UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended June 30, 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 August 8, 2003 Registrant had outstanding 16,965,748 shares of its Common
Stock.
AMERICAN ECOLOGY CORPORATION
QUARTERLY REPORT ON FORM 10-Q FOR THE
THREE MONTHS ENDED JUNE 30, 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
Stephen M. Schutt
Vice President
Nuclear Fuel Services, Inc.
CORPORATE OFFICE
- ----------------
Lakepointe Centre I
American Ecology Corporation
300 East Mallard Drive, Suite 300
Boise, Idaho 83706
(208) 331-8400
(208) 331-7900 (fax)
www.americanecology.com
- -----------------------
COMMON STOCK
- ------------
American Ecology Corporation's common stock trades on the Nasdaq National Market
under the symbol ECOL.
FINANCIAL REPORTS
- -----------------
A copy of American Ecology Corporation Annual and Quarterly Reports, as filed on
Form 10-K and 10-Q with the Securities and Exchange Commission, may be obtained
by writing:
Lakepointe Centre I
300 E. Mallard, Suite 300
Boise, Idaho 83706
or at www.americanecology.com
-----------------------
TRANSFER AGENT
- --------------
Mellon Investor Services LLC
Overpeck Centre
85 Challenger Road
Ridgefield Park, New Jersey 07660
(201) 296-4000
or at www.mellon-investor.com
-----------------------
AUDITOR
- -------
Moss Adams LLP
1001 Fourth Avenue, Suite 2900
Seattle, WA 98154
3
PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS.
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
($ IN 000'S EXCEPT PER SHARE AMOUNTS)
June 30, 2003 December 31, 2002
--------------- -------------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 4,750 $ 135
Receivables, net 9,167 10,460
Income taxes receivable 740 740
Prepayments and other 659 498
Deferred income taxes -- 2,745
Assets held for sale or closure 4,068 10,722
--------------- -------------------
Total current assets 19,384 25,300
Cash and investment securities, pledged 244 244
Property and equipment, net 27,434 26,998
Facility development costs 6,478 27,430
Deferred income taxes 8,284 5,539
Other assets 59 129
Assets held for sale or closure 2,239 1,485
--------------- -------------------
Total Assets $ 64,122 $ 87,125
=============== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long term debt $ 1,455 $ 1,985
Accounts payable 2,697 2,192
Accrued liabilities 3,722 4,166
Accrued closure and post closure obligation, current portion 882 882
Income taxes payable 19 23
Current liabilities of assets held for sale or closure 5,322 7,965
--------------- -------------------
Total current liabilities 14,097 17,213
Revolving line of credit -- 603
Long term accrued liabilities 521 2,372
Long term debt 4,810 5,972
Accrued closure and post closure obligation, excluding current portion 9,479 9,318
Liabilities of assets held for sale or closure, excluding current portion 5,571 5,699
--------------- -------------------
Total liabilities 34,478 41,177
--------------- -------------------
Commitments and contingencies
Stockholders' 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, 16,965,748
and 14,539,264 shares issued and outstanding 170 145
Additional paid-in capital 54,679 55,789
Accumulated deficit (25,205) (9,987)
--------------- -------------------
Total stockholders' equity 29,644 45,948
--------------- -------------------
Total Liabilities and Stockholders' Equity $ 64,122 $ 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 June 30, Six Months Ended June 30,
2003 2002 2003 2002
----------------- -------------- --------------- --------------
(Restated) (Restated)
Revenue $ 12,020 $ 10,605 $ 22,791 $ 24,029
Direct operating costs 6,056 5,841 12,040 12,016
----------------- -------------- --------------- --------------
Gross profit 5,964 4,764 10,751 12,013
Selling, general and administrative expenses 3,289 2,207 7,786 5,748
----------------- -------------- --------------- --------------
Income from operations 2,675 2,557 2,965 6,265
Investment income 22 16 22 27
Interest expense 38 243 159 508
Loss on write off of Ward Valley facility development costs -- -- 20,951 --
Other income (loss) 93 140 93 (325)
----------------- -------------- --------------- --------------
Net income (loss) before income tax, discontinued operations,
and cumulative effect of change in accounting principal 2,752 2,470 (18,030) 5,459
Income tax expense 63 -- 55 --
----------------- -------------- --------------- --------------
Net income (loss) before discontinued operations and
cumulative effect of change in accounting principal 2,689 2,470 (18,085) 5,459
Gain from discontinued operations - El Centro Landfill 16 34 4,960 224
(Loss) from discontinued operations -
Oak Ridge LLRW Facility (692) (303) (2,029) (704)
----------------- -------------- --------------- --------------
Net Income (loss) before cumulative effect of change in
accounting principle 2,013 2,201 (15,154) 4,979
Cumulative effect of change in accounting principle -- -- -- 13,141
----------------- -------------- --------------- --------------
Net income (loss) 2,013 2,201 (15,154) 18,120
Preferred stock dividends -- 99 64 197
----------------- -------------- --------------- --------------
Net income (loss) available to common shareholders $ 2,013 $ 2,102 $ (15,218) $ 17,923
================= ============== =============== ==============
Basic earnings (loss) from continuing operations .16 .16 (1.12) .37
Basic earnings (loss) from discontinued operations (.04) (.02) .18 (.03)
Basic earnings from cumulative effect of
accounting change -- -- -- .93
----------------- -------------- --------------- --------------
Basic earnings (loss) per share $ .12 $ .14 $ (.94) $ 1.27
================= ============== =============== ==============
Diluted earnings (loss) from continuing operations .15 .14 (1.12) .33
Diluted earnings (loss) from discontinued operations (.04) (.02) .18 (.03)
Diluted earnings from cumulative effect of
accounting change -- -- -- .84
----------------- -------------- --------------- --------------
Diluted earnings (loss) per share $ .11 $ .12 $ (.94) $ 1.14
================= ============== =============== ==============
Dividends paid per common share $ -- $ -- $ -- $ --
================= ============== =============== ==============
See notes to consolidated financial statements.
5
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, $ IN 000'S)
Six Months Ended June 30,
-------------------------------
2003 2002
-------------- ---------------
Cash flows from operating activities: (Restated)
Net income (loss) $ (15,154) $ 18,120
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation, amortization and accretion 3,704 2,993
(Income) loss from discontinued operations (2,931) 480
Cumulative effect of change in accounting principle -- (13,141)
Write off of Ward Valley project 20,951 --
Changes in assets and liabilities:
Receivables 1,351 (37)
Other assets (161) (625)
Accounts payable and accrued liabilities (198) (3,357)
Closure and post closure obligation (449) (535)
Income taxes payable (4) (60)
-------------- ---------------
Net cash provided by operating activities 7,110 3,838
Cash flows from investing activities:
Capital expenditures (3,151) (1,750)
-------------- ---------------
Net cash used by investing activities (3,151) (1,750)
Cash flows from financing activities:
Payments of indebtedness (2,295) (5,503)
Retirement of series D preferred stock (6,406) --
Stock options and warrants exercised 3,664 999
-------------- ---------------
Net cash provided by (used in) financing activities (5,037) 145
-------------- ---------------
Decrease in cash and cash equivalents (1,078) (2,416)
Net cash provided by (used in) discontinued operations 5,693 (1,334)
Cash and cash equivalents at beginning of period 135 4,217
-------------- ---------------
Cash and cash equivalents at end of period $ 4,750 $ 467
============== ===============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 159 $ 508
Income taxes paid 59 5
Non-cash investing and financing activities:
Stock issuance-director's compensation 23 --
Preferred stock dividends accrued -- 197
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 Annual Report on Form 10-K for
the year ended December 31, 2002, filed with the Securities and Exchange
Commission.
The previously reported 2002 quarterly information has been restated, see Note
9.
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
stockholders and the weighted average number of common shares outstanding during
the quarter. Diluted earnings per share reflect the assumed issuance of common
shares for outstanding options and conversion of warrants. The computation of
diluted earnings per share does not assume exercise or conversion of securities
whose exercise price is greater than the average common share market price as
the assumed conversion of these securities would increase earnings per share.
The computation of diluted loss per share does not assume exercise or conversion
of any securities as the assumed conversion of securities would decrease loss
per share.
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- ----------------------
($in thousands except per share amounts) 2003 2002 2003 2002
------------ ----------- --------- -----------
(Restated) (Restated)
Income (loss) before discontinued operations and cumulative
effect of accounting change $ 2,689 $ 2,470 $(18,085) $ 5,459
Income (loss) from operations of discontinued segments (676) (269) 2,931 (480)
Cumulative effect of accounting change -- -- -- 13,141
------------ ----------- --------- -----------
Net income (loss) 2,013 2,201 (15,154) 18,120
Preferred stock dividends -- 99 64 197
------------ ----------- --------- -----------
Net income (loss) available to common shareholders $ 2,013 $ 2,102 $(15,218) $ 17,923
============ =========== ========= ===========
Weighted average shares outstanding-
Common shares 16,969 14,408 16,223 14,094
Effect of dilutive shares
Series E Warrants -- 1,238 -- 911
Chase Bank Warrants 629 711 -- 523
Stock Options 112 287 -- 201
------------ ----------- --------- -----------
Average shares 17,710 16,644 16,223 15,729
============ =========== ========= ===========
Basic earnings (loss) per share from continuing operations $ .16 $ .16 $ (1.12) $ .37
Basic earnings (loss) per share from discontinued operations (.04) (.02) .18 (.03)
Basic earnings per share from cumulative effect of accounting
change -- -- -- .93
------------ ----------- --------- -----------
Basic earnings (loss) per share $ .12 $ .14 $ (.94) $ 1.27
============ =========== ========= ===========
Diluted earnings (loss) per share from continuing operations $ .15 $ .14 $ (1.12) $ .33
Diluted earnings (loss) per share from discontinued operations (.04) (.02) .18 (.03)
Diluted earnings per share from cumulative effect of accounting
change -- -- -- .84
------------ ----------- --------- -----------
Diluted earnings (loss) per share $ .11 $ .12 $ (.94) $ 1.14
============ =========== ========= ===========
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 ("Series E 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 at 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.
There are 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.
In January 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, for a total payment of
$6,406,000.
NOTE 4. OPERATING SEGMENTS
The Company operates with two segments based on its internal reporting structure
and nature of services offered, Operating Disposal Facilities, and Non-Operating
Disposal Facilities. The Operating Disposal Facility segment represents
facilities accepting industrial, hazardous and radioactive waste. The
Non-Operating Disposal Facility segment includes facilities that are no longer
accepting waste, no longer owned by the Company, or represent new disposal site
development projects awaiting approval to accept waste.
On December 27, 2002, the Company discontinued commercial operations in its Low
Level Radioactive Waste ("LLRW") Processing and Field Services segment which
aggregated, volume-reduced, and performed remediation and other services on
radioactive material. All prior segment information has been restated in order
to present the operations at the Oak Ridge facility, including the Field
Services division, as discontinued operations.
Effective December 31, 2002, the Company classified the El Centro municipal
landfill as an asset held for sale due to the expected sale of the facility
which occurred on February 13, 2003. All prior segment information has been
restated in order to present the El Centro landfill as a discontinued operation.
Income taxes are assigned to Corporate, but all other items are included in the
segment where they originated. Inter-company transactions have been eliminated
from the segment information and are not significant between segments.
8
Summarized financial information concerning the Company's reportable segments is
shown in the following table ($ in thousands).
Operating Non-Operating Discontinued
Disposal Disposal Processing and
Facilities Facilities Field Services Corporate Total
THREE MONTHS ENDED JUNE 30, 2003
- --------------------------------
Revenue $ 11,969 $ 51 $ -- $ -- $ 12,020
Direct operating cost 5,929 127 -- -- 6,056
----------- --------------- ---------------- ----------- ---------
Gross profit (loss) 6,040 (76) -- -- 5,964
S,G&A 1,831 284 -- 1,174 3,289
----------- --------------- ---------------- ----------- ---------
Income (loss) from operations 4,209 (360) -- (1,174) 2,675
Interest -- -- -- 16 16
Other income 26 67 -- -- 93
----------- --------------- ---------------- ----------- ---------
Income (loss) before income tax
and discontinued operations 4,235 (293) -- (1,190) 2,752
Income tax expense -- -- -- 63 63
Discontinued operations 16 -- (692) -- (676)
----------- --------------- ---------------- ----------- ---------
Net Income (loss) 4,251 (293) (692) (1,253) 2,013
=========== =============== ================ =========== =========
Depreciation, amortization, and
accretion $ 1,990 $ 1 $ -- $ 9 $ 2,000
Capital Expenditures $ 1,427 $ -- $ -- $ -- $ 1,427
Total Assets $ 37,119 $ 6,546 $ 5,274 $ 15,183 $ 64,122
THREE MONTHS ENDED JUNE 30, 2002 (RESTATED)
- -------------------------------------------
Revenue $ 10,492 $ 113 $ -- $ -- $ 10,605
Direct operating cost 5,564 277 -- -- 5,841
----------- --------------- ---------------- ----------- ---------
Gross profit (loss) 4,928 (164) -- -- 4,764
S,G&A 1,442 (25) -- 790 2,207
----------- --------------- ---------------- ----------- ---------
Income (loss) from operations 3,486 (139) -- (790) 2,557
Interest (income) 231 -- -- (4) 227
Other income (expense) 10 3 -- 127 140
----------- --------------- ---------------- ----------- ---------
Income (loss) before discontinued
operations and cumulative effect of
change in accounting principle 3,265 (136) -- (659) 2,470
Discontinued operations 34 -- (303) -- (269)
----------- --------------- ---------------- ----------- ---------
Net Income (loss) $ 3,299 $ (136) $ (303) $ (659) $ 2,201
=========== =============== ================ =========== =========
Depreciation, amortization, and
accretion $ 1,281 $ -- $ 107 $ 15 $ 1,403
Capital Expenditures $ 566 $ -- $ 235 $ -- $ 801
Total Assets $ 43,625 $ 27,491 $ 9,282 $ 3,722 $ 84,170
Operating Non-Operating Discontinued
Disposal Disposal Processing and
Facilities Facilities Field Services Corporate Total
SIX MONTHS ENDED JUNE 30, 2003
- ------------------------------
Revenue $ 22,736 $ 55 $ -- $ -- $ 22,791
Direct operating cost 11,811 229 -- -- 12,040
----------- --------------- ---------------- ----------- ---------
Gross profit (loss) 10,925 (174) -- -- 10,751
S,G&A 3,657 1,801 -- 2,328 7,786
----------- --------------- ---------------- ----------- ---------
Income (loss) from operations 7,268 (1,975) -- (2,328) 2,965
Interest 38 -- -- 99 137
Other Income (expense) 29 64 -- -- 93
9
Write off of Ward Valley facility -- 20,951 -- -- 20,951
----------- --------------- ---------------- ----------- ---------
Income (loss) before income tax
and discontinued operations 7,259 (22,862) -- (2,427) (18,030)
Income tax expense (benefit) -- -- -- 55 55
Discontinued operations 4,960 -- (2,029) -- 2,931
----------- --------------- ---------------- ----------- ---------
Net Income (loss) 12,219 (22,862) (2,029) (2,482) (15,154)
=========== =============== ================ =========== =========
Depreciation, amortization, and
accretion $ 3,793 $ 2 $ -- $ 20 $ 3,814
Capital Expenditures $ 4,063 $ 23 $ 451 $ -- $ 4,537
Total Assets $ 37,119 $ 6,546 $ 5,274 $ 15,183 $ 64,122
SIX MONTHS ENDED JUNE 30, 2002 (RESTATED)
- -----------------------------------------
Revenue $ 23,849 $ 180 $ -- $ -- $ 24,029
Direct operating cost 11,436 580 -- -- 12,016
----------- --------------- ---------------- ----------- ---------
Gross profit (loss) 12,413 (400) -- -- 12,013
S,G&A 4,096 55 -- 1,597 5,748
----------- --------------- ---------------- ----------- ---------
Income (loss) from operations 8,317 (455) -- (1,597) 6,265
Interest 441 -- -- 40 481
Other income (expense) 35 (487) -- 127 (325)
----------- --------------- ---------------- ----------- ---------
Income (loss) before discontinued
operations and cumulative effect of
change in accounting principle 7,911 (942) -- (1,510) 5,459
Discontinued operations 224 -- (704) -- (480)
Cumulative effect of change in
accounting principle $ 14,983 $ 1,548 $ (3,390) $ -- $ 13,141
----------- --------------- ---------------- ----------- ---------
Net Income (loss) $ 23,118 $ 606 $ (4,094) $ (1,510) $ 18,120
=========== =============== ================ =========== =========
Depreciation, amortization, and
accretion $ 3,118 $ 229 $ 269 $ 32 $ 3,648
Capital Expenditures $ 1,559 $ -- $ 247 $ -- $ 1,806
Total Assets $ 43,675 $ 27,491 $ 9,282 $ 3,722 $ 84,170
NOTE 5. STOCK OPTION PLANS
The Company has two stock-based compensation plans, which are accounted for
under the recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees and related Interpretations. No
stock-based employee compensation cost is reflected in net income. The following
table illustrates the effect on net income and earnings per share if the Company
applied the fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation, to stock-based compensation for the
three and six months ended June 30, 2003 and 2002:
Three Months Ended Six Months Ended
------------------------ ----------------------
2003 2002 2003 2002
----------- ----------- ---------- ----------
Net income (loss), as reported $ 2,013 $ 2,201 $ (15,154) $ 18,120
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net of
related tax effects (121) (164) (630) (236)
----------- ----------- ---------- ----------
Pro forma net income (loss) $ 1,892 $ 2,037 $ (15,784) $ 17,884
=========== =========== ========== ==========
EARNINGS (LOSS) PER SHARE:
Basic - as reported $ .12 $ .14 $ (.94) $ 1.27
=========== =========== ========== ==========
Basic - pro forma $ .11 $ .13 $ (.98) $ 1.25
=========== =========== ========== ==========
Diluted - as reported $ .11 $ .12 $ (.94) $ 1.14
=========== =========== ========== ==========
Diluted - pro forma $ .11 $ .11 $ (.98) $ 1.12
=========== =========== ========== ==========
10
The stock option plan summary and changes during the three and six months ended
June 30 are as follows:
Three Months Ended Six Months Ended
------------------------ ------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Options outstanding, beginning of period 1,434,874 946,650 753,150 1,128,650
Granted 55,000 50,000 813,724 130,000
Exercised (1,000) (2,000) (68,500) (2,000)
Canceled (18,150) (40,500) (27,650) (302,500)
----------- ----------- ----------- -----------
Options outstanding, end of period 1,470,724 954,150 1,470,724 954,150
=========== =========== =========== ===========
Weighted average exercise price of options, beginning of period $ 4.03 $ 3.39 $ 3.42 $ 2.90
Weighted average exercise price of options granted $ 2.60 $ 3.92 $ 4.30 $ 3.16
Weighted average exercise price of options exercised $ 1.60 $ 2.30 $ 1.68 $ 2.30
Weighted average exercise price of options canceled $ 10.13 $ 12.17 $ 7.72 $ 2.45
Weighted average exercise price of options, end of period $ 3.90 $ 3.08 $ 3.90 $ 3.08
Options exercisable at end of period 902,681 844,150 865,831 844,150
=========== =========== =========== ===========
Options available for future grant at end of period 416,776 1,108,350 416,776 1,108,350
=========== =========== =========== ===========
The following table summarizes stock options outstanding under the Company's
option plans as of June 30, 2003:
Weighted
average Weighted Weighted
remaining average average
Range of exercise contractual life Number exercise price Number exercise price
price per share (years) outstanding per share exercisable per share
- ------------------ ----------------- ----------- --------------- ----------- ---------------
1.00 - $1.47 4.0 119,500 $ 1.33 119,500 $ 1.33
1.60 - $2.25 6.7 128,000 $ 1.98 128,000 $ 1.98
2.42 - $3.50 8.9 462,329 $ 2.94 259,582 $ 2.89
3.75 - $5.00 7.8 532,884 $ 4.30 296,346 $ 4.14
6.50 9.6 173,011 $ 6.50 43,253 $ 6.50
10.13 0.9 55,000 $ 10.13 55,000 $ 10.13
----------- -----------
1,470,724 901,681
=========== ===========
As of June 30, 2003, the 1992 Stock Option Plan for Employees had options
outstanding to purchase 945,724 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 525,000 common shares with 360,700
shares remaining available for issuance under option grants. The fair value of
each option grant is estimated using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants during the three
months ended June 30 as follows:
2003 2002
---------- ----------
Expected volatility 83% 80%
Risk-free interest rates 3.75% 4.75%
Expected lives 10 years 10 years
Dividend yield 0% 0%
Weighted-average fair value of options granted
during the quarter (Black-Scholes) $ 2.19 $ 3.29
11
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.
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 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. During 2002, the Company reevaluated the deferred tax asset
valuation allowance and determined it was "more likely than not" that a portion
of the deferred tax asset would be realizable. Consequently, the Company
decreased the portion of the valuation allowance related to its operating
facilities.
The Company's net operating loss ("NOL") carry forward of approximately
$30,699,000 at December 31, 2002, and $48,000,000 at June 30, 2003, begins to
expire in the year 2006.
At June 30, 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, California
disposal site 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 to be realized in the years subsequent to 2003, and
therefore classified the total net deferred tax asset as a long term asset on
its 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, subsidiary US Ecology, Inc., sued the State of California, et. al.
("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 State and entered a ground lease.
The State successfully defended the license against court challenges and, until
Governor Gray 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 Fourth Appellate District Court remanded the
case for trial on promissory estoppel grounds. The case was tried in Superior
Court for the County of San Diego during February and March 2003.
On March 26, 2003, the Superior Court 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 latter finding was based on actions
the Court concluded had created obstacles to an agreement between the federal
government and the State to convey the site. The Court also found that key
elements of the Company's promissory estoppel claim had been proven at trial.
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 site, that
Governor Davis' administration abandoned this promise, 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.
12
Based on the uncertainty of recovery following the trial court's adverse
decision, the Company wrote off the $20,951,000 deferred site development asset
at March 31, 2003.
On May 2, 2003, the Company filed a motion to vacate and enter new judgment with
the trial court, arguing that the March 26 decision misapplied the law to the
facts. On May 30, 2003, this motion was denied without comment. On June 26, the
Company filed a notice of appeal with the California Fourth Appellate District
Court.
The Company's financial interest in the pending claim against the State was
improved by an amendment to the November 13, 1998 Ward Valley Interest Agreement
and Assignment entered into by American Ecology and its former primary lender.
This amendment, entered into by the Company and the successor in interest to
that lender on June 27, 2003, provides that any monetary damages obtained shall
first be allocated to the Company to recover past and future litigation fees and
expenses relating to the pending claim. Thereafter, any remaining amount
recovered shall be divided equally between the Company and the former lender.
The 1998 agreement had provided that the first $29.6 million less up to $1.0
million in legal fees and expenses would be owed to the former lender, with any
remaining recovery reserved to the Company.
In early July, the Company engaged the law firm of Cooley Godward on a fixed
price plus contingency basis to pursue the appeal, paying the fixed fee at the
time of engagement. A briefing schedule has not been set.
MANCHAK V. US ECOLOGY, INC., U.S. DISTRICT COURT FOR THE DISTRICT OF NEVADA,
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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 failed to timely file its appellant's brief and the
Company moved to dismiss the appeal. On July 2, 2003, the US Court of Appeals
for the Federal Circuit granted the Company's motion to dismiss, and denied
plaintiff's request for an extension of time and relief from page/word brief
limitations. On July 20, 2003 the plaintiff filed a motion for reconsideration
with the appellate court. In January 2003, the Company filed a motion to recover
legal fees and expenses. This motion was denied, which the Company is appealing.
ENTERGY ARKANSAS, INC. ET AL, CENTRAL INTERSTATE LOW-LEVEL RADIOACTIVE WASTE
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COMMISSION AND US ECOLOGY, INC. ("PLAINTIFFS") V. STATE OF NEBRASKA, ET AL.,
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CASE NO. 4:98CV3411, U.S. DISTRICT COURT, DISTRICT OF NEBRASKA
This action was brought in federal court in December of 1999 by electric
utilities that generate low-level radioactive waste ("LLRW") within the Central
Interstate Low-Level Radioactive Waste Compact (CIC). 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.
13
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 is included within the balance sheet
amount of $6,478,000 of 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.
The case was argued before the Eight Circuit on June 12, 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
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AL.,CAUSE NO. 2000-092, 4TH JUDICIAL DISTRICT COURT, RUSK COUNTY, TEXAS
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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 one 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 in prior periods.
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 maximum bonus
payments in any one year of $1,125,000 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.
On May 21, 2003, the Company met with representatives of the insurance company
that provides closure/post closure insurance to discuss policy renewal. The
Company's current set of primary financial assurance policies expire September
27, 2003. To address risk-related concerns raised by the insurance carrier, the
Company is proposing to increase collateral from the $1,150,000 currently
provided through a standby letter of credit to $4,000,000 over the next five
years, primarily in cash. The Company expects the insurance company to respond
to the proposal in August, 2003. No assurance can be given that the Company's
proposal will be accepted or that higher collateral amounts will be required.
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 for the retirement
14
obligation. This asset is amortized 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 individual facility assets. In recalculating the overall
asset under the revised methodology, the Company recorded a $3,182,000 reduction
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):
3 Months Ending Six Months Ending
June 30, 2002 June 30, 2002
---------------- -------------------
Reported Net Income $ 2,175 $ 21,252
Effect of Restatement:
Cumulative Effect of Accounting Change -- (3,182)
Amortization 26 50
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Restated Net Income $ 2,201 $ 18,120
================ ===================
Reported Diluted EPS $ .12 $ 1.34
Effect of Restatement:
Cumulative Effect of Accounting Change -- (.20)
Amortization -- --
---------------- -------------------
Restated EPS $ .12 $ 1.14
================ ===================
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 477 65 542
Payment of obligation (449) -- (449)
Adjustment of obligation 133 (1,107) (974)
------------------------- ------------------------------ ------------------------
June 30, 2003 obligation $ 10,361 $ 5,498 $ 15,859
========================= ============================== ========================
On February 13, 2003, the Company sold substantially all of the assets of the El
Centro landfill. The sale included transfer of the accrued landfill closure and
post closure obligation, which was $1,107,000 at the date of the sale.
At June 30, 2003, $244,000 of pledged cash and investment securities were
legally restricted. The pledged cash has been set aside to settle any closure
and post closure obligations that are not directly paid by the Company.
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.
15
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 at the discontinued Oak Ridge facility.
NOTE 12. DISCONTINUED OPERATIONS
As of June 30, 2003, "Assets held for sale or closure" consisted of certain
assets at 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 of 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 landfill and Oak Ridge processing and Field Services operations have
been excluded from continuing operations results 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 June 30, 2003 are as follows (in thousands):
Processing and Field El Centro Disposal Total Assets Held
Services Facility Facility for Sale or Closure
--------------------- ------------------- --------------------
Current assets
- --------------
Current assets $ 3,166 $ 350 $ 3,516
Property & equipment, net 552 -- 552
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3,718 350 4,068
===================== =================== ====================
Non-current assets
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Property, plant & equipment, net 1,509 -- 1,509
Other 48 682 730
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1,557 682 2,239
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Current liabilities
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Accounts payable & accruals 5,252 6 5,258
Current portion long term debt 64 -- 64
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5,316 6 5,322
===================== =================== ====================
Non-current liabilities
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Closure/post closure obligations 5,517 -- 5,517
Long-term debt 44 -- 44
Other 10 -- 10
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5,571 -- 5,571
===================== =================== ====================
Operating results for the discontinued operations were as follows for three and
six months ending June 30:
Processing and Field El Centro Disposal Total Discontinued
($in thousands) Services Operations Facility Operations
---------------------- -------------------- --------------------
Three Months Ending June 30, 2003
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Revenues, net $ 1,240 $ -- $ 1,240
Operating income (loss) (690) (3) (693)
Net income (loss) (692) 16 (676)
Basic earnings (loss) per share (.04) -- (.04)
Diluted earnings (loss) per share (.04) -- (.04)
Three Months Ending June 30, 2002
- ---------------------------------
Revenues, net $ 5,579 $ 597 $ 6,176
Operating income (loss) (214) 139 (75)
Net income (loss) (303) 34 (269)
Basic earnings (loss) per share (.02) -- (.02)
Diluted earnings (loss) per share (.02) -- (.02)
16
Six Months Ending June 30, 2003
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Revenues, net $ 2,019 $ 469 $ 2,488
Operating income (loss) (1,793) 74 (1,719)
Net income (loss) (2,029) 4,960 2,931
Basic earnings (loss) per share (.12) .30 .18
Diluted earnings (loss) per share (.12) .30 .18
Six Months Ending June 30, 2002
- -------------------------------
Revenues, net $ 9,913 $ 1,216 $ 11,129
Operating income (loss) (479) 295 (184)
Net income (loss) (704) 224 (480)
Basic earnings (loss) per share (.05) .02 (.03)
Diluted earnings (loss) per share (.05) .02 (.03)
El Centro Disposal Facility. On February 13, 2003, the Company sold the El
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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 the Company
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 a 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. This royalty represents substantially all of the assets held by the
discontinued El Centro disposal facility.
While the El Centro disposal facility is currently classified as a discontinued
operation, royalty payments are expected to be received for at least five years.
After fiscal year 2003 the El Centro disposal facility should realize interest
income and other income from the royalty payments which would not be classified
as discontinued operations due to their recurring nature.
For segment reporting purposes, 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, but was unable to consummate a sale based on continuing
commercial operations. On December 27, 2002, the Company discontinued commercial
waste processing. 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 customer waste from the facility was completed during July
2003. The majority had been shipped off site for processing and disposal as of
June 30, 2003. Detailed information on the exact amount and character of waste
removed at the time of shipment was used to refine initial waste disposition
cost estimates. This resulted in an additional accrual of $911,000 for the three
months ending March 31, 2003 and an additional $465,000 for the three months
ending June 30, 2003.
On June 16, 2003, the Company formally began discussions with a potential buyer
of the Oak Ridge facility. A non-binding letter of intent has been entered into,
based on sale of the facility's assets, including licenses, for a nominal sales
17
price along with buyer assumption of specified liabilities. The sale is
contingent upon numerous items of which a satisfactory radiological
characterization of the facility is a primary consideration. There is no
assurance 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 Oak Ridge 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 with a severance package being accepted in principle on July 12,
2003. On July 16, 2003, a final written agreement was executed which provides
$152,000 of severance to the terminated union employees and a release from all
claims related to their employment with the Company.
Costs incurred at the Oak Ridge facility to remove waste and prepare the
facility for sale during the three and six months ended June 30, 2003 are
summarized as follows: (in thousands $000)
Three Months Six Months
------------- -----------
Net operating costs in excess of previous accrual $ 227 $ 428
Additional impairment of property and equipment -- 225
Increase in estimated cost for disposal of waste at facility 465 1,376
------------- -----------
Disposal costs for the period ended June 30, 2003 $ 692 $ 2,029
============= ===========
Cost changes for Oak Ridge facility on-site activities and disposal liabilities
for removed wastes are as follows:
($in thousands) December 31, 2002 Cash Payments Adjustments June 30, 2003
----------------- -------------- ----------- -------------
Waste disposal liability 1,827 (1,301) 3,703 4,229
On-site discontinued operation
cost liability 1,800 (1,509) 428 719
The Adjustments represent differences between the estimated costs accrued at
December 31, 2002 and the actual costs incurred during 2003 and changes in
estimated future costs for waste disposal. The Adjustments amount in the above
rollforward is different from the Income statement amount due to discontinued
operations revenue realized by the Company upon disposal of customer waste.
NOTE 13. FACILITY DEVELOPMENT COSTS
The Company is involved in litigation requiring estimates of timing and loss
potential whose disposition is controlled by the judicial process. During the
quarter ended March 31, 2003, the Company wrote off its entire $20,951,000 Ward
Valley deferred site development asset following an adverse trial 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 for development of the proposed Butte, Nebraska disposal facility
will be realized, although no assurance can be given that a favorable trial
court decision will be affirmed on appeal. See Note 7.
18
NOTE 14. SUBSEQUENT EVENTS
On July 7, 2003 the Company received a check for $645,000 of a $740,000 federal
income tax receivable. The remaining income tax receivable of $95,000 plus
additional accrued interest is still in the refund process.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This document contains forward-looking statements that involve known and unknown
risks and uncertainties which may cause actual results in future periods to
differ materially from those indicated herein. These risks include, but are not
limited to, the ability to sell Oak Ridge processing facility assets, compliance
with and changes to applicable laws, regulations and permits, exposure to
litigation, access to capital, access to insurance and financial assurances, new
technologies, competitive environment, labor disputes, general economic
conditions, and loss or diminution of major contracts. The Form 10-K for the
year ending December 31, 2002 contains additional risk factors and an expanded
disclosure of these risks. When the Company uses words like "will", "may,"
"believes," "expects," "anticipates," "should," "estimates," "project," "plans,"
their opposites and similar expressions, the Company is making forward-looking
statements. These terms are most often used in statements relating to business
plans, strategies, anticipated benefits or projections about the anticipated
revenues, earnings or other aspects of our operating results. The Company makes
these statements in an effort to keep stockholders and the public informed about
our business based on management's current expectations about future events.
Such statements should be viewed with caution and are not guarantees of future
performance or events. As noted elsewhere in this report, our business is
subject to uncertainties, risks and other influences, many of which the Company
has no control over. Additionally, these factors, either alone or taken
together, could have a material adverse effect on the Company and could change
whether any forward-looking statement ultimately turns out to be true. The
Company undertakes no obligation to publicly release updates or revisions to
these statements. The following discussion should be read in conjunction with
the audited consolidated financial statements and the notes thereto filed on
Form 10-K for the year ending December 31, 2002.
Unless otherwise described, changes discussed relate to the increase or decrease
from the three and six month period ended June 30, 2002 to the three and six
month period ended June 30, 2003.
INTRODUCTION
- ------------
The Company is a hazardous, PCB, industrial and radioactive waste management
company providing transportation, treatment and disposal services to commercial
and government entities including, but not limited to nuclear power plants,
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 financial performance for the three and six months ended June 30,
2003 was weaker than the first and second quarters of 2002. Quarter to quarter
comparisons are affected by a single large project undertaken in early 2002,
higher 2003 litigation expenses, costs related to discontinuation of the
Company's Oak Ridge, Tennessee low-level radioactive waste processing and field
services business, a significant gain on sale of assets in early 2003, and
changes in accounting to comply with recently issued Financial Accounting
Standards. These factors are further discussed below.
Ward Valley Litigation Expenses: Due to the adverse California state court
- ----------------------------------
decision on March 26, 2003, the Company wrote off $20,951,000 of facility
development costs for the Ward Valley project. This is reported as Loss on write
off of Ward Valley facility development costs in the Consolidated Statement of
Operations. Litigation and related costs totaling $288,000 and $1,786,000 were
incurred and included in SG&A during the three and six months, respectively,
ending June 30, 2003. The Company has appealed the Ward Valley ruling, but
expects the appeal cost to be minimal based on a fixed price legal
representation agreement entered in July, 2003 for the appeal.
19
Army Corps of Engineers Fort Greely, Alaska Project: The Company performed a
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$3,850,000 waste packaging and 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 first quarter of 2003.
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 gain 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. This gain was included in discontinued operations during the quarter ended
March 31, 2003.
Oak Ridge Disposal Plan: On December 27, 2002, the Company discontinued
- ---------------------------
operations at the Oak Ridge facility and recognized $7,018,000 of additional
estimated costs required under its asset and liability disposal plan. During the
three and six months ended June 30, 2003, the Company identified or incurred an
additional $692,000 and $2,029,000, respectively, in costs required to remove
accumulated waste from the facility and prepare the facility for sale. This
primarily reflects more accurate information on the specific quantity and type
of waste which became available when specific wastes were prepared for shipment
to off-site service providers.
A significant portion of the Company's revenue is attributable to discrete waste
clean-up projects ("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 Event Business. Management's strategy is to expand its recurring customer
business ("Base Business") while simultaneously securing both large and small
event projects. Management believes that by structuring its operating costs so
that the Company's Base Business covers fixed costs, much 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. 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
capitalized as a cell development asset.
- - The cell development asset is amortized as each available cubic yard of
disposal space is filled. Periodic independent engineering 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 filled 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
estimated as being paid in 2056 based upon current permitted capacity and
estimated annual usage.
ACCOUNTING FOR DISCONTINUED OPERATIONS
Accounting for discontinued operations requires numerous subjective and complex
judgments, estimates and assumptions that materially affect financial results
and position of discontinued operations.
20
At December 27, 2002, the Company discontinued operation of its former
Processing and Field Services segment in Oak Ridge, Tennessee facility. The
discontinued operations were accounted for under Emerging Issues Task Force
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.
The Company has recognized $692,000 and $1,804,000 in incremental liabilities
and $0 and $225,000 for impairment of equipment as of the three and six months
ending June 30, 2003, respectively, relating to discontinuation of its Oak Ridge
LLRW Processing and Field Services operations. The Oak Ridge facility was
cleared of remaining customer waste in July 2003. Due to the ongoing status of
efforts to prepare the facility 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 disposition is controlled by the judicial process. During the
quarter ended March 31, 2003, the Company wrote off $20,951,000 due to an
adverse trial court decision which cast substantial doubt on the Company's
ability to recover its investment in the Ward Valley 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 would likely not utilize portions of the deferred tax assets prior
to their expiration. The valuation allowance is based on management's
contemporaneous evaluation of whether it is more likely than not that the
Company will be able to utilize some, or all of the deferred tax assets. During
2002, the Company assessed the valuation allowance and reversed approximately
$8,284,000 of the valuation allowance that the Company expected to utilize in
the foreseeable future. During the three months ended March 31, 2003, the
Company reclassified the entire net deferred tax asset as long term, given that
no taxable income is expected during 2003 due to the impact of the write off of
the Ward Valley Project.
PROJECT ACCOUNTING
The Company has performed relatively large, fixed fee and long-duration
remediation projects through the Company's discontinued Oak Ridge Field Services
Division. Securing contracts to perform work required the Company to make
assumptions regarding job duration, percentage of completion for waste
processing, and disposal costs that would not be known until the actual project
was complete. Differences between estimated and actual cost to remove, process
and arrange final disposal of contaminated material can vary widely, resulting
in potentially significant changes in individual project profit or loss. As of
June 30, 2003, the Company is awaiting final payment on a Field Service project
completed earlier in the year. Although no remediation work remains, completion
of several contract requirements may positively or negatively impact the results
of discontinued operations.
RESULTS OF OPERATIONS
- -----------------------
The following table presents, for the periods indicated, the operating costs as
a percentage of revenues in the consolidated income statement:
21
Three Months Ended Six Months Ended
------------------------------------ ---------------------------------------
(Restated) (Restated)
($in 000's) June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
----------------- ----------------- ------------------- ------------------
$ % $ % $ % $ %
------- -------- ------- -------- --------- -------- -------- --------
Revenue 12,020 10,605 22,791 24,029
Direct operating costs 6,056 50.4% 5,841 55.1% 12,040 52.8% 12,016 50.0%
------- ------- --------- --------
Gross profit 5,964 49.6% 4,764 44.9% 10,751 47.2% 12,013 50.0%
SG & A 3,289 27.4% 2,207 20.8% 7,786 34.2% 5,748 23.9%
------- ------- --------- --------
Income from operations 2,675 22.3% 2,557 24.1% 2,965 13.0% 6,265 26.1%
Investment income 22 0.2% 16 0.2% 22 0.1% 27 0.1%
Interest expense 38 0.3% 243 2.3% 159 0.7% 508 2.1%
Loss on write off of Ward Valley -- 0.0% -- 0.0% 20,951 91.9% -- 0.0%
Other income (expense) 93 0.8% 140 1.3% 93 0.4% (325) -1.4%
------- ------- --------- --------
Net income (loss) before income
taxes 2,752 22.9% 2,470 23.3% (18,030) -79.1% 5,459 22.7%
Income tax expense 63 0.5% -- 0.0% 55 0.2% -- 0.0%
------- ------- --------- --------
Net income (loss) before discontinued
operations and cumulative effect of
accounting change 2,689 22.4% 2,470 23.3% (18,085) -79.4% 5,459 22.7%
======= ======= ========= ========
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2003 AND 2002
- -------------------------------------------------------
REVENUE
- -------
For the three months ended June 30, 2003, the Company reported consolidated
revenue of $12,020,000, a 13% increase from the $10,605,000 reported for the
same period in 2002. During the three months ending June 30, 2003 and 2002,
$3,702,000 and 742,000 or 31% and 7% 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 under this contract
to the Company's Grand View, Idaho treatment and disposal facility.
Operating Disposal Facilities
- -------------------------------
The Richland, Washington LLRW disposal facility's revenue increased $745,000 for
the three months ended June 30, 2003 from the same period in 2002. The increase
in revenue was primarily due to disposal of a relatively high radiation level
shipment during June 2003. While a significant portion of the Richland
facility's revenue is fixed due to its regulated rate structure, during the
fourth quarter of 2002 the Company hired an experienced salesperson to improve
unregulated revenues at the site. Second quarter 2003 unregulated revenues
increased $174,000 to $305,000 from first quarter 2003 unregulated revenues of
$131,000.
At the Grand View, Idaho disposal facility, revenue increased $2,767,000 or 77%
from the same period last year. During the second quarter, the facility disposed
of 87,000 tons of material, primarily waste from 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 under this contract to the
facility throughout 2003. The Company has also entered into a significant
"Event" business contract for work expected to be completed before year end.
At the Beatty, Nevada hazardous treatment and disposal facility, revenue
decreased $316,000 for the three months ended June 30, 2003 from the same period
in 2002. The decrease in revenue was primarily due to decreased volumes of waste
due to general economic weakness, resulting in little "Event" business to be
competed for. The Company continues its efforts to increase revenue at the
facility through focused sales efforts. Revenue is not expected to increase
significantly, however, until the economy improves.
At the Robstown, Texas hazardous treatment and disposal facility, revenue
decreased $1,719,000 for the three months ended June 30, 2003 from the same
period in 2002. The decrease in revenue was primarily due to reduced "Event"
22
business, including a large steel mill clean-up project performed during the
second quarter 2002. General economic weakness was also a factor. The Company
continues its efforts to increase revenue and throughput at this facility,
primarily focusing on 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 June 30, 2003, consolidated direct operating costs
increased 4% to $6,056,000 (50% of revenue) compared to $5,841,000 (55% of
revenue) for the same period in 2002. The relatively lower direct operating
costs reflect the high fixed cost nature of the disposal business (direct costs
do not materially vary with changes in revenue). The Company continues its
efforts to minimize direct costs through operational improvements.
Operating Disposal Facilities
- -------------------------------
A decrease in direct operating costs at the Robstown, Texas disposal facility
during the three months ended June 30, 2003 was offset by higher direct
operating costs at the Grand View, Idaho facility. Direct costs at the Richland,
Washington and Beatty, Nevada facilities essentially remained flat. The increase
in direct operating costs at Grand View was due to increased volumes of waste
received. Conversely, the decrease in the direct operating costs at the Robstown
facility was largely due to decreased volumes of waste processed and disposed
of.
Non Operating Disposal Facilities
- ------------------------------------
Non Operating Disposal Facilities incur primarily engineering consulting costs
required to meet regulatory agency requirements, and labor costs required to
perform remedial work and safely close the facilities subsequent to operational
use. For the three months ended June 30, 2003 and 2002, the Company reported
$24,000 and $283,000 of expenses related to licensing facilities for initial use
and $104,000 and $19,000 of costs in 2003 and 2002 to remediate or close
facilities subsequent to use.
GROSS PROFIT
- -------------
For the quarter, the higher revenue combined with relatively lower direct costs
generated improved gross profit and gross margin. Gross profit for the quarter
was $6.0 million or 50% of revenue, compared with gross profit of $4.8 million
or 45% of revenue during the same quarter last year. Increased revenue at the
Grand View and Richland facilities allowed the Company to take advantage of the
relatively fixed cost nature of the business and get more 'fall through.' Of
the $1.4 million increase in revenue, $1.2 million was reflected in gross profit
for the quarter.
SELLING, GENERAL AND ADMINISTRATIVE COSTS (SG&A)
- ------------------------------------------------
For the three months ended June 30, 2003, the Company reported SG&A of
$3,289,000 (27% of revenue), a 49% increase from the $2,207,000 (21% of revenue)
for the same three months of 2002. The increase in SG&A resulted from a number
of factors including $290,000 of legal fees in second quarter 2003 associated
with the Ward Valley trial, contrasted with $255,000 of legal and state fee
refunds and $200,000 of reversed legal fee accruals that reduced second quarter
2002 SG&A. Company efforts to refocus operations and consolidate administrative
activities have incurred incremental costs. On May 6, 2003, the Company
implemented a new information systems upgrade at two of its hazardous waste
treatment and disposal facilities with a third facility upgraded on July 24,
2003. Management believes that implementation of an enhanced information system
platform along with the recently completed centralized accounting will increase
operational efficiency and improve the availability and timeliness of financial
and management information.
Non Operating Disposal Facilities
- ------------------------------------
Non Operating Disposal Facilities incur primarily legal costs to protect the
Company's investment in proposed new disposal sites in Ward Valley, California
and Butte, Nebraska, and legal and engineering consulting costs to meet
obligations at facilities subsequent to operational use. For the three months
23
ended June 30, 2003 and 2002, the Company reported $284,000 and ($25,000) 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. The
credit in second quarter 2002 SG&A expenses reflects actual legal fees being
less than the previously estimated and accrued legal fees related to the
litigation settled in 2002.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2003 AND 2002
- -----------------------------------------------------
REVENUE
- -------
For the six months ended June 30, 2003, the Company reported consolidated
revenue of $22,791,000, 5% lower than the $24,029,000 reported for the same
period in 2002. During the six months ending June 30, 2003 and 2002, $7,858,000
and 6,871,000 or 35% and 29% of revenue, respectively, represented work
performed under contract with the U.S. Army Corps of Engineers. During the six
months ending June 30, 2003, 10% of revenue represented work performed for Nucor
Steel Company.
Operating Disposal Facilities
- -------------------------------
At the Company's Grand View, Idaho disposal facility, revenue increased
$3,909,000 or 47% over the same six months last year. During the first six
months of 2003, the facility disposed of 165,000 tons of material, mostly under
the Army Corps of Engineers contract, including increased shipments from both
the Army and other federal agencies utilizing the contract. It is expected that
the Army and other federal agencies will continue to ship significant volumes of
material to the facility throughout 2003.
The Richland, Washington facility's revenue decreased $2,463,000 for the six
months ended June 30, 2003 from the same period in 2002. The decrease in revenue
was primarily due to a 3,850,000 clean-up project performed for the Army Corps
of Engineers unrelated to the Company's Idaho site contract during the first
quarter of 2002 which was not replaced by a like project in 2003. A significant
portion of the Richland facility's revenue is fixed due to a stipulated rate
agreement entered with the Washington Utility and Transportation Commission.
During the fourth quarter of 2002 the Company hired an experienced salesperson
to improve unregulated revenues at the site. The hiring of this sales person
resulted in higher unregulated revenues for the six months, as this part of the
business recorded revenue growth of $437,000 as of June 30, 2003.
In the six months ending June 30, 2003, revenue at the Beatty, Nevada disposal
facility was $119,000 lower than the same six months in 2002, primarily due to
decreased volumes of waste received for disposal. As general economic weakness
has continued, less waste has been produced and fewer remedial projects have
occurred. The Beatty site continues to experience transportation and state tax
disadvantages when competing for large remedial projects and base business
customers in the southern California industrial waste market.
At the Robstown, Texas hazardous treatment and disposal facility, revenue
decreased $2,440,000 for the six months ended June 30, 2003 from the same period
in 2002. The decrease in revenue was primarily due to reduced event business.
Like Richland, a large first half 2002 event project was not replaced in 2003.
General economic weakness was also a factor. The Company continues its efforts
to increase revenue and throughput at this facility, primarily focusing on
operational improvements and focused sales efforts. Site revenue is not expected
to increase significantly, however, until the economy improves.
DIRECT OPERATING COSTS
- ------------------------
For the six months ended June 30, 2003, consolidated direct operating costs
increased less than 1% to $12,040,000 (53% of revenue) compared to $12,016,000
(50% of revenue) in the same period in 2002. The small change in direct
operating costs largely reflect the high fixed cost nature of the disposal
business (direct costs do not materially vary due to revenue). The Company
continues its efforts to minimize direct costs through operational improvements.
Operating Disposal Facilities
- -------------------------------
A decrease in direct operating costs at the Robstown, Texas disposal facility
during the six months ended June 30, 2003 was offset by higher direct operating
costs at the Grand View, Idaho facility. Direct costs at the Richland,
Washington and Beatty, Nevada facilities essentially remained flat. The increase
in direct operating costs at Grandview was due to increased volumes of waste.
Conversely, the decrease in the direct operating costs at the Robstown facility
was due to decreased volumes of waste.
24
Non Operating Disposal Facilities
- ------------------------------------
Non Operating Disposal Facilities incur primarily legal and engineering
consulting costs required to maintain licenses and labor costs required to
remediate and safely close facilities subsequent to operational use. For the
six months ended June 30, 2003 and 2002, the Company reported $24,000 and
$470,000 of expenses related to licensing facilities for initial use and
$206,000 and $137,000 in 2003 and 2002 to remediate or close facilities
subsequent to use.
GROSS PROFIT
- -------------
For the six months ending June 30, gross profit decreased to $10.7 million (47%
of revenue) from $12 million (50% of revenue) during the same six months last
year. The decreased gross profit in the first six months of 2003 reflected a
large project at the Company's Richland facility that was not replaced. This
Richland project accounted for more than $2 million of gross profit in the first
half of 2002.
SELLING, GENERAL AND ADMINISTRATIVE COSTS (SG&A)
- ------------------------------------------------
For the six months ended June 30, 2003, the Company reported SG&A of $7,786,000
(34% of revenue), a 35% increase from the $5,748,000 (24% of revenue) for the
same six months of 2002. The primary increase in SG&A is due to $1,790,000 in
2003 legal and related fees associated with the Ward Valley state court trial.
The Company has invested in centralization, and staffing upgradesand expects to
continue to do so for the remainder of 2003
COMPARISON OF THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
- ---------------------------------------------------------------
INVESTMENT INCOME
- ------------------
For the six months ended June 30, 2003, the Company earned $22,000 of investment
income, down from $27,000 in the same period of 2002. 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 has
been maintained in very short term investments. Based on anticipated cash
balances and low interest rates, the Company does not anticipate significant
investment income in the future.
INTEREST EXPENSE
- -----------------
For the three months ended June 30, 2003, the Company reported interest expense
of $38,000, a decrease of $205,000 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 through
a $7,000,000, five year, fully amortizing term loan from the Company's primary
lender, Wells Fargo Bank. The term loan provides for a variable interest rate of
the bank's prime rate or an offshore rate plus an applicable margin that is
based upon the Company's performance. For the three and six months ended June
30, 2003, the interest rate paid on the majority of the outstanding term loan
was 3.7%. Additional reductions in interest expense are attributable to
management's initiative to retire high cost debt, with no new debt being
incurred other than periodic short term borrowings under the line of credit.
OTHER INCOME (LOSS)
- ---------------------
Other Income is composed of the following ($ in thousands):
25
Three Months Ended June 30, Six Months Ended June 30,
2003 2002 2003 2002
----------------- ------------ --------------- -------------
Litigation accrual related to GM settlement $ -- $ -- $ -- $ (740)
Payment received on National Union settlement -- -- -- 250
Other litigation related settlements -- 100 -- 100
Insurance claim refunds -- 2 -- 27
Data processing services 8 27 8 27
Cash receipts for sale or rent of property rights 80 -- 80 --
Other miscellaneous income, net 5 11 5 11
----------------- ------------ --------------- -------------
Total other income (loss) $ 93 $ 140 $ 93 $ (325)
================= ============ =============== =============
INCOME TAXES
- ------------
The components of the income tax provision (benefit) were as follows (in
thousands):
Three Months Ended June 30, Six Months Ended June 30,
2003 2002 2003 2002
----------------- ------------ --------------- ------------
State tax expense (benefit) $ 63 $ -- $ 55 $ --
================= ============ =============== ============
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 entire
$20,951,000 Ward Valley asset. This large write off effectively 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 June 30,
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
- ----------------------------------
At June 30, 2003, cash and cash equivalents totaled $4,750,000, an increase of
$4,615,000 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 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 insurance policy for financial assurance at its hazardous waste
disposal facilities expires. It is expected that the cost and cash collateral
requirements to renew this insurance will increase. Depending on collateral
requirements, the new terms could have a material, adverse impact on the
Company's available cash.
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
26
out $3,525,000 in cash received for 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 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 $1,014,000 of relatively high cost debt in the first six months of
2003 and retired an additional $658,000 of debt secured by equipment included in
the sale of El Centro. These preferred stock and debt reduction actions reflect
continuing management initiatives to improve the Company's balance sheet and
maximize asset utilization.
On March 28, 2003 the Company exercised an early buyout of an 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 lease buyout.
The early lease buyout accomplished three objectives. The primary objective was
to repay Wells Fargo Bank $500,000 required by the Bank as a condition for their
approving the repurchase of the Series D Preferred Stock. In addition, the
Company cleared title to certain 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 six months of 2003, the Company's days sales outstanding
("DSO") decreased to 73 days at June 30, 2003, compared to 77 days at December
31, 2002. Continued improvements in cash and receivable balances are a priority
objective. The Company expects that implementation of its new information
system and the hiring of a credit and collections manager will improve DSO in
the second half of 2003.
As of June 30, 2003 the Company's liquidity, as measured by the current ratio,
decreased to 1.4 to 1.0 from 1.5 to 1.0 at December 31, 2002. Likewise, the
Company's reported working capital decreased to $5,287,000 at June 30, 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 $3,151,000 in
capital expenditures paid for with cash. The majority of these capital
expenditures were devoted to construction of new disposal capacity at the Grand
View, Idaho facility.
The Company's leverage, as evidenced by debt to equity ratio, has increased
since December 31, 2002. The debt to equity ratio increased to 1.3:1.0 at June
30, 2003, compared to 0.9:1.0 at fiscal year-end 2002. The increase in the
Company's debt to equity ratio was caused by the $20,951,000 write off of the
Ward Valley asset, which outweighed the Company's repayment of approximately
$6,600,000 in liabilities during the first six months of 2003. The debt to
equity ratio is defined as total liabilities divided by shareholders equity
On June 30, 2003, 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 June 30, 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. It currently reserves $1,400,000 as a letter
of credit used as collateral for an insurance policy and a lien bond.
Management estimates total capital expenditure needs for 2003 of approximately
$8,600,000. Along with the normal upgrading and replacement of aging assets, a
$4,500,000 expansion of disposal capacity at the Grand View, Idaho facility is
projected to be completed in the third quarter of 2003.
The Company's Oak Ridge facility continues to require cash. Usage of cash is
expected to increase as waste shipped off site is disposed of and billed. At
June 30, 2003, the Company's Oak Ridge facility had liabilities expected to be
paid in 2003 of $5,300,000.
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.
27
The Company does not maintain equities, commodities, derivatives, or any other
instruments for trading or any other purposes, and does not enter into
transactions denominated in currencies other than the U.S. Dollar.
The Company has minimal interest rate risk on investments or other assets as the
amount held is traditionally the minimum requirement imposed by insurance or
government agencies. At June 30, 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 $4,500,000 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 June 30, 2003 the interest rate
incurred by the Company was 3.7% on the outstanding term loan balance of
$6,183,000. As of June 30, 2003, each 1% change in the term loan interest rate
would result in an annual $59,000 change in interest expense.
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 is designed to
provide reasonable assurance that its records and filings accurately reflect the
transactions engaged in. For the quarter ending June 30, 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, subsidiary US Ecology, Inc., sued the State of California, et. al.
("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 State and entered a ground lease.
The State successfully defended the license against court challenges and, until
Governor Gray 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 Fourth Appellate District Court remanded the
case for trial on promissory estoppel grounds. The case was tried in Superior
Court for the County of San Diego during February and March 2003.
On March 26, 2003, the Superior Court 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 latter finding was based on actions
the Court concluded had created obstacles to an agreement between the federal
28
government and the State to convey the site. The Court also found that key
elements of the Company's promissory estoppel claim had been proven at trial.
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 site, that
Governor Davis' administration abandoned this promise, 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.
Based on the uncertainty of recovery following the trial court's adverse
decision, the Company wrote off the $20,951,000 deferred site development asset
at March 31, 2003.
On May 2, 2003, the Company filed a motion to vacate and enter new judgment with
the trial court, arguing that the March 26 decision misapplied the law to the
facts. On May 30, 2003, this motion was denied without comment. On June 26, the
Company filed a notice of appeal with the California Fourth Appellate District
Court.
The Company's financial interest in the pending claim against the State was
improved by an amendment to the November 13, 1998 Ward Valley Interest Agreement
and Assignment entered into by American Ecology and its former primary lender.
This amendment, entered into by the Company and the successor in interest to
that lender on June 27, 2003, provides that any monetary damages obtained shall
first be allocated to the Company to recover past and future litigation fees and
expenses relating to the pending claim. Thereafter, any remaining amount
recovered shall be divided equally between the Company and the former lender.
The 1998 agreement had provided that the first $29.6 million less up to $1.0
million in legal fees and expenses would be owed to the former lender, with any
remaining recovery reserved to the Company.
In early July, the Company engaged the law firm of Cooley Godward on a fixed
price plus contingency basis to pursue the appeal, paying the fixed fee at the
time of engagement. A briefing schedule has not been set.
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 failed to timely file its appellant's brief and the
Company moved to dismiss the appeal. On July 2, 2003, the US Court of Appeals
for the Federal Circuit granted the Company's motion to dismiss, and denied
plaintiff's request for an extension of time and relief from page/word brief
limitations. On July 20, 2003 the plaintiff filed a motion for reconsideration
with the appellate court. In January 2003, the Company filed a motion to recover
legal fees and expenses. This motion was denied, which the Company is appealing.
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.
29
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 is included within the balance sheet
amount of $6,478,000 of 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.
The case was argued before the Eight Circuit on June 12, 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
- ----
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 one 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 in prior periods.
ITEM 2. CHANGES IN SECURITIES AND USE O 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 cost of $6,406,000 was incurred 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. There are no Series E warrants outstanding.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its Annual Meeting of Stockholders on May 29, 2003. On the
record date of March 31, 2003 there were 16,960,901 shares of common stock. At
the meeting the Company's nominees for Director were all elected to the Board,
the selection of Moss Adams LLP as the Company's independent auditor was
ratified, and the 1992 Employee Stock Option Plan was extended for 10 years.
The voting on the three items was as follows:
Nominee for Director For Withheld
- ---------------------------------------------------- ---------- ---------
David B. Anderson 16,200,174 86,511
Rotchford L. Barker 16,255,261 31,424
Roy C. Eliff 15,838,324 448,361
Edward F. Heil 12,903,286 3,383,399
30
Roger P. Hickey 16,259,624 27,061
Stephen A. Romano 16,133,791 152,894
Stephen M. Schutt 16,200,184 86,501
Ratification of Moss Adams LLP
- ------------------------------
For 16,230,665
Against 9,033
Abstain 46,987
10 Year Extension of 1992 Employee Stock Option Plan
- ----------------------------------------------------
For 16,082,980
Against 161,529
Abstain 42,176
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 31.1 Certification of June 30, 2003 Form 10-Q by Chief Executive
Officer dated August 12, 2003
Exhibit 31.2 Certification of June 30, 2003 Form 10-Q by Chief Financial
Officer dated August 12, 2003
Exhibit 32.1 Certification of June 30, 2003 Form 10-Q by Chief Executive
Officer dated August 12, 2003
Exhibit 32.2 Certification of June 30, 2003 Form 10-Q by Chief Financial
Officer dated August 12, 2003
(b) Reports on Form 8-K.
On April 28, 2003, the Company issued an 8-K to announce first
quarter 2003 earnings.
On July 28, 2003, the Company issued an 8-K to announce second
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: August 12, 2003 By: /s/ Stephen A. Romano
---------------------------------------
Stephen A. Romano
President, Chief Executive Officer
and Chief Operating Officer
31
Date: August 12, 2003 By: /s/ James R. Baumgardner
---------------------------------------
James R. Baumgardner
Senior Vice President, Chief Financial
Officer, Secretary and Treasurer
32
EXHIBIT INDEX
Exhibit Description
- ------- -----------
Exhibit 31.1 Certification of June 30, 2003 Form 10-Q by Chief Executive
Officer dated August 12, 2003
Exhibit 31.2 Certification of June 30, 2003 Form 10-Q by Chief Financial
Officer dated August 12, 2003
Exhibit 32.1 Certification of June 30, 2003 Form 10-Q by Chief Executive
Officer dated August 12, 2003
Exhibit 32.2 Certification of June 30, 2003 Form 10-Q by Chief Financial
Officer dated August 12, 2003
33