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, 2005
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 Drive, 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 [X] No [ ]
At July 29, 2005 Registrant had outstanding 17,635,919 shares of its Common
Stock.
AMERICAN ECOLOGY CORPORATION
QUARTERLY REPORT ON FORM 10-Q FOR THE
THREE MONTHS ENDED JUNE 30, 2005
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 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
Item 4. Controls and Procedures 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 28
Item 6. Exhibits 28
Signatures 28
2
OFFICERS CORPORATE OFFICE
- -------- ----------------
Stephen A. Romano Lakepointe Centre I
Chief Executive Officer, President and Chief American Ecology Corporation
Operating Officer 300 East Mallard Drive, Suite 300
Boise, Idaho 83706
James R. Baumgardner (208) 331-8400
Senior Vice President, Chief Financial Officer (208) 331-7900 (fax)
Treasurer and Secretary www.americanecology.com
-----------------------
Michael J. Gilberg
Vice President and Controller
Steven D. Welling COMMON STOCK
Vice President, Sales & Marketing ------------
American Ecology Corporation's common stock
trades on the Nasdaq National Market under the
John M. Cooper symbol ECOL.
Vice President and Chief Information Officer
DIRECTORS FINANCIAL REPORTS
- --------- -----------------
Edward F. Heil, Chairman A copy of American Ecology Corporation
Independent Businessman Annual and Quarterly Reports, as filed on Form 10-K
and 10-Q with the Securities and Exchange
Rotchford L. Barker Commission, may be obtained by writing:
Independent Businessman Lakepointe Centre I
300 E. Mallard Drive, Suite 300
Roy C. Eliff Boise, Idaho 83706
Independent Businessman or at www.americanecology.com
-----------------------
Kenneth C. Leung
Managing Director of Investment Banking, Sanders
Morris Harris TRANSFER AGENT
--------------
American Stock Transfer & Trust Company
Richard Riazzi 59 Maiden Lane
Independent Businessman New York, New York 10038
(718) 921-8289
Stephen A. Romano or at www.amstock.com
Chief Executive Officer, President and Chief ---------------
Operating Officer
General Jimmy D. Ross AUDITOR
U.S. Army, Retired -------
Moss Adams LLP
General Richard T. Swope 1001 Fourth Avenue, Suite 2900
U.S. Air Force, Retired Seattle, WA 98154
3
PART I. FINANCIAL INFORMATION
- -----------------------------
ITEM 1. FINANCIAL STATEMENTS.
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
($ IN 000'S EXCEPT PER SHARE AMOUNTS)
June 30, 2005 December 31, 2004
-------------- ------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,685 $ 2,160
Short term investments 10,960 10,967
Receivables, net 13,636 8,963
Insurance receivable 636 1,285
Prepayments and other 2,616 1,469
Deferred income taxes 5,613 5,613
-------------- ------------------
Total current assets 35,146 30,457
Property and equipment, net 32,008 27,363
Facility development costs 6,478 6,478
Other assets 1,136 462
Deferred income taxes 10,338 12,473
-------------- ------------------
Total assets $ 85,106 $ 77,233
============== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long term debt $ 1,459 $ 1,457
Accounts payable 3,176 3,022
Dividends payable 2,645 --
Deferred revenue 1,248 724
State burial fees payable 1,541 1,446
Management incentive plan payable 630 934
Customer advances 1,364 --
Customer refunds -- 2,512
Accrued liabilities 1,443 725
Accrued closure and post closure obligation, current portion 2,323 2,323
-------------- ------------------
Total current liabilities 15,829 13,143
Long term debt 2,004 2,734
Long term customer advances 2,136 --
Long term accrued liabilities 522 441
Accrued closure and post closure obligation, excluding current portion 9,385 9,304
-------------- ------------------
Total liabilities 29,876 25,622
-------------- ------------------
Commitments and contingencies
Shareholders' equity:
Convertible preferred stock, 1,000,000 shares authorized,
Common stock, $.01 par value, 50,000,000 authorized, 17,635,709
and 17,398,494 shares issued and outstanding 176 174
Additional paid-in capital 52,715 51,015
Retained earnings 2,339 422
-------------- ------------------
Total shareholders' equity 55,230 51,611
-------------- ------------------
Total Liabilities and Shareholders' Equity $ 85,106 $ 77,233
============== ==================
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,
2005 2004 2005 2004
---------- ----------- -------- ------------
Revenue $ 18,779 $ 13,795 $31,333 $ 27,700
Direct operating costs 9,559 7,449 18,272 15,061
---------- ----------- -------- ------------
Gross profit 9,220 6,346 13,061 12,639
Selling, general and administrative expenses 3,358 2,578 5,872 5,450
Business interruption insurance claim -- -- (41) --
---------- ----------- -------- ------------
Operating income 5,862 3,768 7,230 7,189
Interest income 93 45 178 81
Interest expense 48 49 95 98
Other income 22 20 39 65
---------- ----------- -------- ------------
Income before income tax and discontinued operations 5,929 3,784 7,352 7,237
Income tax (benefit) expense 2,223 (11,338) 2,790 (10,174)
---------- ----------- -------- ------------
Income before discontinued operations 3,706 15,122 4,562 17,411
Gain from discontinued operations - Oak Ridge Facility -- 920 -- 1,069
---------- ----------- -------- ------------
Net income $ 3,706 $ 16,042 $ 4,562 $ 18,480
========== =========== ======== ============
Basic earnings from continuing operations .21 .88 .26 1.02
Basic earnings from discontinued operations -- .05 -- .06
---------- ----------- -------- ------------
Basic earnings per share $ .21 $ .93 $ .26 $ 1.08
========== =========== ======== ============
Diluted earnings from continuing operations .21 .85 .26 .98
Diluted earnings from discontinued operations -- .05 -- .06
---------- ----------- -------- ------------
Diluted earnings per share $ .21 $ .90 $ .26 $ 1.04
========== =========== ======== ============
Dividends paid per common share $ -- $ -- $ -- $ --
========== =========== ======== ============
See notes to consolidated financial statements.
5
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, $ IN 000'S)
Six Months Ended June 30,
-------------------------------
2005 2004
-------------- ---------------
Cash flows from operating activities:
Net income $ 4,562 $ 18,480
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, amortization, and accretion 3,066 3,029
Income from discontinued operations -- (1,069)
Income tax benefit on exercise of stock options 652 --
Deferred tax asset 2,135 (10,171)
Stock compensation 180 --
Changes in assets and liabilities:
Receivables (4,673) 3,059
Other assets (1,874) (685)
Closure and post closure obligation (460) (382)
Income taxes payable/receivable -- (201)
Accounts payable and accrued liabilities 2,256 1,494
-------------- ---------------
Net cash provided by operating activities 5,844 13,554
Cash flows from investing activities:
Capital expenditures (7,217) (2,394)
Proceeds from sale of assets 749 106
Transfers from cash to short tem investments, net 7 (6,398)
-------------- ---------------
Net cash used by investing activities (6,461) (8,686)
Cash flows from financing activities:
Payments of indebtedness (728) (758)
Retirement of common stock warrants -- (5,500)
Stock options exercised 870 511
-------------- ---------------
Net cash provided (used) by financing activities 142 (5,747)
-------------- ---------------
Increase (decrease) in cash and cash equivalents (475) (879)
Net cash used in discontinued operations -- (2,594)
Cash and cash equivalents at beginning of period 2,160 6,674
-------------- ---------------
Cash and cash equivalents at end of period $ 1,685 $ 3,201
============== ===============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 95 $ 98
Income taxes paid 4 201
Non-cash investing and financing activities:
Common stock dividends accrued 2,645 --
Common stock issued for director compensation 180 --
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 2004 Annual Report on Form 10-K
for the year ended December 31, 2004, 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) 2005 2004 2005 2004
---------- ---------- ---------- ---------
Income before discontinued operations $ 3,706 $ 15,122 $ 4,562 $ 17,411
Income from operations of discontinued segments -- 920 -- 1,069
---------- ---------- ---------- ---------
Net income $ 3,706 $ 16,042 $ 4,562 $ 18,480
========== ========== ========== =========
Weighted average shares outstanding-
Common shares 17,509 17,202 17,460 17,146
Effect of dilutive stock options 436 641 421 584
---------- ---------- ---------- ---------
Average shares 17,945 17,843 17,881 17,730
========== ========== ========== =========
Basic earnings per share from continuing operations $ .21 $ .88 $ .26 $ 1.02
Basic earnings per share from discontinued operations -- .05 -- .06
---------- ---------- ---------- ---------
Basic earnings per share $ .21 $ .93 $ .26 $ 1.08
========== ========== ========== =========
Diluted earnings per share from continuing operations $ .21 $ .85 $ .26 $ .98
Diluted earnings per share from discontinued operations -- .05 -- .06
---------- ---------- ---------- ---------
Diluted earnings per share $ .21 $ .90 $ .26 $ 1.04
========== ========== ========== =========
NOTE 3. EQUITY
On May 26, 2005 the Company declared a dividend of $.15 per common share to
stockholders of record on July 1, 2005. The dividend was paid out of cash on
hand on July 15, 2005 and totaled $2,645,000.
NOTE 4. LINE OF CREDIT
On May 25, 2005 the Company entered into an Amended and Restated Credit
Agreement with Wells Fargo Bank
7
("Bank") which extended its $8,000,000 line of credit maturity to June 15, 2007,
eliminated the Bank's security interest in Company assets and, among other
things, allowed for the payment of quarterly dividends and/or stock repurchases
subject to specified covenants.
NOTE 5. OPERATING SEGMENTS
The Company operates within two segments, Operating Disposal Facilities and
Non-Operating Disposal Facilities, based on its internal reporting structure and
nature of services offered. The Operating Disposal Facility segment represents
facilities accepting hazardous and radioactive waste. The Non-Operating Disposal
Facility segment represents facilities that are no longer accepting hazardous
and/or radioactive waste or formerly proposed new disposal facilities.
On December 27, 2002, the Company committed to discontinue commercial operations
within its Processing and Field Services segment which aggregated,
volume-reduced, and performed remediation and other services on radioactive
material, but excluded processing performed at its disposal facilities. All
prior segment information has been restated in order to present the operations
at its former Oak Ridge facility and associated Field Services division as
discontinued operations. On June 30, 2004 the Oak Ridge assets were sold.
Income taxes are assigned to Corporate, but all other items are included in the
segment where they originated. Inter-company transactions have been eliminated
from the segment information and are not significant between segments.
Summarized financial information concerning the Company's reportable segments is
shown in the following table:
($in thousands) Operating Non-Operating Discontinued
Disposal Disposal Processing and
Facilities Facilities Field Services Corporate Total
THREE MONTHS ENDED JUNE 30, 2005
- --------------------------------
Revenue $ 18,762 $ 17 $ -- $ -- $ 18,779
Direct operating cost 9,456 103 -- -- 9,559
------------ --------------- --------------- ----------- ---------
Gross profit (loss) 9,306 (86) -- -- 9,220
S,G&A 1,257 2 -- 2,099 3,358
------------ --------------- --------------- ----------- ---------
Income (loss) from operations 8,049 (88) -- (2,099) 5,862
Interest income, net 10 -- -- 35 45
Other income 22 -- -- -- 22
------------ --------------- --------------- ----------- ---------
Income (loss) before income tax
and discontinued operations 8,081 (88) -- (2,064) 5,929
Income tax expense (benefit) -- -- -- 2,223 2,223
------------ --------------- --------------- ----------- ---------
Net Income (loss) 8,081 (88) -- (4,287) 3,706
============ =============== =============== =========== =========
Depreciation, amortization, and
accretion $ 1,588 $ 95 $ -- $ 7 $ 1,690
Capital Expenditures $ 4,685 $ 3 $ -- $ -- $ 4,688
Total Assets $ 46,702 $ 6,545 $ -- $ 31,859 $ 85,106
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
8
Operating Non-Operating Discontinued
Disposal Disposal Processing and
Facilities Facilities Field Services Corporate Total
SIX MONTHS ENDED JUNE 30, 2005
- ------------------------------
Revenue $ 31,299 $ 34 $ -- $ -- $ 31,333
Direct operating cost 18,063 209 -- -- 18,272
------------ --------------- ---------------- ----------- ---------
Gross profit (loss) 13,236 (175) -- -- 13,061
S,G&A 2,364 7 -- 3,501 5,872
BI claim (41) -- -- -- (41)
------------ --------------- ---------------- ----------- ---------
Income (loss) from operations 10,913 (182) -- (3,501) 7,230
Interest income, net 20 -- -- 63 83
Other Income (expense) 39 -- -- -- 39
------------ --------------- ---------------- ----------- ---------
Income (loss) before income tax 10,972 (182) -- (3,438) 7,352
Income tax expense -- -- -- 2,790 2,790
------------ --------------- ---------------- ----------- ---------
Net Income (loss) 10,972 (182) -- (6,228) 4,562
============ =============== ================ =========== =========
Depreciation, amortization, and
accretion $ 2,861 $ 190 $ -- $ 15 $ 3,066
Capital Expenditures $ 7,214 $ 3 $ -- $ -- $ 7,217
Total Assets $ 46,702 $ 6,545 $ -- $ 31,859 $ 85,106
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
------------ --------------- ---------------- ----------- ---------
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
NOTE 6. STOCK OPTION PLANS
The Company had 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 applying 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, 2005 and 2004:
9
Three Months Ended Six Months Ended
------------------------ ----------------------
2005 2004 2005 2004
----------- ----------- ---------- ----------
Net income, as reported $ 3,706 $ 16,042 $ 4,562 $ 18,480
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net
of related tax effects (94) (520) (227) (614)
----------- ----------- ---------- ----------
Pro forma net income $ 3,612 $ 15,522 $ 4,335 $ 17,866
=========== =========== ========== ==========
EARNINGS PER SHARE:
Basic - as reported $ .21 $ .93 $ .26 $ 1.08
=========== =========== ========== ==========
Basic - pro forma $ .21 $ .90 $ .25 $ 1.04
=========== =========== ========== ==========
Diluted - as reported $ .21 $ .90 $ .26 $ 1.04
=========== =========== ========== ==========
Diluted - pro forma $ .20 $ .87 $ .24 $ 1.00
=========== =========== ========== ==========
The stock option plan summary and changes during the three and six months ended
June 30 are as follows:
Three Months Ended Six Months Ended
------------------------ -----------------------
2005 2004 2005 2004
----------- ----------- ---------- -----------
Options outstanding, beginning of period 878,408 1,125,181 913,708 1,266,281
Granted -- 57,500 7,500 57,500
Exercised (179,377) (36,400) (222,177) (177,500)
Canceled (25,000) (55,000) (25,000) (55,000)
----------- ----------- ---------- -----------
Options outstanding, end of period 674,031 1,091,281 674,031 1,091,281
=========== =========== ========== ===========
Weighted average exercise price of options, beginning of period $ 4.50 $ 4.08 $ 4.40 $ 3.90
Weighted average exercise price of options granted $ -- $ 9.20 $ 11.53 $ 9.20
Weighted average exercise price of options exercised $ 4.01 $ 3.95 $ 3.92 $ 2.79
Weighted average exercise price of options canceled $ 4.00 $ 10.13 $ 4.00 $ 10.13
Weighted average exercise price of options, end of period $ 4.65 $ 4.05 $ 4.65 $ 4.05
Options exercisable at end of period 521,361 785,941 521,361 785,941
=========== =========== ========== ===========
Options available for future grant at end of period 188,976 507,176 188,976 507,176
=========== =========== ========== ===========
The following table summarizes information about the stock options outstanding
under the Company's option plans as of June 30, 2005
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 2.2 27,500 $ 1.26 27,500 $ 1.26
1.60 - $2.25 3.9 20,000 $ 2.13 20,000 $ 2.13
2.42 - $3.50 7.4 184,732 $ 2.93 130,336 $ 2.90
3.75 - $4.50 7.3 258,046 $ 4.41 194,585 $ 4.38
6.50 7.6 131,253 $ 6.50 96,440 $ 6.50
9.20 - $12.15 9.1 52,500 $ 9.95 52,500 $ 9.95
----------- -----------
674,031 521,361
=========== ===========
10
As of June 30, 2005, the 1992 Stock Option Plan for Employees had options
outstanding to purchase 514,331 common shares with 188,976 shares remaining
available for issuance under option grants.
Effective March 28, 2005, the Company's Board of Directors terminated the 1992
Amended and Restated Outside Director Stock Option Plan, except for option
grants then outstanding. As of June 30, 2005 the 1992 Outside Director Stock
Option Plan had options outstanding to purchase 159,700 common shares.
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 and six months ended June 30:
Three Months Ended June 30 Six Months Ended June 30
----------------------------- ------------------------------
2005 2004 2005 2004
------------ --------------- -------------- --------------
Expected volatility -- 73% 50% 73%
Risk-free interest rates -- 4.72% 4.1% 4.72%
Expected lives -- 10 years 10 years 10 years
Dividend yield -- 0% 2.7% 0%
Weighted-average fair value of options
granted during the quarter (Black-Scholes) -- $ 7.42 $ 5.28 $ 7.42
NOTE 7. 2005 NON-EMPLOYEE DIRECTOR COMPENSATION PLAN
The 2005 Non-Employee Director Compensation Plan ("Plan") was approved by
shareholders at the Company's May 25, 2005 Annual Meeting. The Plan provides for
Non-Employee Directors to be paid an annual retainer of $16,000 in cash plus
$25,000 in restricted stock. The Plan also provides for each Non-Employee
Director to be paid a meeting fee of $750 or $1,000 for each Committee or Board
meeting that they attend, as well as an additional payment, when appointed, of
$4,000 for each standing committee Chairman and $20,000 to the Chairman of the
Board. The current Chairman has elected to waive the chairman's fee for 2005.
As of June 30, 2005, 14,700 shares of restricted stock had been issued to the
Non-Employee Directors and 185,300 shares of stock remain available for issuance
under the Plan.
NOTE 8. LITIGATION
Significant developments have occurred on the following legal matters since
December 31, 2004:
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 1999 by electric utilities
that generate LLRW within the Central Interstate Low-Level Radioactive Waste
Compact ("CIC"). The action sought declaratory relief and damages for bad faith
in the State of Nebraska's processing and denial of the Company's application to
develop and operate a LLRW disposal facility near Butte, Nebraska. US Ecology
was the CIC's contractor and intervened as a plaintiff.
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, USE'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 appealed the judgment to the Eighth Circuit Court of Appeals, which
affirmed the District Court ruling in its entirety.
On August 9, 2004 Nebraska and the CIC entered into a settlement under which the
State agreed to pay in full, or to make four equal payments of $38.5 million to
the CIC beginning August 1, 2005 and annually thereafter for three
11
years. The full $154 million settlement reflects a principal amount of $140.5
million, plus interest of 3.75% compounded annually and beginning August 1,
2004. During its 2005 session, the Nebraska legislature appropriated the full
$154 million settlement amount to the State Attorney General's Office.
On July 15, 2005, the CIC adopted a resolution to pay the Company approximately
$11,800,000 provided that CIC receives a 'substantial' payment from the State of
Nebraska. No assurance can be given that the Nebraska Attorney General will
remit the full settlement amount to the CIC and that the Company will receive
the funds settling its claim as resolved by the CIC.
MANCHAK V. US ECOLOGY, INC., U.S. DISTRICT COURT FOR THE DISTRICT OF NEVADA,
- --------------------------------
CASE NO. CV-S-97-0655.
In April 1996, Frank Manchak, Jr. ("Manchak") filed suit against subsidiary US
Ecology, Inc., alleging infringement of a sludge treatment patent to stabilize
hazardous waste at the Company's Beatty, Nevada hazardous waste facility.
Manchak sought unspecified damages for infringement, treble damages, interest,
costs and attorney fees. In October 2002, the United States District Court for
the District of Nevada dismissed the matter. Manchak's subsequent appeal to the
U.S. Court of Appeals for the Federal Circuit was also dismissed, and his
requests for reconsideration and en banc review were rejected in October 2003.
In January 2004, Manchak filed a Rule 60(b) motion in the Nevada District Court
seeking relief from that Court's orders granting summary judgment of
non-infringement and denying reconsideration. Manchak appealed a March 2004
District Court order. On March 18, 2005 the United States Court of Appeals for
the Federal Circuit affirmed the lower Court's ruling rejecting Manchak's claim.
The Company considers the matter closed.
DAVID W. CROW V. AMERICAN ECOLOGY CORPORATION, U.S. DISTRICT COURT OF HARRIS
- --------------------------------------------------
COUNTY, TEXAS; 280TH JUDICIAL DISTRICT.
Former employee David Crow alleged he was hired by the Company as its General
Counsel in October 1995 and that his compensation package included options to
purchase Company common stock with an oral agreement that the options would be
exercisable for ten years. The complaint alleged breach of written contract,
breach of oral contract, fraudulent inducement, and declaratory judgment that
Crow is entitled to purchase 150,000 shares of stock at a strike price of $4 per
share.
Mr. Crow's lawsuit, initially filed in Harris County (Texas) District Court in
May 2004 was removed to federal court. Mr. Crow, the Plaintiff, estimated his
damages in the Complaint as between $1,050,000 and $1,258,500 based on the then
value of the Company's stock. On June 13, 2005, the United States District Court
for the Southern District of Texas granted the Company's motion of summary
judgment. In early July, the deadline for timely appeal passed without any known
filing by Crow. The Company considers the matter closed.
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 2000, subsidiary US Ecology, Inc. sued the State of California in state court
for monetary damages exceeding $162 million based on California's alleged
abandonment of the formerly proposed Ward Valley LLRW disposal project. In March
2003, the Superior Court ruled that the Company failed to establish causation
and that its claim was further barred by the doctrine of unclean hands. Based on
the trial court's adverse decision, the Company wrote off a $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. On May 25,
2005, the California Court of Appeal, Fourth Appellate District affirmed the
trial court. No further appeal is planned and the matter is considered closed.
NOTE 9. COMMITMENTS AND CONTINGENCIES
Effective January 1, 2003, the Company established the American Ecology
Corporation Management Incentive Plan ("MIP"). The Plan provides for specified
participants to receive bonuses based on pre-tax operating income levels. Plan
bonuses are to be paid out over three years with a maximum in any one year of
$1,125,000 if pre-tax operating income exceeds $12,000,000 including all MIP
costs. The Company has accrued for the MIP as follows:
12
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ -----------------------------
($in thousands) 2005 2004 2005 2004
------------- --------------- ------------- --------------
MIP expense included in SG&A $ 541 $ 322 $ 541 $ 614
In June 2005, the Company entered into a five year operating lease for 152 rail
cars at $475 a month for each car leased.
On June 27, 2005, the Company committed to purchase 75 rail cars for an
aggregate purchase price of $5,400,000
On May 26, 2005 the Company declared a dividend of $.15 per common share to
stockholders of record on July 1, 2005 and payable July 15, 2005. The Company
intends that shareholders of record on October 3, 2005 and January 2, 2006 will
also receive a $.15 per share dividend subject to compliance with applicable
Bank covenants.
NOTE 10. CLOSURE AND POST CLOSURE OBLIGATIONS
Closure and post closure obligations are recorded when environmental assessments
and/or remedial efforts are probable, and the costs can be reasonably estimated
consistent with Statement of Financial Accounting Standards ("SFAS") No. 5 with
the liability calculated in accordance with SFAS No. 143. The Company performs
periodic reviews of both non-operating and operating facilities and revises
accruals for estimated post-closure, remediation and other costs when necessary.
The Company's recorded liabilities are based on best estimates of current costs
and are updated periodically to reflect current technology, laws and
regulations, inflation and other economic factors.
Changes to reported closure and post closure obligations were as follows ($ in
thousands):
Accrued Closure and
Post Closure Obligation
-------------------------
January 1, 2005 obligation $ 11,627
Accretion of obligation 541
Payment of obligation (460)
Adjustment of obligation --
-------------------------
June 30, 2005 obligation $ 11,708
=========================
At June 30, 2005, none of the Company's assets were legally restricted for
purposes of meeting closure and post closure obligations.
NOTE 11. DISCONTINUED OPERATIONS
During 2002, the Company offered for sale its former Processing Facility and
Field Services operations in Oak Ridge, Tennessee. On December 27, 2002, the
facility ceased revenue-producing operations and all on-site waste was
subsequently shipped to off-site processors and disposers. The Oak Ridge assets
were sold to Toxco, Inc. on June 30, 2004. As of June 30, 2005, there were no
"Assets held for sale or closure" associated with discontinued Oak Ridge
operations. The revenue, costs and expenses and cash flows for these former
operations have been excluded from continuing operations results and reported as
"Gain (loss) from discontinued operations" and "Net cash provided by (used in)
discontinued operations". Prior periods have been restated to reflect this.
13
Operating results for the discontinued operations were as follows for three and
six months ending June 30 2004:
($in thousands) Processing and Field
Services Operations
Three months ending June 30, 2004
- ---------------------------------
Revenues, net $ --
Operating income (loss) (10)
Net income (loss) 920
Basic earnings (loss) per share .05
Diluted earnings (loss) per share .05
Six months ending June 30, 2004
- -------------------------------
Revenues, net $ --
Operating income (loss) 139
Net income (loss) 1,069
Basic earnings (loss) per share .06
Diluted earnings (loss) per share .06
Costs incurred at the former Oak Ridge facility during the three and six months
ended June 30, 2004 are summarized as follows: ($ in thousands)
Three Months Six Months
-------------- ------------
Net operating costs in excess of previous accruals $ 108 $ 142
Additional impairment of property and equipment -- --
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) (16)
-------------- ------------
Net (income) for the three and six months ended June 30 $ (920) $ (1,069)
============== ============
Cost changes for Oak Ridge activities and disposal liabilities for removed
wastes are as follows for the six months ending June 30, 2004:
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 --
Adjustments reflect differences between the estimated costs accrued at December
31, actual costs incurred during the first and second quarters of 2004, and
differences between estimated and actual costs incurred for disposition of waste
removed from the facility.
NOTE 12. HONEYWELL INTERNATIONAL CONTRACT
On June 8, 2005, the Company entered into a contract with Honeywell
International, Inc. for transport, treatment, and disposal of an estimated 1
million tons of chromite ore processing residue over an estimated four to five
year period. A $3,500,000 advance payment was received from, and will be
credited back to, Honeywell during the contract term. The contract provides that
the Company will receive substantially all of the material shipped off-site for
disposal. No assurance can be given regarding the actual amount of waste that is
ultimately shipped to the Company under the contract.
NOTE 13. 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 waste treatment
building. Treatment revenue had previously represented approximately 50% of the
Texas facility's revenue. Direct disposal operations, which continued without
interruption after the fire, represent the balance of the facility's revenue.
While the Company is insured for property and equipment damage and business
interruption, insurance deductibles, operational upgrades and loss of customer
business have, and may continue to negatively impact financial performance. The
facility resumed limited treatment services in December 2004, but will not
resume all permitted services until the new treatment building is operational.
The Company currently expects to open the new building for waste treatment in
August 2005.
14
The Company filed a property insurance claim and received $790,000 of the
$954,000 recognized as of June 30, 2005. The balance of the claim is under
review by its insurance carrier. The Company has also filed approximately
$2,400,000 in claims under its business interruption insurance policy for July
2004 through April 2005, of which $472,000 has been recognized in the
consolidated statement of operations through June 30, 2005. This claim is also
under review by its insurer. The Company anticipates recognizing the value of
the claims after its insurer accepts or confirms amounts. No assurance can be
given that the Company will be able to recognize the pending insurance claims.
NOTE 14. SUBSEQUENT EVENT - WASHINGTON SUBLEASE
On July 27, 2005 the Company entered into a new sublease for the Washington
disposal facility. The agreement provides for a ten year sublease with four,
ten-year renewal options and an annual inflation-adjusted rental payment of
approximately $63,000.
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 July 2004 fire at its 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, 2004 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, 2004.
Unless otherwise described, changes discussed relate to the increase or decrease
from the three and six month periods ended June 30, 2004 to the three and six
month periods ended June 30, 2005.
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. Moreover, the types and amounts of waste received from
recurring ("Base Business") customers also varies quarter to quarter. These
variations in service mix are difficult to forecast with precision, and
15
can produce large quarter to quarter swings in revenue, gross profit, gross
margin and operating profit. Management's strategy is to continue expanding its
recurring customer 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 waste disposal
business.
OVERALL COMPANY PERFORMANCE
- ---------------------------
The Company's operational performance for the three months ended June 30, 2005
was substantially improved over the second quarter of 2004. All four of the
Company's disposal facilities improved performance over the previous quarter,
and 3 of the 4 sites improved their performance over the same quarter in 2004.
Another significant factor in this improvement was an increase in second quarter
waste shipments to the Company's Idaho facility from multiple, previously
delayed, clean-up projects.
Quarter to quarter comparisons were also materially affected by several
non-operating events in 2004 including a gain on the Oak Ridge asset sale, and
the reversal of the valuation allowance on the Company's deferred tax assets.
These events and the Honeywell International contract are discussed in more
detail below.
Oak Ridge Asset Disposition: 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: Based on the Company's evaluation of year-to-date 2004
- ---------------------
pre-tax income, expectations of continued profitability, and disposition of the
Oak Ridge facility, the deferred tax asset's valuation allowance was reversed at
June 30, 2004. This resulted in an income tax benefit of $11,338,000 for the
three months ended June 30, 2004.
Honeywell International Contract: On June 8, 2005 the Company entered into a
- -----------------------------------
contract to transport, treat, and dispose of contaminated soils from a site in
Jersey City, New Jersey. Initial engineering studies estimate that 1 million
tons of chromite ore processing residues are present at the Jersey City site.
Depending on the volume of material shipped off-site and the Company's ability
to successfully perform under the contract, the Company estimates revenue in the
range of $175 to $240 million over a 4 to 5 year period. A significant portion
of the revenue under the contract will include transportation services. As a
result, management expects that while revenue dollars will increase, the
Company's gross margin relative to revenue will decrease.
Under the terms of the contract, American Ecology will treat and dispose of the
contaminated soil at Company owned hazardous waste disposal facilities. The
contract specifies that American Ecology will receive substantially all of the
waste shipped offsite, subject to applicable contract conditions. The Company
plans to expand its facilities and increase rail transport capabilities at an
estimated cost of up to $12 million. Off-site disposal of the material began in
July 2005. No assurance can be given regarding the actual amount of waste that
is ultimately shipped to the Company under the contract.
Transportation Costs: Because of increasing fuel costs and higher rates for
- ----------------------
transportation services, the Company's ability to compete for disposal projects
could be impacted.
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. Accounting for the July 1, 2004 Texas Fire, Disposal Facility
Accounting, and Litigation 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.
16
ACCOUNTING FOR THE JULY 1, 2004 TEXAS FIRE
A July 1, 2004 fire in the Robstown, Texas facility's waste treatment building
resulted in an insurance claim for Property and Equipment damaged in the fire.
As of December 31, 2004 the Company had fully impaired the $679,000 in book
value of assets damaged in the fire and recognized $954,000 of Fire insurance
proceeds, which net to the $275,000 net claims shown in the Consolidated
Statements of Operations. This amount represents the stated values submitted to
the insurance carrier at the inception of coverage and the probable recovery
expected by management. As of June 30, 2005, $790,000 in property insurance
proceeds had been received by the Company.
As of June 30, 2005, the Company has filed approximately $2,400,000 in business
interruption insurance claims with its insurer, of which $472,000 of incremental
costs due to the fire have been recognized. The Company has not recognized
significant lost revenue associated with suspension of treatment services
following the fire pending determination of the actual amounts recovered from
its insurer.
DISPOSAL FACILITY ACCOUNTING
In general terms, a disposal cell development asset exists for the cost of
building usable disposal space and a closure liability exists for closing,
maintaining and monitoring the disposal unit once this space has been filled.
Major assumptions and judgments used to calculate cell development assets and
closure liabilities are as follows:
- - Personnel and equipment costs incurred to construct disposal cells are
capitalized as a cell development asset.
- - The cell development asset is amortized as each available cubic yard of
disposal space is filled. Periodic independent engineering survey and
inspection reports are used to determine the remaining volume available.
These reports take into account waste volume, compaction rates and space
reserved for capping filled cells. Additionally, changes in the estimated
useful lives of the cells or related expansion plans have a direct effect
on the amortization expense related to those cells during future periods.
- - The closure liability is the present value based on a current cost estimate
prepared by an independent engineering firm of the costs to close, maintain
and monitor filled disposal units. Management estimates the timing of
payment, accretes the current cost estimate by an estimated cost of living
(1.5%), and then discounts (9.3%) the accreted current cost estimate back
to a present value. The final payments of the closure liability are
estimated as being paid in 2056 based upon current permitted capacity and
estimated annual usage.
LITIGATION
The Company is involved in litigation requiring estimates of timing and loss
potential whose disposition is controlled by the judicial process.
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 1999 by electric utilities
that generate LLRW within the Central Interstate Low-Level Radioactive Waste
Compact ("CIC"). The action sought declaratory relief and damages for bad faith
in the State of Nebraska's processing and denial of the Company's application to
develop and operate a LLRW disposal facility near Butte, Nebraska. US Ecology
was the CIC's contractor and intervened as a plaintiff.
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, USE'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 appealed the judgment to the Eighth Circuit Court of Appeals, which
affirmed the District Court ruling in its entirety.
On August 9, 2004 Nebraska and the CIC entered into a settlement under which the
State agreed to pay in full, or to make four equal payments of $38.5 million to
the CIC beginning August 1, 2005 and annually thereafter for three
17
years. The full $154 million settlement reflects a principal amount of $140.5
million, plus interest of 3.75% compounded annually and beginning August 1,
2004. During its 2005 session, the Nebraska legislature appropriated the full
$154 million settlement amount to the State Attorney General's Office.
On July 15, 2005, the CIC adopted a resolution to pay the Company approximately
$11,800,000 provided that CIC receives a 'substantial' payment from the State of
Nebraska. No assurance can be given that the Nebraska Attorney General will
remit the full settlement amount to the CIC and that the Company will receive
the funds settling its claim as resolved by the CIC.
MANCHAK V. US ECOLOGY, INC., U.S. DISTRICT COURT FOR THE DISTRICT OF NEVADA,
- --------------------------------
CASE NO. CV-S-97-0655.
In April 1996, Frank Manchak, Jr. ("Manchak") filed suit against subsidiary US
Ecology, Inc., alleging infringement of a sludge treatment patent to stabilize
hazardous waste at the Company's Beatty, Nevada hazardous waste facility.
Manchak sought unspecified damages for infringement, treble damages, interest,
costs and attorney fees. In October 2002, the United States District Court for
the District of Nevada dismissed the matter. Manchak's subsequent appeal to the
U.S. Court of Appeals for the Federal Circuit was also dismissed, and his
requests for reconsideration and en banc review were rejected in October 2003.
In January 2004, Manchak filed a Rule 60(b) motion in the Nevada District Court
seeking relief from that Court's orders granting summary judgment of
non-infringement and denying reconsideration. Manchak appealed a March 2004
District Court order. On March 18, 2005 the United States Court of Appeals for
the Federal Circuit affirmed the lower Court's ruling rejecting Manchak's claim.
The Company considers the matter closed.
DAVID W. CROW V. AMERICAN ECOLOGY CORPORATION, U.S. DISTRICT COURT OF HARRIS
- --------------------------------------------------
COUNTY, TEXAS; 280TH JUDICIAL DISTRICT.
Former employee David Crow alleged he was hired by the Company as its General
Counsel in October 1995 and that his compensation package included options to
purchase Company common stock with an oral agreement that the options would be
exercisable for ten years. The complaint alleged breach of written contract,
breach of oral contract, fraudulent inducement, and declaratory judgment that
Crow is entitled to purchase 150,000 shares of stock at a strike price of $4 per
share.
Mr. Crow's lawsuit, initially filed in Harris County (Texas) District Court in
May 2004 was removed to federal court. Mr. Crow, the Plaintiff, estimated his
damages in the Complaint as between $1,050,000 and $1,258,500 based on the then
value of the Company's stock. On June 13, 2005, the United States District Court
for the Southern District of Texas granted the Company's motion of summary
judgment. In early July, the deadline for timely appeal passed without any known
filing by Crow. The Company considers the matter closed.
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 2000, subsidiary US Ecology, Inc. sued the State of California in state court
for monetary damages exceeding $162 million based on California's alleged
abandonment of the formerly proposed Ward Valley LLRW disposal project. In March
2003, the Superior Court ruled that the Company failed to establish causation
and that its claim was further barred by the doctrine of unclean hands. Based on
the trial court's adverse decision, the Company wrote off a $20,951,000 deferred
site development asset on March 31, 2003. In June 2003, the Company filed a
notice of appeal with the California Fourth Appellate District Court. On May 25,
2005, the California Court of Appeal, Fourth Appellate District affirmed the
trial court. No further appeal is planned and the matter is considered closed.
18
RESULTS OF OPERATIONS
- -----------------------
The following table presents, for the periods indicated, the operating costs as
a percentage of revenues in the consolidated income statement:
Three Months Ended Six Months Ended
-------------------------------------- ---------------------------------------
($in 000's) June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004
----------------- ------------------- ------------------ -------------------
$ % $ % $ % $ %
------- -------- --------- -------- -------- -------- --------- --------
Revenue 18,779 13,795 31,333 27,700
Direct operating costs 9,559 50.9% 7,449 54.0% 18,272 58.3% 15,061 54.4%
------- --------- -------- ---------
Gross profit 9,220 49.1% 6,346 46.0% 13,061 41.7% 12,639 45.6%
SG & A 3,358 17.9% 2,578 18.7% 5,872 18.7% 5,450 19.7%
Business interruption insurance claim -- 0.0% -- 0.0% (41) -0.1% -- 0.0%
------- --------- -------- ---------
Income from operations 5,862 31.2% 3,768 27.3% 7,230 23.1% 7,189 26.0%
Interest income 93 0.5% 45 0.3% 178 0.6% 81 0.3%
Interest expense 48 0.3% 49 0.4% 95 0.3% 98 0.4%
Other income 22 0.1% 20 0.1% 39 0.1% 65 0.2%
------- --------- -------- ---------
Net income before income taxes and
discontinued operations 5,929 31.6% 3,784 27.4% 7,352 23.5% 7,237 26.1%
Income tax (benefit) expense 2,223 11.8% (11,338) -82.2% 2,790 8.9% (10,174) -36.7%
------- --------- -------- ---------
Net income before discontinued
operations 3,706 19.7% 15,122 109.6% 4,562 14.6% 17,411 62.9%
======= ========= ======== =========
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2005 AND 2004
- --------------------------------------------------------
REVENUE
- -------
For the three months ended June 30, 2005, the Company reported consolidated
revenue of $18,779,000, a 36% increase over the $13,795,000 reported for the
same period in 2004. All four waste disposal facilities generated higher revenue
during the second quarter of 2005 as volumes increased 25% over the same quarter
last year. Higher quarterly waste volume was combined with an 8% increase in
average selling price ("ASP") for the Company's treatment and disposal services.
The increase in waste volume primarily resulted from an increase in both project
(or "Event") work and base business during the quarter. The increase in ASP
reflects an increased percentage of revenue from higher priced niche and
treatment services. Also contributing to the quarterly revenue growth was a 63%
increase in transportation revenue over the same quarter last year. During the
three months ending June 30, 2005 and 2004, revenue from a contract between the
Company's Idaho facility and the U.S. Army Corps of Engineers accounted for
$6,849,000 and $4,975,000 or 37% and 36% 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
- -------------------------------
At the Richland, Washington LLRW disposal facility revenue increased 26% for the
three months ended June 30, 2005 from the same period in 2004. This increase in
revenue was due to above average rate-regulated shipments to the facility during
the second quarter of 2005 which were below average during the second quarter of
2004. For 2005, the Washington Utilities and Transportation Commission has
approved a revenue requirement of $5,346,000 for the Richland facility's
rate-regulated low-level radioactive waste interstate compact business.
At the Grand View, Idaho disposal facility, a 45% increase in waste volumes and
a 1% increase in ASP, drove a 46% increase in revenue over the same quarter last
year. Management expects the U.S. Army Corps of Engineers, Honeywell
International, and other customers to continue to ship to the Grand View, Idaho
disposal facility.
At the Beatty, Nevada hazardous treatment and disposal facility, revenue
increased 15% for the three months ended June 30, 2005 from the same period in
2004. The increased revenue reflects a 25% decrease in waste volumes offset by a
more favorable service mix, as evidenced by a 49% increase in ASP. The decreased
volume was due to decreased activity from highly competed, lower-priced
remediation projects. Higher ASP reflected greater delivery of treatment
services, including receipt of corrosive wastes, allowed by the facility's five
year hazardous waste permit renewal, which took effect in April 2005.
19
At the Robstown, Texas hazardous treatment and disposal facility, revenue
increased 33% for the three months ended June 30, 2005 from the same period in
2004. The increased revenue reflected an 11% higher priced mix of treatment
wastes as well as a 21% increase in waste volumes received at the site compared
to the second quarter of 2004.
DIRECT OPERATING COSTS
- ----------------------
For the three months ended June 30, 2005, consolidated direct operating costs
increased 28% to $9,559,000 compared to $7,449,000 for the same period in 2004.
This primarily reflects increased waste volumes and transportation costs.
Relative to revenue direct operating costs decreased from 54% of revenue in the
second quarter of 2004 to 51% for the same quarter this year.
Operating Disposal Facilities
- -------------------------------
Direct costs at all four of the operating disposal facilities increased 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 $1,561,000. This increase was due to increased wages and
consumption of disposal airspace and increased transportation costs of
$1,156,000 to handle higher waste volumes. Higher fuel charges were also a
factor in pushing costs higher.
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, 2005 and 2004, the Company reported $12,000
and $13,000 of expenses on proposed development projects, and $91,000 and
$101,000 of costs in 2005 and 2004 to remediate or close facilities subsequent
to use.
GROSS PROFIT
- -------------
Significantly higher quarterly revenue contributed to a 45% increase in gross
profit. This pushed quarterly gross profit to $9,220,000 compared with a gross
profit of $6,346,000 for the same quarter last year. Increased disposal direct
costs at all three hazardous waste disposal facilities was more than offset by
the higher revenue, producing an increased gross margin. This is consistent with
the largely fixed cost nature of the waste disposal business and the operating
leverage delivered by increased waste throughput. Gross margin increased to 49%
of revenue compared to 46% of revenue in 2004. This was despite the increased
transportation costs associated with the bundling of transportation and disposal
services on certain large clean-up 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, 2005, the Company reported SG&A of
$3,358,000 (18% of revenue), a 27% increase from the $2,578,000 (19% of revenue)
for the same three months of 2004.
Operating Disposal Facilities
- -------------------------------
During the quarter ended June 30, 2005, Operating Disposal Facilities SG&A
increased $110,000 primarily due to the hiring of additional personnel needed to
properly manage and track the additional waste volumes being processed at the
Grand View, Idaho facility.
20
Corporate
- ---------
During the quarter ended June 30, 2005, Corporate SG&A increased $687,000. The
increase in SG&A reflects a $541,000 catch-up accrual in 2005 for the Management
Incentive Plan or $219,000 higher than the accrued MIP in the second quarter of
2004. The Company did not accrue any Management Incentive Plan obligation in the
first quarter of 2005. The Company will accrue costs for the 2005 Management
Incentive Plan if and when pro rata operating income of $12,000,000 including
the $906,000 cost of the plan is achieved. The Company also incurred $136,000
for legal costs, higher costs for director fees under the new shareholder
approved 2005 Director compensation plan, consulting and auditing fees to
implement internal controls as mandated by Section 404 of the Sarbanes-Oxley Act
of 2002, and bank fees associated with renewal of the Company's line of credit.
Non Operating Disposal Facilities
- ------------------------------------
Non Operating Disposal Facilities incur primarily legal costs to recover the
Company's investment in formerly proposed disposal site development projects in
Ward Valley, California and Butte, Nebraska. For the three months ended June 30,
2005 and 2004, the Company reported $2,000 and $5,000 of such SG&A expenses.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2005 AND 2004
- -----------------------------------------------------
REVENUE
- -------
For the six months ended June 30, 2005, the Company reported consolidated
revenue of $31,333,000, a 13% increase over the $27,700,000 reported for the
same period in 2004. All three hazardous waste disposal facilities generated
higher revenue during the first half of 2005. The higher revenue resulted from
increased waste volumes and slightly higher average selling price ("ASP") for
the Company's treatment and disposal services. At the three hazardous waste
disposal facilities, volumes increased 13% over the same six months last year.
The increase in waste volume resulted primarily from an increase in project (or
"Event") work performed during the period. The 2% increase in year-to-date 2005
ASP reflected a more favorable mix of niche treatment and disposal business. The
balance of the increase in consolidated revenue resulted from increased
transportation revenue as the Company continued to employ its strategy of
selective bundling of disposal with transportation services to win targeted
contracts. During the six months ending June 30, 2005 and 2004, revenue from the
Grand View, Idaho site's contract with the U.S. Army Corps of Engineers
accounted for $9,498,000 and $8,966,000 or 30% and 32% 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 3% for the
six months ended June 30, 2005 from the same period in 2004. This decrease in
revenue was due to above average non rate-regulated shipments to the facility
during 2004 which did not fully recur during 2005. The Washington Utilities and
Transportation Commission has approved a 2005 revenue requirement of $5,346,000
for the Richland facility's rate-regulated low-level radioactive waste
interstate compact business.
At the Grand View, Idaho disposal facility, higher waste volumes and slightly
higher disposal ASPs drove a 20% increase in revenue over the same six months
last year. During the first six months of 2005, the facility disposed of 22%
more waste volume than in the same period last year. The U.S. Army Corps of
Engineers and other federal agencies are presently shipping to the facility from
multiple sites.
At the Beatty, Nevada hazardous treatment and disposal facility, revenue
increased 10% for the six months ended June 30, 2005 from the same period in
2004. The increased revenue was due to a 13% increase in ASP despite a 7%
decrease in disposal volume. This decrease resulted from less lower-priced
remediation projects. Shipments from recurring base business customers increased
slightly. During the second quarter of 2005, the facility received regulatory
approval to treat corrosive wastes which contributed to the increase in ASP.
At the Robstown, Texas hazardous treatment and disposal facility, revenue
increased 6% for the six months ended June 30, 2005 from the same period in
2004. The increased revenue reflected a more favorable mix of wastes received at
the site, reflected in a 4% increase in ASP . During the first half of 2004, the
site received a high volume, lower-priced project at the site that was not
replaced in the first half of 2005. A fire in the permitted containment
21
building on July 1, 2004 continued to limit the scope of treatment services
offered. A gradual increase in the facility's revenues is expected once the new
treatment building becomes operational and full service capability is restored.
DIRECT OPERATING COSTS
- ----------------------
For the six months ended June 30, 2005, consolidated direct operating costs
increased 21% to $18,272,000 (58% of revenue) compared to $15,061,000 (54% of
revenue) for the same period in 2004. This primarily reflected increased
transportation costs and 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's transportation assets were fully utilized by the end of the second
quarter of 2005, an improvement over the first quarter of 2005 when clean-up
project shipment delays led to substantial underutilization of the Company's
leased railcar fleet.
Operating Disposal Facilities
- -------------------------------
Direct costs at all four disposal facilities increased 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 $2,056,000. This increase was due to increased waste volumes and
related transportation costs. Approximately $1,482,000 or 75% of the increase in
direct operating costs at Grand View was for costs incurred to transport waste
to the facility. During the six months ended June 30, 2005 the Company was able
to reduce the costs of waste treatment additives, lowering variable costs for
certain waste streams. Higher fuel charges also increased transportation costs
over the same 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 six months ended June 30, 2005 and 2004, the Company reported $26,000
and $23,000 in expenses on proposed development projects, and $183,000 and
$200,000 in costs to remediate and/or monitor such facilities.
GROSS PROFIT
- -------------
Significantly higher revenue allowed the Company to generate a 3% increase in
gross profit, pushing gross profit to $13,061,000, compared with a gross profit
of $12,639,000 for the same six months last year. Increased disposal revenue at
all operating hazardous waste disposal facilities produced more earnings
contribution due to a more favorable service mix combined with the operating
leverage produced by high volume throughput. Gross margin decreased to 42% of
revenue from 46% of revenue due to increased low margin transportation revenue
and underutilized transportation assets in the first quarter of 2005.
SELLING, GENERAL AND ADMINISTRATIVE COSTS (SG&A)
- ------------------------------------------------
For the six months ended June 30, 2005, the Company reported SG&A of $5,872,000
(19% of revenue), an 8% increase from the $5,450,000 (20% of revenue) for the
same six months of 2004. The increase in SG&A primarily resulted from increases
in legal expenses, auditing, consulting, and director fees. The Company has
resolved multiple lawsuits, reducing legal fees and freeing up management time
and resources to focus on growing the business.
Operating Disposal Facilities
- -------------------------------
During the six months ended June 30, 2005, Operating Disposal Facilities SG&A
decreased $7,000.
Corporate
- ---------
During the six months ended June 30, 2005, Corporate SG&A increased $446,000.
The increase in SG&A is from increases from a variety of expenses, including
legal, auditing, consulting, and director fees, all of which management expects
to decrease in the second half of 2005.
22
The Company complied with the internal control requirements of Section 404 of
the Corporate Reform Act of 2002 (Sarbanes-Oxley) during the second quarter of
2005. The Company invested significant time and resources complying with Sectio
404 requirements and retained independent contractors to assist. While the
Company will continue to devote resources to this effort in the second half of
2005, the time and cost devoted to maintain Section 404 compliance should
decrease from the second half of 2004 and the first half of 2005.
Non Operating Disposal Facilities
- ------------------------------------
Non Operating Disposal Facilities incur primarily legal costs to support
recovery of the Company's investment in the Butte, Nebraska and Ward Valley,
California projects. For the six months ended June 30, 2005 and 2004, the
Company reported $7,000 and $24,000 of SG&A expenses, respectively, at Non
Operating Disposal Facilities.
COMPARISON OF THREE AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004
- ---------------------------------------------------------------
INTEREST INCOME
- ---------------
For the three and six months ended June 30, 2005, the Company earned $93,000 and
$178,000 of interest income, an increase from $45,000 and $81,000 in the same
periods of 2004 due to higher cash balances and higher interest rates available
on short term investments. Interest income is earnings on cash balances,
short-term investments, and notes receivable for which income is a function of
prevailing market rates. Based on current interest rates, the Company does not
anticipate significant interest income in 2005.
INTEREST EXPENSE
- -----------------
For the three and six months ended June 30, 2005, the Company reported interest
expense of $48,000 and $95,000, a decrease from $49,000 and $98,000 in 2004. The
primary cause of this decrease was the reduction in average debt outstanding by
$1,400,000 from June 30, 2004 to 2005 offset by rising interest rates. For the
six months ending June 30, 2005, the interest rate paid on its single
outstanding term loan was 5.5%, an increase of 2.12% from the 3.38% at June 30,
2004. Additional reductions may occur as debt balances continue to be paid down,
however interest expenses will increase if interest rates increase. At June 30,
2005, the line of credit had a zero balance.
OTHER INCOME (LOSS)
- -------------------
Other Income is composed of the following ($ in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2005 2004 2005 2004
------------- --------------- ------------- --------------
Data processing services -- 14 -- 34
Cash receipts for sale or rent of property rights 22 6 39 22
Other miscellaneous income, net -- -- -- 9
------------- --------------- ------------- --------------
Total other income (loss) $ 22 $ 20 $ 39 $ 65
============= =============== ============= ==============
INCOME TAXES
- ------------
The components of the income tax provision (benefit) were as follows for the
periods ended June 30 (in thousands):
Three Months Ended Six Months Ended
----------------------- ----------------------
2005 2004 2005 2004
---------- ----------- ---------- ----------
State income tax expense $ 167 $ -- $ 210 $ --
Federal income tax expense 2,056 1,593 2,580 2,757
Reversal of deferred tax asset valuation allowance -- (12,931) -- (12,931)
---------- ----------- ---------- ----------
Income tax (benefit) expense $ 2,223 $ (11,338) $ 2,790 $ (10,174)
========== =========== ========== ==========
23
The tax effects of temporary differences between income for financial reporting
and income taxes give rise to deferred tax assets and liabilities. 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.
The net operating loss carry forward at June 30, 2005 was approximately
$30,000,000 and expires on various dates between 2011 and 2020. Due to the
Company's net operating loss carry forwards, 2005 income tax expense of
approximately 2% of pretax income tax expense is expected to be paid in cash.
The remaining approximately 35% of income tax expense will be offset against the
net operating loss carry forwards.
On July 20, 2005, a registration statement on Form S-3 was filed with the
Securities and Exchange Commission allowing for two Directors of the Company to
sell their shares without certain restrictions. Section 382 of the Internal
Revenue Code imposes an annual limitation on the amount of net operating loss
carryforwards that may be used to offset taxable income when a corporation has
undergone significant changes in its ownership. Should a change of control occur
due to the two Directors selling their shares, the Company may be subject to an
annual limitation upon the usage of the net operating losses
The Company will continue to assess the deferred tax asset for utilization as
needed but at least annually.
SEASONAL EFFECTS
- ----------------
Operating revenues are generally lower in the winter months than the warmer
summer months when more short duration, one-time remediation projects tend to
occur. While both disposal and processing revenue are generally more affected
by market conditions than seasonality, weather related clean-up project delays
did have an adverse impact on the first quarter of 2005.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
At June 30, 2005, cash and short term investments totaled $12,645,000, a
decrease of $482,000 from December 31, 2004. The small decrease in cash reflects
the Company's capital expenditures and growth in accounts receivable offset by
the Company's continued profitability and an advance payment received under its
contract with Honeywell.
During the first three months of 2005, the Company's days sales outstanding
("DSO") increased at June 30, 2005, to 66 days compared to December 31, 2004 at
60 days.
As of June 30, 2005 the Company's liquidity, as measured by the current ratio,
was 2.2 to 1.0. The debt to equity ratio decreased to 0.5:1.0 at June 30, 2005.
There have not been any substantial changes to working capital or debt to equity
ratio during the six months ended June 30, 2005. The debt to equity ratio is
defined as total liabilities divided by stockholders equity.
SOURCES OF CASH
On June 30, 2005, the Company had an unsecured $8,000,000 revolving line of
credit with Wells Fargo Bank in Boise, Idaho maturing June 15, 2007. At June 30,
2005, the outstanding balance on the revolving line of credit was $-0-. The
Company borrows and repays according to business demands and availability of
cash. It currently reserves $5,000,000 of the line of credit for a letter of
credit used as collateral for an insurance policy.
On June 8, 2005, the Company was awarded a contract for transport, treatment,
and disposal of approximately 1 million tons of waste over a four to five year
period from Honeywell International. A $3,500,000 advance was received from,
and will be credited back to Honeywell International during the contract term.
Company operations produced an average of almost $4,000,000 a quarter in cash
flow over the past three years. Management expects 2005 quarterly cash flow from
operations to, on average, be higher. The $12,645,000 in cash and short term
investments at June 30, 2005 was comprised of short term investments which were
not required for
24
operations of $10,960,000, cash immediately available for operations of
$3,314,000, and a net checks outstanding amount of ($1,629,000).
The potential receipt of approximately $11.8 million in proceeds in resolution
of the Company's claim to proceeds in the settlement between the Central
Interstate Compact and the State of Nebraska would augment the Company's cash
resources, if and when received.
USES OF CASH
Management currently expects its capital spending could reach $20,000,000 in
2005, including investments to increase rail transportation capabilities and
waste unloading throughput capabilities to more efficiently manage waste
received at the Idaho facility under contracts with Honeywell International, the
U.S. Army Corps of Engineers and other customers. Disposal cell expansion at
each of the Company's four sites is also underway in 2005, with new buildings
under development in Texas and Nevada. Certain of these cash outlays will extend
into 2006.
The Company paid a $0.15 quarterly dividend on July 15, 2005 out of cash on
hand. The Company also intends that shareholders of record on October 3, 2005
and January 2, 2006 will also receive a $.15 per share dividend subject to
compliance with applicable Bank covenants.
The Company believes that cash on hand and cash flow from operations, augmented
as needed by periodic borrowings under the line of credit, will be sufficient to
meet the Company's cash needs for the foreseeable future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company does not maintain equities, commodities, derivatives, or any other
instruments for trading or any other purposes, and does not enter into
transactions denominated in currencies other than the U.S. Dollar.
The Company has minimal interest rate risk on investments or other assets due to
the Company's preservation of capital approach to investments. At June 30, 2005,
approximately $12,600,000 was held in cash or short term investments at terms
ranging from overnight to three months. Together, these items earned interest at
approximately 3% and comprised 15% of assets.
The Company has interest rate risk on debt instruments due on a fully amortizing
term loan due Wells Fargo Bank. At June 30, 2005, $3,383,000 of variable rate
debt was owed under the term loan, accruing interest at the rate of 5.5%. A
hypothetical change of 1% in interest rates would change annual interest expense
paid by the Company by approximately $27,000.
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, 2005, there were no
changes to internal controls or in other factors that could materially affect
these internal controls.
On April 25, 2005 the Company filed an Amended Form 10-K with the Securities and
Exchange Commission that contained the opinions of management and the Company's
Independent Registered Public Accounting firm regarding the Company's internal
controls over financial reporting. Both Management and the Independent
Registered Public Accounting firm found that the Company's controls over
financial reporting at December 31, 2004 were effective and that no material
weaknesses existed.
25
PART II OTHER INFORMATION.
- --------------------------
ITEM 1. LEGAL PROCEEDINGS.
Significant developments have occurred on the following legal matters since
December 31, 2004:
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 1999 by electric utilities
that generate LLRW within the Central Interstate Low-Level Radioactive Waste
Compact ("CIC"). The action sought declaratory relief and damages for bad faith
in the State of Nebraska's processing and denial of the Company's application to
develop and operate a LLRW disposal facility near Butte, Nebraska. US Ecology
was the CIC's contractor and intervened as a plaintiff.
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, USE'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 appealed the judgment to the Eighth Circuit Court of Appeals, which
affirmed the District Court ruling in its entirety.
On August 9, 2004 Nebraska and the CIC entered into a settlement under which the
State agreed to pay in full, or to make four equal payments of $38.5 million to
the CIC beginning August 1, 2005 and annually thereafter for three years. The
full $154 million settlement reflects a principal amount of $140.5 million, plus
interest of 3.75% compounded annually and beginning August 1, 2004. During its
2005 session, the Nebraska legislature appropriated the full $154 million
settlement amount to the State Attorney General's Office
On July 15, 2005, the CIC adopted a resolution to pay the Company approximately
$11,800,000 provided that CIC receives a 'substantial' payment from the State of
Nebraska. No assurance can be given that the Nebraska Attorney General will
remit the full settlement amount to the CIC and that the Company will receive
the funds settling its claim as resolved by the CIC.
MANCHAK V. US ECOLOGY, INC., U.S. DISTRICT COURT FOR THE DISTRICT OF NEVADA,
- --------------------------------
CASE NO. CV-S-97-0655.
In April 1996, Frank Manchak, Jr. ("Manchak") filed suit against subsidiary US
Ecology, Inc., alleging infringement of a sludge treatment patent to stabilize
hazardous waste at the Company's Beatty, Nevada hazardous waste facility.
Manchak sought unspecified damages for infringement, treble damages, interest,
costs and attorney fees. In October 2002, the United States District Court for
the District of Nevada dismissed the matter. Manchak's subsequent appeal to the
U.S. Court of Appeals for the Federal Circuit was also dismissed, and his
requests for reconsideration and en banc review were rejected in October 2003.
In January 2004, Manchak filed a Rule 60(b) motion in the Nevada District Court
seeking relief from that Court's orders granting summary judgment of
non-infringement and denying reconsideration. Manchak appealed a March 2004
District Court order. On March 18, 2005 the United States Court of Appeals for
the Federal Circuit affirmed the lower Court's ruling rejecting Manchak's claim.
The Company considers the matter closed.
DAVID W. CROW V. AMERICAN ECOLOGY CORPORATION, U.S. DISTRICT COURT OF HARRIS
- --------------------------------------------------
COUNTY, TEXAS; 280TH JUDICIAL DISTRICT.
Former employee David Crow alleged he was hired by the Company as its General
Counsel in October 1995 and that his compensation package included options to
purchase Company common stock with an oral agreement that the options would be
exercisable for ten years. The complaint alleged breach of written contract,
breach of oral contract, fraudulent inducement, and declaratory judgment that
Crow is entitled to purchase 150,000 shares of stock at a strike price of $4 per
share.
Mr. Crow's lawsuit, initially filed in Harris County (Texas) District Court in
May 2004 was removed to federal court. Mr. Crow, the Plaintiff, estimated his
damages in the Complaint as between $1,050,000 and $1,258,500 based
26
on the then value of the Company's stock. On June 13, 2005, the United States
District Court for the Southern District of Texas granted the Company's motion
of summary judgment. In early July, the deadline for timely appeal passed
without any known filing by Crow. The Company considers the matter closed.
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 2000, subsidiary US Ecology, Inc. sued the State of California in state court
for monetary damages exceeding $162 million based on California's alleged
abandonment of the formerly proposed Ward Valley LLRW disposal project. In March
2003, the Superior Court ruled that the Company failed to establish causation
and that its claim was further barred by the doctrine of unclean hands. Based on
the trial court's adverse decision, the Company wrote off a $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. On May 25,
2005, the California Court of Appeal, Fourth Appellate District affirmed the
trial court. No further appeal is planned and the matter is considered closed.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
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 25, 2005. On the
record date of March 28, 2005 there were 17,441,294 shares of common stock
issued and outstanding. At the Annual Meeting the Company's eight nominees for
Director were all elected to the Board, the selection of Moss Adams LLP as the
Company's independent auditor was ratified, and the 2005 Non-Employee Director
Compensation Plan was approved. The voting on the three items was as follows:
Nominee for Director For Withheld
-------------------- ---------- --------
Rotchford L. Barker 16,713,078 136,983
Roy C. Eliff 16,793,017 57,044
Edward F. Heil 16,679,113 170,948
Kenneth C. Leung 16,793,336 56,725
Richard Riazzi 16,801,492 48,569
Stephen A. Romano 16,789,452 60,609
Jimmy D. Ross 16,798,136 51,925
Richard T. Swope 16,771,699 78,362
Ratification of Moss Adams LLP
- ------------------------------
For 16,761,832
Against 22,998
Abstain 65,231
Approval of 2005 Non-Employee Director Compensation Plan
- --------------------------------------------------------
For 12,173,379
Against 316,205
Abstain 87,409
Broker Non-Vote 4,273,068
27
Following its annual meeting of stockholders on May 25, 2005 in Boise, Idaho,
American Ecology Corporation's Board of Directors met and elected Edward F. Heil
to serve as chairman of the newly elected Board.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
(a) The following exhibits are filed as part of this report:
Exhibit No. Description
- ----------- ----------------------------------------------------------------------------------------
31.1 Certifications of June 30, 2005 Form 10-Q by Chief Executive Officer dated July 29, 2005
- ----------- ----------------------------------------------------------------------------------------
31.2 Certifications of June 30, 2005 Form 10-Q by Chief Financial Officer dated July 29, 2005
- ----------- ----------------------------------------------------------------------------------------
32.1 Certifications of June 30, 2005 Form 10-Q by Chief Executive Officer dated July 29, 2005
- ----------- ----------------------------------------------------------------------------------------
32.2 Certifications of June 30, 2005 Form 10-Q by Chief Financial Officer dated July 29, 2005
- -----------------------------------------------------------------------------------------------------
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: July 29, 2005 By:/s/ Stephen A. Romano
------------------------
Stephen A. Romano
President, Chief Executive Officer and
Chief Operating Officer
Date: July 29, 2005 By:/s/ James R. Baumgardner
---------------------------
James R. Baumgardner
Senior Vice President,
Chief Financial Officer,
Secretary and Treasurer
28
EXHIBIT INDEX
Exhibit Description
- ------- -----------
31.1 Certifications of June 30, 2005 Form 10-Q by Chief Executive Officer dated July 29, 2005
31.2 Certifications of June 30, 2005 Form 10-Q by Chief Financial Officer dated July 29, 2005
32.1 Certifications of June 30, 2005 Form 10-Q by Chief Executive Officer dated July 29, 2005
32.2 Certifications of June 30, 2005 Form 10-Q by Chief Financial Officer dated July 29, 2005
29