income (loss) before discontinued
operations 15,122 109.6% 2,689 22.4% 17,411 62.9% (18,085) -79.4%
========= ======== ========= =========
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2004 AND 2003
- -------------------------------------------------------
REVENUE
- -------
For the three months ended June 30, 2004, the Company reported consolidated
revenue of $13,795,000, a 15% increase over the $12,020,000 reported for the
same period in 2003. All three hazardous waste disposal facilities generated
higher revenue during the second quarter of 2004 as volumes increased 26% over
the same quarter last year. Higher quarterly waste volume was partially offset
by a 5% lower average selling price ("ASP") for the Company's treatment and
disposal services. The increase in waste volume resulted from an increase in
both recurring (or "Base") business and project (or "Event") work during the
quarter. The decrease in ASP reflects an increased percentage of revenue from
lower priced, commoditized services. Also contributing to the quarterly revenue
growth was a 53% increase in transportation revenue over the same quarter last
year. Transportation revenue increased to $2,172,000 during the second quarter
of 2004. During the three months ending June 30, 2004 and 2003, revenue from a
contract between the Company's Idaho facility and the U.S. Army Corps of
Engineers accounted for $4,975,000 and $3,702,000 or 36% and 31% of revenue,
respectively. The Army and other federal agencies continue to ship waste under
this contract to the Company's Grand View, Idaho facility.
Operating Disposal Facilities
- -------------------------------
19
At the Richland, Washington LLRW disposal facility revenue decreased for the
three months ended June 30, 2004 from the same period in 2003. This decrease in
revenue was due to a high radiation content shipment received in June 2003 which
did not recur in 2004. For 2004, the Washington Utilities and Transportation
Commission has approved a revenue requirement of $5,476,000 for the Richland
facility's rate-regulated low-level radioactive waste interstate compact
business. $1,150,000 of this revenue was recorded in the three months ended June
30, 2004.
At the Grand View, Idaho disposal facility, higher waste volumes more than
offset a 17% decrease in ASP, allowing the site to increase revenue 24% from the
same quarter last year. During the second quarter of 2004, the facility
increased disposal volume by 30% over the same period last year. During the
quarter, the U.S. Army Corps of Engineers exercised its option to renew its
contract with the Company for five years with no pricing change. Management
expects the Army and other federal agencies to continue shipping to the facility
under this five year contract renewal.
At the Beatty, Nevada hazardous treatment and disposal facility, revenue
increased 54% for the three months ended June 30, 2004 from the same period in
2003. The increased revenue reflects a 100% increase in waste volumes partially
offset by a 22% decrease in ASP. The increased volume was from both remediation
projects and increased activity from existing customers. The lower ASP resulted
from a higher percentage of waste being generated by highly competed,
lower-priced remediation projects.
At the Robstown, Texas hazardous treatment and disposal facility, revenue
increased 22% for the three months ended June 30, 2004 from the same period in
2003. The increased revenue reflected a higher priced mix of wastes received at
the site, driving ASP up 102% over the same period last year. This much higher
ASP more than offset a 37% reduction in waste volumes compared to the second
quarter of 2003. Also, during the second quarter of 2003, the site received a
high volume, low-priced project that did not recur in the second quarter of
2004. A fire in the permitted containment building on July 1, 2004 will decrease
revenues at the Robstown facility in the second half of 2004.
DIRECT OPERATING COSTS
- ----------------------
For the three months ended June 30, 2004, consolidated direct operating costs
increased 23% to $7,449,000 compared to $6,056,000 for the same period in 2003.
This primarily reflects increased waste volumes and transportation costs.
Relative revenue direct operating costs also increased from 50% of revenue in
the second quarter of 2003 to 54% for the same quarter this year.
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
$1,378,000. This increase was due to increased consumption of constructed
disposal space from higher waste volumes and increased transportation costs.
$1,130,000 of the increase in direct operating costs at Grand View was for
transportation costs on a New York remediation project completed in the second
quarter of 2004.
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 June 30, 2004 and 2003, the Company reported $13,000
and $24,000 of expenses on proposed development projects, and $101,000 and
$104,000 of costs in 2004 and 2003 to remediate or close facilities subsequent
to use.
GROSS PROFIT
- -------------
Significantly higher quarterly revenue contributed to a 6% increase in gross
profit. This pushed quarterly gross profit
20
to $6,346,000 compared with a gross profit of $5,964,000 for the same quarter
last year. Increased disposal revenue at all three hazardous waste disposal
facilities produced an increased contribution to operating income even though
much of the increased revenue was at a lower ASP. This is consistent with the
largely fixed cost nature of the disposal business, and the operating leverage
gained by increased waste throughput. Gross margin decreased slightly to 46% of
revenue compared to 50% of revenue. This was due primarily to increased
transportation costs associated with the bundling of transportation and disposal
services on certain large projects. Large remediation projects can increase
earnings substantially while simultaneously decreasing gross margins,
particularly when low margin transportation services are bundled with treatment
and disposal services. The Company seeks to maximize contribution margin and
gross profit by controlling direct costs and increasing waste volumes.
SELLING, GENERAL AND ADMINISTRATIVE COSTS (SG&A)
- ------------------------------------------------
For the three months ended June 30, 2004, the Company reported SG&A of
$2,578,000 (19% of revenue), a 22% decrease from the $3,289,000 (27% of revenue)
for the same three months of 2003. This decrease primarily resulted from a
$410,000 decrease in legal expenses quarter to quarter. Legal expenses for the
second quarter of 2004 dropped to $46,000 compared to $456,000 in the second
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.
Also, 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 result is improved management access to timely, more detailed
information at a lower cost.
Operating Disposal Facilities
- -------------------------------
During the quarter ended June 30, 2004, Operating Disposal Facilities SG&A
decreased $684,000 due to business re-engineering, cost containment efforts and
centralization of accounting cost at Corporate.
Corporate
- ---------
During the quarter ended June 30, 2004, Corporate SG&A increased $238,000. This
primarily reflects $322,000 accrued for the Management Incentive Plan (MIP) to
be paid to selected participants if the Company's pre-tax operating income
exceeds $12,000,000 including MIP costs. The Company continues its efforts to
minimize Corporate SG&A through optimization of the centralized information and
accounting systems and ongoing spending controls.
The Company is currently in the process of complying with the internal control
requirements of Section 404 of the Corporate Reform Act of 2002 (a.k.a.
Sarbanes-Oxley). The Company is investing a significant effort into complying
with the requirements of Section 404 and has retained independent consultants
and contractors to assist in this effort. The Company currently expects to spend
at least $100,000 and devote substantial resources to this effort in the 2nd
half of 2004, however, the cost and resources required may increase
significantly.
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 June 30, 2004 and
2003, the Company reported $19,000 and $284,000 of SG&A expenses, respectively,
at Non Operating Disposal Facilities. The majority of 2003 legal costs were
associated with the Ward Valley, California litigation.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2004 AND 2003
- -----------------------------------------------------
REVENUE
- -------
For the six months ended June 30, 2004, the Company reported consolidated
revenue of $27,700,000, a 22% increase over the $22,791,000 reported for the
same period in 2003. All three hazardous waste disposal facilities generated
higher revenue during the first half of 2004. The higher revenue resulted from
increased waste volumes
21
and slightly higher average selling price ("ASP") for the Company's treatment
and disposal services. At the three hazardous waste disposal facilities, volumes
increased 15% over the same six months 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 period. The slight increase in year-to-date
2004 ASP reflected a more favorable mix of niche treatment and disposal business
and a very large, lower priced project performed during the first half of 2003.
The balance of the increase in consolidated revenue resulted from increased
transportation revenue as the Company employed its strategy of selective
bundling disposal with transportation to win targeted contracts. Year-to-date
transportation revenue growth was a 90% increase over the same six months last
year, reaching $5,286,000. During the six months ending June 30, 2004 and 2003,
revenue from the Grand View, Idaho site's contract with the U.S. Army Corps of
Engineers accounted for $8,966,000 and $7,858,000 or 32% and 35% of revenue,
respectively. The Army and other federal agencies continue to ship waste under
this contract, which was renewed by the Army for five years in the second
quarter of 2004.
Operating Disposal Facilities
- -------------------------------
At the Richland, Washington LLRW disposal facility revenue decreased for the six
months ended June 30, 2004 from the same period in 2003. This decrease in
revenue was due to a higher radiation content shipment received in June 2003
which did not recur during 2004. The Washington Utilities and Transportation
Commission has approved a 2004 revenue requirement of $5,476,000 for the
Richland facility's rate-regulated low-level radioactive waste interstate
compact business. $2,593,000 of this revenue was recorded in the six months
ended June 30, 2004.
At the Grand View, Idaho disposal facility, higher waste volumes more than
offset slightly lower disposal ASPs, allowing the site to increase revenue 26%
from the same six months last year. During the first six months of 2004, the
facility disposed of 24% more waste volume than in the same period last year.
Management expects the U.S. Army Corps of Engineers and other federal agencies
to continue shipping to the facility under the five year contract extension.
At the Beatty, Nevada hazardous treatment and disposal facility, revenue
increased 42% for the six months ended June 30, 2004 from the same period in
2003. The increased revenue was due to a 59% increase in waste volume. Average
prices decreased by 7%. The increased volume was from both remediation projects
and increased shipments from existing customers. The lower ASP resulted from a
higher percentage of waste from highly competed remediation projects and wastes
not requiring specialized treatment services (e.g. direct disposal wastes).
At the Robstown, Texas hazardous treatment and disposal facility, revenue
increased 13% for the six months ended June 30, 2004 from the same period in
2003. The increased revenue reflected a higher priced mix of wastes received at
the site, which increased ASP 92%. This much higher ASP more than offset a 38%
reduction in waste volumes compared to the first half of 2003. During the first
half of 2003, the site received a high volume, lower-priced project at the site
that did not recur in the first half of 2004. A fire in the permitted
containment building on July 1, 2004 will decrease revenues at the Robstown
facility in the second half of 2004.
DIRECT OPERATING COSTS
- ----------------------
For the six months ended June 30, 2004, consolidated direct operating costs
increased 26% to $15,061,000 (54% of revenue) compared to $12,040,000 (53% of
revenue) for the same period in 2003. This primarily reflected increased waste
volumes. Direct operating costs increased slightly relative to revenue,
reflecting an increase in low margin transportation services provided in
conjunction with disposal services. The Company continues its efforts to
minimize direct costs through improved operational efficiency and ongoing cost
controls.
Operating Disposal Facilities
- -------------------------------
Direct costs at the Richland, Washington; Robstown, Texas; and Beatty, Nevada
facilities essentially remained flat from the same six months 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
$2,881,000. This increase was due to increased waste volumes and related
transportation costs. Approximately $2,604,000 of the increase in direct
22
operating costs at Grand View was for transportation costs primarily related to
a completed New York clean-up project. During the six months ended June 30,
2004 the Company was able to reduce the costs of additives used to treat waste,
resulting in lower variable costs for certain waste streams.
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 six months ended June 30, 2004 and 2003, the Company reported $23,000
and $24,000 in expenses on proposed development projects, and $200,000 and
$206,000 in costs to remediate and/or monitor facilities subsequent to
operational use.
GROSS PROFIT
- -------------
Significantly higher quarterly revenue allowed the Company to generate an 18%
increase in gross profit, pushing gross profit to $12,639,000, compared with a
gross profit of $10,751,000 for the same six months last year. Increased
disposal revenue at all operating hazardous waste disposal facilities produced
more earnings contribution due to the largely fixed cost nature of the disposal
business. Gross margin decreased slightly to 46% of revenue compared to 47% of
revenue due to increased low margin transportation revenue.
SELLING, GENERAL AND ADMINISTRATIVE COSTS (SG&A)
- ------------------------------------------------
For the six months ended June 30, 2004, the Company reported SG&A of $5,450,000
(20% of revenue), a 30% decrease from the $7,786,000 (34% of revenue) for the
same six months of 2003. The decrease in SG&A primarily resulted from a
$1,884,000 decrease in legal expenses. Legal expenses for the first half of 2004
dropped to $130,000 compared to $2,014,000 in the first half 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.
Operating Disposal Facilities
- -------------------------------
During the six months ended June 30, 2004, Operating Disposal Facilities SG&A
decreased $1,286,000 due to business reorganizations, cost containment efforts
and centralization of accounting at Corporate.
Corporate
- ---------
During the six months ended June 30, 2004, Corporate SG&A increased $727,000.
This includes $614,000 accrued for the Management Incentive Plan (MIP) to be
paid to selected participants if the Company's pre-tax operating income exceeds
$12,000,000 including all costs associated with the MIP. The remaining increase
in Corporate SG&A represents costs previously borne by the Operating Disposal
Facilities and now assigned to Corporate.
The Company is currently in the process of complying with the internal control
requirements of Section 404 of the Corporate Reform Act of 2002 (a.k.a.
Sarbanes-Oxley). The Company is investing a significant effort into complying
with the requirements of Section 404 and has retained independent consultants
and contractors to assist in this effort. The Company currently expects to spend
at least $100,000 and devote substantial resources to this effort in the 2nd
half of 2004, however, the cost and resources required may increase
significantly.
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 six months ended June 30, 2004 and 2003,
the Company reported $24,000 and $1,802,000 of SG&A expenses, respectively, at
Non Operating Disposal Facilities. Substantially all of these expenses were
legal costs associated with the Ward Valley, California litigation.
23
COMPARISON OF THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
- ---------------------------------------------------------------
INTEREST INCOME
- ---------------
For the three and six months ended June 30, 2004, the Company earned $45,000 and
$81,000 of interest income, an increase from $22,000 and $22,000 in the same
period of 2003. This was due to substantially higher cash and short term
investment balances. Interest income is earnings on tax refunds, cash balances,
restricted investments, and notes receivable. The Company typically earns
minimal income based on prevailing market rates on short term investments.
Assuming continued low interest rates, the Company does not anticipate
significant interest income in 2004. Beginning in the quarter ended June 30,
2004, the Company is investing in short term debt instruments of quasi
governmental institutions such as the Federal Home Loan Bank. These investments
have had maximum maturities of approximately three months and are expected to
earn a slightly higher rate of return than the previous investment in overnight
securities.
INTEREST EXPENSE
- -----------------
For the three and six months ended June 30, 2004, the Company reported interest
expense of $49,000 and $98,000, compared to $38,000 and $159,000 from the
corresponding periods in 2003. This reflects a reduction in average debt
outstanding by $1,800,000 from the six months ending June 30, 2003 to 2004,
offset by slightly higher interest rates. The interest rate paid on the
outstanding term loan was fixed at 3.81%. This rate will be effective to
November 18, 2004 at which time the Company and the bank will reset the interest
rate. Additional reductions in interest expense may occur as debt balances
continue to be paid down, however, the Company may experience increased interest
expense if interest rates materially increase. At June 30, 2004, the line of
credit had a zero balance.
OTHER INCOME (LOSS)
- -------------------
Other Income is composed of the following ($ in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
------------- --------------- -------------- -------------
Data processing services 14 8 34 8
Cash receipts for sale or rent of property rights 6 80 22 80
Other miscellaneous income, net -- 5 9 5
------------- --------------- -------------- -------------
Total other income (loss) $ 20 $ 93 $ 65 $ 93
============= =============== ============== =============
INCOME TAXES
- ------------
The components of the income tax provision (benefit) were as follows (in
thousands):
Three Months Ended Six Months Ended
----------------------- ---------------------
2004 2003 2004 2003
----------- ---------- ---------- ---------
State income tax expense $ -- $ 63 $ -- $ 55
Federal income tax expense 1,593 -- 2,757 --
Reversal of deferred tax asset valuation allowance (12,931) -- (12,931) --
----------- ---------- ---------- ---------
Income tax (benefit) expense $ (11,338) $ 63 $ (10,174) $ 55
=========== ========== ========== =========
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 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
24
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. As a result, no portion of the
deferred tax asset was utilized. Based on the Company's $7,237,000 first half
2004 pre-tax income, $1,716,000 and $2,757,000 of gross income tax expense was
recognized during the three and six months ended June 30, 2004. The sale of the
Company's Oak Ridge assets prompted a reassessment of the valuation allowance.
Based on disposition of the Oak Ridge assets and management's expectation of
continued profitability, the Company determined that the deferred tax asset
would be utilized in its entirety and no valuation allowance was warranted.
Accordingly the valuation allowance was reversed by a gross income tax benefit
of $12,931,000.
The net operating loss carry forward at June 30, 2004 was approximately
$36,000,000. Of this net operating loss carry forward, approximately $2,115,000
is limited by 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.
Approximately 32% of remaining pretax income tax expense will be offset against
the net operating loss carry forwards.
The Company will continue to assess the deferred tax asset as circumstance
dictate, but at least annually.
SEASONAL EFFECTS
- ----------------
Operating revenues are generally lower in the winter months and higher in the
summer and fall when more short duration, one-time remediation projects tend to
occur. However, both treatment and disposal revenue are generally more affected
by the national economy, government funding levels and base business production
levels than seasonality.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
At June 30, 2004, cash and cash equivalents totaled $3,201,000, a decrease of
$3,473,000 from December 31, 2003. The decrease in cash reflects an investment
in slightly longer term quasi governmental obligations such as Federal Home Loan
Bank instruments. This will increase interest income yields by approximately
50%. As of June 30, 2004, short term investments of $6,398,000 had been made
using staggered maturities of approximately three months.
During the first six months of 2004, the Company's days sales outstanding
("DSO") decreased to 62 days compared to 68 days at December 31, 2003. Continued
improvement in cash and receivable balances is a management priority.
As of June 30, 2004 the Company's liquidity, as measured by the current ratio,
was 2.0 to 1.0. The debt to equity ratio decreased to 0.5:1.0 at June 30, 2004.
The primary changes to working capital and debt to equity ratio were caused by a
payment of $5,500,000 in cash to redeem a common stock warrant, partially offset
by first half 2004 earnings and reversal of the deferred tax asset valuation
allowance. The debt to equity ratio is defined as total liabilities divided by
stockholders equity.
SOURCES OF CASH
On March 30, 2004, the Company had an $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 June 30, 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 and
currently reserves $3,258,000 for a letter of credit used as collateral for an
insurance policy.
Company operations have produced a three year rolling quarterly average of
approximately $2,500,000 a quarter in cash flow. Management expects 2004
quarterly cash flow from operations to be higher on average. The $3,201,000 in
cash on hand at June 30, 2004 was comprised of investments which were not
required for operations of
25
$3,579,000 and a net checks outstanding amount of ($378,000).
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 expects its known capital spending needs to be between $5,000,000 and
$6,500,000 in 2004. The Company is making capital improvements at its Grand
View, Idaho and Beatty, Nevada facilities to increase operational efficiency.
Substantial 2004 capital spending is also allocated to the Texas hazardous waste
facility for disposal cell construction, future disposal cell engineering,
equipment replacement, and restoration of treatment services following a July 1,
2004 fire incident in the Texas facility's permitted containment building.
Treatment performed in the Texas facility's containment building represents
approximately 50% of the Texas facility's year-to-date revenue. Direct disposal
operations continue without interruption and generate the balance of the
facility's revenue. The precise costs of the fire and a potential fine related
to the fire and an unrelated notice of enforcement cannot be estimated at this
time. While the Company carries property and business interruption insurance,
significant cash usage will likely be required to meet ongoing operational needs
and to contract for the capital improvements needed to restore treatment
services prior to the receipt of insurance proceeds. The Company is assessing
the costs and time required to bring treatment services back on line on a
priority basis.
The Company's Oak Ridge facility required cash of $2,594,000 during the six
month period ending on the June 30, 2004. Most of the cash was used to pay
Toxco, Inc. $1,650,000 for assuming the facility's environmental and future
closure liabilities, with the remainder being used to pay operational expenses
and for waste disposal. At June 30, 2004 the Company expects to pay an
additional $398,000 during 2004, primarily for disposition of waste removed from
the facility following discontinuation of commercial operations.
The Company believes that cash on hand, short term investments, 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
management takes a preservation of capital approach to investments and does not
hold long term or speculative investments. At June 30, 2004 approximately
$9,600,000 was held in investment accounts whose maturity ranged from overnight
to three months. Together these items earn interest at approximately 1%, and
comprise 13% of assets.
The Company does have interest rate risk on debt instruments. In October 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 June 30, 2004 the interest rate incurred on the term loan had
increased from 3.5% at December 31, 2003 to 3.81% on the outstanding term loan
balance of $4,783,000. The term loan interest expense is currently fixed at
3.81% through November 18, 2004. A hypothetical increase of 1% in interest rates
would increase annual interest expense paid by the Company by approximately
$41,000.
26
ITEM 4. CONTROLS AND PROCEDURES.
(a) As of the end of the period covered by this quarterly 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 June 30, 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
- ---------------------------------------------------
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. 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.
In June 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 was granted an extension to file its opposition brief. The Company
expects this brief and its subsequent reply brief to be filed in 2004, and that
oral arguments will be held in early to mid 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.
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 April 21, 2004, the Eighth Circuit Court of Appeals
denied Nebraska's petition for rehearing en banc. On July 16, 2004, the State of
Nebraska petitioned the U.S. Supreme Court to review the Court of Appeals'
judgment.
No assurance can be given that the U.S. Supreme Court will deny the petition for
review, that if the case is heard by the U.S. Supreme Court the plaintiffs will
prevail, or that US Ecology will recover its contributions or interest thereon.
27
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.
The Company held its Annual Meeting of Stockholders on May 20, 2004. On the
record date of March 31, 2004 there were 17,175,150 shares of common stock. At
the meeting the Company's nominees for Director were all elected to the Board,
and the selection of Moss Adams LLP as the Company's independent auditor was
ratified. The voting on the two items was as follows:
Nominee for Director For Withheld
------------------------ --- --------
David B. Anderson 16,788,951 49,907
Rotchford L. Barker 16,768,337 70,521
Roy C. Eliff 16,789,983 48,875
Edward F. Heil 16,789,983 48,875
Stephen A. Romano 16,789,983 48,875
Jimmy D. Ross 16,788,954 49,904
Stephen M. Schutt 16,782,908 55,950
Ratification of Moss Adams LLP
- ------------------------------
For 16,768,504
Against 12,841
Abstain 57,513
ITEM 5. OTHER INFORMATION.
On June 30, 2004, the Company's unaffiliated market capitalization was
$134,000,000. As the Company's unaffiliated market capitalization was greater
than $75,000,000 at the end of its second quarter, the Company will become an
accelerated filer with the SEC effective January 1, 2005.
Due to the increase in the Company's unaffiliated market capitalization, the
Company will now be required to comply with Section 404 of the Corporate Reform
Act of 2002 (a.k.a. Sarbanes-Oxley). Section 404 requires that the Company
design, document, implement and test internal controls consistent with
guidelines issued by the Public Company Accounting Oversight Board ("PCAOB") and
the Committee of Sponsoring Organizations of the Treadway Commission ("COSO").
The Company is investing a significant effort into complying with the
requirements of Section 404 and has retained independent consultants and
contractors to assist in this effort. The Company currently expects to spend at
least $100,000 and devote substantial resources to this effort in the 2nd half
of 2004, however, the cost and resources required may increase significantly.
Given the scope and requirements of Section 404 and the recent date of the
commencement of this compliance effort based on the Company's increased market
capitalization, no assurance can be given that the Company will have all of its
internal controls designed, documented, implemented, and tested in time for its
external auditors to perform the independent tests required under current rules
and regulations.
28
On July 30, 2004 the Company terminated Mellon Investor Services as its transfer
agent and, as of August 2, 2004, engaged American Stock Transfer & Trust Company
("AST") as the transfer agent for Company stock. The Company believes that AST
will increase the level of service for our shareholders while decreasing the
cost of transfer agent services to the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are filed as part of this report:
- ------------------------------------------------------------------------------------------------------
Exhibit No. Description
- ----------- -----------------------------------------------------------------------------------------
31.1 Certifications of June 30, 2004 Form 10-Q by Chief Executive Officer dated August 3, 2004
- ----------- -----------------------------------------------------------------------------------------
31.2 Certifications of June 30, 2004 Form 10-Q by Chief Financial Officer dated August 3, 2004
- ----------- -----------------------------------------------------------------------------------------
32.1 Certifications of June 30, 2004 Form 10-Q by Chief Executive Officer dated August 3, 2004
- ----------- -----------------------------------------------------------------------------------------
32.2 Certifications of June 30, 2004 Form 10-Q by Chief Financial Officer dated August 3, 2004
- ------------------------------------------------------------------------------------------------------
(b) Reports on Form 8-K.
Press Release, dated April 20, 2004, entitled "AMERICAN ECOLOGY
POSTS $3.4 MILLION FIRST QUARTER OPERATING INCOME"
Press Release, dated June 1, 2004, entitled "AMERICAN ECOLOGY
ANNOUNCES 5 YEAR RENEWAL OF ARMY CORPS OF ENGINEERS DISPOSAL
CONTRACT "
Press Release, dated July 1, 2004, entitled "AMERICAN ECOLOGY
ANNOUNCES SALE OF OAK RIDGE, TENNESSEE ASSEETS TO TOXCO, INC."
Form 8-K dated July 2, 2004 disclosing partial disruption of
service at American Ecology's Robstown, Texas facility due to a
fire in the permitted containment building.
Press Release, dated July 20, 2004, entitled "AMERICAN ECOLOGY
SECOND QUARTER OPERATING INCOME UP 41% TO $3.8 MILLION"
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN ECOLOGY CORPORATION
(Registrant)
Date: August 3, 2004 By:/s/ Stephen A. Romano
------------------------
Stephen A. Romano
President, Chief Executive Officer
and Chief Operating Officer
Date: August 3, 2004 By:/s/ James R. Baumgardner
---------------------------
James R. Baumgardner
Senior Vice President, Chief Financial Officer,
Secretary and Treasurer
29
30
EXHIBIT INDEX
Exhibit Description
- ------- -----------
31.1 Certifications of June 30, 2004 Form 10-Q by Chief Executive Officer dated August 3, 2004
31.2 Certifications of June 30, 2004 Form 10-Q by Chief Financial Officer dated August 3, 2004
32.1 Certifications of June 30, 2004 Form 10-Q by Chief Executive Officer dated August 3, 2004
32.2 Certifications of June 30, 2004 Form 10-Q by Chief Financial Officer dated August 3, 2004
31