UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF 1934
For the Quarterly Period Ended March 31, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT
OF 1934
For the transition period from to
------------------ --------------------
Commission File Number 0-11688
AMERICAN ECOLOGY CORPORATION
----------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-3889638
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Lakepointe Centre I,
300 E. Mallard, Suite 300
Boise, Idaho 83706
------------------------- -----
(Address of principal executive offices) (Zip Code)
(208) 331-8400
--------------
(Registrant's telephone number, including area code)
Indicate by a check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
At May 12, 2003 Registrant had outstanding 16,960,901 shares of its Common
Stock.
AMERICAN ECOLOGY CORPORATION
QUARTERLY REPORT ON FORM 10-Q FOR THE
THREE MONTHS ENDED MARCH 31, 2003
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements
Consolidated Balance Sheets
(Unaudited) 4
Consolidated Statements of Operations
(Unaudited) 5
Consolidated Statements of Cash Flows
(Unaudited) 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
Item 4. Controls and Procedures 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in 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 27
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 28
2
OFFICERS
- --------
Stephen A. Romano
Chief Executive Officer, President and Chief Operating Officer
James R. Baumgardner
Senior Vice President, Chief Financial Officer
Treasurer and Secretary
Michael J. Gilberg
Vice President and Controller
DIRECTORS
- ---------
Roger P. Hickey, Chairman
President, Chicago Partners
David B. Anderson
Principal, Lochborn Partners LLC
Rotchford L. Barker
Independent Businessman
Roy C. Eliff
Independent Businessman
Edward F. Heil
Sole Member
E.F. Heil, LLC
Stephen A. Romano
Chief Executive Officer, President and Chief Operating Officer
Paul F. Schutt
Chairman of the Board
Nuclear Fuel Services, Inc.
CORPORATE OFFICE
- -----------------
Lakepointe Centre I
American Ecology Corporation
300 East Mallard Drive, Suite 300
Boise, Idaho 83706
(208) 331-8400
(208) 331-7900 (fax)
www.americanecology.com
- -----------------------
COMMON STOCK
- -------------
American Ecology Corporation's common stock trades on the Nasdaq National Market
under the symbol ECOL.
FINANCIAL REPORTS
- ------------------
A copy of American Ecology Corporation Annual and Quarterly Reports, as filed on
Form 10-K and 10-Q with the Securities and Exchange Commission, may be obtained
by writing:
Lakepointe Centre I
300 E. Mallard, Suite 300
Boise, Idaho 83706
or at www.americanecology.com
-----------------------
TRANSFER AGENT
- ---------------
Mellon Investor Services LLC
Overpeck Centre
85 Challenger Road
Ridgefield Park, New Jersey 07660
(201) 296-4000
or at www.mellon-investor.com
-----------------------
AUDITOR
- -------
Moss Adams LLP
1001 Fourth Avenue, Suite 2900
Seattle, WA98154
3
PART I. FINANCIAL INFORMATION
- ------- ----------------------
ITEM 1. FINANCIAL STATEMENTS.
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
($ IN 000'S EXCEPT PER SHARE AMOUNTS)
MARCH 31, 2003 December 31, 2002
---------------- -------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 7,134 $ 135
Receivables, net 7,306 10,460
Income taxes receivable 742 740
Prepayments and other 368 498
Deferred income taxes -- 2,745
Assets held for sale or closure 3,542 10,722
---------------- -------------------
Total current assets 19,092 25,300
Cash and investment securities, pledged 244 244
Property and equipment, net 27,488 26,998
Facility development costs 6,478 27,430
Deferred income taxes 8,284 5,539
Other assets 66 129
Assets held for sale or closure 2,238 1,485
---------------- -------------------
Total Assets $ 63,890 $ 87,125
================ ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long term debt $ 1,719 $ 1,985
Accounts payable 2,568 2,192
Accrued liabilities 4,461 4,166
Accrued closure and post closure obligation, current portion 882 882
Income taxes payable 15 23
Current liabilities of assets held for sale or closure 5,716 7,965
---------------- -------------------
Total current liabilities 15,361 17,213
Revolving line of credit -- 603
Long term accrued liabilities 526 2,372
Long term debt 5,310 5,972
Accrued closure and post closure obligation, excluding current portion 9,485 9,318
Liabilities of assets held for sale or closure, excluding current portion 5,591 5,699
---------------- -------------------
Total liabilities 36,273 41,177
---------------- -------------------
Commitments and contingencies
Shareholders' equity:
Convertible preferred stock, 1,000,000 shares authorized,
Designated as follows:
Series D cumulative convertible preferred stock, $.01 par value,
0 and 100,001 shares issued and outstanding; -- 1
Common stock, $.01 par value, 50,000,000 authorized, 16,960,901
and 14,539,264 shares issued and outstanding 170 145
Additional paid-in capital 54,665 55,789
Accumulated deficit (27,218) (9,987)
---------------- -------------------
Total shareholders' equity 27,617 45,948
---------------- -------------------
Total Liabilities and Shareholders' Equity $ 63,890 $ 87,125
================ ===================
See notes to consolidated financial statements.
4
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
($ IN 000'S EXCEPT PER SHARE AMOUNTS)
Three Months Ended
MARCH 31, 2003 March 31, 2002
---------------- ----------------
(Restated)
Revenue $ 10,771 $ 13,424
Direct operating costs 5,984 6,175
---------------- ----------------
Gross profit 4,787 7,249
Selling, general and administrative expenses 4,497 3,541
---------------- ----------------
Income from operations 290 3,708
Investment income -- 11
Interest expense 121 265
Loss on write off of Ward Valley facility development costs 20,951 --
Other income (loss) -- (465)
---------------- ----------------
Income (loss) before income tax, discontinued operations and cumulative effect of
change in accounting principal (20,782) 2,989
Income tax expense (benefit) (8) --
---------------- ----------------
Income (loss) before discontinued operations and cumulative effect of change in
accounting principal (20,774) 2,989
Gain from discontinued operations - El Centro Landfill 4,944 190
(Loss) from discontinued operations - Oak Ridge LLRW Facility (1,337) (401)
---------------- ----------------
Income (loss) before cumulative effect of change in accounting principal (17,167) 2,778
Cumulative effect of accounting change -- 13,141
---------------- ----------------
Net income (loss) (17,167) 15,919
Preferred stock dividends 64 98
---------------- ----------------
Net income (loss) available to common shareholders $ (17,231) $ 15,821
================ ================
Basic (loss) earnings from continuing operations (1.34) .22
Basic (loss) earnings from discontinued operations .23 (.02)
Basic earnings from cumulative effect of accounting change -- .95
---------------- ----------------
Basic (loss) earnings per share $ (1.11) $ 1.15
================ ================
Diluted (loss) earnings from continuing operations (1.34) .21
Diluted (loss) earnings from discontinued operations .23 (.02)
Diluted earnings from cumulative effect of accounting change -- .92
---------------- ----------------
Diluted (loss) earnings per share $ (1.11) $ 1.11
================ ================
Dividends paid per common share $ -- $ --
================ ================
See notes to consolidated financial statements.
5
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, $ IN 000'S)
Three Months Ended March 31,
----------------------------------
2003 2002
------------------ --------------
Cash flows from operating activities: (Restated)
Net income (loss) $ (17,167) $ 15,919
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, amortization, and accretion 1,707 1,420
(Income) loss from discontinued operations (3,607) 211
Cumulative effect of change in accounting principle -- (13,141)
Write off of Ward Valley project 20,951 --
Changes in assets and liabilities:
Receivables 3,211 1,392
Other assets 131 19
Closure and post closure obligation (204) (637)
Income taxes payable (10) 285
Accounts payable and accrued liabilities 875 (5,888)
------------------ --------------
Net cash provided by (used in) operating activities 5,887 (420)
Cash flows from investing activities:
Capital expenditures (2,277) (984)
------------------ --------------
Net cash used by investing activities (2,277) (984)
Cash flows from financing activities:
Payments of indebtedness (1,531) (830)
Retirement of series D preferred stock (6,406) --
Stock options exercised 3,650 975
------------------ --------------
Net cash provided by (used in) financing activities (4,287) 145
------------------ --------------
Decrease in cash and cash equivalents (677) (1,259)
Net cash provided by (used in) discontinued operations 7,676 (1,248)
Cash and cash equivalents at beginning of period 135 4,217
------------------ --------------
Cash and cash equivalents at end of period $ 7,134 $ 1,710
================== ==============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 121 $ 288
Income taxes paid 2 5
Non-cash investing and financing activities:
Stock issuance-director's compensation 12 --
Preferred stock dividends accrued -- 98
Transfer of prepaid assets to settle closure liability -- 462
See notes to consolidated financial statements.
6
AMERICAN ECOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments and disclosures necessary to present fairly
the financial position, results of operations, and cash flows of American
Ecology Corporation and its wholly-owned subsidiaries (the "Company"). These
financial statements and notes should be read in conjunction with the financial
statements and notes included in the Company's 2002 Annual Report on Form 10-K
for the year ended December 31, 2002, filed with the Securities and Exchange
Commission.
Certain reclassifications of prior quarter amounts have been made to conform
with current quarter presentation, none of which affect previously recorded net
income.
NOTE 2. EARNINGS PER SHARE
Basic earnings per share are computed based on net income available to common
shareholders and the weighted average number of common shares outstanding during
the quarter. Diluted earnings per share reflect the assumed issuance of common
shares for outstanding options and conversion of warrants. The computation of
diluted earnings per share does not assume exercise or conversion of securities
whose exercise price is greater than the average common share market price as
the assumed conversion of these securities would increase earnings per share.
The computation of diluted loss per share does not assume exercise or conversion
of any securities as the assumed conversion of securities would decrease loss
per share.
THREE MONTHS ENDED MARCH 31
($in thousands except per share amounts) 2003 2002
---------------- ----------------
(Restated)
Income (loss) before discontinued operations and cumulative
effect of accounting change $ (20,774) $ 2,989
Income (loss) from operations of discontinued segments 3,607 (211)
Cumulative effect of accounting change -- 13,141
---------------- ----------------
Net income (loss) (17,167) 15,919
Preferred stock dividends 64 98
---------------- ----------------
Net income (loss) available to common shareholders $ (17,231) $ 15,821
================ ================
Weighted average shares outstanding-
Common shares 15,476 13,781
Effect of dilutive shares
Series E Warrants -- 250
Chase Bank Warrants -- 144
Stock Options -- 84
---------------- ----------------
Average shares 15,476 14,259
================ ================
Basic earnings (loss) per share from continuing operations $ (1.34) $ .22
Basic earnings (loss) per share from discontinued operations .23 (.02)
Basic earnings per share from cumulative effect of accounting change -- .95
---------------- ----------------
Basic earnings (loss) per share $ (1.11) $ 1.15
================ ================
Diluted earnings (loss) per share from continuing operations $ (1.34) $ .21
Diluted earnings (loss) per share from discontinued operations .23 (.02)
Diluted earnings per share from cumulative effect of accounting change -- .92
---------------- ----------------
Diluted earnings (loss) per share $ (1.11) $ 1.11
================ ================
7
NOTE 3. EQUITY
In 1996, the Company issued 300,000 shares of Series E Redeemable Convertible
Preferred Stock ("Series E Preferred Stock") that were retired in 1998. The
Series E Preferred Stock carried warrants to purchase 3,000,000 shares of common
stock with a $1.50 per share exercise price.
In February 2003, three Series E warrant holders exercised the remaining
2,350,000 Series E warrants with an exercise price of $1.50 per share.
Consequently, the Company issued 2,350,000 shares of common stock and received
$3,525,000 in cash. At March 31, 2003 there were no Series E warrants
outstanding.
In September 1995, the Board of Directors authorized the issuance of 105,264
shares of preferred stock designated as 8 3/8% Series D Cumulative Convertible
Preferred Stock (Series D Preferred Stock), which were sold in a private
offering to a group of present and past members of the Board of Directors. Each
of the remaining 100,001 shares of Series D Preferred Stock was convertible at
any time at the option of the holder into 17.09 shares of the Company's common
stock, equivalent to a conversion price of $3.71 per share due to dilution by
subsequent sales of common stock.
On January 14, 2003, the Company extended an offer to all holders of Series D
Preferred Stock to repurchase their stock for the original sales price of $47.50
a share plus accrued but unpaid dividends. Repurchase was subject to approval of
the Company's Board of Directors and primary bank, Wells Fargo Bank, and
required a minimum of 67% of the Series D Preferred Stock to be tendered by the
Series D Preferred Stockholders. The offer was accepted by all Series D holders
and approved by the Company's Board of Directors and Wells Fargo Bank.
On February 28, 2003, the Company repurchased the remaining 100,001 shares of
Series D Preferred Stock for the original sales price of $47.50 a share plus
accrued but unpaid dividends of $16.56 a share. A total of $6,406,000 was paid.
NOTE 4. OPERATING SEGMENTS
The Company operates with two segments, Operating Disposal Facilities, and
Non-Operating Disposal Facilities, based on its internal reporting structure and
nature of services offered. The Operating Disposal Facility segment represents
facilities accepting hazardous and radioactive waste. The Non-Operating Disposal
Facility segment represents facilities that are not accepting hazardous and/or
radioactive waste or are awaiting approval to open.
On December 27, 2002, the Company committed to discontinue commercial operations
within its Processing and Field Services segment which aggregated,
volume-reduced, and performed remediation and other services on radioactive
material, but excluded processing performed at the disposal facilities. All
prior segment information has been restated in order to present the operations
at the Oak Ridge facility, including the Field Services division, as
discontinued operations.
Effective December 31, 2002, the Company classified the El Centro municipal
landfill as an asset held for sale due to the expected sale of the facility
which occurred on February 13, 2003. All prior segment information has been
restated in order to present the operations of the El Centro landfill as
discontinued operations.
Income taxes are assigned to Corporate, but all other items are included in the
segment where they originated. Inter-company transactions have been eliminated
from the segment information and are not significant between segments.
8
Summarized financial information concerning the Company's reportable segments is
shown in the following table ($ in thousands).
Operating Non-Operating Discontinued
Disposal Disposal Processing and
Facilities Facilities Field Services Corporate Total
THREE MONTHS ENDED MARCH 31, 2003
- ---------------------------------
Revenue $ 10,767 $ 4 $ -- $ -- $ 10,771
Direct operating cost 5,882 102 -- -- 5,984
----------- --------------- ---------------- ----------- ---------
Gross profit (loss) 4,885 (98) -- -- 4,787
S,G&A 1,826 1,517 -- 1,154 4,497
----------- --------------- ---------------- ----------- ---------
Income (loss) from operations 3,059 (1,615) -- (1,154) 290
Interest expense 44 -- -- 77 121
Write off of Ward Valley facility -- 20,951 -- -- 20,951
----------- --------------- ---------------- ----------- ---------
Income (loss) before income tax
and discontinued operations 3,015 (22,566) -- (1,231) (20,782)
Income tax expense (benefit) -- -- -- (8) (8)
Discontinued operations 4,944 -- (1,337) -- 3,607
----------- --------------- ---------------- ----------- ---------
Net Income (loss) 7,959 (22,566) (1,337) (1,223) (17,167)
=========== =============== ================ =========== =========
Depreciation Expense $ 1,802 $ 1 $ -- $ 11 $ 1,814
Capital Expenditures $ 2,614 $ 23 $ 473 $ -- $ 3,110
Total Assets $ 36,230 $ 6,519 $ 4,231 $ 16,910 $ 63,890
THREE MONTHS ENDED MARCH 31, 2002 (RESTATED)
- --------------------------------------------
Revenue $ 13,357 $ 67 $ -- $ -- $ 13,424
Direct operating cost 5,872 303 -- -- 6,175
----------- --------------- ---------------- ----------- ---------
Gross profit (loss) 7,485 (236) -- -- 7,249
S,G&A 2,654 80 -- 807 3,541
----------- --------------- ---------------- ----------- ---------
Income (loss) from operations 4,831 (316) -- (807) 3,708
Investment income 8 -- -- 3 11
Interest expense 218 -- -- 47 265
Other income (expense) 25 (490) -- -- (465)
----------- --------------- ---------------- ----------- ---------
Income (loss) before discontinued
operations and cumulative effect of
change in accounting principle 4,646 (806) -- (851) 2,989
Discontinued operations 190 -- (401) -- (211)
Cumulative effect of change in
accounting principle $ 14,983 $ 1,548 $ (3,390) $ -- $ 13,141
----------- --------------- ---------------- ----------- ---------
Net Income (loss) $ 19,819 $ 742 $ (3,791) $ (851) $ 15,919
=========== =============== ================ =========== =========
Depreciation Expense $ 1,695 $ 1 $ 143 $ 18 $ 1,857
Capital Expenditures $ 993 $ -- $ 12 $ -- $ 1,005
Total Assets $ 47,148 $ 27,484 $ 11,315 $ 3,826 $ 89,773
NOTE 5. STOCK OPTION PLANS
The Company has two stock-based compensation plans, which are accounted for
under the recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees and related Interpretations. No
stock-based employee compensation cost is reflected in net income. The following
table illustrates the effect on net income and earnings per share if the Company
applied the fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation, to stock-based compensation for the
quarters ended March 31, 2003 and 2002:
9
2003 2002
--------- --------
Net income (loss), as reported $(17,167) $15,919
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects (509) (72)
--------- --------
Pro forma net income (loss) $(17,676) $15,847
========= ========
EARNINGS (LOSS) PER SHARE:
Basic - as reported $ (1.11) $ 1.15
========= ========
Basic - pro forma $ (1.14) $ 1.15
========= ========
Diluted - as reported $ (1.11) $ 1.11
========= ========
Diluted - pro forma $ (1.14) $ 1.11
========= ========
The stock option plan summary and changes during quarters ended March 31 are as
follows:
2003 2002
----------- -----------
Options outstanding, beginning of quarter 753,150 1,128,650
Granted 758,724 80,000
Exercised (67,500) --
Canceled (9,500) (262,000)
----------- -----------
Options outstanding, end of quarter 1,434,874 946,650
=========== ===========
Weighted average exercise price of options, beginning of quarter $ 3.42 $ 2.90
Weighted average exercise price of options granted $ 4.42 $ 2.68
Weighted average exercise price of options exercised $ 1.68 --
Weighted average exercise price of options canceled $ 3.12 $ 1.06
Weighted average exercise price of options, end of quarter $ 4.03 $ 3.39
Options exercisable at end of quarter 865,831 844,150
=========== ===========
Options available for future grant at end of quarter 453,626 1,117,850
=========== ===========
The following table summarizes information about the stock options outstanding
under the Company's option plans as of March 31, 2003:
Weighted
average Weighted Weighted
remaining average average
Range of exercise contractual life Number exercise price exercise price
price per share (years) outstanding per share Number exercisable per share
- ------------------ ----------------- ----------- --------------- ------------------ ---------------
1.00 - $1.47 4.3 119,500 $ 1.33 119,500 $ 1.33
1.60 - $2.25 6.8 129,000 $ 1.98 129,000 $ 1.98
2.42 - $3.50 7.2 407,329 $ 2.98 204,582 $ 2.96
3.75 - $5.00 8.1 532,884 $ 4.30 296,346 $ 4.14
6.50 9.9 173,011 $ 6.50 43,253 $ 6.50
10.13 0.9 73,150 $ 10.13 73,150 $ 10.13
----------- ------------------
1,434,874 865,831
=========== ==================
As of March 31, 2003, the 1992 Stock Option Plan for Employees had options
outstanding to purchase 949,874 common shares with 92,926 shares remaining
available for issuance under option grants. The 1992 Stock Option Plan for
Directors had options outstanding to purchase 485,000 common shares with 360,700
shares remaining available for issuance under option grants.
10
The fair value of each option grant is estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants during the quarter ended March 31:
2003 2002
---------- ----------
Expected volatility 105% 49%
Risk-free interest rates 4.25% 4.75%
Expected lives 10 YEARS 10 years
Dividend yield 0% 0%
Weighted-average fair value of options granted
during the quarter (Black-Scholes) $ 2.68 $ 0.90
NOTE 6. INCOME TAXES
Income tax expense differs from that calculated using applicable income tax
rates to pretax income due primarily to the presence of net operating loss
carryforwards and a valuation allowance.
At March 31, 2003, the Company has approximately $25,000,000 of deferred tax
assets and a corresponding valuation allowance which reduces the net deferred
tax asset to $8,284,000. $8,284,000 represents the expected utilization of
deferred tax assets in the foreseeable future.
On March 26, 2003, the Company wrote off $20,951,000 in Ward Valley development
costs and therefore does not expect to realize previously estimated taxable
income in 2003. Management expects the $8,284,000 of deferred tax asset is
expected to be realized in the years subsequent to 2003, and therefore
classified the total net deferred tax asset as a long term asset on the balance
sheet.
NOTE 7. LITIGATION
Significant developments have occurred on the following legal matters since
December 31, 2002:
US ECOLOGY, INC. V. THE STATE OF CALIFORNIA, ET AL., CASE NO.GIC747562, SUPERIOR
- ---------------------------------------------------
COURT OF THE STATE OF CALIFORNIA FOR THE COUNTY OF SAN DIEGO
In May 2000, the Company's subsidiary, US Ecology, Inc., sued the State of
California, its Governor, Gray Davis, and the Director of its Department of
Health Services (DHS) and other State entities ("the State") for monetary
damages exceeding $162 million. The suit stems from the State's abandonment of
the Ward Valley low-level radioactive waste ("LLRW") disposal project.
California law requires the state to build a disposal site for LLRW produced in
California, Arizona, North Dakota and South Dakota; member states of the
Southwestern Compact. US Ecology was selected in 1985 to locate and license the
site using its own funds on a reimbursable basis. In 1993, US Ecology obtained a
license from the DHS and entered a ground lease.
The State successfully defended the license against court challenges and, until
Governor Davis took office, actively pursued conveyance of the site from the
federal government. In September 2000, the Superior Court granted California's
motion to dismiss all causes of action, which the Company appealed. In September
2001, the California Court of Appeal Fourth Appellate District Appellate Court
upheld the trial court's decision in part and denied it in part, remanding the
case for trial based on the Company's promissory estoppel claim. The case was
tried in Superior Court for the County of San Diego in February and March 2003.
On March 26, 2003, Superior Court Judge E. Mac Amos, Jr. issued a Statement of
Decision finding that the Company failed to establish causation and that its
claim is further barred by the doctrine of unclean hands. The unclean hands
finding was based on actions the Court concluded had created obstacles to an
agreement between the federal government and the State to convey the Ward Valley
property to the State. The Court also found, however, that certain elements of
the Company's promissory estoppel claim had been established. Specifically, the
Court ruled that the State made a clear and unambiguous promise to US Ecology in
1988 to use its best efforts to acquire the Ward Valley site, that the State
subsequently abandoned this promise during Governor Davis' administration, and
11
that the Company's reliance on the State's promise was reasonable and forseable.
However, the Court found that the State's breach of its best efforts promise was
not a substantial factor in causing damages to US Ecology since the federal
government had continued to resist the land transfer.
On May 2, 2003, the Company filed a Motion to Vacate with the trial court based
on advice of counsel that the March 26 decision had misapplied the facts of the
case to the law with respect to both the adverse causation and unclean hands
findings. The Company will await a ruling on this motion before determining
whether or not to pursue an appeal to the California Fourth Appellate District
Court.
Based on the trial court's decision, management is no longer certain the
Company's investment in the Ward Valley project can be recovered. As a result,
the Company has written off the $20,951,000 deferred site development asset
previously reflected on its balance sheet.
MANCHAK V. US ECOLOGY, INC., U.S. DISTRICT COURT FOR THE DISTRICT OF NEVADA,
- -------------------------------
CIVIL ACTION NO. 96-494.
In March 1996, Frank Manchak, Jr. ("Plaintiff" or "Manchak") filed suit alleging
infringement of a sludge treatment patent to stabilize hazardous waste at the
Company's Beatty, Nevada hazardous waste disposal facility. Plaintiff seeks
unspecified damages for infringement, treble damages, interest, costs and
attorney fees. On October 17, 2002, the US District Court for the District of
Nevada granted the Company's motion for summary judgment to dismiss the suit.
Manchak's motion for reconsideration was denied on January 8, 2003. Manchak
appealed, however, plaintiff appears to have failed to timely file an
appellant's brief and the Company moved to dismiss the appeal. The Company's
motion to dismiss is pending. In January 2003, the Company filed a motion to
recover legal fees and expenses. This motion was denied, which the Company is
considering appealing. The Company does not believe it infringed any Manchak
patent and will continue to vigorously defend the case.
ENTERGY ARKANSAS, INC., ET AL, CENTRAL INTERSTATE LOW-LEVEL RADIOACTIVE WASTE
- --------------------------------------------------------------------------------
COMMISSION AND US ECOLOGY, INC. ("PLAINTIFFS") V. STATE OF NEBRASKA, ET AL.,
- ------------------------------------------------------------------------------
CASE NO. 4:98CV3411, U.S. DISTRICT COURT, DISTRICT OF NEBRASKA
This action was brought in federal court in December of 1999 by electric
utilities that generate low-level radioactive waste ("LLRW") within the Central
Interstate Low-Level Radioactive Waste Compact (CIC). CIC member states are
Nebraska, Kansas, Oklahoma, Arkansas, and Louisiana. The action seeks
declaratory relief and damages for bad faith in the State of Nebraska's
processing and ultimate denial of US Ecology's application to site, develop and
operate a LLRW disposal facility near Butte, Nebraska. US Ecology is the CIC's
contractor and developer. The CIC was originally named as a defendant and
subsequently realigned as a plaintiff. US Ecology intervened as a plaintiff.
The CIC sought to recover contributions made by the utilities and US Ecology to
the CIC for pre-licensing project costs in the approximate amounts of $95
million and $6.2 million, respectively, and removal of the State of Nebraska
from the licensing process. The Eighth Circuit Court of Appeals subsequently
dismissed the utilities' and US Ecology's independent claims against Nebraska
for breach of the good faith provision of the Compact, and for denial of due
process based on sovereign immunity. The utilities and US Ecology subsequently
filed cross claims against the CIC for breach of contract and the imposition of
a constructive trust.
On September 30, 2002, the US District Court for the District of Nebraska
entered judgment against Nebraska in favor of the CIC for $153 million,
including approximately $50 million for prejudgment interest. Of this amount,
US Ecology's share was for a $6.2 million contribution and $6.1 for prejudgment
interest. The $6.2 million contribution in included within the balance sheet as
capitalized facility development costs. The Court also dismissed the utilities'
and US Ecology's cross claims for breach of contract and imposition of a
constructive trust, finding that it was premature to decide the merits of these
claims and leaving the question open for future resolution if necessary. The
State appealed the judgment to the Eighth Circuit Court of Appeals. It is
currently expected that the case will be argued in the fall of 2003 with an
appeals court decision around the end of 2003. No assurance can be given that
the trial court's decision will be affirmed on appeal or that US Ecology will
recover its contributions or interest thereon.
MATTIE CUBA, ET AL. V. AMERICAN ECOLOGY ENVIRONMENTAL SERVICES CORPORATION, ET
- --------------------------------------------------------------------------------
AL.,CAUSE NO. 2000-092, 4TH JUDICIAL DISTRICT COURT, RUSK COUNTY, TEXAS
12
This suit was brought in November 2000 by 28 named plaintiffs against the
Company and named subsidiaries, the former owners and approximately 60 former
customers of its Winona, Texas facility. Plaintiffs seek recovery for personal
injuries, property damages and exemplary damages based on negligence, gross
negligence, nuisance and trespass. The Company filed a motion for summary
judgment in July 2002 based on lack of evidence. In November 2002, the trial
court granted partial summary judgment, dismissing certain causes of action and
reducing the number of plaintiffs, but preserving other causes of action. The
Company subsequently filed a motion for summary judgment seeking dismissal
against all of the adult plaintiffs on statute of limitations grounds. On March
26, 2003 the court granted this motion and dismissed the adult plaintiffs.
Seven minors and an intervenor remain party to the lawsuit. The Company believes
plaintiffs' remaining case is without merit and will continue to vigorously
defend the matter. No assurance can be given that the Company will prevail or
that the matter can be favorably resolved. The Company's current insurance
carrier is paying for defense of this matter subject to the Company's $250,000
deductible, which has been fully accrued.
NOTE 8. COMMITMENTS AND CONTINGENCIES
Effective January 1, 2003, the Company established the American Ecology
Corporation Management Incentive Plan. The Plan provides for selected
participants to receive bonuses based on pre-tax operating income levels.
Bonuses under the plan are to be paid out over three years with a maximum in any
one year of $1,125,000 in bonuses if pre-tax operating income exceeds
$12,000,000.
In February 2003, the Company entered into employment agreements with four key
executive employees. The agreements expire December 31, 2004 and 2005 and
provide for aggregate minimum annual salaries of $639,000.
NOTE 9. ACCOUNTING CHANGES AND RESTATEMENT
Effective January 1, 2002, the Company implemented Statement of Financial
Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" (FAS
143) under the early adoption provisions. FAS 143 requires a liability to be
recognized as part of the fair value of future asset retirement obligations and
an associated asset to be recognized as part of the carrying amount of the
underlying asset. Previously the Company recorded a Closure and Post Closure
Obligation for the pro-rata amount of space used of the total permitted space
available. On January 1, 2002, in accordance with FAS 143, this obligation was
valued at the current closure cost, increased by a cost of living adjustment for
the estimated time of payment, and discounted back to its present value.
In further accordance with FAS 143, upon calculation of the asset retirement
obligation the Company also recorded an associated asset related to the
retirement obligation. This asset is amortized to operations over the estimated
useful life of the related long-lived asset. FAS 143 allows for the aggregation
of certain assets in calculating and subsequently amortizing this asset. During
the fourth quarter of 2002, the Company reassessed its methodology of applying
FAS 143 and disaggregated certain facility components. In recalculating the
asset under the revised methodology, the Company recorded a $3,182,000 reduction
in the asset with no corresponding change in the recorded liability.
Consequently, the initial 2002 gain on implementation of the new accounting
standard recorded in the first quarter of 2002 was reduced by $3,182,000, and
the amortization associated with the asset was reduced from what was previously
recorded during the first three quarters of 2002. The following restatements
were made to account for this change in FAS 143 implementation methodology (in
thousands):
March 31, 2002
----------------
Reported Net Income $ 19,077
Effect of Restatement:
Cumulative Effect of Accounting Change $ (3,182)
Amortization $ 24
----------------
Restated Net Income $ 15,919
================
Reported Diluted EPS $ 1.33
13
Effect of Restatement:
Cumulative Effect of Accounting Change $ (.22)
Amortization $ --
----------------
Restated EPS $ 1.11
================
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 No. 5. The Company
performs periodic reviews of both non-operating and operating facilities and
revises accruals for estimated post-closure, remediation and other costs when
necessary. The Company's recorded liabilities are based on best estimates of
current costs and are updated periodically to reflect current technology, laws
and regulations, inflation and other economic factors.
Changes to reported closure and post closure obligations were as follows (in
thousands):
Accrued Closure and Closure Obligation of Assets Total Closure and Post
Post Closure Obligation Held for Sale or Closure Closure Obligations
------------------------- ------------------------------ ------------------------
December 31, 2002 obligation $ 10,200 $ 6,560 $ 16,760
Accretion of obligation 239 36 275
Payment of obligation (205) -- (205)
Adjustment of obligation 133 (1,098) (965)
------------------------- ------------------------------ ------------------------
March 31, 2003 obligation $ 10,367 $ 5,498 $ 15,865
========================= ============================== ========================
On February 13, 2003, the Company sold substantially all of the assets of the El
Centro landfill, which also included the transfer of the related accrued closure
and post closure obligation amounting to $1,098,000 at the date of the sale.
At March 31, 2003, $244,000 of pledged cash and investment securities were
legally restricted for purposes of settling the closure and post closure
obligation.
NOTE 11. OPERATING LEASE BUY OUT
On August 3, 2000, the Company entered into a $2,000,000 equipment sale and
leaseback transaction based on the sale of specified equipment and rolling stock
to a third party lessor. The Company received $2,000,000 in proceeds from the
asset sale and entered into an operating lease for the use of the equipment
beginning August 8, 2000 with monthly payments scheduled through September 8,
2006. The Company realized a $1,098,000 gain on the sale of the equipment to be
amortized over the life of the lease.
On March 28, 2003 the Company exercised an early buyout of the operating lease
for $1,159,000 and recorded equipment purchases with a book value of $702,000
along with a reduction in the deferred gain of $457,000. In conjunction with the
early buyout, the Company recorded an impairment charge of $225,000 on certain
equipment utilized at the discontinued Oak Ridge facility that were included in
the early buyout.
NOTE 12. DISCONTINUED OPERATIONS
As of March 31, 2003, the components of "Assets Held for Sale or Closure"
consisted of certain assets relating to the El Centro municipal waste disposal
facility, which the Company sold to a wholly-owned subsidiary of Allied Waste
Industries, Inc. on February 13, 2003, and the assets and liabilities relating
to the discontinued Oak Ridge processing and field services operations
classified as "Held for Sale or Closure". Accordingly, the revenue, costs and
expenses and cash flows for the El Centro and Oak Ridge processing and Field
Services operations have been excluded from the results from continuing
operations and reported as "Income (loss) from discontinued operations" and "Net
cash used by discontinued operations". Prior periods have been restated to
reflect the discontinued operations. The assets and liabilities of discontinued
operations included within the consolidated balance sheet as of March 31, 2003
are as follows (in thousands):
14
Processing and Field El Centro Disposal Total Assets Held
Services Facility Facility for Sale or Closure
--------------------- ------------------- --------------------
Current assets
- --------------
Current assets $ 2,122 $ 868 $ 2,990
Property & equipment, net 552 -- 552
--------------------- ------------------- --------------------
2,674 868 3,542
===================== =================== ====================
Non-current assets
- ------------------
Property, plant & equipment, net 1,507 -- 1,507
Other 49 681 730
--------------------- ------------------- --------------------
1,556 681 2,237
===================== =================== ====================
Current liabilities
- -------------------
Accounts payable & accruals 5,357 285 5,642
Current portion long term debt 73 -- 73
--------------------- ------------------- --------------------
5,430 285 5,715
===================== =================== ====================
Non-current liabilities
- -----------------------
Closure/post closure obligations 5,498 -- 5,498
Long-term debt 61 -- 61
Other 31 -- 31
--------------------- ------------------- --------------------
5,590 -- 5,590
===================== =================== ====================
Operating results for the discontinued operations were as follows for quarter
ending March 31:
($in thousands) Processing and Field El Centro Disposal Total Discontinued
Services Operations Facility Operations
---------------------- ------------------- --------------------
2003
- ----
Revenues, net $ 779 $ 469 $ 1,248
Operating income (loss) (1,316) 78 (1,238)
Net income (loss) (1,337) 4,944 3,607
Basic earnings (loss) per share (.09) .32 .23
Diluted earnings (loss) per share (.09) .32 .23
2002
- ----
Revenues, net $ 4,334 $ 619 $ 4,953
Operating income (loss) (265) 156 (109)
Net income (loss) (401) 190 (211)
Basic earnings (loss) per share (.03) .01 (.02)
Diluted earnings (loss) per share (.03) .01 (.02)
El Centro Disposal Facility. On February 13, 2003, the Company sold the El
- ------------------------------
Centro municipal and industrial waste landfill to a subsidiary of Allied Waste
Industries, Inc. ("Allied") for $10 million cash at closing and future
volume-based royalty payments. Under the Agreement, Allied will pay American
Ecology minimum royalties of at least $215,000 annually. Once Allied has paid
the Company $14,000,000 in royalties, it no longer has an obligation to pay
annual minimum royalties, but will still be required to pay royalties if
disposal volumes exceed the minimum volume threshold. The Purchase Agreement
provides incentives for Allied to bring Texas Class 1 industrial waste to the
Company's adjacent hazardous waste facility, and for the Company to utilize the
El Centro landfill.
The Company sold $7,047,000 of Property and Equipment in exchange for
$10,000,000 of Cash, Royalties valued at $858,000, and the assumption by Allied
of $1,098,000 of Closure Liabilities. A gain of $4,909,000 was recognized in
discontinued operations related to this sale.
The royalties, valued at $858,000, represent the present value of 5 years of
minimum royalty payments. Annual payments in excess of $215,000 or payments
subsequent to 2007 would be included in Other Income at the time of their
receipt.
15
For segment reporting purposes, the El Centro landfill operating results were
previously classified as "Operating Disposal Facilities".
Oak Ridge Processing Facility and Field Services. During 2002, the Company
- -----------------------------------------------------
offered for sale its LLRW Processing Facility and Field Services operations
based in Oak Ridge, TN. On December 27, 2002, the Company committed to
discontinuing revenue-producing waste processing operations. Since that time,
the Company has devoted its primary efforts to removing accumulated waste from
the facility to prepare the facility for sale. Removal of all waste from the
facility is expected to be completed during June 2003, and a significant portion
had been shipped off site for processing and disposal as of March 31, 2003. As
waste is shipped from the facility, detailed information on the exact amount and
character of waste removed is used to refine cost estimates. This resulted in an
additional accrual of $911,000 for the three months ending March 31, 2003.
Discussions continue with potential buyers identified during the fourth quarter
of 2002, however, no qualified offers have yet been received and no assurance
can be given that the Company will be able to sell the Oak Ridge facility on
terms favorable to the Company.
On March 28, 2003, the Company recorded an additional impairment charge of
$225,000 on certain Oak Ridge equipment acquired under the early buyout of an
operating lease.
On December 27, 2002, management informed all employees that the Company was
discontinuing commercial processing at the Oak Ridge facility and implemented a
substantial reduction in the facility's labor force. Terminated union employees
were compensated for prior service, provided health coverage through January 31,
2003, and presented with a proposed severance package. Terminated non-union
employees were paid severance in accordance with written Company policy. For
employees covered under the collective bargaining agreement, the Company entered
into good faith severance negotiations with union representatives. The Company
met on several occasions with the union to negotiate severance. Both sides
amended their original proposals during these negotiations, however, no
agreement was reached. On February 3, 2003 the Company extended another
severance package to Union employees, which was not accepted. The Company is
open to additional discussions with the union to reach a satisfactory resolution
of any severance payment. If agreement is not reached, the matter may be
litigated. The outcome of potential future negotiations or litigation and any
payments associated with the terminations cannot reasonably be estimated at this
time, therefore, no costs relating to these employees have been accrued.
However, management believes any such payment will not be material.
A summary of the Oak Ridge facility wind down and disposal costs are as follows
for the three months ended March 31, 2003: (in thousands $000)
Net operating costs in excess of previous accrual $ 201
Additional impairment of property and equipment 225
Increase in estimated cost for disposal of waste at facility 911
-------
Disposal costs for the three months ended March 31, 2003 $1,337
======
A summary of the changes in the Oak Ridge facility wind down and disposal
liabilities are as follows:
($in thousands) December 31, 2002 Cash Payments Other Changes March 31, 2003
----------------- -------------- ------------- --------------
Waste disposal liability 1,827 (29) 1,596 3,394
Facility operating cost liability 1,800 (800) 201 1,201
Other Changes represent differences between the costs accrued at December 31,
2002 and the March 31, 2003 estimated costs for waste disposal or incurred costs
for operating costs. The Other Changes in the liability is different from the
costs due to discontinued operations revenue realized by the Company upon
disposal of customer waste.
NOTE 13. FACILITY DEVELOPMENT COSTS
16
The Company is involved in litigation requiring estimates of timing and loss
potential whose timing and ultimate disposition is controlled by the judicial
process. During the quarter ended March 31, 2003, the Company wrote off the Ward
Valley project of $20,951,000 due to an adverse court decision, which cast
substantial doubt on the Company's ability to recover its investment in the
project. The decision to accrue costs or write off assets is based upon the
specific facts and circumstances pertaining to each case and management's
evaluation of present circumstances. See Note 7.
The Company continues to believe that the facility development costs which were
capitalized during development of the Butte, Nebraska proposed facility will be
realized, although no assurance that the trial court's decision will be affirmed
on appeal. See Note 7.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This document contains forward-looking statements that involve known and unknown
risks and uncertainties which may cause actual results in future periods to
differ materially from those indicated herein. These risks include, but are not
limited to, the ability to sell the Oak Ridge processing and field services
subsidiary (AERC), compliance with and changes to applicable laws, regulations
and permits, exposure to litigation, access to capital, access to insurance and
financial assurances, new technologies, competitive environment, labor disputes,
general economic conditions, and loss or diminution of major contracts. The
audited consolidated financial statements and the notes thereto filed on Form
10-K for the year ending December 31, 2002 contains additional risk factors and
an expanded disclosure of these risks. When the Company uses words like "will",
"may," "believes," "expects," "anticipates," "should," "estimate," "project,"
"plan," 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 our current expectations
about future events. Such statements should be viewed with caution and are not
guarantees of future performance or events. As noted elsewhere in this report,
our business is subject to uncertainties, risks and other influences, many of
which the Company has no control over. Additionally, these factors, either alone
or taken together, could have a material adverse effect on the Company and could
change whether any forward-looking statement ultimately turns out to be true.
The Company undertakes no obligation to publicly release updates or revisions to
these statements. The following discussion should be read in conjunction with
the audited consolidated financial statements and the notes thereto filed on
Form 10-K for the year ending December 31, 2002.
Unless otherwise described, changes discussed relate to the increase or decrease
from the three-month period ended March 31, 2002 to the three-month period ended
March 31, 2003.
INTRODUCTION
- ------------
The Company is a hazardous, PCB, non-hazardous, and radioactive waste management
company providing treatment and disposal services to commercial and government
entities including, but not limited to nuclear power plants, petro-chemical
refineries, steel mills, the U.S. Department of Defense, biomedical facilities,
universities and research institutions. The majority of its revenues are derived
from fees charged for use of the Company's four fixed waste disposal facilities.
The Company and its predecessors have been in business for 51 years.
OVERALL COMPANY PERFORMANCE
- -----------------------------
The Company's reported financial performance for the three months ended March
31, 2003 was weaker than the first and fourth-quarters of 2002, primarily due to
several large events, although a general weakening of the economy has also
impacted performance:
Ward Valley: Due to the adverse California state court decision on March 26,
- ------------
2003, the Company wrote off $20,951,000 of facility development costs for the
Ward Valley project, which is included in Write off of Ward Valley Project
within the Consolidated Statement of Operations. $1,498,000 in associated legal
17
and expert witness fees incurred during the quarter ended March 31, 2003 were
included in SG&A. The Company has not yet decided whether to appeal the court's
decision.
Army Corps of Engineers Fort Greely, Alaska Project: The Company performed a
- -------------------------------------------------------
$3,850,000 disposal project during the quarter ended March 31, 2002, which
represented 29% of first quarter 2002 revenues. This large project was not
replaced by like business in the quarter.
FAS 143: The Company implemented FAS 143 on January 1, 2002. FAS 143 requires a
- --------
liability to be recognized as part of the fair value of future asset retirement
obligations and an associated asset to be recognized as part of the carrying
amount of the underlying asset. The implementation of FAS 143 resulted in a
$13,141,000 cumulative effect of change in accounting principle during the
quarter ended March 31, 2002.
Sale of El Centro: On February 13, 2003, the Company sold the El Centro
- ---------------------
municipal waste landfill to Allied Waste and recognized a $4,909,000 gain on
sale, which has been included in discontinued operations during the quarter
ended March 31, 2003.
Oak Ridge Disposal Plan: On December 27, 2002, the Company committed to
- ---------------------------
discontinue operations at the Oak Ridge facility and recognized $7,018,000 of
additional costs required under the disposal plan. During the quarter ended
March 31, 2003, the Company identified or incurred an additional $1,337,000 in
costs required to remove accumulated waste from the facility. This primarily
reflects more accurate information on the specific quantity and type of waste to
be removed.
A significant portion of the Company's revenue is attributable to discrete
clean-ups ("Event Business"). The project-specific nature of the Event Business
necessarily creates variability in revenue and earnings. This can produce large
quarter to quarter swings, depending on the relative contribution from single
Event Business. Management's strategy is to expand its recurring customer
business ("Base Business") while simultaneously securing both large and small
event opportunities. Management believes that by structuring its operating costs
so that the Company's Base Business covers fixed costs, more of the Event
Business revenue will fall through to the bottom line. This strategy takes
advantage of the high fixed cost nature of the disposal business.
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. It is unlikely that changes in most estimates and assumptions would
materially change the Company's financial position and results of operations.
Disposal Facility Accounting, Accounting for Discontinued Operations,
Litigation, Income Taxes, and Project Accounting involve subjective judgments,
estimates and assumptions that would likely produce a materially different
financial position and result of operation if different judgments, estimates, or
assumptions were used. These matters are discussed below.
DISPOSAL FACILITY ACCOUNTING
In general terms, a disposal cell development asset exists for the cost of
building usable disposal space and a closure liability exists for closing,
maintaining and monitoring the disposal unit once this space has been filled.
Major assumptions and judgments used to calculate cell development assets and
closure liabilities are as follows:
- - Personnel and equipment costs incurred to construct disposal cells are
identified by management and capitalized as a cell development asset.
- - The cell development asset is depreciated as each available cubic yard of
disposal space is filled. Periodic independent engineering surveys 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.
- - The closure liability is the present value based on a current cost estimate
prepared by an independent engineering firm of the costs to close, maintain
and monitor disposal units. Management estimates the timing of payment and
then accretes the current cost estimate by an estimated cost of living
(1.5%), and then discounts (9.3%) the accreted current cost estimate back
to a present value. The final payments of the closure liability are
currently estimated as being paid in 2056 based upon current permitted
capacity and estimated annual usage.
18
ACCOUNTING FOR DISCONTINUED OPERATIONS
Accounting for discontinued operations requires numerous subjective and complex
judgments, estimates and assumptions that materially affect financial results
and position of discontinued operations.
At December 27, 2002, the Company committed to discontinue operation of its
former Processing and Field Services segment in Oak Ridge, Tennessee facility.
The discontinued operations were accounted for under Emerging Issues Task Force
Issue No 94-3 Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring), which requires a liability to be recognized at the time that the
decision to exit the segment was made. EITF 94-3 was chosen as the guiding
literature rather than Statement of Financial Accounting Standards No. 146
Accounting for Costs Associated with Exit or Disposal Activities (FAS 146),
which requires a liability to be recognized at the time that the liability is
incurred. FAS 146 is required for exit activities entered into after December
31, 2002 and was optional for exit activities prior to December 31, 2002.
Approximately $1,800,000 of liabilities was recognized as of December 31, 2002
under EITF 94-3 that would not have been recognized until incurred had the
Company adopted FAS 146 prior to December 27, 2002.
During the quarter ended March 31, 2003, the Company recognized $1,112,000 in
incremental liabilities and $225,000 for impairment of equipment relating to
discontinuation of its Oak Ridge LLRW Processing and Field Services operations.
The Company has assumed that the Oak Ridge facility will be cleared of remaining
material in June 2003. Due to the ongoing status of the waste removal effort and
related preparation for sale, the cost estimate for exit from the segment may
change, potentially by a material amount.
LITIGATION
The Company is involved in litigation requiring estimates of timing and loss
potential whose timing and ultimate disposition is controlled by the judicial
process. During the quarter ended March 31, 2003, the Company wrote off
$20,951,000 due to an adverse court decision, which cast substantial doubt on
the Company's ability to recover its investment in the Ward Valley project. The
decision to accrue costs or write off assets is based upon the specific facts
and circumstances pertaining to each case and management's evaluation of present
circumstances.
INCOME TAXES
The Company has historically recorded a valuation allowance against its deferred
tax assets in accordance with FAS 109, Accounting for Income Taxes. This past
valuation allowance reflected management's belief that due to a history of tax
losses and the previously weak financial condition and prospects for the
business, it was more likely than not that the Company would not utilize
portions of the deferred tax assets prior to their expiration. The valuation
allowance is based on management's contemporaneous evaluation of whether it is
more likely than not that the Company will be able to utilize some, or all of
the deferred tax assets. During 2002, the Company assessed the valuation
allowance and reversed approximately $8,284,000 of the valuation allowance that
the Company expected to utilize in the foreseeable future. During the three
months ended March 31, 2003, the Company reclassified the entire net deferred
tax asset as long term, given that no taxable income is expected during 2003 due
to the impact of the write off of the Ward Valley Project.
PROJECT ACCOUNTING
The Company has performed relatively large, fixed fee and long-duration
remediation projects through the Company's discontinued Oak Ridge Field Services
Division. Securing contracts to perform work required the Company to make
assumptions regarding job duration, percentage of completion for waste
processing, and disposal costs that would not be known until the actual project
is complete. Differences between estimated and actual cost to remove, process
and arrange final disposal of contaminated material can vary widely, resulting
in potentially significant changes in individual project profit or loss. As of
March 31, 2003, one major project is awaiting completion. Changes in the
estimated cost to complete may positively or negatively impact the results of
discontinued operations.
RESULTS OF OPERATIONS
- -----------------------
19
The following table presents, for the periods indicated, the percentage of
operating line items in the consolidated income statement to revenues:
Three Months Ended
-----------------------------------------
($in 000's) March 31, 2003 March 31, 2002
-------------------- -------------------
$ % $ %
----------- ------- -------- ---------
Revenue 10,771 13,424
Direct operating costs 5,984 55.6% 6,175 46.0%
----------- --------
Gross profits 4,787 44.4% 7,249 54.0%
SG & A 4,497 41.8% 3,541 26.4%
----------- --------
Income from operations 290 2.7% 3,708 27.6%
Investment income -- --% 11 0.1%
Interest expense 121 1.1% 265 2.0%
Write off of Ward Valley 20,951 194.5% -- --%
Other income (expense) -- --% (465) -3.5%
----------- --------
Net income (loss) before income tax, discontinued
operations and cumulative effect of accounting change (20,782) -192.9% 2,989 22.3%
Income tax expense (benefit) (8) -0.1% -- --%
----------- --------
Net income (loss) before discontinued operations and
cumulative effect of accounting change (20,774) -192.9% 2,989 22.3%
Discontinued operations - El Centro Landfill 4,944 45.9% 190 1.4%
Discontinued operations - Oak Ridge LLRW Facility (1,337) -12.4% (401) 3.0%
Cumulative effect of accounting change -- --% 13,141 97.9%
----------- --------
Net income (loss) (17,167) -159.4% 15,919 118.6%
Preferred stock dividends 64 0.6% 98 0.7%
----------- --------
Net income available to common shareholders (17,231) -160% 15,821 117.9%
=========== ========
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2003 AND 2002
- -----------------------------------------------------------------
REVENUE
- -------
For the three months ended March 31, 2003, the Company reported consolidated
revenue of $10,771,000, a 20% decrease from the $13,424,000 reported for the
same period in 2002. During the three months ending March 31, 2003 and 2002,
$4,156,000 and 6,129,000 or 39% and 47% of revenue, respectively, represented
work performed under contract with the U.S. Army Corps of Engineers. The Corps
of Engineers and other federal agencies continue to ship waste to the Company's
Grand View, Idaho treatment and disposal facility under contract. During the
three months ending March 31, 2003, 10% of revenue represented work performed
for Nucor Steel Company.
Operating Disposal Facilities
- -------------------------------
The Richland, Washington LLRW disposal facility's revenue decreased $3,208,000
for the three months ended March 31, 2003 from the same period in 2002. The
decrease in revenue was primarily due to a stand alone $3,850,000 project
performed for the Army Corps of Engineers during the first quarter of 2002,
which was not replaced by a like project in 2003. While a significant portion of
the Richland facility's revenue is fixed due to its regulation as a monopoly,
during the fourth quarter of 2002 the Company hired an experienced salesperson
20
to improve unregulated revenues at the site. Higher unregulated revenues are
expected in the second quarter of 2003.
At the Grand View, Idaho disposal facility, revenue increased $1,142,000 or 24%
from the same period last year. During the first quarter, the facility disposed
of 78,000 tons of material, with a large percentage representing usage under the
Army Corps of Engineers contract. It is expected that the Army Corps of
Engineers and other federal agencies will continue to ship significant volumes
of material to the facility throughout 2003.
In the three months ending March 31, 2003, revenue at the Beatty, Nevada
disposal facility was $197,000 higher than the same quarter of 2002, primarily
due to increased throughput of thermal processing material. In the first quarter
of 2002, the Company experienced problems with the thermal processing units and
entered into an incentive-driven operating agreement with the thermal equipment
manufacturer that, combined with enhanced marketing, has produced increased
throughput. Increased thermal treatment volumes offset a decline in direct
disposal volume and revenue due to general economic weakness, resulting in
improved revenue for the quarter ending March 31, 2003.
At the Robstown, Texas hazardous treatment and disposal facility, revenue
decreased $720,000 for the three months ended March 31, 2003 from the same
period in 2002. The decrease in revenue was primarily due to reduced "Event"
business. General economic weakness was also a factor. The Company continues its
efforts to increase revenue and throughput at this facility, primarily focusing
on the site management, operational improvements and focused sales efforts.
Revenue is not expected to increase significantly, however, until the economy
improves.
DIRECT OPERATING COSTS
- ------------------------
For the three months ended March 31, 2003, consolidated direct operating costs
decreased 3% to $5,984,000 (56% of revenue) compared to $6,175,000 (46% of
revenue) in the same period in 2002. The relatively higher direct operating
costs largely reflect the high fixed cost nature of the disposal business
(direct costs do not materially vary due to revenue).
Operating Disposal Facilities
- -------------------------------
An increase in direct operating costs at the Beatty, Nevada disposal facility
during the three months ended March 31, 2003 was offset by lower direct
operating costs at the Grand View, Idaho and Robstown, Texas facilities. Direct
cost at the Richland facility remained flat. The increase in direct operating
costs at Beatty was due to increased volumes of waste processed and disposed of,
including elimination of a significant backlog of difficult to treat waste that
had accumulated over time. It is expected that direct costs at the Beatty
facility will decrease in the second quarter.
Non Operating Disposal Facilities
- ------------------------------------
Non Operating Disposal Facilities incur primarily legal and consulting costs
required to maintain licenses and labor costs required to safely close and
maintain the facilities subsequent to operational use. For the three months
ended March 31, 2003 and 2002, the Company reported $0 and $187,000 of expenses
related to licensing facilities for initial use and $99,000 and $118,000 of
costs in 2003 and 2002 to close or maintain facilities subsequent to use.
SELLING, GENERAL AND ADMINISTRATIVE COSTS (SG&A)
- -----------------------------------------------------
For the three months ended March 31, 2003, the Company reported SG&A of
$4,497,000 (42% of revenue), a 27% increase from the $3,541,000 (26% of revenue)
for the same three months of 2002. The increase in SG&A is a direct result of
$1,353,000 increase in legal and expert witness fees associated with the
recently concluded Ward Valley trial.
Operating Disposal Facilities
- -------------------------------
At the Richland, Washington LLRW disposal facility, SG&A decreased $931,000
during the three months ended March 31, 2003. The decrease is primarily due to a
$3,850,000 project performed for the Army Corps of Engineers in the first
quarter of 2002 for which the Company incurred $870,000 of site use taxes. This
did not recur in 2003.
21
At the Beatty, Nevada disposal facility, SG&A increased $146,000 during the
three months ended March 31, 2003. The increase is due to increased operational
costs. Management expects lower SG&A in the second quarter.
The remaining Operating Disposal Facilities maintained SG&A at approximately
2002 levels. Similar to direct costs, this highlights the fact that the
majority of facility costs are fixed costs.
Non Operating Disposal Facilities
- ------------------------------------
Non Operating Disposal Facilities incur primarily legal and consulting costs
required to maintain the Company's legal rights to facilities prior to initial
operation, or to manage liabilities at facilities subsequent to operational use.
For the three months ended March 31, 2003 and 2002, the Company reported
$1,498,000 and $80,000 of SG&A expenses at Non Operating Disposal Facilities
with substantially all of the 2003 expenses being legal costs associated with
the Ward Valley litigation.
Corporate
- ---------
While management continues to focus on cost containment, new investment is being
made in information system infrastructure and upgraded staffing. Beginning in
July 2002, the Company launched an initiative to materially upgrade its
production and financial information systems. On May 6, 2003, the Company
implemented this new information systems upgrade at two of its hazardous waste
treatment and disposal facilities. During the last few months, the Company has
taken action to centralize its accounting function, which is now complete.
Management believes that full implementation of an enhanced information system
platform and centralized accounting will increase operational efficiency and
improve the availability and timeliness of financial and management information.
Approximately $150,000 to $200,000 of these costs were incurred and expensed in
2002 with another $100,000 incurred and expensed during the first quarter of
2003. The Company expects to continue to invest in information systems upgrades
for the balance of the year, although at a lower rate.
INVESTMENT INCOME
- ------------------
For the three months ended March 31, 2003, the Company did not earn any
investment income. Investment income is earnings on cash balances, restricted
investments, and notes receivable of which the Company traditionally maintains
minimal amounts and are a function of prevailing market rates. The Company
received approximately $10,000,000 from the February 13, 2003 sale of the El
Centro municipal waste landfill. This cash was utilized to support operations,
for capital expenditures and to fund the retirement of Series D Preferred Stock
and accrued dividends. The balance was maintained in very short term investments
and did not earn any net investment income. Due to decreasing cash balances and
low interest rates, the Company does not anticipate significant investment
income.
INTEREST EXPENSE
- -----------------
For the three months ended March 31, 2003, the Company reported interest expense
of $121,000, or a decrease of $144,000 from the corresponding period in 2002.
The primary cause of this decrease is the refinancing of the $8,500,000
industrial revenue bond ("IRB") for the Grand View, Idaho facility, which bore
an interest rate of 8.25%. The IRB was substantially refinanced on November 1,
2002 with a $7,000,000, five year, fully amortizing term loan from the Company's
primary lender, Wells Fargo Bank. The term loan provides for a variable interest
rate of the bank's prime rate or an offshore rate plus an applicable margin that
is based upon the Company's performance. For the quarter ended March 31, 2003,
the interest rate paid on the majority of the outstanding term loan was 3.7%.
Additional reductions in interest expense are attributable to management's
initiative to retire high cost debt, with no new debt being incurred other than
periodic borrowings under the line of credit.
OTHER INCOME (LOSS)
- ---------------------
Other Income is composed of the following ($ in thousands):
22
Three Months Ended March 31,
---------------------------------
2003 2002
---------------- ---------------
Litigation accrual related to GM settlement $ -- $ (740)
Payment received on National Union settlement -- 250
Insurance claim refunds -- 25
Other miscellaneous income, net -- --
---------------- ---------------
Total other income (loss) $ -- $ (465)
================ ===============
INCOME TAXES
- ------------
The components of the income tax provision (benefit) were as follows (in
thousands):
Three Months Ended March 31,
---------------- -------------
2003 2002
---------------- -------------
State tax expense (benefit) (8) --
================ =============
The tax effects of temporary differences between income for financial reporting
and taxes give rise to deferred tax assets and liabilities. The Company has
historically recorded a valuation allowance for certain deferred tax assets due
to uncertainties regarding future operating results and for limitations on
utilization of acquired net operating loss carry forwards for tax purposes. The
potential realization of a significant portion of net deferred tax assets is
based in part on the Company's estimates of the timing of reversals of certain
temporary differences and on the generation of taxable income before such
reversals. In 2002, the Company reevaluated the deferred tax asset valuation
allowance, determined it was then "more likely than not" that a portion of the
deferred tax asset would be realizable, and decreased the portion of the
valuation allowance related to its operating facilities.
During the quarter ended March 31, 2003, the Company wrote off its $20,951,000
of Ward Valley asset. This large write off virtually assures the Company of a
tax loss in 2003. Due to this expected loss, the $8,284,000 net deferred tax
asset has been classified as long term. Management expects to realize a portion
of this asset in 2004.
The net operating loss carry forward is approximately $48,000,000 at March 31,
2003. Of this carry forward, approximately $2,745,000 is limited pursuant to the
net operating loss limitation rules of Internal Revenue Code Section 382 and
begins to expire in 2006. The remaining unrestricted net operating loss carry
forward expires at various dates between 2010 and 2020.
SEASONAL EFFECTS
- -----------------
Operating revenues are generally lower in the winter months than the warmer
summer months when short duration, one-time remediation projects tend to occur.
However, both disposal and processing revenue are more affected by market
conditions than seasonality.
CAPITAL RESOURCES AND LIQUIDITY
- ----------------------------------
On March 31, 2003, cash and cash equivalents totaled $7,134,000, an increase of
$6,999,000 from December 31, 2002. The increase in cash was primarily due to the
sale of El Centro for $10,000,000 in cash. The Company expects significant
reductions in cash balances during the remainder of 2003 as cash is utilized for
new disposal cell construction at its Grand View, Idaho facility and disposal of
waste removed from the Oak Ridge, Tennessee facility. Also, in September of
2003, the Company's primary financial assurance insurance for its hazardous
waste disposal facilities expires. It is expected that the cost and cash
collateral requirements of this insurance will increase. Depending upon
collateral requirements, the new insurance terms could have a material, adverse
impact on the Company's cash position.
On February 28, 2003, the Company repurchased all 100,001 shares of Series D
Preferred Stock outstanding for a net cash outflow of $2,800,000 after netting
out proceeds of $3,525,000 in cash received from the issuance of 2,350,000
common shares issued upon exercise of the Series E Warrants. Repurchase of the
Series D Preferred Stock eliminated an 8 3/8% debt instrument due to the
23
preferred stockholders and removed the potential dilution that the conversion of
these shares would have had on common stockholders. In addition to regularly
scheduled debt payments, the Company early retired $548,000 of relatively high
cost debt in the first three months of 2003 as well as the retirement of an
additional $658,000 of debt secured by equipment included in the sale of El
Centro. These preferred stock and debt reduction actions reflect management
initiatives to improve the Company's balance sheet and maximize asset
utilization.
On March 28, 2003 the Company exercised an early buyout of the operating lease
for $1,159,000 and recorded equipment purchases with a book value of $702,000
along with a reduction in the deferred gain of $457,000. In conjunction with the
early buyout, the Company recorded an impairment charge of $225,000 on certain
equipment utilized at the discontinued Oak Ridge facility which was included in
the early buyout.
The early lease buyout accomplished three objectives. The primary objective was
the repayment to Wells Fargo Bank of at least $500,000, which was required by
the Bank as a condition for approving the repurchase of the Series D Preferred
Stock. In addition, the Company cleared title to leased equipment at the Oak
Ridge facility to support ongoing efforts to sell the facility. Lastly, buyout
of the operating lease eliminated an expensive source of capital, improving the
Company's overall cost of capital.
During the first three months of 2003, the Company's "days sales outstanding"
decreased to 66 days at March 31, 2003, compared to 77 days at December 31, 2002
due in large part to the Company's focus on improving cash flow. Continued
improvements in cash and receivable balances are a priority objective for 2003.
As of March 31, 2003 the Company's liquidity, as measured by the current ratio,
decreased to 1.2 to 1.0 from 1.5 to 1.0 at December 31, 2002. Likewise, the
Company's reported working capital decreased to $3,731,000 at March 31, 2003
from $8,087,000 on December 31, 2002. The primary reasons for the decrease in
working capital were the repurchase of the Series D Preferred Stock, which
resulted in a net cash outflow of $2,800,000, the retirement of debt, and
$2,277,000 in capital expenditures from cash in the quarter.
Since December 31, 2002, the Company's leverage has increased, as evidenced by
debt to equity ratio of 1.3:1.0 at March 31, 2003, compared to 0.9:1.0 at fiscal
year-end 2002. The debt to equity ratio is defined as total debt divided by
shareholders equity. This increase in the Company's leverage is principally the
result of the $20,951,000 write off of the Ward Valley asset.
On September 30, 2002, the Company had in place a $6,000,000 revolving line of
credit with Wells Fargo Bank in Boise, Idaho maturing June 15, 2004. The line of
credit is secured by the Company's accounts receivable. At March 31, 2003 and
December 31, 2002, the outstanding balance on the revolving line of credit was
$0 and $603,000, respectively. The Company borrows and repays according to
business demands and availability of cash and currently reserves $1,150,000 of
the revolving line of credit as a letter of credit used as collateral for an
insurance policy.
Management estimates capital expenditure needs for 2003 of approximately
$9,200,000. Along with the normal replacement of aging assets, a $4,500,000
expansion of disposal capacity at the Grand View, Idaho facility is currently
underway.
The Company's Oak Ridge facility continues to use several hundred thousand
dollars a month of cash. Usage of cash is expected to increase as waste shipped
off site is disposed of and billed. At March 31, 2003, the Company's Oak Ridge
facility had liabilities expected to be paid in 2003 of $5,400,000, or
approximately $600,000 a month.
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.
24
The Company has minimal interest rate risk on investments or other assets as the
amount held is traditionally the minimum requirement imposed by insurance or
government agencies. At March 31, 2003, $244,000 is held in short term pledged
investment accounts and $740,000 in tax refunds is due from the Federal
Government. Together these items earn interest at approximately 5%, and
comprise 1.5% of assets. An additional $6,500,000 is held in short term
investments with the majority expected to be utilized by the Company in 2003 for
scheduled capital expenditures and payment of accrued liabilities.
The Company does have interest rate risk on debt instruments. On October 28,
2002, the Company substantially refinanced the 8.25% fixed rate $8,500,000
Industrial Revenue Bond with a $7,000,000 five year term loan from the
Company's primary lender. The term loan provides for a variable interest rate of
the bank's prime rate or an offshore rate plus an applicable margin that is
based upon the Company's performance. At March 31, 2003 the interest rate
incurred by the Company was 3.7% on the outstanding term loan balance of
$6,533,000.
ITEM 4. CONTROLS AND PROCEDURES.
(a) Within the 90 day period prior to the filing of this report, Company
management, under the direction of the Chief Executive Officer and Chief
Financial Officer, carried out an evaluation of the effectiveness of the design
and operation of the Company's disclosure controls and procedures pursuant to
Rule 13a-14 of the Securities Exchange Act of 1934 (Exchange Act). Based upon
that evaluation, the Chief Executive Officer and Chief Financial Officer believe
that the Company's disclosure controls and procedures are effective in timely
alerting them to material information required to be disclosed in the Company's
Exchange Act filings.
(b) The Company maintains a system of internal controls that are designed to
provide reasonable assurance that its records and filings accurately reflect the
transactions engaged in. For the quarter ending March 31, 2003, there were no
significant changes to internal controls or in other factors that could
significantly affect these internal controls.
PART II OTHER INFORMATION.
- -----------------------------
ITEM 1. LEGAL PROCEEDINGS.
Significant developments have occurred on the following legal matters since
December 31, 2002:
US ECOLOGY, INC. V. THE STATE OF CALIFORNIA, ET AL., CASE NO.GIC747562, SUPERIOR
- ---------------------------------------------------
COURT OF THE STATE OF CALIFORNIA FOR THE COUNTY OF SAN DIEGO
In May 2000, the Company's subsidiary, US Ecology, Inc., sued the State of
California, its Governor, Gray Davis, and the Director of its Department of
Health Services (DHS) and other State entities ("the State") for monetary
damages exceeding $162 million. The suit stems from the State's abandonment of
the Ward Valley low-level radioactive waste ("LLRW") disposal project.
California law requires the state to build a disposal site for LLRW produced in
California, Arizona, North Dakota and South Dakota; member states of the
Southwestern Compact. US Ecology was selected in 1985 to locate and license the
site using its own funds on a reimbursable basis. In 1993, US Ecology obtained a
license from the DHS and entered a ground lease.
The State successfully defended the license against court challenges and, until
Governor Davis took office, actively pursued conveyance of the site from the
federal government. In September 2000, the Superior Court granted California's
motion to dismiss all causes of action, which the Company appealed. In September
2001, the California Court of Appeal Fourth Appellate District Appellate Court
upheld the trial court's decision in part and denied it in part, remanding the
case for trial based on the Company's promissory estoppel claim. The case was
tried in Superior Court for the County of San Diego in February and March 2003.
On March 26, 2003, Superior Court Judge E. Mac Amos, Jr. issued a Statement of
Decision finding that the Company failed to establish causation and that its
claim is further barred by the doctrine of unclean hands. The unclean hands
finding was based on actions the Court concluded had created obstacles to an
agreement between the federal government and the State to convey the Ward Valley
property to the State. The Court also found, however, that certain elements of
the Company's promissory estoppel claim had been established. Specifically, the
Court ruled that the State made a clear and unambiguous promise to US Ecology in
1988 to use its best efforts to acquire the Ward Valley site, that the State
25
subsequently abandoned this promise during Governor Davis' administration, and
that the Company's reliance on the State's promise was reasonable and
foreseeable. However, the Court found that the State's breach of its best
efforts promise was not a substantial factor in causing damages to US Ecology
since the federal government had continued to resist the land transfer.
On May 2, 2003, the Company filed a Motion to Vacate with the trial court based
on advice of counsel that the March 26 decision had misapplied the facts of the
case to the law with respect to both the adverse causation and unclean hands
findings. The Company will await a ruling on this motion before determining
whether or not to pursue an appeal to the California Fourth Appellate District
Court.
Based on the trial court's decision, management is no longer certain the
Company's investment in the Ward Valley project can be recovered. As a result,
the Company has written off the $20.951,000 deferred site development asset
previously reflected on its balance sheet.
MANCHAK V. US ECOLOGY, INC., U.S. DISTRICT COURT FOR THE DISTRICT OF NEVADA,
- -------------------------------
CIVIL ACTION NO. 96-494.
In March 1996, Frank Manchak, Jr. ("Plaintiff" or "Manchak") filed suit alleging
infringement of a sludge treatment patent to stabilize hazardous waste at the
Company's Beatty, Nevada hazardous waste disposal facility. Plaintiff seeks
unspecified damages for infringement, treble damages, interest, costs and
attorney fees. On October 17, 2002, the US District Court for the District of
Nevada granted the Company's motion for summary judgment to dismiss the suit.
Manchak's motion for reconsideration was denied on January 8, 2003. Manchak
appealed, however, plaintiff appears to have failed to timely file an
appellant's brief and the Company moved to dismiss the appeal. The Company's
motion to dismiss is pending. In January 2003, the Company filed a motion to
recover legal fees and expenses. This motion was denied, which the Company is
considering appealing. The Company does not believe it infringed any Manchak
patent and will continue to vigorously defend the case.
ENTERGY ARKANSAS, INC., ET AL, CENTRAL INTERSTATE LOW-LEVEL RADIOACTIVE WASTE
- --------------------------------------------------------------------------------
COMMISSION AND US ECOLOGY, INC. ("PLAINTIFFS") V. STATE OF NEBRASKA, ET AL.,
- ------------------------------------------------------------------------------
CASE NO. 4:98CV3411, U.S. DISTRICT COURT, DISTRICT OF NEBRASKA
This action was brought in federal court in December of 1999 by electric
utilities that generate low-level radioactive waste ("LLRW") within the Central
Interstate Low-Level Radioactive Waste Compact (CIC). CIC member states are
Nebraska, Kansas, Oklahoma, Arkansas, and Louisiana. The action seeks
declaratory relief and damages for bad faith in the State of Nebraska's
processing and ultimate denial of US Ecology's application to site, develop and
operate a LLRW disposal facility near Butte, Nebraska. US Ecology is the CIC's
contractor and developer. The CIC was originally named as a defendant and
subsequently realigned as a plaintiff. US Ecology intervened as a plaintiff.
The CIC sought to recover contributions made by the utilities and US Ecology to
the CIC for pre-licensing project costs in the approximate amounts of $95
million and $6.2 million, respectively, and removal of the State of Nebraska
from the licensing process. The Eighth Circuit Court of Appeals subsequently
dismissed the utilities' and US Ecology's independent claims against Nebraska
for breach of the good faith provision of the Compact, and for denial of due
process based on sovereign immunity. The utilities and US Ecology subsequently
filed cross claims against the CIC for breach of contract and the imposition of
a constructive trust.
On September 30, 2002, the US District Court for the District of Nebraska
entered judgment against Nebraska in favor of the CIC for $153 million,
including approximately $50 million for prejudgment interest. Of this amount,
US Ecology's share was for a $6.2 million contribution and $6.1 for prejudgment
interest. The $6.2 million contribution in included within the balance sheet as
capitalized facility development costs. The Court also dismissed the utilities'
and US Ecology's cross claims for breach of contract and imposition of a
constructive trust, finding that it was premature to decide the merits of these
claims and leaving the question open for future resolution if necessary. The
State appealed the judgment to the Eighth Circuit Court of Appeals. It is
currently expected that the case will be argued in the fall of 2003 with an
appeals court decision around the end of 2003. No assurance can be given that
the trial court's decision will be affirmed on appeal or that US Ecology will
recover its contributions or interest thereon.
MATTIE CUBA, ET AL. V. AMERICAN ECOLOGY ENVIRONMENTAL SERVICES CORPORATION, ET
- --------------------------------------------------------------------------------
AL.,CAUSE NO. 2000-092, 4TH JUDICIAL DISTRICT COURT, RUSK COUNTY, TEXAS
- ---
26
This suit was brought in November 2000 by 28 named plaintiffs against the
Company and named subsidiaries, the former owners and approximately 60 former
customers of its Winona, Texas facility. Plaintiffs seek recovery for personal
injuries, property damages and exemplary damages based on negligence, gross
negligence, nuisance and trespass. The Company filed a motion for summary
judgment in July 2002 based on lack of evidence. In November 2002, the trial
court granted partial summary judgment, dismissing certain causes of action and
reducing the number of plaintiffs, but preserving other causes of action. The
Company subsequently filed a motion for summary judgment seeking dismissal
against all of the adult plaintiffs on statute of limitations grounds. On March
26, 2003 the court granted this motion and dismissed the adult plaintiffs.
Seven minors and an intervenor remain party to the lawsuit. The Company believes
plaintiffs' remaining case is without merit and will continue to vigorously
defend the matter. No assurance can be given that the Company will prevail or
that the matter can be favorably resolved. The Company's current insurance
carrier is paying for defense of this matter subject to the Company's $250,000
deductible, which has been fully accrued.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On February 28, 2003, the Company repurchased all 100,001 shares of Series D
Preferred Stock for the original sales price of $47.50 a share plus accrued but
unpaid dividends of $16.56 a share. A total of $6,406,000 was paid in order to
complete the repurchase.
During February, 2003, three remaining Series E warrant holders exercised
2,350,000 Series E warrants with an exercise price of $1.50 per share.
Consequently, the Company issued 2,350,000 shares of common stock and received
$3,525,000 in cash. At March 31, 2003 there were no Series E warrants
outstanding.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
On January 28, 2003, John M. Couzens resigned from the Board of Directors.
On February 17, 2003, the Board of Directors appointed David B. Anderson to the
Board of Directors. Mr. Anderson is a Principal at Lochborn Partners LLC, in
Chicago, Illinois. He has held senior executive positions with GATX Corporation
and Inland Steel Industries. An attorney, Mr. Anderson has extensive experience
in corporate strategy, compliance, acquisitions, and business development.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are filed as part of this report:
Exhibit 99.1 Certification of March 31, 2003 Form 10-Q by Chief Executive
Officer dated May 12, 2003
Exhibit 99.2 Certification of March 31, 2003 Form 10-Q by Chief Financial
Officer dated May 12, 2003
Exhibit 99.3 Certification of March 31, 2003 Form 10-Q by Chief Executive
Officer dated May 12, 2003
Exhibit 99.4 Certification of March 31, 2003 Form 10-Q by Chief Financial
Officer dated May 12, 2003
(b) Reports on Form 8-K.
On February 13, 2003, the Company issued an 8-K to announce that
its wholly owned subsidiary, Texas Ecologists, Inc. sold the El
Centro municipal waste landfill in Robstown, Texas to a
subsidiary of Allied Waste Industries, Inc.
27
On February 28, 2003 the Company issued an 8-K to announce that
it exercised its right to repurchase the Series D Preferred Stock
and utilized $4,670,000 of available cash in order to complete
the repurchase.
On March 28, 2003, the Company issued an 8-K to announce that its
wholly owned subsidiary, US Ecology, Inc., has received an
adverse judgment in the case styled US Ecology, Inc. v. The State
of California, et al.
On April 28, 2003, the Company issued an 8-K to announce first
quarter 2003 earnings.
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN ECOLOGY CORPORATION
(Registrant)
Date: May 12, 2003 By: /s/ Stephen A. Romano
-----------------------------------
Stephen A. Romano
President, Chief Executive Officer
and Chief Operating Officer
Date: May 12, 2003 By: /s/ James R. Baumgardner
-----------------------------------
James R. Baumgardner
Senior Vice President, Chief
Financial Officer, Secretary and
Treasurer
28
EXHIBIT INDEX
Exhibit Description
- ------- -----------
Exhibit 99.1 Certification of March 31, 2003 Form 10-Q by Chief Executive
Officer dated May 12, 2003
Exhibit 99.2 Certification of March 31, 2003 Form 10-Q by Chief Financial
Officer dated May 12, 2003
Exhibit 99.3 Certification of March 31, 2003 Form 10-Q by Chief Executive
Officer dated May 12, 2003
Exhibit 99.4 Certification of March 31, 2003 Form 10-Q by Chief Financial
Officer dated May 12, 2003
29