UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended September 30, 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 [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
At November 1, 2005 Registrant had outstanding 17,734,920 shares of its Common
Stock.
AMERICAN ECOLOGY CORPORATION
QUARTERLY REPORT ON FORM 10-Q FOR THE
THREE MONTHS ENDED SEPTEMBER 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
John M. Cooper trades on the Nasdaq National Market under the
Vice President and Chief Information Officer symbol ECOL.
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, Sanders
Morris Harris TRANSFER AGENT
--------------
Richard Riazzi American Stock Transfer & Trust Company
Independent Businessman 59 Maiden Lane
New York, New York 10038
Stephen A. Romano (718) 921-8289
Chief Executive Officer, President and Chief or at www.amstock.com
Operating Officer ---------------------
General Jimmy D. Ross AUDITOR
U.S. Army, Retired -------
Moss Adams LLP
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)
September 30,2005 December 31, 2004
------------------ ------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 2,808 $ 2,160
Short term investments 20,971 10,967
Receivables, net 15,866 8,963
Insurance receivable 636 1,285
Prepayments and other 2,311 1,469
Deferred income taxes 5,613 5,613
------------------ ------------------
Total current assets 48,205 30,457
Property and equipment, net 35,274 27,363
Facility development costs -- 6,478
Other assets 956 462
Deferred income taxes 6,595 12,473
------------------ ------------------
Total assets $ 91,030 $ 77,233
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long term debt $ 1,460 $ 1,457
Accounts payable 3,385 3,022
Deferred revenue 1,684 724
State burial fees payable 1,698 1,446
Management incentive plan payable 995 934
Customer advances 1,784 --
Customer refunds 657 2,512
Accrued liabilities 1,690 725
Accrued closure and post closure obligation, current portion 1,577 2,323
------------------ ------------------
Total current liabilities 14,930 13,143
Long term debt 1,638 2,734
Long term customer advances 1,574 --
Long term accrued liabilities 498 441
Accrued closure and post closure obligation, excluding current portion 9,421 9,304
------------------ ------------------
Total liabilities 28,061 25,622
------------------ ------------------
Commitments and contingencies
Shareholders' equity:
Convertible preferred stock, 1,000,000 shares authorized,
Common stock, $.01 par value, 50,000,000 authorized, 17,635,919
and 17,398,494 shares issued and outstanding 176 174
Additional paid-in capital 52,718 51,015
Retained earnings 10,075 422
------------------ ------------------
Total shareholders' equity 62,969 51,611
------------------ ------------------
Total Liabilities and Shareholders' Equity $ 91,030 $ 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 Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
----------- ----------- ----------- ----------
Revenue $ 24,791 $ 12,929 $ 56,124 $ 40,629
Direct operating costs 14,822 7,396 33,094 22,457
----------- ----------- ----------- ----------
Gross profit 9,969 5,533 23,030 18,172
Selling, general and administrative expenses 3,103 2,967 8,975 8,417
Business interruption insurance claim -- -- (41) --
----------- ----------- ----------- ----------
Operating income 6,866 2,566 14,096 9,755
Interest income 164 52 342 133
Interest expense 45 48 140 146
Gain on settlement of Nebraska litigation 5,327 -- 5,327 --
Other income (loss) (31) 9 8 74
----------- ----------- ----------- ----------
Income before income tax and discontinued operations 12,281 2,579 19,633 9,816
Income tax expense (benefit) 4,545 884 7,335 (9,290)
----------- ----------- ----------- ----------
Income before discontinued operations 7,736 1,695 12,298 19,106
Gain (loss) from discontinued operations - Oak Ridge Facility -- (1) -- 1,068
----------- ----------- ----------- ----------
Net income $ 7,736 $ 1,694 $ 12,298 $ 20,174
=========== =========== =========== ==========
Basic earnings from continuing operations .44 .10 .70 1.12
Basic earnings from discontinued operations -- .00 -- .06
----------- ----------- ----------- ----------
Basic earnings per share $ .44 $ .10 $ .70 $ 1.18
=========== =========== =========== ==========
Diluted earnings from continuing operations .43 .10 .68 1.08
Diluted earnings from discontinued operations -- .00 -- .06
----------- ----------- ----------- ----------
Diluted earnings per share $ .43 $ .10 $ .68 $ 1.14
=========== =========== =========== ==========
Dividends paid per common share $ .15 $ -- $ .15 $ --
=========== =========== =========== ==========
See notes to consolidated financial statements.
5
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, $ IN 000'S)
Nine Months Ended September 30,
-------------------------------------
2005 2004
----------------- ------------------
Cash flows from operating activities:
Net income $ 12,298 $ 20,174
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, amortization, and accretion 4,851 4,508
Gain on settlement of Nebraska litigation (5,327) --
Income from discontinued operations -- (1,068)
Income tax benefit on exercise of stock options 654 --
Deferred tax asset 5,878 (9,323)
Stock compensation 180 --
Changes in assets and liabilities:
Receivables (6,903) 4,268
Other assets (1,398) (152)
Closure and post closure obligation (1,440) (773)
Income taxes payable/receivable -- (226)
Accounts payable and accrued liabilities 4,161 2,016
----------------- ------------------
Net cash provided by operating activities 12,954 19,424
Cash flows from investing activities:
Capital expenditures (12,118) (2,964)
Proceeds from sale of assets 878 116
Proceeds from settlement of Nebraska litigation 11,805 --
Transfers from cash to short term investments, net (10,004) (4,989)
----------------- ------------------
Net cash used by investing activities (9,439) (7,837)
Cash flows from financing activities:
Payments of indebtedness (1,093) (1,120)
Retirement of common stock warrants -- (5,500)
Dividends paid (2,645) --
Stock options exercised 871 996
----------------- ------------------
Net cash provided (used) by financing activities (2,867) (5,624)
----------------- ------------------
Increase in cash and cash equivalents 648 5,963
Net cash used in discontinued operations -- (2,925)
Cash and cash equivalents at beginning of period 2,160 6,674
----------------- ------------------
Cash and cash equivalents at end of period $ 2,808 $ 9,712
================= ==================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 140 $ 146
Income taxes paid 804 274
Non-cash investing and financing activities:
Common stock dividends accrued -- 4,345
Common stock issued for director compensation 180 --
See notes to consolidated financial statements.
AMERICAN ECOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments and disclosures necessary to present fairly
the financial position, results of operations, and cash flows of American
Ecology Corporation and its wholly-owned subsidiaries (the "Company"). These
financial statements and notes should be read in conjunction with the financial
statements and notes included in the Company's Annual Report on Form 10-K for
the year ended December 31, 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. 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.
Three Months Ended Nine Months Ended
----------------------- ---------------------
September 30, September 30,
------------- -------------
(in thousands except per share amounts) 2005 2004 2005 2004
---------- ----------- --------- ----------
Income before discontinued operations $ 7,736 $ 1,695 $ 12,298 $ 19,106
Income from operations of discontinued segments -- (1) -- 1,068
---------- ----------- --------- ----------
Net income $ 7,736 $ 1,694 $ 12,298 $ 20,174
========== =========== ========= ==========
Weighted average shares outstanding-
Common shares 17,636 17,257 17,519 17,183
Effect of dilutive stock options 503 527 455 488
---------- ----------- --------- ----------
Average shares 18,139 17,784 17,974 17,671
========== =========== ========= ==========
Basic earnings per share from continuing operations $ .44 $ .10 $ .70 $ 1.12
Basic earnings per share from discontinued operations -- .00 -- .06
---------- ----------- --------- ----------
Basic earnings per share $ .44 $ .10 $ .70 $ 1.18
========== =========== ========= ==========
Diluted earnings per share from continuing operations $ .43 $ .10 $ .68 $ 1.08
Diluted earnings per share from discontinued operations -- .00 -- .06
---------- ----------- --------- ----------
Diluted earnings per share $ .43 $ .10 $ .68 $ 1.14
========== =========== ========= ==========
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 ("Bank") which extended its $8,000,000 line of
credit maturity to June 15, 2007, eliminated the Bank's security
7
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:
Operating Non-Operating Discontinued
Disposal Disposal Processing and
Facilities Facilities Field Services Corporate Total
THREE MONTHS ENDED SEPTEMBER 30, 2005
- -------------------------------------
Revenue $ 24,774 $ 17 $ -- $ 24,791
Direct operating cost 14,707 115 -- 14,822
---------------- ---------------- ---------------- ----------------
Gross profit (loss) 10,067 (98) -- 9,969
S,G&A 1,154 3 1,946 3,103
---------------- ---------------- ---------------- ----------------
Income (loss) from operations 8,913 (101) (1,946) 6,866
Interest income, net 11 -- 108 119
Gain on settlement of Nebraska
litigation -- 5,327 -- 5,327
Other income (expense) (31) -- -- (31)
---------------- ---------------- ---------------- ----------------
Income (loss) before income tax 8,893 5,226 (1,838) 12,281
Income tax expense -- -- 4,545 4,545
---------------- ---------------- ---------------- ----------------
Net Income (loss) 8,893 5,226 (6,383) 7,736
================ ================ ================ ================
Depreciation, amortization, and
accretion $ 1,470 $ 1 $ 6 $ 1,785
Capital Expenditures $ 4,898 $ 3 $ -- $ 4,901
Total Assets $ 52,844 $ 43 $ 38,143 $ 91,030
THREE MONTHS ENDED SEPTEMBER 30, 2004
- -------------------------------------
Revenue $ 12,923 $ 6 $ -- $ -- $ 12,929
Direct operating cost 7,289 107 -- -- 7,396
---------------- ---------------- ---------------- ---------------- ----------------
Gross profit (loss) 5,634 (101) -- -- 5,533
S,G&A 1,395 1 -- 1,571 2,967
---------------- ---------------- ---------------- ---------------- ----------------
Income (loss) from operations 4,239 (102) -- (1,571) 2,566
Interest income (expense), net 14 -- -- (10) 4
Other income (expense) (1) -- -- 10 9
---------------- ---------------- ---------------- ---------------- ----------------
Income (loss) before income tax and
discontinued operations 4,252 (102) -- (1,571) 2,579
8
Income tax expense -- -- -- 884 884
Discontinued operations -- -- (1) -- (1)
---------------- ---------------- ---------------- ---------------- ----------------
Net Income (loss) 4,252 (102) (1) (2,455) 1,694
================ ================ ================ ================ ================
Depreciation, amortization, and
accretion $ 1,470 $ 1 $ -- $ 8 $ 1,479
Capital Expenditures $ 570 $ -- $ -- $ -- $ 570
Total Assets $ 35,751 $ 6,534 $ 43 $ 34,417 $ 76,745
Operating Non-Operating Discontinued
Disposal Disposal Processing and
Facilities Facilities Field Services Corporate Total
NINE MONTHS ENDED SEPTEMBER 30, 2005
- ------------------------------------
Revenue $ 56,073 $ 51 $ -- $ 56,124
Direct operating cost 32,770 324 -- 33,094
---------------- ---------------- ---------------- ----------------
Gross profit (loss) 23,303 (273) -- 23,030
S,G&A 3,518 10 5,447 8,975
Business interruption insurance claim (41) -- -- (41)
---------------- ---------------- ---------------- ----------------
Income (loss) from operations 19,826 (283) (5,447) 14,096
Interest income, net 31 -- 171 202
Gain on settlement of Nebraska
litigation -- 5,327 -- 5,327
Other income (expense) 8 -- -- 8
---------------- ---------------- ---------------- ----------------
Income (loss) before income tax and
discontinued operations 19,865 5,044 (5,276) 19,633
Income tax expense (benefit) -- -- 7,335 7,335
---------------- ---------------- ---------------- ----------------
Net Income (loss) 19,865 5,044 (12,611) 12,298
================ ================ ================ ================
Depreciation, amortization, and
accretion $ 4,825 $ 5 $ 21 $ 4,851
Capital Expenditures $ 12,115 $ 3 $ -- $ 12,118
Total Assets $ 52,844 $ 43 $ 38,143 $ 91,030
NINE MONTHS ENDED SEPTEMBER 30, 2004
- ------------------------------------
Revenue $ 40,576 $ 53 $ -- $ -- $ 40,629
Direct operating cost 22,127 330 -- -- 22,457
---------------- ---------------- ---------------- ---------------- ----------------
Gross profit (loss) 18,449 (277) -- -- 18,172
S,G&A 3,766 25 -- 4,626 8,417
---------------- ---------------- ---------------- ---------------- ----------------
Income (loss) from operations 14,683 (302) -- (4,626) 9,755
Interest income (expense), net 39 -- -- (52) (13)
Other income (expense) 17 19 -- 38 74
---------------- ---------------- ---------------- ---------------- ----------------
Income (loss) before income tax and
discontinued operations 14,739 (283) -- (4,640) 9,816
Income tax expense (benefit) -- -- -- (9,290) (9,290)
Discontinued operations -- -- 1,068 -- 1,068
---------------- ---------------- ---------------- ---------------- ----------------
Net Income (loss) 14,739 (283) 1,068 4,650 20,174
================ ================ ================ ================ ================
Depreciation, amortization, and
accretion $ 4,479 $ 5 $ -- $ 24 $ 4,508
Capital Expenditures $ 2,932 $ -- $ -- $ 32 $ 2,964
Total Assets $ 35,751 $ 6,534 $ 43 $ 34,417 $ 76,745
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
9
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 nine months ended September 30, 2005 and 2004:
Three Months Ended Nine Months Ended
------------------------ -----------------------
2005 2004 2005 2004
----------- ----------- ---------- -----------
Net income, as reported $ 7,736 $ 1,694 $ 12,298 $ 20,174
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net (94) (94) (321) (708)
----------- ----------- ---------- -----------
of related tax effects
Pro forma net income $ 7,642 $ 1,600 $ 11,977 $ 19,466
=========== =========== ========== ===========
EARNINGS PER SHARE:
Basic - as reported $ .44 $ .10 $ .70 $ 1.18
=========== =========== ========== ===========
Basic - pro forma $ .43 $ .09 $ .68 $ 1.13
=========== =========== ========== ===========
Diluted - as reported $ .43 $ .10 $ .68 $ 1.14
=========== =========== ========== ===========
Diluted - pro forma $ .42 $ .09 $ .67 $ 1.10
=========== =========== ========== ===========
The stock option plan summary and changes during the three and nine months ended
September 30 are as follows:
Three Months Ended Nine Months Ended
------------------------ -----------------------
2005 2004 2005 2004
----------- ----------- ---------- -----------
Options outstanding, beginning of period 674,031 1,091,281 913,708 1,266,281
Granted -- -- 7,500 57,500
Exercised (210) (167,573) (222,387) (345,073)
Canceled -- -- (25,000) (55,000)
----------- ----------- ---------- -----------
Options outstanding, end of period 673,821 923,708 673,821 923,708
=========== =========== ========== ===========
Weighted average exercise price of options, beginning of period $ 4.65 $ 4.05 $ 4.40 $ 3.90
Weighted average exercise price of options granted $ -- $ -- $ 11.53 $ 9.20
Weighted average exercise price of options exercised $ 3.50 $ 2.59 $ 3.92 $ 2.69
Weighted average exercise price of options canceled $ -- $ -- $ 4.00 $ 10.13
Weighted average exercise price of options, end of period $ 4.65 $ 4.31 $ 4.65 $ 4.31
Options exercisable at end of period 521,151 618,368 521,151 618,368
=========== =========== ========== ===========
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 September 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 1.9 27,500 $ 1.26 27,500 $ 1.26
$1.60 - $2.25 3.6 20,000 $ 2.13 20,000 $ 2.13
$2.42 - $3.50 7.2 184,522 $ 2.93 130,126 $ 2.90
$3.75 - $4.50 7.1 258,046 $ 4.41 194,585 $ 4.38
10
$6.50 7.4 131,253 $ 6.50 96,440 $ 6.50
$9.20 - $12.15 8.8 52,500 $ 9.95 52,500 $ 9.95
----------- -----------
673,821 521,151
=========== ===========
As of September 30, 2005, the 1992 Stock Option Plan for Employees had options
outstanding to purchase 514,121 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 September 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 nine months ended September 30:
Three Months Ended Nine Months Ended
-------------------- -----------------------
2005 2004 2005 2004
--------- --------- ----------- ----------
Expected volatility -- -- 50% 73%
Risk-free interest rates -- -- 4.1% 4.72%
Expected lives -- -- 10 years 10 years
Dividend yield -- -- 2.7% 0%
Weighted-average fair value of options
granted during the period (Black-Scholes) -- -- $ 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 waived the chairman's fee for 2005.
As of September 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
The Company is not presently involved in any material 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 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 2002, the US District Court for the District of Nebraska entered judgment in
favor of the CIC for $153 million. Of this amount, USE's share was $6.2 million
plus $6.1 million for prejudgment interest. The Company carried $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.
11
In August, 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. 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. The State Attorney
General's Office subsequently paid the CIC in full. On August 1, 2005 the
Company received $11,805,000 from the CIC, fully resolving its claim on the
Nebraska settlement proceeds. The Company is presently completing agreed upon
transition activities preparatory to terminating its contract with the CIC. The
matter is considered closed.
MANCHAK V. US ECOLOGY, INC., U.S. DISTRICT COURT FOR THE DISTRICT OF NEVADA,
- --------------------------------
CASE NO. CV-S-97-0655.
In 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 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 2003. In January 2004,
Manchak filed a 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 matter is considered 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 were
exercisable for ten years. The complaint alleged breach of written contract,
breach of oral contract, fraudulent inducement, and declaratory judgment that
Crow was entitled to purchase 150,000 shares of stock at a strike price of $4
per share. Crow estimated his damages as between $1,050,000 and $1,258,500. The
lawsuit, initially filed in Texas District Court was removed to federal court.
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 matter
is considered 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 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 in March 2003. In June 2003, the Company appealed. On May
25, 2005, the California Court of Appeal, Fourth Appellate District affirmed the
trial court. No further appeal applies 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 $12,000,000 including all MIP
costs. The Company has accrued for the MIP as follows:
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------ -----------------------------------
($ in thousands) 2005 2004 2005 2004
----------------- ----------------- ---------------- -----------------
MIP expense included in SG&A $ 365 $ 267 $ 906 $ 881
12
In June 2005, the Company entered into a five year operating lease for 152 rail
cars at $475 a month for each car leased.
The Company has committed to purchase 150 rail cars for an aggregate purchase
price of $10,900,000 with scheduled delivery dates between November 2005 and
March 2006.
The Company intends that shareholders of record on October 3, 2005 and January
2, 2006 will receive a $.15 per share dividend subject to compliance with
applicable Bank covenants.
NOTE 10. CLOSURE AND POST CLOSURE OBLIGATIONS
Closure and post closure obligations are recorded when environmental assessments
and/or remedial efforts are probable, and the costs can be reasonably estimated
consistent with Statement of Financial Accounting Standards ("SFAS") No. 5 with
the liability calculated in accordance with SFAS No. 143. The Company performs
periodic reviews of both non-operating and operating facilities and revises
accruals for estimated post-closure, remediation and other costs when necessary.
The Company's recorded liabilities are based on its current best estimates of
costs and are updated periodically to reflect existing environmental conditions,
current technology, laws and regulations, inflation and other economic factors.
Changes to reported closure and post closure obligations were as follows ($ in
thousands):
Accrued Closure and
Post Closure Obligation
-----------------------
January 1, 2005 obligation $ 11,627
Accretion of obligation 811
Payment of obligation (1,440)
Adjustment of obligation --
-----------------------
September 30, 2005 obligation $ 10,998
=======================
At September 30, 2005, none of the Company's assets were legally restricted for
purposes of meeting closure and post closure obligations.
NOTE 11. DISCONTINUED OPERATIONS
In 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. in June 2004. As of September 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
used in discontinued operations". Prior periods have been restated to reflect
this.
Operating results for the discontinued operations were as follows for three and
nine months ending September 30 2004:
Processing and Field
($in thousands) Services Operations
Three months ending September 30, 2004
--------------------------------------
Revenues, net $ --
Operating income (loss) (1)
Net income (loss) (1)
Basic earnings (loss) per share .00
Diluted earnings (loss) per share .00
13
Nine months ending September 30, 2004
-------------------------------------
Revenues, net $ --
Operating income (loss) 138
Net income (loss) 1,068
Basic earnings (loss) per share .06
Diluted earnings (loss) per share .06
Costs incurred at the former Oak Ridge facility during the three and nine months
ended September 30, 2004 are summarized as follows: ($ in thousands)
Three Months Nine Months
------------ -----------
Net operating costs in excess of previous accruals $ 21 $ 163
Additional impairment of property and equipment -- --
Accounts receivable collected in excess of valuation allowance (9) (274)
Gain on sale of facility -- (930)
Decrease in estimated cost to dispose of removed waste (11) (27)
-------- --------
Net (income) for the three and nine months ended September 30 $ 1 $(1,068)
======== ========
Cost changes for Oak Ridge activities and disposal liabilities for removed
wastes are as follows for the nine months ending September 30, 2004:
December 31,2003 Cash Payments Adjustments September 30,2004
---------------- ----------------- ----------------- -----------------
Waste disposal liability 623 (485) (27) 111
On-site discontinued
operation cost liability 442 (469) 27 --
Adjustments reflect differences between the estimated costs accrued at December
31, actual costs incurred during the first three 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. to transport, treat, and dispose of an estimated 1 million
tons of chromite ore processing residue over an estimated four to five year
period. Waste disposal at the Company's Grand View, Idaho facility began in July
2005. 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 99% of the material shipped off-site for disposal.
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 previously represented approximately 50% of the
Texas facility's revenue. Direct disposal operations, which continued without
interruption after the fire, represented the balance of the facility's revenue.
On August 8, 2005 the Texas facility resumed full treatment services.
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
Company filed a property insurance claim and received $790,000 of the $954,000
recognized as of September 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 September 30,
14
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. 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.
NOTE 15. SUBSEQUENT EVENTS
On October 3, 2005 the Company declared a dividend of $.15 per common share to
stockholders of record on October 3, 2005. The dividend was paid out of cash on
hand on October 14, 2005 and totaled $2,645,000.
On October 6, 2005 Honeywell filed a motion in US District Court for the
District of New Jersey citing changed circumstances and seeking to reduce the
waste material shipped off-site by 53%. This motion and related motions filed by
other parties are now under review by the Court. No assurance can be given that
the total estimated volume of waste under the Honeywell contract will be
disposed of by the Company.
In late October 2005 the Company was notified by Honeywell that the preliminary
phase of excavation and waste shipments at the project site was complete, but
that the main excavation of waste material at the site would be delayed for up
to 90 days. Unless otherwise agreed, the Company will assess specified
deficiency fees to Honeywell for not meeting minimum average shipment
requirements in accordance with its existing Contract. The Company will also pay
certain deficiency fees to a subcontractor.
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, 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,
transportation and reagent costs, 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.
Transportation and Waste Treatment Reagent Costs: During the quarter ended
- ---------------------------------------------------
September 30, 2005 transportation services and expenses represented an
increasing portion of the Company's business. While the Company is able to
impose fuel surcharges on certain customers, the Company's exposure to changes
in transportation related costs has increased. Additionally, the cost of waste
treatment reagents has also increased, in certain cases significantly. These
factors may, over time, affect the Company's ability to compete for treatment
and disposal projects in the future. This is also a key component of the
Company's strategy to bundle rail transportation and disposal services for large
projects. This may expose the Company to increased costs and decreasing gross
margins.
15
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------ -----------------------------------
($ in thousands) 2005 2004 2005 2004
----------------- ----------------- ----------------- ----------------
Transportation Costs included in
Direct Operating Costs $ 8,435 $ 2,142 $ 15,471 $ 7,445
Unless otherwise described, changes discussed relate to the increase or decrease
from the three and nine month periods ended September 30, 2004 to the three and
nine month periods ended September 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, 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 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 short term and
extended duration Event Business projects. When the Company's Base Business
covers the Company's fixed costs, a significant portion of the Event Business
revenue generally 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 September 30,
2005 was substantially improved over the third quarter of 2004. All four of the
Company's disposal facilities improved performance over the same quarter in
2004, and three of the four sites improved performance over the second quarter
of 2005. Another significant factor in this improvement was an increase in
second and third quarter waste shipments to the Company's Idaho facility from
multiple, previously delayed clean-up projects.
Year to date comparisons are materially affected by several non-operating events
including a gain on the Oak Ridge asset sale, the reversal of the valuation
allowance on the Company's deferred tax assets, and receipt of proceeds from the
Nebraska litigation settlement. 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 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.
16
Settlement of Nebraska Litigation: On August 1, 2005 the Company received
- -------------------------------------
$11,805,000, from the CIC, fully resolving its claim on the Nebraska settlement
proceeds. The Company is presently completing agreed upon transition activities
preparatory to terminating its contract with the CIC.
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 ("COPR") 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 initially
estimated revenue in the range of $175 to $240 million over a four to five year
period. A significant portion of the revenue under the contract will include
transportation services. As a result, management expects that while revenue will
increase, the Company's gross profit relative to revenue i.e. gross margin, will
decrease.
Under terms of the contract, the Company will treat and dispose of the
contaminated soil at Company owned hazardous waste disposal facilities. The
contract specifies that the Company 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.
On October 6, 2005 Honeywell filed a motion in US District Court for the
District of New Jersey citing changed circumstances and requested the judge to
allow 53% of the COPR material to remain in place. No assurance can be given
that the initially estimated waste volume will be shipped for disposal.
In late October 2005 the Company was notified by Honeywell that the preliminary
phase of excavation and waste shipments at the project site was complete, but
that the main excavation of waste material at the site would be delayed for up
to 90 days. Unless otherwise agreed in writing, the Company will assess
deficiency fees to Honeywell for not meeting minimum average shipment
requirements in accordance with its existing Contract, and will pay deficiency
fees to a subcontractor.
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.
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. 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 September 30, 2005, $790,000 in property insurance proceeds
had been received by the Company.
As of September 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
recoverable 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:
17
- - 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, or concurred in 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. Final payments of the closure liability
are estimated as being paid in 2056 based upon current permitted capacity
and estimated annual usage.
A periodic review of the current cost estimate to close and maintain the
Company's Non-Operating deep well injection operation in Winona, Texas is being
undertaken in consultation with State of Texas officials and with the support of
an independent engineering firm. While the closure and post-closure activities
and the associated costs and their duration have not yet been established by the
responsible regulatory agency, the Company may be required to perform such
activities for a longer time period it has currently accounted for. Management
expects to complete its periodic review and revise its estimates during the
fourth quarter of 2005.
LITIGATION
The Company is periodically involved in litigation requiring estimates of timing
and loss potential whose disposition is controlled by the judicial process or
other factors. The Company is not presently involved in any material 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 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 2002, the US District Court for the District of Nebraska entered judgment in
favor of the CIC for $153 million. Of this amount, USE's share was $6.2 million
plus $6.1 million for prejudgment interest. The Company carried $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.
In August, 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. 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. The State Attorney
General's Office subsequently paid the CIC in full. On August 1, 2005 the
Company received $11,805,000 from the CIC, fully resolving its claim on the
Nebraska settlement proceeds. The Company is presently completing agreed upon
transition activities preparatory to terminating its contract with the CIC. The
matter is considered closed.
MANCHAK V. US ECOLOGY, INC., U.S. DISTRICT COURT FOR THE DISTRICT OF NEVADA,
- --------------------------------
CASE NO. CV-S-97-0655.
In 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 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
18
review were rejected in 2003. In January 2004, Manchak filed a 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 matter is considered 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 were
exercisable for ten years. The complaint alleged breach of written contract,
breach of oral contract, fraudulent inducement, and declaratory judgment that
Crow was entitled to purchase 150,000 shares of stock at a strike price of $4
per share. Crow estimated his damages as between $1,050,000 and $1,258,500. The
lawsuit, initially filed in Texas District Court was removed to federal court.
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 matter
is considered 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 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 $20,951,000 deferred
site development asset in March 2003. In June 2003, the Company appealed. On May
25, 2005, the California Court of Appeal, Fourth Appellate District affirmed the
trial court. No further appeal applies and the matter is considered closed.
RESULTS OF OPERATIONS
- -----------------------
The following table presents, for the periods indicated, the operating costs as
a percentage of revenues in the consolidated income statement:
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------ ------------------------------------
($ in 000's) 2005 2004 2005 2004
----- ---- ---- ----
$ % $ % $ % $ %
-------- ------- ------- ------- -------- ------- -------- -------
Revenue 24,791 12,929 56,124 40,629
Direct operating costs 14,822 59.8% 7,396 57.2% 33,094 59.0% 22,457 55.3%
-------- ------- -------- --------
Gross profit 9,969 40.2% 5,533 42.8% 23,030 41.0% 18,172 44.7%
SG & A 3,103 12.5% 2,967 22.9% 8,975 16.0% 8,417 20.7%
Business interruption insurance claim -- 0.0% -- 0.0% (41) -0.1% -- 0.0%
-------- ------- -------- --------
Income from operations 6,866 27.7% 2,566 19.8% 14,096 25.1% 9,755 24.0%
Interest income 164 0.7% 52 0.4% 342 0.6% 133 0.3%
Interest expense 45 0.2% 48 0.4% 140 0.2% 146 0.4%
Gain on settlement of Nebraska litigation 5,327 21.5% -- 0.0% 5,327 9.5% -- 0.0%
Other income (expense) (31) -0.1% 9 0.1% 8 0.0% 74 0.2%
-------- ------- -------- --------
Net income before income taxes and
discontinued operations 12,281 49.5% 2,579 19.9% 19,633 35.0% 9,816 24.2%
Income tax expense (benefit) 4,545 18.3% 884 6.8% 7,335 13.1% (9,290) -22.9%
-------- ------- -------- --------
19
Net income before discontinued operations 7,736 31.2% 1,695 13.1% 12,298 21.9% 19,106 47.0%
======== ======= ======== ========
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
- ------------------------------------------------------------
REVENUE
- -------
For the three months ended September 30, 2005, the Company reported consolidated
revenue of $24,791,000, a 92% increase over the $12,929,000 reported for the
same period in 2004. All four waste disposal facilities generated higher revenue
during the third quarter of 2005 as volumes increased 71% over the same quarter
last year. Higher quarterly waste volume was slightly offset by a 2% decrease in
average selling price ("ASP") for the Company's treatment and disposal services.
The increase in waste volume primarily resulted from an increase in project or
Event work during the quarter. The decrease in ASP reflects an increased
percentage of revenue derived from large Event projects during the third quarter
of 2005. The following customers accounted for more than 10% of revenue during
the three months ended September 30:
Three Months Ended September 30,
------------------------------------
(% of revenue, $in thousands) 2005 2004
----------------- -----------------
U.S. Army Corps of Engineers 27% 37%
Honeywell International 18% --
Sevenson Environmental 13% --
Operating Disposal Facilities
- -------------------------------
At the Richland, Washington LLRW disposal facility revenue increased 38% for the
three months ended September 30, 2005 from the same period in 2004. This
increase in revenue was due to above average shipments to the facility during
the third quarter of 2005. For 2005, the Washington Utilities and Transportation
Commission has approved an annual 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 95% increase in waste volumes and
a 294% increase in transportation services were slightly offset by an 8%
decrease in ASP. However, the higher volumes drove a 126% increase in revenue
over the same quarter last year.
At the Beatty, Nevada hazardous treatment and disposal facility, revenue
increased 22% for the three months ended September 30, 2005 from the same period
in 2004. The increased revenue reflects a 2% increase in waste volumes and a 22%
increase in ASP. Higher ASP reflected greater delivery of specialized treatment
services, including receipt of corrosive wastes, allowed by the facility's
recently renewed five year hazardous waste permit.
At the Robstown, Texas hazardous treatment and disposal facility, revenue
increased 97% for the three months ended September 30, 2005 over the same period
in 2004. The increased revenue reflected a 67% increase in waste volumes and a
21% increase in ASP associated with a favorable service mix compared to the
third quarter of 2004. In July 2004 a fire occurred in the permitted treatment
building at the Robstown facility resulting in no waste being treated at the
facility during the third quarter of 2004.
DIRECT OPERATING COSTS
- ----------------------
For the three months ended September 30, 2005, consolidated direct operating
costs increased 100% to $14,822,000 compared to $7,396,000 for the same period
in 2004. This primarily reflects increased waste volumes and a $6,293,000
increase in transportation costs due to the Company's increased delivery of
bundled transportation and disposal services. Relative to revenue, direct
operating costs increased from 57% of revenue in the third quarter of 2004 to
60% for the same quarter this year.
20
Operating Disposal Facilities
- -------------------------------
Direct costs at all four operating disposal facilities increased from the same
quarter last year. The increase in consolidated direct operating costs was
largely driven by a $6,871,000 increase in direct costs at the Grand View, Idaho
facility. The higher direct costs were principally caused by transportation
costs and other volume related variable expenses. Specifically, transportation
costs increased almost 300% as the Company shipped waste under bundled
transportation and disposal jobs. In the third quarter of this year,
transportation costs represented 57% of total direct costs. In the same quarter
last year, transportation costs only represented 29% of total direct costs. Also
impacting direct costs in the quarter were higher costs for waste treatment
reagents, increased disposal airspace amortization directly associated with
higher disposal volumes, increased maintenance costs due to higher equipment
utilization, and higher labor costs caused by increased overtime, additional
hiring and operating second shifts to support the higher waste volumes at its
Grand View, Idaho facility.
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 September 30, 2005 and 2004, the Company reported
$5,000 and $22,000 of expenses on formerly proposed development projects, and
$110,000 and $85,000 of costs in 2005 and 2004 for closure and post-closure
expenses for discontinued operations.
GROSS PROFIT
- -------------
Significantly higher quarterly revenue drove an 80% increase in gross profit or
$9,969,000, compared with a gross profit of $5,533,000 for the same quarter last
year. Increased disposal direct costs at all four disposal facilities were more
than offset by the higher revenue although at a decreased rate relative to
revenue. As a result, gross margin decreased to 40% of revenue compared to 43%
of revenue in 2004. Large Event projects can significantly increase earnings
while simultaneously decreasing gross margins, particularly when low margin
transportation services are bundled with higher margin 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 September 30, 2005, the Company reported SG&A of
$3,103,000 (13% of revenue), a 5% increase from the $2,967,000 (23% of revenue)
for the same three months of 2004.
Operating Disposal Facilities
- -------------------------------
During the quarter ended September 30, 2005, Operating Disposal Facilities SG&A
decreased $240,000 primarily due to the reclassification of certain personnel to
Corporate SG&A.
Corporate
- ---------
During the quarter ended September 30, 2005, Corporate SG&A increased $374,000
over the same period last year. The increase in SG&A reflects a $365,000 accrual
in the third quarter of 2005 for the Management Incentive Plan, or $102,000
higher than the third quarter 2004 MIP accrual. The Company has fully accrued
the costs for the 2005 Management Incentive Plan as of September 30, 2005. As
noted above, certain personnel were reclassified to Corporate SG&A from
Operating Disposal Facilities, resulting in a further increase Corporate SG&A
over third quarter 2004 Corporate SG&A.
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
21
ended September 30, 2005 and 2004, the Company reported $3,000 and $1,000 of
such SG&A expenses for close-out activities following resolution of previously
settled litigation.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
- -----------------------------------------------------------
REVENUE
- -------
For the nine months ended September 30, 2005, the Company reported consolidated
revenue of $56,124,000, a 38% increase over the $40,629,000 reported for the
same period in 2004. All four operating disposal facilities generated higher
revenue in the first nine months of 2005 than the same period in 2004. The
higher revenue reflected increased waste volumes and slightly higher average
selling price ("ASP"). At the three hazardous waste disposal facilities, volumes
increased 33% over the same nine months last year. This increase primarily
reflects an increase in Event work performed during the period, although there
was also an increase in recurring Base business. There was a 1% increase in
year-to-date 2005 ASP compared to 2004. The balance of the increase in
consolidated revenue reflects increased transportation revenue as the Company
continued to execute its strategy of selective bundling of disposal with rail
transportation services to win targeted contracts. During the nine months ending
September 30, 2005 and 2004, revenue from the Grand View, Idaho site's contract
with the U.S. Army Corps of Engineers accounted for $16,105,000 and $13,693,000
or 29% and 34% of revenue, respectively. The Army and other federal agencies
continue to ship waste under this contract, which was renewed for five years in
the second quarter of 2004.
Operating Disposal Facilities
- -------------------------------
At the Richland, Washington disposal facility, revenue increased 11% for the
nine months ended September 30, 2005 from the same period in 2004. This increase
was due to above average non rate-regulated shipments to the facility during
2005. The Washington Utilities and Transportation Commission has approved an
annual 2005 revenue requirement of $5,346,000 for the Richland facility's
rate-regulated low-level radioactive waste interstate compact business of which
$3,871,000 was recognized during the nine months ended September 30, 2005.
At the Grand View, Idaho disposal facility, higher waste volumes and flat ASPs
drove a 55% increase in revenue over the same nine months last year. During the
first nine months of 2005, the facility disposed of 47% more waste volume than
in the same period last year.
At the Beatty, Nevada disposal facility, revenue increased 14% for the nine
months ended September 30, 2005 from the same period in 2004. The increased
revenue was due to an 8% increase in ASP despite a 4% decrease in disposal
volume. This decrease resulted from fewer lower priced remediation projects
compared to 2004. 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 disposal facility, revenue increased 26% for the nine
months ended September 30, 2005 over the same period in 2004. The increased
revenue reflected a more favorable mix of wastes received at the site, a 10%
increase in ASP and a 15% increase in waste volume. A fire in the permitted
containment building on July 1, 2004 limited the scope of treatment services
offered until the new permitted containment building was operational on August
8, 2005.
DIRECT OPERATING COSTS
- ----------------------
For the nine months ended September 30, 2005, consolidated direct operating
costs increased 47% to $33,094,000 (59% of revenue) compared to $22,457,000 (55%
of revenue) for the same period in 2004. This primarily reflected increased
transportation costs and waste volumes. Direct operating costs increased
relative to revenue, reflecting an increase in low margin transportation
services provided in conjunction with disposal services. The Company's rail
transportation assets were fully utilized by the end of the third quarter of
2005, an improvement over the first quarter of 2005 when Event project shipment
delays caused substantial underutilization of the Company's leased railcar
fleet.
Operating Disposal Facilities
- -------------------------------
22
Direct costs at all four disposal facilities increased from the same nine months
last year. The increase in consolidated direct operating costs for the Company
was largely driven by an $8,928,000 increase in direct costs at the Grand View,
Idaho facility. This increase was due to increased waste volumes and related
transportation costs. Approximately $6,293,000 or 70% of the increase in direct
operating costs at Grand View was for costs incurred to transport waste to the
facility. During the nine months ended September 30, 2005 higher waste
treatment reagent and fuel charges increased costs over the same period 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 nine months ended September 30, 2005 and 2004, the Company reported
$31,000 and $44,000 in expenses on the formerly proposed Nebraska and California
development projects, and $293,000 and $286,000 in closure and post-closure
expenses at discontinued operations.
GROSS PROFIT
- -------------
Significantly higher revenue allowed the Company to generate a 27% increase in
gross profit, pushing gross profit to $23,030,000, compared with a gross profit
of $18,172,000 for the same nine months last year. Increased disposal revenue at
all operating disposal facilities produced a greater earnings contribution when
combined with a more favorable service mix and the favorable operating leverage
produced by high volume throughput. Gross margin decreased to 41% of revenue
from 45% of revenue due to increased low margin rail transportation services.
SELLING, GENERAL AND ADMINISTRATIVE COSTS (SG&A)
- ------------------------------------------------
For the nine months ended September 30, 2005, the Company reported SG&A of
$8,975,000 (16% of revenue), a 7% increase from the $8,417,000 (21% of revenue)
for the same nine months of 2004. The increase in SG&A primarily reflected
increased legal expenses, auditing, consulting, and director fees. No material
lawsuits are currently outstanding, which should, reduce legal fees and free up
management time and resources to focus on growing the business.
Operating Disposal Facilities
- -------------------------------
During the nine months ended September 30, 2005, Operating Disposal Facilities
SG&A decreased $248,000 primarily due to the assignment of certain sales
personnel to Corporate SG&A.
Corporate
- ---------
During the nine months ended September 30, 2005, Corporate SG&A increased
$821,000. The increase in SG&A reflects increased legal, auditing, consulting,
and director fees, all of which management expects to decrease in the fourth
quarter of 2005. The Company also reclassified certain personnel as Corporate
SG&A from the Operating Disposal Facilities, resulting in the other primary
change from SG&A for the nine months ended September 30, 2004.
The Company continued to maintain compliance with internal control requirements
of Section 404 of the Corporate Reform Act of 2002 (Sarbanes-Oxley) in the
second quarter of 2005. While the Company continues to devote significant
resources to this effort, the time and cost required to maintain Section 404
compliance is less than 2004 levels.
Non Operating Disposal Facilities
- ------------------------------------
Non Operating Disposal Facilities incurred primarily legal costs seeking
recovery of the Company's previous investments in the discontinued Butte,
Nebraska and Ward Valley, California projects. As litigation involving both of
these projects has concluded, no further material costs are expected. For the
nine months ended September 30,
23
2005 and 2004, the Company reported $10,000 and $25,000 of SG&A expenses,
respectively, at Non Operating Disposal Facilities.
COMPARISON OF THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
- ---------------------------------------------------------------------
INTEREST INCOME
- ---------------
For the three and nine months ended September 30, 2005, the Company earned
$164,000 and $342,000 of interest income, an increase from $52,000 and $133,000
in the same periods of 2004. This was caused by 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.
INTEREST EXPENSE
- -----------------
For the three and nine months ended September 30, 2005, the Company reported
interest expense of $45,000 and $140,000, a decrease from $48,000 and $146,000
in 2004. The primary cause of this decrease was a $1,400,000 reduction in the
average debt outstanding from September 30, 2004 to 2005, offset by rising
interest rates. For the nine months ending September 30, 2005, the interest rate
paid on its single outstanding term loan was 5.5%, an increase of 1.69% from the
3.81% at September 30, 2004.
OTHER INCOME (LOSS)
- -------------------
Other Income is composed of the following for the periods ended September 30 ($
in thousands):
Three Months Ended, Nine Months Ended,
2005 2004 2005 2004
----------- ------------ ---------- -----------
Data processing services -- 10 -- 44
Cash receipts for sale or rent of property rights (31) -- 8 22
Other miscellaneous income, net -- (1) -- 8
----------- ------------ ---------- -----------
Total other income (loss) $ (31) $ 9 $ 8 $ 74
=========== ============ ========== ===========
INCOME TAXES
- ------------
The components of the income tax provision (benefit) were as follows for the
periods ended September 30 (in thousands):
Three Months Ended Nine Months Ended
---------------------- ----------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
State income tax expense $ 343 $ 48 $ 553 $ 48
Federal income tax expense 4,202 836 6,782 3,593
Reversal of deferred tax asset valuation allowance -- -- -- (12,931)
---------- ---------- ---------- ----------
Income tax expense (benefit) $ 4,545 $ 884 $ 7,335 $ (9,290)
========== ========== ========== ==========
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 carryforward at September 30, 2005 was approximately
$22,000,000 and expires on various dates between 2011 and 2020. Due to the
Company's net operating loss carryforwards, 2005 income tax expense of
approximately 8% of pretax income is expected to be paid quarterly in cash. The
remaining approximately 29% of income tax expense will be offset against the net
operating loss carry forwards.
24
On July 20, 2005, a registration statement on Form S-3 was filed with the
Securities and Exchange Commission allowing two Directors of the Company to sell
their shares without certain restrictions under the securities laws. 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, as defined by applicable IRS regulations, as a result of the
two Directors selling their shares, the Company may be subject to an annual
limitation on usage of its net operating loss carryforwards. 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 Event 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 material
adverse impact on the first quarter of 2005 and a correspondingly positive
effect on the second and third quarters of 2005 as previously expected waste
shipments resumed.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
At September 30, 2005, cash and short term investments totaled $23,779,000, an
increase of $10,652,000 from December 31, 2004. The large increase in cash
reflects the $11,805,000 payment received from settlement of the Nebraska
litigation, and 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 nine months of 2005, the Company's days sales outstanding
("DSO") decreased at September 30, 2005, to 58 days compared to 60 days at
December 31, 2004.
As of September 30, 2005 the Company's liquidity, as measured by the current
ratio, was 3.2 to 1.0. The debt to equity ratio decreased to 0.4:1.0 at
September 30, 2005. While the current ratio has materially improved with receipt
of the $11,805,000 Nebraska settlement proceeds, there have not been any
substantial changes to the debt to equity ratio during the nine months ended
September 30, 2005. The debt to equity ratio is defined as total liabilities
divided by stockholders equity.
SOURCES OF CASH
On September 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
September 30, 2005, this revolving line of credit remained unused. 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 use as collateral on an
insurance policy.
The Company has entered into preliminary discussions with its bank and other
parties regarding potential financing of 150 railcars. The Company may or may
not finance the railcars depending upon the available terms and competing uses
of cash.
On June 8, 2005, the Company was awarded a contract to transport, treat dispose
of approximately 1 million tons of waste over a four to five year period from
the Honeywell International Event project. A $3,500,000 advance was received
from, and will be credited back to Honeywell 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 $23,779,000 in cash and short term
investments at September 30, 2005 was comprised of short term investments which
were not required for operations of $20,971,000, cash immediately available for
operations of $3,686,000, and a net checks outstanding amount of ($878,000).
On August 1, 2005 the Company received $11,805,000 in proceeds in resolution of
the Company's claim to proceeds
25
in the settlement between the Central Interstate Compact and the State of
Nebraska.
USES OF CASH
Capital spending may reach $20,000,000 in 2005, including investments to
increase rail transportation and waste unloading 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. In addition, a new waste treatment building was completed in Texas and a
similar building is in the design phase for the Nevada facility. Certain of
these cash outlays will extend into 2006.
The Company paid a $0.15 quarterly dividend on July 15, 2005 and October 14,
2005 out of cash on hand. The Company also intends that shareholders of record
on January 2, 2006 will also receive a $.15 per share dividend subject to
compliance with applicable Bank covenants.
The Company meets it financial assurance obligations for facility closure
through an annual insurance policy that matures in December 2005. Collateral
requirements are presently met through a $5,000,000 standby letter of credit.
Renewal of this policy, or the purchase of an alternative financial assurance
mechanism, could require significant additional cash or collateral.
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 preservation of capital approach to investments adopted by its Board of
Directors. At September 30, 2005, approximately $23,800,000 was held in cash or
short term investments at terms ranging from overnight to four months. Together,
these items earned interest at approximately 3% and comprised 26% of assets.
The Company has interest rate risk on debt instruments due on a fully amortizing
term loan due Wells Fargo Bank. At September 30, 2005, $3,033,000 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 $23,000.
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 September 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
26
and that no material weaknesses existed.
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 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 2002, the US District Court for the District of Nebraska entered judgment in
favor of the CIC for $153 million. Of this amount, USE's share was $6.2 million
plus $6.1 million for prejudgment interest. The Company carried $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.
In August, 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. 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. The State Attorney
General's Office subsequently paid the CIC in full. On August 1, 2005 the
Company received $11,805,000 from the CIC, fully resolving its claim on the
Nebraska settlement proceeds. The Company is presently completing agreed upon
transition activities preparatory to terminating its contract with the CIC. The
matter is considered closed.
MANCHAK V. US ECOLOGY, INC., U.S. DISTRICT COURT FOR THE DISTRICT OF NEVADA,
- --------------------------------
CASE NO. CV-S-97-0655.
In 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 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 2003. In January 2004,
Manchak filed a 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 matter is considered 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 were
exercisable for ten years. The complaint alleged breach of written contract,
breach of oral contract, fraudulent inducement, and declaratory judgment that
Crow was entitled to purchase 150,000 shares of stock at a strike price of $4
per share. Crow estimated his damages as between $1,050,000 and $1,258,500. The
lawsuit, initially filed in Texas District Court was removed to federal court.
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 matter
is considered 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
27
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 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 in March 2003. In June 2003, the Company appealed. On May
25, 2005, the California Court of Appeal, Fourth Appellate District affirmed the
trial court. No further appeal applies 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.
None
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 September 30, 2005 Form 10-Q by Chief Executive Officer dated November
1, 2005
- ---------------- ----------------------------------------------------------------------------------------
31.2 Certifications of September 30, 2005 Form 10-Q by Chief Financial Officer dated November
1, 2005
- ---------------- ----------------------------------------------------------------------------------------
32.1 Certifications of September 30, 2005 Form 10-Q by Chief Executive Officer dated November
1, 2005
- ---------------- ----------------------------------------------------------------------------------------
32.2 Certifications of September 30, 2005 Form 10-Q by Chief Financial Officer dated November
1, 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: November 1, 2005 By:/s/ Stephen A. Romano
------------------------
Stephen A. Romano
President, Chief Executive Officer and
Chief Operating Officer
28
Date: November 1, 2005 By:/s/ James R. Baumgardner
---------------------------
James R. Baumgardner
Senior Vice President,
Chief Financial Officer,
Secretary and Treasurer
29
EXHIBIT INDEX
Exhibit Description
- ------- -----------
31.1 Certifications of September 30, 2005 Form 10-Q by Chief Executive Officer dated November 1,
2005
31.2 Certifications of September 30, 2005 Form 10-Q by Chief Financial Officer dated November 1,
2005
32.1 Certifications of September 30, 2005 Form 10-Q by Chief Executive Officer dated November 1,
2005
32.2 Certifications of September 30, 2005 Form 10-Q by Chief Financial Officer dated November 1,
2005
30