SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED DECEMBER 31, 2004 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 NO.)
300 E. MALLARD, SUITE 300, BOISE, IDAHO 83706
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (208) 331-8400
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [X] No [_]
The aggregate market value of the Registrant's voting stock held by
non-affiliates on June 30, 2004 was approximately $134,800,000 based on the
closing price of $11.98 per share as reported on the NASDAQ Stock Market, Inc.'s
National Market System.
At March 1, 2005, Registrant had outstanding 17,411,294 shares of its Common
Stock.
Documents Incorporated by Reference
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be
held May 25, 2005. Part III
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TABLE OF CONTENTS
Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . 14
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities 15
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 32
Item 8. Financial Statements and Supplementary Data. . . . . . . . . . . . . . . . . 34
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Item 9A. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Item 9B. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
PART III
Items 10 through 14 are incorporated by reference from the definitive proxy
statement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
PART IV
Item 15. Exhibits, Financial Statement Schedules. . . . . . . . . . . . . . . . . . . 63
2
DEFINITIONS
TERM MEANING
---- -------
AEC or the Company . . . . . . . . . . . . . American Ecology Corporation and its subsidiaries
CERCLA or "Superfund". . . . . . . . . . . . Comprehensive Environmental Response,
Compensation and Liability Act of 1980
FUSRAP . . . . . . . . . . . . . . . . . . . U.S. Army Corps of Engineers Formerly Utilized Site
Remedial Action Program
LLRW . . . . . . . . . . . . . . . . . . . . Low-level radioactive waste
NORM/NARM. . . . . . . . . . . . . . . . . . Naturally occurring and accelerator produced
radioactive material
NRC. . . . . . . . . . . . . . . . . . . . . U.S. Nuclear Regulatory Commission
PCBs . . . . . . . . . . . . . . . . . . . . Polychlorinated biphenyls
RCRA . . . . . . . . . . . . . . . . . . . . Resource Conservation and Recovery Act of 1976
SEC. . . . . . . . . . . . . . . . . . . . . U. S. Securities and Exchange Commission
TCEQ . . . . . . . . . . . . . . . . . . . . Texas Commission on Environmental Quality
TSCA . . . . . . . . . . . . . . . . . . . . Toxic Substance Control Act of 1976
USACE. . . . . . . . . . . . . . . . . . . . U.S. Army Corps of Engineers
US EPA . . . . . . . . . . . . . . . . . . . U.S. Environmental Protection Agency
WUTC . . . . . . . . . . . . . . . . . . . . Washington Utilities and Transportation Commission
3
PART I
ITEM 1. BUSINESS
The Company provides radioactive, hazardous and industrial waste management
services to commercial and government entities, such as nuclear power plants,
medical and academic institutions, steel mills, refineries and chemical
production facilities. Headquartered in Boise, Idaho, the Company is one of the
nation's oldest providers of radioactive and hazardous waste services. AEC and
its predecessor companies have been in business for more than 50 years. AEC
operates nationally and currently employs 178 people.
The Company's official website can be found at www.americanecology.com. Company
-----------------------
filings with the SEC are posted on the website subsequent to the official
filing. The information found on our website is not part of this or any other
report we file with or furnish to the SEC.
AEC was most recently incorporated as a Delaware corporation in May 1987. The
Company's wholly owned primary operating subsidiaries are US Ecology Nevada,
Inc., a Delaware corporation ("USEN"); US Ecology Washington, Inc., a Delaware
corporation ("USEW"); US Ecology Texas, L.P., a Texas Limited Partnership
("USET"); US Ecology Idaho, Inc., a Delaware corporation ("USEI") and US
Ecology, Inc. a California Corporation ("USE"). American Ecology Recycle Center,
Inc., a Delaware corporation ("AERC") is the subsidiary that previously owned
the discontinued Oak Ridge LLRW processing and field services operations.
The Company operates within two business segments: Operating Disposal
Facilities and Non-Operating Disposal Facilities. These segments reflect AEC's
internal reporting structure and current operational status. The Operating
Disposal Facilities currently accept hazardous and low-level radioactive waste
and include the Company's RCRA hazardous waste treatment and disposal facilities
in Beatty, Nevada; Grand View, Idaho; and Robstown, Texas; and its LLRW disposal
facility in Richland, Washington. Each of the Washington, Idaho and (to a much
lesser degree) Texas facilities accept NORM/NARM waste also. The Non-Operating
Disposal Facilities segment includes non-operating disposal facilities in
Sheffield, Illinois; Beatty, Nevada; and Bruneau, Idaho; a closed hazardous
waste processing and deep-well injection facility in Winona, Texas; and formerly
proposed new disposal facilities in Butte, Nebraska and Ward Valley, California
which are the subject of damages claims filed by the Company. 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.
The Company's Oak Ridge, Tennessee based LLRW Processing and Field Services
business ceased processing operations in December 2002 and is reported as
discontinued operations. On June 30, 2004, the Company transferred substantially
all of the assets and liabilities of the Oak Ridge business to Toxco, Inc.
("Toxco"). In this transaction, the Company transferred $2,060,000 in Property
and $1,650,000 in Cash to Toxco in exchange for Toxco's assumption of $4,640,000
of Closure and Other Liabilities. When combined with reductions in liabilities,
the transaction resulted in a gain on sale of approximately $930,000. This gain
was recognized during the second quarter of 2004.
On February 13, 2003, the Company sold its El Centro municipal and industrial
waste landfill to a wholly-owned subsidiary of Allied Waste Industries, Inc.
("Allied") for $10 million cash at closing and future volume-based royalty
payments. The El Centro landfill is located adjacent to subsidiary US Ecology
Texas' hazardous and industrial waste treatment and disposal facility. Under the
agreement, Allied pays American Ecology minimum royalties of at least $215,000
annually. Once Allied has paid the Company $14,000,000 it will no longer have an
obligation to pay annual minimum royalties but will still be required to pay
royalties based upon El Centro waste volumes. The El Centro solid waste landfill
was carried on the Company's books at approximately $7 million prior to sale.
When combined with reductions in liabilities and the recognition of future
minimum royalties, the transaction resulted in a gain on sale of approximately
$4.9 million. This gain was recognized during the first quarter of 2003.
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The following table summarizes each segment:
SUBSIDIARY LOCATION SERVICES
- ---------------- ----------------------- ------------------------------------------------------------
OPERATING DISPOSAL FACILITIES
-----------------------------
USEI Grand View, Idaho Hazardous, PCB, NORM/NARM and NRC-exempt
radioactive and mixed waste treatment and disposal, rail
transfer station
USET Robstown, Texas Hazardous, non-hazardous industrial and NORM/NARM
waste treatment and disposal
USEN Beatty, Nevada Hazardous, non-hazardous industrial and PCB waste
treatment and disposal
USEW Richland, Washington Low-Level Radioactive and NORM/NARM waste disposal
NON-OPERATING DISPOSAL FACILITIES
---------------------------------
US Ecology Beatty, Nevada Closed LLRW disposal facility: State of Nevada is licensee
US Ecology Sheffield, Illinois Closed LLRW disposal facility: State of Illinois is licensee
US Ecology Sheffield, Illinois Non-operating hazardous waste disposal facility: US
Ecology is permittee
AEESC Winona, Texas Non-operating hazardous waste processing and deep well
facility: AEESC is permittee
USEI Bruneau, Idaho Closed hazardous waste disposal facility: US Ecology Idaho
is permittee
US Ecology Ward Valley, California Formerly proposed LLRW disposal facility: in litigation
US Ecology Butte, Nebraska Formerly proposed LLRW disposal facility: litigation settled
DISCONTINUED OPERATIONS
-----------------------
AERC Oak Ridge, Tennessee LLRW volume reduction and processing facility and related
Field Services, sold June 30, 2004
Texas Ecologists Robstown, Texas Municipal and industrial solid waste, sold February 13, 2003
OPERATING DISPOSAL FACILITIES
A significant portion of the Company's revenue from operating disposal
facilities is attributable to discrete, one-time clean-up projects ("Event
Business"). Individual clean-up efforts may span weeks, months or years
depending on project scope. The project-specific nature of the Event Business
necessarily creates variability in revenue and earnings. This can produce large
quarter to quarter and year to year changes in earnings, depending on the
relative contribution from Event Business projects. Management's strategy is to
expand its recurring business ("Base Business"), while simultaneously securing
both large and small Event Business sales opportunities. Experience indicates
that by controlling operating costs so that Base Business covers fixed costs, an
increased amount of the Event Business revenue will fall through to the bottom
line. This strategy takes advantage of the predominantly fixed cost nature of
waste disposal operations and the related operating leverage advantages of the
business.
Grand View, Idaho RCRA Facility. USEI is located on 1,304 acres of
Company-owned land about 60 miles southeast of Boise, Idaho in the Owyhee
Desert. This operation, acquired in February 2001, includes a rail transfer
station located approximately 30 miles northeast of the disposal site. As part
of the acquisition, the Company also obtained rights to a patented, U.S.
Environmental Protection Agency ("US EPA") approved technology to stabilize and
"delist" hazardous electric arc furnace dust from steel mills. Delisted waste is
subject to the lower State fees applicable to non-hazardous waste. The facility
is also permitted to accept certain naturally occurring and
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accelerator produced radioactive material and low activity radioactive material
exempted from regulation by the U.S. Nuclear Regulatory Commission, including
certain "mixed" hazardous and radioactive wastes, generated by commercial and
government customers. This material includes waste received under a five year
contract renewal entered with the U.S. Army Corps of Engineers in 2004. The
facility is regulated under permits issued by the Idaho Department of
Environmental Quality and the US EPA, and is subject to applicable Federal and
State law and regulations.
Robstown, Texas RCRA Facility. USET operates on 240 acres of Company-owned land
near Robstown, Texas about 10 miles west of Corpus Christi. The facility,
opened to accept waste in 1973, is regulated under a permit issued by the Texas
Commission on Environmental Quality ("TCEQ"). The site is also subject to US EPA
regulations and is permitted to accept certain low activity radioactive
materials and mixed wastes. Waste treatment at the Company's Robstown Texas
facility was suspended following a July 1, 2004 fire in the facility's waste
treatment building. Treatment revenue previously represented approximately 50%
of facility revenue. Direct disposal operations, which continued without
interruption after the fire, generated the balance of the facility's revenue.
While the Company is insured for property and equipment damage and business
interruption, operational upgrades and loss of customer business impacted 2004
results and may continue to negatively impact financial performance in 2005. The
Company also filed property and business interruption claims with its insurance
carrier. Any differences between the amounts ultimately paid and amounts
recognized by the Company will impact 2005 financial performance. The Texas
facility restored limited treatment services in December 2004 and expects to
resume full treatment services late in the first half of 2005.
Beatty, Nevada RCRA Facility. USEN leases approximately 80 acres from the State
of Nevada on which treatment and disposal operations are conducted. The
Company's lease was renewed for ten years in 1997. The Company expects to timely
renew its lease prior to expiration. Opened to receive hazardous waste in 1970,
the site is located in the Amargosa Desert approximately 100 miles northwest of
Las Vegas, Nevada and 30 miles east of Death Valley, California. The facility is
regulated under permits issued by the Nevada Department of Environmental
Protection and the US EPA.
Richland, Washington LLRW Facility. In operation since 1965, this USEW facility
is located on 100 acres of State leased land on the U.S. Department of Energy
Hanford Site approximately 35 miles west of Richland, Washington. The lease
between the State of Washington and the Federal government expires in 2061. The
Company expects to renew its sublease with the State, which expires in July
2005, based on a February 2004 decision by the State of Washington not to put
the sublease out for competitive bid. The facility is licensed by the Washington
Department of Health for health and safety purposes, and is also regulated by
the Washington Utilities and Transportation Commission ("WUTC"), which sets
disposal rates for low-level radioactive wastes. Rates are set at an amount
sufficient to cover operating costs and provide the Company with a reasonable
profit. A new regulated rate agreement was entered into in 2001 and expires
January 1, 2008. The State also assesses user fees for local economic
development, State regulatory agency expenses, and a dedicated trust account to
pay for long-term care and maintenance after the facility closes. The Richland
facility also serves as home to the US Ecology NORM/NARM Services group offering
waste packaging, removal, off-site shipment and disposal services.
NON-OPERATING DISPOSAL FACILITIES
Beatty, Nevada LLRW Site. Operated by the Company from 1962 to 1993, the Beatty
LLRW disposal site was the nation's first commercial facility licensed to
dispose of LLRW. In 1997, it became the first such LLRW disposal facility to
successfully complete closure and post-closure stabilization and to transfer its
license to the government for long-term institutional control. Since that time,
the Company has performed maintenance and surveillance under a contract with the
State of Nevada that is paid from a State-controlled account funded during
facility operations.
Bruneau, Idaho RCRA Site. This remote 88 acre desert site, acquired along with
the Grand View, Idaho disposal operation in February 2001, was closed by the
prior owner under an approved RCRA plan. Post closure monitoring will continue
for approximately 25 more years in accordance with permit and regulatory
requirements.
Sheffield Illinois LLRW Site. The Company previously operated this LLRW
disposal facility on a 20 acre, State-owned site from 1968 to 1978. After
performing closure work under a 1988 Settlement Agreement with the State of
Illinois, the Company monitored and maintained the site until mid-2001, when the
LLRW license was transferred to
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the State. As at Beatty, the Company has a contract with the State to perform
long-term inspection and maintenance funded from a State-controlled account.
Sheffield Illinois RCRA Site. The Company previously operated two hazardous
waste disposal areas adjacent to the Sheffield LLRW disposal area. One hazardous
waste area was opened in 1968 and ceased accepting waste in 1974. The second
accepted hazardous waste from 1974 through 1983. In November 2003 the Company
renegotiated its closure/post-closure obligations, allowing the Company to
reduce its financial assurance requirement from $3,181,000 to $1,497,000. The
Company also reduced its corrective action financial assurance requirements from
$1,500,000 to $800,000. The Company continues to perform corrective measures at
the facility under regulation by the US EPA. During the fourth quarter of 2004
the Company increased its estimate for closure and post-closure costs at this
site by $715,000. The revised cost estimate and increase in the related reserve
was based on a review of planned remediation activities and environmental
monitoring work. An independent environmental consulting firm with prior
experience at the site provided peer review of the revised estimate. Including
the $715,000, the updated reserve for the Sheffield hazardous waste disposal
area is now $2,489,000. Post closure monitoring will continue for approximately
22 more years in accordance with permit and regulatory requirements.
Winona, Texas Site. From 1980 to 1994, Gibraltar Chemical Resources operated the
Winona hazardous waste processing and deep well facility, at which time AEC
purchased the facility. Solvent recovery, deep well injection and waste
brokerage operations were conducted on an eight acre site until March 1997, when
the Company ceased operations. The Company is proceeding under an Agreed Order
entered with the State of Texas for closure, and maintains a $1,300,000
financial assurance. State action is pending on a Closure Certification Report
submitted in 1999 and supplemented with additional information in 2003 and 2004.
The Company owns an additional 540 acres contiguous to the permitted site.
Ward Valley, California Formerly Proposed LLRW Disposal Facility. In 1993, the
Company received a State of California license to construct and operate a LLRW
disposal facility in the Mojave Desert to serve the Southwestern LLRW Compact.
The Company has alleged that the State of California abandoned its duty to
acquire the project property from the U.S. Department of the Interior in a suit
filed in State court seeking recovery of monetary damages in excess of $162
million. The trial court ruled against the Company in March 2003. Based on the
uncertainty of recovery following this adverse decision, the Company wrote off
the $20,951,000 deferred site development asset. In June 2003, the Company filed
a notice of appeal with the California Fourth Appellate District Court. The
appeal is now fully briefed. Management expects oral argument to be scheduled in
the spring of 2005.
Butte, Nebraska Formerly Proposed LLRW Disposal Facility. The Company submitted
an application to the State of Nebraska to construct and operate this facility,
developed under contract to the Central Interstate LLRW Compact Commission
("CIC"). Following proposed license denial by the State of Nebraska, the CIC,
the Company and a number of nuclear power utilities funding the project sued the
State of Nebraska alleging bad faith in the license review process. In September
2002, the federal district court awarded plaintiffs $153 million in damages,
including approximately $12 million to the Company based on its contributions to
the project and pre-judgment interest. On February 18, 2004, the Eighth U.S.
Circuit Court of Appeals affirmed the district court ruling in its entirety. On
August 9, 2004 Nebraska and the CIC entered into a settlement under which the
State agreed to make four equal payments of $38.5 million to the CIC beginning
August 1, 2005 and annually thereafter for three years. The $154 million
settlement reflects a principal amount of $140.5 million, plus interest of 3.75%
compounded annually and beginning August 1, 2004. The principal may be reduced
to $130 million if Nebraska and the CIC negotiate suitable access to a proposed
future Texas LLRW disposal site. Settlement payments are subject to legislative
appropriation. Should the Nebraska legislature fail to appropriate the required
payments, the CIC retains rights to pursue enforcement by any and all legal
remedies available. Under the settlement, Nebraska waived any claim to sovereign
immunity in a suit brought to enforce payment and agreed to dismiss its petition
for U.S. Supreme Court review.
DISCONTINUED OPERATIONS
Oak Ridge, Tennessee LLRW Processing Facility. AERC, acquired in 1994, processed
LLRW to reduce the volume of waste requiring disposal at licensed LLRW
facilities. The plant, situated on 16 acres in Oak Ridge, Tennessee, primarily
served the commercial nuclear power industry. AERC's processing services were
never successfully integrated with the Company's core disposal business, and
management was unable to identify a viable business strategy to reverse the
recurring losses that occurred at the facility since its acquisition in 1994. In
December 2002,
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the Company ceased commercial operations and focused on efforts to remove
customer waste from the plant site and market the business' physical assets for
sale. On June 30, 2004, the Company transferred substantially all of the assets
and liabilities of its discontinued Oak Ridge Tennessee processing and field
services operations to Toxco, Inc. ("Toxco"). The Company transferred $2,060,000
in Property and $1,650,000 in Cash to Toxco in exchange for Toxco's assumption
of $4,640,000 of Closure and Other Liabilities. When combined with reductions
in liabilities, the transaction resulted in a gain on sale of approximately
$930,000. This gain was recognized during the second quarter of 2004.
Robstown, Texas Municipal Solid Waste Landfill. In July 2000, the Company began
operation of a municipal and industrial waste landfill adjacent to subsidiary US
Ecology Texas' hazardous and industrial waste treatment and disposal facility.
On February 13, 2003, the Company sold the El Centro landfill to a subsidiary of
Allied Waste Industries, Inc. ("Allied") for $10 million cash at closing and
future volume-based royalty payments of at least $215,000 annually. Once Allied
has paid the Company $14,000,000, it no longer has an obligation to pay annual
minimum royalties, but will still be required to pay royalties based upon El
Centro waste volumes. When combined with reductions in liabilities and the
recognition of certain future minimum royalties, the transaction resulted in a
net gain on sale of approximately $4.9 million which was recognized in the first
quarter of 2003.
INDUSTRY
The hazardous waste industry has entered a mature phase after rapid expansion in
the 1970s and 1980s that was driven by new environmental laws and actions by
federal and state agencies to regulate existing hazardous waste management
facilities and direct the clean up of contaminated sites under the federal
Superfund law. By the early 1990s, excess hazardous waste management capacity
had been constructed by the waste services industry. At the same time, to better
manage risk and reduce expenses, many waste generators instituted industrial
process changes and other methods to minimize waste production. The volume of
waste shipped for disposal from Superfund and other properties also diminished
as many contaminated sites were cleaned up. Improved waste management by
generators coupled with excess commercial disposal capacity and a maturing
federal Superfund program created highly competitive market conditions that
still apply today.
Management believes that a baseline demand for hazardous waste services will
remain, but that this demand will fluctuate (increase and decrease) in response
to both general economic conditions and large specific clean-up projects.
Management further believes that the ability to deliver specialized niche
services, while aggressively competing for large volume projects and
non-specialized commodity business, will differentiate successful from less
successful companies going forward. The Company's 2001 acquisition of Envirosafe
Services of Idaho and access to its patented steel mill waste delisting
technology, expanded approvals to manage certain radioactive and mixed waste
materials, operation of patented thermal treatment units at its Beatty, Nevada
hazardous waste facility, and development of more cost-effective treatment
processes for specific customer wastes reflect successful initiatives by the
Company to increase market share and profitability. The Company's Idaho rail
transfer facility was expanded and road improvements were completed to better
position the Company to compete for large volume clean-up projects.
The commercial LLRW business has also experienced significant change. This is
primarily due to failure of the LLRW Policy Act of 1980 ("Policy Act") and
interstate Compacts encouraged to be formed under the Policy Act to develop new
disposal sites and related market responses. Company efforts to site new
disposal facilities in Ward Valley, California and Butte, Nebraska to serve
Compact regions have been unsuccessful. The Company alleged, in separate
litigation, that the states of California and Nebraska abandoned their duties
under the Policy Act and related law. Management believes the Company is
entitled to compensation for its past investments in these statutorily-required
site development projects and has pursued litigation in both instances to
recover monetary damages. In 2004, a damages settlement was reached between
Nebraska and the Central Interstate Compact subject to legislative
appropriation. The California litigation is pending.
The Company's Richland, Washington disposal facility, serving the Northwest and
Rocky Mountain Compacts, is one of only two operating Compact disposal
facilities in the nation. Both were in full operation for many years before
passage of the LLRW Policy Act. While the Richland site has substantial unused
capacity, it can only accept LLRW from the eleven western states comprising the
two Compacts served. The Barnwell, South Carolina site,
8
operated by a competitor, is located in the Atlantic Compact. The Barnwell site
is open to the entire nation until at least 2008 but imposes much higher state
fees.
Restricted access to the Company's Richland, Washington facility, Barnwell's fee
status and future availability uncertainty, and the failure of the Compacts to
establish new disposal facilities created a market opportunity for a privately
held Utah disposal company. The Utah facility is licensed to accept a
substantial subset of the LLRW which Congress made a state responsibility under
the Policy Act. Increased disposal prices have also induced a number of
businesses to offer LLRW processing and volume reduction services. The Company
purchased its Oak Ridge facility in 1994 to participate in this market, along
with other new market entrants. The LLRW volume reduction business has
experienced heavy price competition and a number of companies later ceased
operations and/or declared bankruptcy. This heavy competition and the Oak Ridge
facility's reliance on disposal facilities operated by competitors to ship
processed waste produced substantial losses leading to the Company's decision to
discontinue waste processing in late 2002 and sell the land, plant, and
equipment of this business on June 30 2004.
The significant rise in radioactive waste disposal prices at traditional LLRW
facilities has also heightened demand for more cost-effective disposal services
for soil, debris, consumer products, industrial wastes and other materials
containing low activity radioactive material, as well as mixed wastes exhibiting
both hazardous and radioactive properties. In addition to commercial demand, a
substantial amount of low activity radioactive materials is generated by federal
clean-up projects. Management believes the expanded use of permitted hazardous
waste disposal facilities to dispose of such materials is a safe,
environmentally sound market response. The Company's Grand View, Idaho RCRA
hazardous waste facility has significantly increased waste volume throughput
since 2001. The Company's US Ecology Texas disposal facility is also permitted
to accept, on a much more limited basis, this type of waste.
Management believes the Company is well positioned to grow its low activity
radioactive material business based on its industry reputation, its existing
Idaho and Texas facility permits, its substantial experience handling
radioactive materials at multiple facilities, its high volume waste throughput
capabilities, and its competitive pricing.
PERMITS, LICENSES AND REGULATORY REQUIREMENTS
The Company's hazardous, industrial, non-hazardous, and radioactive materials
business is subject to extensive environmental, health, safety, and
transportation laws, regulations, permits and licenses administered by federal,
state and local agencies. The responsible agencies regularly inspect the
Company's operations to monitor compliance. They have authority to enforce
compliance through the suspension or revocation of operating licenses and
permits and the imposition of civil or criminal penalties in case of violations.
This body of law and regulations contribute to the demand for Company services
and represent a significant obstacle to new market entrants.
The Resource Conservation and Recovery Act of 1976 ("RCRA") provides a
comprehensive framework for regulating hazardous waste handling, transportation,
treatment, storage, and disposal. Certain radioactive materials may also be
managed under RCRA permits, as specifically authorized for the Company's
facilities in Grand View, Idaho and Robstown, Texas. RCRA regulation and
permitting is the responsibility of the US EPA and state agencies delegated such
authority. Listed chemical compounds and residues derived from listed industrial
processes are subject to RCRA standards unless they are delisted through a
formal rulemaking process such as the patented steel mill treatment employed at
the Company's Grand View, Idaho facility. RCRA liability may be imposed for
improper waste management or for failure to take corrective action to address
releases of hazardous substances. To the extent wastes are recycled or
beneficially reused, regulatory controls under RCRA diminish.
CERCLA and its amendments ("Superfund") impose strict, joint and several
liability on owners or operators of facilities where a release of hazardous
substances has occurred, on parties who generated hazardous substances released
at such facilities, and on parties who arranged for the transportation of
hazardous substances. Liability under Superfund may be imposed if releases of
hazardous substances occur at treatment, storage, or disposal sites. Since waste
generators face the same liabilities, they are motivated to minimize the number
of commercial disposal sites utilized to manage their wastes. Commercial
disposal facilities require authorization from the US EPA to receive CERCLA
wastes. The Company's three hazardous waste disposal facilities each maintain
this authorization.
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The Toxic Substances Control Act ("TSCA") establishes a comprehensive regulatory
program for treatment, storage and disposal of PCBs. Regulation and licensing of
PCB wastes is the responsibility of the US EPA. The Company's Grand View, Idaho
and Beatty, Nevada disposal facilities have TSCA permits.
The Atomic Energy Act of 1954 ("AEA") and the Energy Reorganization Act of 1974
assign to the NRC regulatory authority over the receipt, possession, use and
transfer of specified radioactive materials, including disposal. The NRC has
adopted regulations for licensing commercial LLRW processing and disposal sites,
and may delegate regulatory and licensing authority to individual states. The
NRC and U.S. Department of Transportation regulate the transport of radioactive
materials. Shippers and carriers of radioactive materials must comply with both
the general requirements for hazardous materials transportation and with
specific requirements for radioactive materials.
The AEA does not authorize the NRC to regulate NORM/NARM. However, individual
states may assert regulatory jurisdiction. Many states, including Idaho and
Texas where the Company operates facilities, have chosen to do so.
The process of applying for and obtaining licenses and permits to construct and
operate facilities accepting radioactive and hazardous waste is lengthy and
complex. Management believes the Company has significant knowledge and expertise
in this area. The Company also believes it possesses all permits, licenses and
regulatory approvals currently required to maintain regulatory compliance and
safely operate its facilities, and has the specialized expertise required to
obtain additional approvals to continue growing its business in the future.
INSURANCE, FINANCIAL ASSURANCE AND RISK MANAGEMENT
The Company carries a broad range of insurance coverage, including general
liability, automobile liability, real and personal property, workers'
compensation, directors' and officers' liability, environmental impairment
liability, and other coverage customary to the industry. Management does not
expect the impact of any known casualty, property, environmental or other
contingency to be material to its financial condition, results of operations or
cash flows.
Existing regulations require financial assurance to cover the cost of final
closure and/or post-closure obligations at certain Company operating and
non-operating disposal facilities. Acceptable forms of financial assurance
include third party letters of credit, surety bonds and traditional insurance.
Alternatively, facilities may be required to fund State-controlled escrow type
or trust accounts during the operating life of the facility.
Through December 31, 2004, the Company has been able to meet all its financial
assurance requirements through insurance. The Company's current closure and
post-closure policies were renewed on December 19, 2004 with increased
collateral and premium requirements and have a term of one year. The Company
expects to continue renewing these insurance policies. If the Company were
unable to obtain adequate closure, post-closure or environmental insurance in
the future, any partially or completely uninsured claim against the Company, if
successful and of sufficient magnitude, could have a material adverse effect on
the Company's financial condition, results of operations and cash flows.
Additionally, continued access to casualty and pollution legal liability
insurance with sufficient limits, at acceptable terms, is important to obtaining
new business. Failure to maintain adequate financial assurance could also result
in regulatory action being taken against the Company that could include the
early closure of affected facilities. As of December 31, 2004, the Company
provided letters of credit of $5,000,000 as collateral for financial assurance
insurance policies of approximately $32,000,000 for closure and post-closure
obligations. Management believes the Company will be able to maintain the
requisite financial assurance policies. While the Company has been able to
obtain financial assurance for its current operations, premium and collateral
requirements may continue to increase.
Primary casualty insurance programs do not generally cover accidental
environmental contamination losses. To provide insurance protection for
potential claims, the Company maintains environmental impairment liability
insurance and professional environmental consultant's liability insurance for
non-nuclear occurrences. For nuclear liability coverage, the Company maintains
Facility Form nuclear liability insurance provided under the federal Price
Anderson Act. This insurance covers the operations of its facilities, suppliers
and transporters. The Company purchases primary property, casualty and excess
liability policies through traditional third party insurance carriers.
10
CUSTOMERS
The Company disposes of low activity radioactive material and hazardous waste
under a five year contract with the U.S. Army Corps of Engineers Formerly
Utilized Site Remedial Action Program ("FUSRAP"), and steel mill air pollution
control dust (KO61 waste) under individual multi-year steel mill contracts. The
Company also periodically manages the transportation of wastes to its disposal
facilities. These projects may periodically contribute significant revenue. The
following customers accounted for more than 10% of the Company's revenue in
2004, 2003 or 2002:
% OF REVENUE FOR YEAR ENDING
CUSTOMER 2004 2003 2002
------ ------ ------
U.S. Army Corps of Engineers 31 27 27
Nucor Steel Company 6 7 13
Shaw Environmental & Infrastructure, Inc. - 18 -
MARKETS
Disposal Services. The hazardous waste treatment and disposal business is both
competitive and sensitive to transportation costs. NRC-exempt radioactive
material and other specialized niche services are less sensitive to these
factors. Waste transported by rail is less expensive, on a per mile basis, than
waste transported by truck.
The Company's Robstown, Texas hazardous waste facility is geographically well
positioned to serve refineries, chemical production plants and other industries
concentrated on the Texas Gulf coast. The facility is also permitted to accept
certain NORM and NRC-exempt radioactive materials and competes over a larger
area for these wastes. Waste treatment at the Company's Robstown Texas facility
was suspended following a July 1, 2004 fire in the facility's waste treatment
building. Treatment revenue previously represented approximately 50% of facility
revenue. Direct disposal operations, which continued without interruption after
the fire, generated the balance of the facility's revenue. While the Company is
insured for property and equipment damage and business interruption, operational
upgrades and loss of customer business impacted 2004 results and may continue to
negatively impact financial performance in 2005. The Company also filed property
and business interruption claims with its insurance carrier. Any differences
between the amounts ultimately paid and amounts recognized by the Company will
impact 2005 financial performance. The Texas facility restored limited treatment
services in December 2004 and expects to resume full treatment services late in
the first half of 2005.
The Company's Beatty, Nevada facility primarily competes for business in the
California, Arizona, Utah and Nevada markets. Due to the site's superior
geologic and climate conditions in the Amargosa Desert, the Nevada facility can
compete for wastes shipped from more distant locations. The Nevada facility also
competes over a larger geographic area for PCB waste due to the more limited
number of TSCA disposal facilities nationwide. The Beatty facility also offers
thermal treatment services, primarily to customers in western states.
The Company's Grand View, Idaho facility accepts wastes from across the nation
and operates a Company-owned rail transfer station located adjacent to a main
east-west rail line, generally allowing much lower cost transportation than by
truck. The Idaho facility's two primary markets are steel mill air pollution
control dust, NORM and NRC-exempt radioactive materials and mixed wastes in
concentrations specified by permit. Substantial waste volumes are received under
a contract with the U.S. Army Corps of Engineers that is also utilized by other
federal agencies. Effective May 14, 2004 the Corps exercised their option to
extend the contract through May 13, 2009. Permit modifications have expanded
disposal capabilities at the Idaho facility. Waste throughput has been
significantly enhanced by the addition of track at the Company's Idaho rail
transfer station.
Waste stabilization, encapsulation, chemical oxidation and other treatment
technologies are available at the Company's Idaho, Nevada and Texas facilities
to meet US EPA land disposal restrictions. This capability allows all three
sites to manage a significantly broader spectrum of wastes than if pre-disposal
treatment was not offered.
The Richland, Washington disposal facility serves LLRW producers in the eight
member States of the Northwest Compact. The three Rocky Mountain Compact States
are also eligible to use the facility subject to annual volume limits. Since US
Ecology is a monopoly LLRW service provider under the Northwest Compact, the
State of
11
Washington approves the facility's LLRW disposal rates. The site competes for
NORM/NARM from customers across the country. NORM/NARM rates are not regulated,
since a monopoly does not exist.
COMPETITION
The Company competes with large and small companies in each of the markets in
which it operates. The radioactive, hazardous and non-hazardous industrial waste
management industry is highly competitive. Management believes that its primary
disposal competitors are Waste Management, Clean Harbors, Envirocare of Utah,
and Waste Control Specialists and that the principal competitive factors
applicable to its business are:
- - Price
- - Specialized permits and "niche" service offerings
- - Customer service
- - Operational efficiency and technical expertise
- - Environmental compliance and credibility with regulatory agencies
- - Industry reputation and brand name recognition
- - Transportation distance
Management believes the Company is competitive in the geographic areas it seeks
to serve and that it offers a nationally unique mix of services, including
specialized patent rights and niche services which favorably distinguish it from
competitors. Management further believes that its strong "brand" name
recognition from more than 50 years of industry experience, excellent compliance
record and customer service reputation, and positive relationships with
customers, regulators, and the local communities enhance its competitive
position. While the Company is competitive, advantages exist for certain
competitors that have technology, permits, and equipment enabling them to accept
additional wastes streams, that operate in jurisdictions that impose lower
disposal taxes, and/or are located closer to where various wastes are generated.
PERSONNEL
Since 2001, the executive management team has implemented major business system
and organizational changes, which included a large reduction in force following
a December 2002 decision to exit the LLRW processing business. On January 31,
2005, the Company had 178 full time employees, of which 11 were members of the
PACE union at its Richland, Washington facility.
ITEM 2. PROPERTIES
The Company believes that its property and equipment are well maintained, in
good operating condition, and suitable for the Company's current and projected
needs. Company headquarters are located in Boise, Idaho in leased office space.
AEC also leases sales and administrative offices in Washington and Kentucky. The
following table describes the principal properties and facilities owned or
leased by the Company.
CORPORATE FUNCTION ACREAGE OWN/LEASE
- -------------------- ------------------------------- ------------- ---------
Boise, Idaho Corporate office 8,572 sq. ft. Lease
OPERATING DISPOSAL FACILITIES
- -----------------------------
Beatty, Nevada Treatment and disposal facility 80 acres Lease
Grand View, Idaho Treatment and disposal facility 1,304 acres Own
Elmore County, Idaho Rail transfer station 140 acres Own
Robstown, Texas Treatment and disposal facility 240 acres Own
Richland, Washington Disposal facility 100 acres Sublease
NON-OPERATING DISPOSAL FACILITIES
- ---------------------------------
Bruneau, Idaho Closed disposal facility 88 acres Own
Sheffield, Illinois Closed disposal facility 204 acres Own
Sheffield, Illinois Closed disposal facility 170 acres Own
Winona, Texas Non-operating processing and 540 acres Own
deep well facility
DISCONTINUED OPERATIONS
- -----------------------
Oak Ridge, Tennessee Processing facility 16 acres Sold
Robstown, Texas Municipal landfill 200 acres Sold
12
The principal properties of the Company make up less than 10% of the total
assets. The properties utilized are sufficient and suitable for the Company's
needs.
ITEM 3. LEGAL PROCEEDINGS
- ----------------------------
US ECOLOGY, INC. V. THE STATE OF CALIFORNIA, ET AL., CASE NO.GIC747562, SUPERIOR
- ---------------------------------------------------
COURT OF THE STATE OF CALIFORNIA FOR THE COUNTY OF SAN DIEGO
In 2000, subsidiary US Ecology, Inc., sued the State of California for monetary
damages exceeding $162 million. The suit stems from California's alleged
abandonment of the formerly proposed Ward Valley LLRW disposal project. State
and federal law requires the State to build a disposal facility for LLRW
produced in California, Arizona, North Dakota and South Dakota, member states of
the Southwestern Compact. USE was selected to site and license the facility
using its own funds on a reimbursable basis and obtained a license in 1993.
On March 26, 2003, the Superior Court ruled 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 to convey the proposed site from the federal
government to the State. The Court also ruled that key elements of the Company's
promissory estoppel claim were proven at trial. Specifically, the Court ruled
that the State made a clear and unambiguous promise to USE in 1988 to use its
best efforts to acquire the site, that the State had abandoned this promise, and
that the Company's reliance on the State's promise was foreseeable. However, the
Court found that the State's breach of its promise was not a substantial factor
in causing damages to USE 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
on March 31, 2003.
In June 2003, the Company filed a notice of appeal with the California Fourth
Appellate District Court. The law firm of Cooley Godward was engaged on a fixed
price plus contingency basis to pursue the appeal. The fixed fee was expensed at
the time of engagement in July 2003. The matter is now fully briefed and the
Company expects that oral argument will be held in the spring of 2005. A
decision will be due 90 days following oral argument.
The Company's financial interest in the matter was materially improved by a 2003
amendment to the 1998 Ward Valley Interest Agreement and Assignment entered into
by the Company and its former primary lender. This amendment, entered into with
the former lender's successor, 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 case. 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.
13
No assurance can be given that the Company will prevail on appeal or reach a
settlement to recover any portion of its investment or legal expenses.
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 LLRW within the Central Interstate Low-Level Radioactive
Waste Compact ("CIC"). CIC member states are Nebraska, Kansas, Oklahoma,
Arkansas, and Louisiana. The action sought declaratory relief and damages for
bad faith in the State of Nebraska's processing and denial of USE's application
to develop and operate a LLRW disposal facility near Butte, Nebraska. US Ecology
is the CIC's contractor and intervened as a plaintiff.
In September 2002, the US District Court for the District of Nebraska entered
judgment against Nebraska in favor of the CIC for $153 million, including
approximately $50 million for prejudgment interest. Of this amount, USE's share
was $6.2 million plus $6.1 million for prejudgment interest. The Company carries
$6.5 million on its balance sheet for capitalized facility development costs.
The State appealed the judgment to the Eighth Circuit Court of Appeals where it
was argued in June 2003.
On February 18, 2004, the Eighth U.S. Circuit Court of Appeals affirmed the
District Court ruling in its entirety. On August 9, 2004 Nebraska and the CIC
entered into a settlement under which the State agreed to make four equal
payments of $38.5 million to the CIC beginning August 1, 2005 and annually
thereafter for three years. The $154 million settlement reflects a principal
amount of $140.5 million, plus interest of 3.75% compounded annually and
beginning August 1, 2004. The principal amount may be reduced to $130 million if
Nebraska and the CIC negotiate suitable access to a proposed future Texas LLRW
disposal site. Settlement payments are subject to legislative appropriation.
Should the Nebraska legislature fail to appropriate the required payments, the
CIC retains rights to pursue enforcement by any and all legal remedies
available. Under the settlement, Nebraska waived any claim to sovereign immunity
in a suit brought to enforce payment and agreed to dismiss its petition for U.S.
Supreme Court review. The Company expects to finalize payment arrangements with
the CIC prior to the intended August 2005 disbursement.
No assurance can be given that the Nebraska legislature will appropriate the
funds required to comply with the settlement agreement or that an acceptable
payment arrangement can be entered into with the CIC.
MANCHAK V. US ECOLOGY, INC., U.S. DISTRICT COURT FOR THE DISTRICT OF NEVADA,
- --------------------------------
CASE NO. CV-S-97-0655.
In April 1996, Frank Manchak, Jr. ("Manchak") filed suit against subsidiary US
Ecology, Inc., alleging infringement of a sludge treatment patent to stabilize
hazardous waste at the Company's Beatty, Nevada hazardous waste facility.
Manchak sought unspecified damages for infringement, treble damages, interest,
costs and attorney fees. In October 2002, the United States District Court for
the District of Nevada entered a summary judgment in favor of the Company.
Manchak filed a motion for reconsideration that was denied. Manchak's
subsequent appeal to the U.S. Court of Appeals for the Federal Circuit was
dismissed, and his requests for reconsideration and en banc review were finally
rejected in October 2003. On January 8, 2004, Manchak filed a Rule 60(b) motion
in the Nevada District Court seeking relief from that Court's orders granting
summary judgment of non-infringement and denying reconsideration. On March 8,
2004, the District Court rejected Manchak's Rule 60(b) motion, prohibited
further filings with the Court on the matter and imposed sanctions on Manchak.
Based on this, the Company believed the matter was closed. However, Manchak
appealed the District Court's March 8, 2004 order and the Federal Circuit has
agreed to hear the appeal. Oral argument is scheduled for March 8, 2005. No
assurance can be given that the Company will prevail in this matter.
DAVID W. CROW V. AMERICAN ECOLOGY CORPORATION, U.S. DISTRICT COURT OF HARRIS
- --------------------------------------------------
COUNTY, TEXAS; 280TH JUDICIAL DISTRICT.
In the complaint, Mr. Crow alleges he was hired by the Company as its General
Counsel in October 1995 and that his compensation package included 150,000
options to purchase Company common stock with an oral agreement by the prior CEO
that the stock options would be exercisable for ten years.
14
In May 2000, Mr. Crow first contacted the Company regarding the stock options.
The Company informed Mr. Crow by letter that pursuant to the Company's 1992
Employee Stock Option Plan, Mr. Crow's options had expired thirty days after his
employment with the Company ended.
Mr. Crow's lawsuit was initially filed in Harris County (Texas) District Court
on or about May 4, 2004. The Company removed the lawsuit to federal court based
on diversity jurisdiction. The Complaint alleges four counts: breach of written
contract, breach of oral contract, fraudulent inducement, and declaratory
judgment that Crow is entitled to purchase 150,000 shares of AEC stock at a
strike price of $4 per share.
Mr. Crow, the Plaintiff, estimates his damages in the Complaint as between
$1,050,000 and $1,258,500. These figures are calculated by taking the difference
of the Company's current and 52 week high stock trading price and the $4/share
alleged option strike price.
The Company believes it has insurance against the claim and has notified its
carrier of the claim. The Company believes that allegations are without merit
and intends to vigorously defend itself in the matter. However, no assurance can
be given that it will prevail.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's security holders during the fourth
quarter of 2004.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
American Ecology Corporation common stock is listed on the NASDAQ National
Market System under the symbol ECOL. As of March 1, 2005, there were
approximately 4,000 common stockholders. High and low sales prices for the
common stock for each quarter in the last two years are shown below:
2004 2003
-------------- ------------
PERIOD High Low High Low
------ ------ ----- -----
1st Quarter $ 8.95 $ 6.28 $3.42 $2.69
2nd Quarter 12.10 8.49 3.15 2.60
3rd Quarter 11.77 8.85 3.80 2.80
4th Quarter 12.15 10.09 8.26 3.59
On August 31, 2004 the Company declared a dividend of $.25 per common share to
stockholders of record on September 30, 2004 and payable October 15, 2004. The
dividend was paid out of cash on hand and totaled $4,345,000.
In August 2000, the Company established a credit facility with Wells Fargo Bank.
This credit facility, which has been amended several times, currently provides
the Company with $8.0 million of borrowing capacity and matures on June 15,
2005. This credit facility allows for annual dividends on any of the Company's
outstanding capital stock as long as an event of default has not occurred, and
will not occur as a result of the dividend.
In 2003, a Company offer to repurchase all outstanding Series D Preferred Stock
for the original sales price plus accrued but unpaid dividends was accepted by
all Series D holders and approved as required by the Board of Directors and
Wells Fargo Bank. The Company repurchased the remaining 100,001 shares of
Series D Preferred Stock for $47.50 a share plus accrued but unpaid dividends of
$16.56 a share, for a total payment of $6,406,000.
On February 18, 2004, the Company redeemed a warrant to purchase 1,349,843
shares of common stock for $5,500,000. The warrant was issued in 1998 as part
of the settlement with the Company's former primary bank, and enabled the bank
to acquire 1,349,843 common shares for $1.50 each.
16
ITEM 6 SELECTED FINANCIAL DATA
This summary should be read in conjunction with the consolidated financial
statements and related notes.
(Dollars in thousands, except per share amounts)
YEARS ENDED DECEMBER 31, 2004 2003 2002 2001 2000
- ------------------------ -------- --------- --------- -------- --------
Revenue $54,167 $ 57,047 $ 46,789 $40,175 $27,054
Loss on write off of Ward Valley development costs $ -- $(20,951) $ -- $ -- $ --
Income (loss) from operations $13,148 $(11,069) $ 16,094 $ 2,991 $ 5,510
Income tax benefit from reversal of valuation allowance $14,117 $ -- $ 8,284 $ -- $ --
Cumulative effect of change in accounting principle $ -- $ -- $ 13,141 $ -- $ --
Income (loss) from discontinued operations $ 1,047 $ 2,477 $(10,464) $(2,189) $ (813)
Net Income $23,410 $ (8,592) $ 18,771 $ 802 $ 4,697
Preferred stock dividends accrued $ -- $ 64 $ 398 $ 398 $ 398
Shares used to compute income (loss) per share (000's) 17,226 16,604 14,311 13,738 13,711
Total assets $77,233 $ 66,626 $ 87,125 $86,824 $65,750
Long-term debt, net of current portion $ 2,734 $ 4,200 $ 8,344 $ 4,436 $10,775
Shareholders' equity $51,611 $ 36,351 $ 45,948 $26,416 $25,984
Current ratio (current assets divided by current
liabilities) 2.3:1 2.10:1 1.47:1 0.65:1 1.17:1
Return on average equity (net income divided by
average equity) 53.2% (20.9)% 51.9% 3.1% 19.7%
Dividends declared per common share $ 0.25 $ -- $ -- $ -- $ --
Capital expenditures $ 4,984 $ 6,270 $ 2,737 $ 4,009 $ 3,267
Depreciation, amortization and accretion expense $ 5,957 $ 6,973 $ 6,604 $ 4,076 $ 1,899
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
- --------------------------
When the Company uses words like "may," "believes," "expects," "anticipates,"
"should," "estimates," "projects," "plan," their opposites and similar
expressions, it is making forward-looking statements. These expressions are most
often used in statements relating to business plans, strategies, anticipated
benefits or projections about anticipated revenues, earnings or other aspects of
Company operating results. The Company makes these statements in an effort to
keep stockholders and the public informed about its business based on its
current expectations about future events. Such statements should be viewed with
caution and are not guarantees of future performance or events.
As noted above, and elsewhere in this report, the Company's business is subject
to uncertainties, risks and other influences, many of which are not within its
control. 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 proves to be accurate. The Company undertakes no obligation
to publicly release updates or revisions to these statements. The following
discussion should be read in conjunction with audited consolidated financial
statements and the notes thereto for the year ending December 31, 2004, included
elsewhere in this Form 10-K.
17
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:
- Dependence on key personnel
- compliance with and changes in applicable laws and regulations
- exposure to litigation
- access to capital
- access to cost-effective insurance and financial assurances
- new technologies and patent rights
- competitive environment
- general economic conditions
- potential loss of major contracts
- compliance with Section 404 of Sarbanes-Oxley
- ability to collect on insurance claims
- natural disasters, acts of war or terrorism, or fires may limit
operations
- the effect of weather conditions or other forces of nature
- possible fluctuations in reported earnings due to changes in or new
interpretations of accounting standards
- changes in tax rates and regulations, interest rates, or inflation
rates
- the availability of cost effective rail transportation service
Dependence on Key Personnel
- ------------------------------
The Company has a relatively flat management structure and relies on the
continued service of its senior management. The loss of the services of any key
management employee could adversely effect the business or the price of the
Company's securities. Also, the future success of the Company depends on its
ability to identify, attract, hire, train and motivate other highly skilled
personnel. Failure to do so may adversely affect future results.
Compliance and Changes with Applicable Laws and Regulations
- -----------------------------------------------------------
The changing regulatory framework governing the Company's diverse business
creates significant risks, including potential liabilities from violations of
environmental statutes and regulations. Failure to timely obtain or comply with
applicable federal, state and local governmental licenses, permits or approvals
for its waste treatment and disposal facilities could prevent or inhibit the
Company from operating its facilities and providing services, resulting in a
potentially significant loss of revenue and earnings. Changes in laws or
regulations or changes in the enforcement or interpretation of existing laws and
regulations may require the Company to modify existing operating licenses or
permits, or obtain additional approvals if new environmental legislation or
regulations are enacted or existing legislation or regulations are amended,
reinterpreted or enforced differently than in the past. Any new governmental
requirements that raise compliance standards or require changes in operating
practices or technology requirements may impose significant costs upon the
Company. Failure to comply with applicable statutes, and regulations, licenses
and permits may result in the imposition of substantial fines and penalties and
could adversely affect the Company's ability to carry on its business as
presently constituted.
The Company's revenues are primarily generated as a result of requirements
arising under federal and state laws, regulations, and programs to protect
public health and the environment. Management believes the nation's basic
framework of environmental laws and regulations is widely accepted as sound
public policy. If requirements to comply with these laws and regulations,
particularly those relating to the treatment or disposal of PCB, hazardous,
NORM/NARM and low-level radioactive waste were substantially relaxed or less
vigorously enforced in the future, demand for the Company's services could
materially decrease and revenues could be significantly reduced.
Exposure to Litigation
- ----------------------
Since Company personnel routinely handle radioactive, PCB and hazardous
materials, the Company may be subject to liability claims by employees,
contractors and other third parties. There can be no assurance that the
Company's existing liability insurance is adequate to cover claims asserted
against the Company or that the Company will be able to maintain adequate
insurance in the future. Management believes the Company has adopted prudent
risk
18
management programs to reduce these risks and potential liabilities; however,
there can be no assurance that such programs will fully protect the Company.
Adverse rulings in ongoing legal matters could also have a material adverse
effect on the Company.
Access to Capital
- -------------------
The Company requires cost effective access to capital to implement its strategic
and financial plan. If the Company cannot maintain access to capital or raise
additional capital, the Company may need to delay or scale back planned
infrastructure improvements or disposal capacity expansions. This could
negatively impact the Company's ability to generate earnings. The Company
currently has cash and short term investments on hand to fund its budgeted 2005
capital projects and expects to maintain access to cost-effective capital in the
event borrowings are required. Additionally, the Company has constructed
sufficient disposal capacity to meet foreseeable near-term needs. No assurance
can be given, however, that the Company will continue to have cash on hand for
these purposes or maintain cost-effective access to the capital markets.
Access to Insurance and Financial Assurances
- -------------------------------------------------
The Company is required by license, permit, and prudence to maintain a variety
of insurance instruments and financial assurances. Without cost-effective access
to insurance and/or financial assurance markets, the Company's ability to
operate its facilities would be materially and adversely affected. On December
19, 2004, insurance for the Company's primary financial assurance for its
hazardous waste disposal facilities was renewed for one year. Although the
Company expects to renew these policies prior to expiration, no guarantee can be
given that the Company will be able to renew or procure new financial assurance
insurance on terms favorable to the Company. Inability to obtain cost-effective
insurance and/or financial assurance could have a material adverse effect on the
Company.
New Technologies and Patent Rights
- ----------------------------------
The Company expects to introduce new technologies at its facilities from time to
time. The Company has experienced difficulties implementing new technologies in
the past. If the Company cannot cost-effectively deploy new treatment
technologies in response to market conditions and customer requirements, the
Company's business could be adversely affected.
Competitive Environment
- -----------------------
The Company faces competition from companies with much greater resources and
potentially more cost-effective services. An increase in the number of
commercial treatment or disposal facilities for hazardous or radioactive waste
in the United States, or a decrease in the treatment or disposal fees charged by
competitors could reduce or eliminate the competitive advantage of the Company's
facilities and services. The Company's business is heavily affected by waste
tipping fees assessed by state regulatory entities. These fees, which vary from
State to State, are periodically adjusted. Such adjustments may significantly
impact the competitive environment in which the Company conducts business either
positively or negatively.
General Economic Conditions
- -----------------------------
The Company's hazardous waste facilities serve steel mills, refineries, chemical
production plants and other basic industries that are, or may be, affected by
general economic conditions. During periods of economic weakness, these
industries may curtail production activities producing waste and/or delay
spending on plant maintenance, waste clean-up work and other discretionary
projects. While management believes that bid activity for the services it offers
was solid in 2004, the Company makes no predictions whether general economic
conditions will positively impact its business in 2005.
Potential Loss of Major Contracts
- ---------------------------------
A loss of one or more of the Company's large contracts could significantly
reduce Company revenues and negatively impact earnings. Effective May 14, 2004,
the US Army Corps of Engineers (USACE) exercised its option
19
to extend the term of its disposal contract with USE through May 13, 2009.
Discontinuation of this, or any other, large contract could have a material
adverse impact on the Company. Customers periodically review their contracts
with the Company and may, from time to time, opt not to renew or extend their
disposal contracts with the Company.
Compliance with Section 404 of Sarbanes-Oxley
- ---------------------------------------------
As directed by Section 404 of Sarbanes-Oxley Act of 2002, the Securities and
Exchange Commission adopted rules requiring public companies to issue a report
on management's internal controls over financial reporting in their annual
report on Form 10K. In addition, the independent registered public accounting
firm auditing the Company's financial statements must attest to and report on
management's assessment of internal controls over financial reporting.
Management has conducted a rigorous review of its internal controls and
continues to expend substantial resources to comply with Section 404.Management
is required to issue a report to its independent auditors regarding its internal
controls over financial reporting. Management's assessment of its internal
controls over financial reporting may include an opinion on the effectiveness of
such controls and may describe deficiencies, significant deficiencies or
material weaknesses. If the Company's independent auditors interpret the rules,
requirements, and regulations of Section 404 differently than management, they
may disagree with management's assessment and issue a qualified opinion
regarding management's assessment. If management cannot attest to the adequacy
of its internal controls over financial reporting or the independent auditors
disagree with management's assessment, investors could lose confidence in the
quality of the Company's financial statements which may adversely impact the
price of the Company's common stock. No assurance can be given at this time that
management's internal controls over financial reporting are adequate or that the
auditors will issue an unqualified opinion on management's report on internal
controls over financial reporting. The Company continues to incur significant
costs and management continues to devote substantial time and resources to
comply with Section 404. This compliance effort has diverted management and
resources from implementing the Company's growth initiatives. At this time, the
Company is not prepared to issue our report on the effectiveness of our internal
controls over financial reporting, nor is our independent registered public
accounting firm able to attest to the effectiveness of our internal controls
over financial reporting. The Company anticipates filing an amended Form 10K on
or before May 2, 2005 in compliance with the SEC's exceptive order dated
November 30, 2004 which provided an extension of time to file the required
reports.
Ability to Collect on Insurance
- -------------------------------
While the Company believes its business interruption claim filed in response to
the 2004 fire at its Texas facility and other filed insurance claims are valid,
no assurance can be given that the Company can collect on amounts claimed.
Potential Fires or Other Incidents Limiting Operations
- ------------------------------------------------------
The Company is subject to unexpected occurrences related, or unrelated, to our
daily handling of dangerous substances. A fire or other incident could impair
one or more of the facilities from performing their normal operations which
could have a material adverse impact on the Company.
Access to Cost Effective Rail Transportation Service
- ----------------------------------------------------------
Revenue at the Company's Grand View, Idaho facility is subject to potential
risks from disruptions in rail transportation service. Large volume base
business and event business at this facility frequently arrives by rail. Events
such as strikes, natural disasters and other acts of God, war, or terror could
delay shipments and reduce both volumes and revenues. In addition, rail car
service may be limited by economic conditions, specifically including increasing
demand for rail service, which may result in sustained periods of slower service
and make it difficult to acquire sufficient rolling stock. These economic
conditions could also result in lower volumes and revenues. During the second
half of 2004 the Company did experience delays in receiving waste, as rail
transporters failed to meet agreed to schedules and a tight market for railcars
existed. No assurance can be given that the Company can procure transportation
services at historical rates. The lack of railcars, now and in the future, could
limit the Company's ability to implement its growth plan and increase revenue.
General
- -------
20
The Company is a hazardous, non-hazardous, industrial, and radioactive waste
management company providing treatment and disposal service to commercial and
government entities including but not limited to, nuclear power plants,
refineries, chemical production plants, steel mills, the U.S. Department of
Defense, medical facilities, universities and research institutions. The
majority of revenues are derived from fees charged for waste treated and
disposed of at Company-owned facilities. The Company also manages transportation
of wastes to its facilities which may contribute significant revenue. Fees are
also charged for waste packaging, brokering and transportation to facilities
operated by other service providers. The Company and its predecessors have been
in business for more than 50 years.
Overall Company Performance
- ---------------------------
On a consolidated basis, the Company's financial performance for the
twelve-months ended December 31, 2004, showed material improvement over 2003 and
2002 as measured by income from operations. Management believes this improvement
is due to the strong performance of its Grand View, Idaho and Beatty, Nevada
operations, execution of management's growth strategy and organizational changes
implemented in 2002 and 2003. These actions focused on increasing waste
treatment and disposal throughput at the Company's operating facilities,
securing permit modifications required to expand higher margin "niche" services,
reducing personnel and other costs, streamlining reporting, implementing
centralized information and accounting systems, reducing use of external
consultants and attorneys, and restructuring the sales function to increase
revenue and earnings.
Management believes recent operating performance, as well as future operating
performance, is driven by the Company's core disposal business. A significant
portion of the Company's revenue is derived from government remediation
projects, which are driven by availability of state and federal appropriations
and regulatory requirements. Since 2002, the Army Corps of Engineers (USACE) and
federal contractors have represented significant amounts of the Company's
revenue.
Funding for the USACE FUSRAP program, which contracts with the Company for
disposal, has remained generally constant. Management expects this to continue
for the remaining four years of the contract. The US EPA and other federal
agencies have also used this USACE contract to dispose of Superfund and other
federal clean-up waste.
Superfund projects depend on site-specific fund availability. Federal funding
levels have generally decreased since the early 1990s; however, major projects
continue. The Company is currently accepting waste from several large multi-year
federal Superfund projects. States also fund remediation projects. The majority
of the Company's 2003 Shaw E&I revenue derived from a remediation project funded
by the State of New Jersey.
Non-government remediation project opportunities are driven by regulatory agency
enforcement actions and settlements, litigation, local community controversy,
availability of private funds and other factors. To the extent privately funded
remediation projects are discretionary, management believes a healthy national
economy generally favors increased project availability. Management further
believes that bid activity for such projects increased in the second half of
2003 and 2004, and that this higher level of bid activity will continue during
2005.
The Company's largest base business customer is Nucor Corporation, which
operates electric arc furnace steel mills. The Company treats and disposes of
air pollution control dust (KO61) from Nucor steel mills in several states and
from other steel mills at its Grand View, Idaho facility. Aggressive price
competition from KO61 recyclers resulted in a loss of market share and revenue
during 2003 and 2004. In February 2004, the Company entered into an agreement
with Envirosafe Services of Ohio, Inc. ("ESOI") to provide ESOI's USEPA-approved
KO61 "delisting" technology at the Company's Robstown, Texas and Beatty, Nevada
facilities. The Company plans to extend the regulatory fee advantages enjoyed by
its Idaho operation to these other two facilities. No assurance can be given,
however, that this strategy will result in new KO61 business.
Other than Nucor, no other base business customer contributed more than 5% of
Company revenue in 2004. The Company has been successful in securing new base
business contracts from hazardous waste customers and employs a sales incentive
plan that is weighted to rewarding new base business revenue. The hazardous
waste business is highly competitive, however, and no assurance can be given
that the Company will retain its present base business customers or increase its
market share for steel mill air pollution control dust or other hazardous waste.
21
Year to year comparisons from 2003 to 2004 are made difficult by a series of
material, independent events. These included:
- a reversal in the second quarter of 2004 of the allowance on the
Company's deferred tax asset,
- a gain on sale of the discontinued Oak Ridge, Tennessee facility in
the second quarter of 2004,
- a fire in the third quarter of 2004 in the Company's Robstown, Texas
waste treatment building,
- an increase in the amount reserved for future costs at the closed
Sheffield hazardous waste facility,
- a large single event business project undertaken in the second half of
2003 at the Company's Grand View, Idaho facility,
- unusually high litigation expenses in early 2003 and write off of the
Ward Valley, California litigation,
- a gain on sale of the El Centro landfill assets in early 2003,
- costs to discontinue the Company's Oak Ridge, Tennessee low-level
radioactive waste processing business, remove waste from the premises
and sell the discontinued operation's primary assets in 2003 and 2004,
- a reversal in the fourth quarter of 2002 of the allowance on the
Company's deferred tax asset,
- a large single event business clean-up project undertaken in early
2002 by the Company's Richland, Washington facility, and
- the adoption of a new accounting standard ("FAS 143") which resulted
in a large gain in early 2002.
These events are discussed in detail below.
2004 EVENTS
- ------------
Reversal of the Allowance on the Deferred Tax Asset: Following the June 30, 2004
- ----------------------------------------------------
sale of the discontinued Oak Ridge LLRW processing business, management
reassessed its valuation allowance and determined that most of the Company's
deferred tax assets would likely be utilized prior to expiration. During the
year ended December 31, 2004, the Company reversed $14,117,000 of the valuation
allowance.
Sale of Oak Ridge Facility: On June 30, 2004, the Company transferred
- -------------------------------
substantially all the primary assets and liabilities of its discontinued Oak
Ridge Tennessee processing operation to Toxco, Inc. ("Toxco"). The Company
transferred $2,060,000 in Property and $1,650,000 in Cash to Toxco in exchange
for Toxco's assumption of $4,640,000 of Closure and Other Liabilities. The
Company recorded a $930,000 gain on the sale which is included as a Gain from
discontinued operations in the Consolidated Statements of Operations.
Fire in the Robstown Texas Waste Treatment Building: Waste treatment at the
- ---------------------------------------------------------
Company's Robstown Texas facility was suspended following a July 1, 2004 fire in
the facility's waste treatment building. Treatment revenue previously
represented approximately 50% of facility revenue. Direct disposal operations,
which continued without interruption after the fire, generated the balance of
the facility's revenue. While the Company is insured for property and equipment
damage and business interruption, operational upgrades and loss of customer
business impacted 2004 results and may continue to negatively impact financial
performance in 2005. The Company also filed property and business interruption
claims with its insurance carrier. Any differences between the amounts
ultimately paid and amounts recognized by the Company will impact 2005 financial
performance. The Texas facility restored limited treatment services in December
2004 and expects to resume full treatment services late in the first half of
2005. During the year ended December 31, 2004 the Company recognized the
impairment of $679,000 of assets involved in the fire offset by $954,000 of
expected property insurance proceeds. The Company also recognized $431,000 of
expected business interruption proceeds.
Increase in the amount reserved for future costs at the closed Sheffield
- --------------------------------------------------------------------------------
hazardous waste facility:
- ---------------------------
During the fourth quarter of 2004 the Company increased its estimate for closure
and post-closure costs at this site by $715,000. The revised cost estimate and
increase in the related reserve was based on a review of planned remediation
activities and environmental monitoring work. An independent environmental
consulting firm with prior experience at the site provided peer review of the
revised estimate. Including the $715,000, the updated reserve
22
for the Sheffield hazardous waste disposal area is now $2,489,000. Post closure
monitoring will continue for approximately 22 more years in accordance with
permit and regulatory requirements.
2003 EVENTS
- ------------
Oak Ridge Asset Disposition: During 2003, the Company accrued an additional
- -------------------------------
$2,517,000 in costs to remove waste from the facility and prepare the facility
for sale. This primarily reflects actual expenses, above initial estimates,
incurred to dispose of specific wastes which were identified when the wastes
were shipped to off-site service providers. $442,000 of these additional costs
were accrued for expenses paid during 2004 in accordance with the provisions of
EITF 94-3.
Ward Valley Litigation and Expenses: Following the adverse California state
- ----------------------------------------
trial court decision in March 2003, the Company wrote off $20,951,000 of
deferred site 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 $1,786,000 were
incurred and included in SG&A during 2003. The Company appealed the trial court
ruling in 2003. Briefing in that appeal is now complete and oral argument is
expected to be scheduled in the spring of 2005. Minimal out-of-pocket costs for
this appeal were incurred and expensed in 2004 based on a fixed price legal
representation agreement entered into and paid for in July 2003. Minimal costs
will also be incurred in 2005 pending a ruling, expected ninety days after oral
argument.
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.
New Jersey PCB Clean-up Project: The Company's Grand View, Idaho facility
- ------------------------------------
performed a $10,053,000 transportation and disposal project in the third and
fourth quarters of 2003. This project represented 18% of 2003 revenues.
2002 EVENTS
- ------------
Financial Accounting Standard No. 143 ("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. It also requires 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.
Reversal of the Allowance on the Deferred Tax Asset: Following a profitable year
- ----------------------------------------------------
in 2002 and with the expectation of continued profitability, management
reassessed the valuation allowance and determined that a portion of the
Company's deferred tax assets would likely be utilized prior to expiration.
During the year ended December 31, 2002, the Company reversed $8,284,000 of the
valuation allowance.
Army Corps of Engineers Fort Greely, Alaska Project: The Company performed a
- -------------------------------------------------------
$3,850,000 waste packaging and disposal project at its Richland, Washington
facility during the first quarter of 2002. This project represented 8% of 2002
revenues and produced significantly higher margin and earnings than other
projects typically handled by the Richland facility.
Oak Ridge Disposal Plan: On December 27, 2002, the Company discontinued
- ---------------------------
operations at the Oak Ridge facility and recognized $7,018,000 of additional
estimated costs to implement its asset and liability disposal plan.
RESULTS OF OPERATIONS
Operating Disposal Facilities, Non-operating Disposal Facilities, the
discontinued Processing and Field Services operations and Corporate are combined
to arrive at consolidated income. Continuing Operations is comprised of
Operating Disposal Facilities, Non-operating Disposal Facilities, and Corporate.
Only the Operating Disposal
23
Facility segment reports revenue and profits. Revenue, costs and profits or
losses in the discontinued Processing and Field Services segment are reflected
in the consolidated financial statements in a single line item. The
Non-operating Disposal Facility segment generates minimal revenues and does not
generate profits. The Corporate segment generates no revenue and provides
administrative, managerial and support services for the other segments.
Summarized financial information concerning the Company's reportable segments is
shown in the following table.
Operating Non-Operating Discontinued
Disposal Disposal Processing and
($in thousands) Facilities Facilities Field Services Corporate Total
- ---------------
2004
- ----
Revenue $ 54,090 $ 77 $ -- $ -- $ 54,167
Direct operating cost 29,806 1,091 -- -- 30,897
------------ --------------- ---------------- ----------- ---------
Gross profit (loss) 24,284 (1,014) -- -- 23,270
S,G&A 4,581 29 -- 5,943 10,553
Business interruption insurance claim (431) -- -- -- (431)
------------ --------------- ---------------- ----------- ---------
Income (loss) from operations 20,134 (1,043) -- (5,943) 13,148
Investment income 68 -- -- 135 203
Interest expense 14 -- -- 180 194
Insurance claims net of impairment 275 -- -- -- 275
Other income 42 19 -- 38 99
------------ --------------- ---------------- ----------- ---------
Income (loss) before income tax and
discontinued operations 20,505 (1,024) -- (5,950) 13,531
Income tax expense (benefit) -- -- -- (8,832) (8,832)
------------ --------------- ---------------- ----------- ---------
Income (loss) before discontinued
operations 20,505 (1,024) -- 2,882 22,363
Gain (loss) from discontinued operations -- -- 1,047 -- 1,047
------------ --------------- ---------------- ----------- ---------
Net income (loss) $ 20,505 $ (1,024) $ 1,047 $ 2,882 $ 23,410
============ =============== ================ =========== =========
Depreciation and accretion $ 5,550 $ 375 $ -- $ 32 $ 5,957
Capital Expenditures $ 4,952 $ -- $ -- $ 32 $ 4,984
Total Assets $ 37,217 $ 6,526 $ -- $ 33,490 $ 77,233
2003
- ----
Revenue $ 56,973 $ 74 $ -- $ -- $ 57,047
Direct operating cost 32,571 908 -- -- 33,479
------------ --------------- ---------------- ----------- ---------
Gross profit (loss) 24,402 (834) -- -- 23,568
S,G&A 6,982 1,794 -- 5,043 13,819
------------ --------------- ---------------- ----------- ---------
Income (loss) from operations 17,420 (2,628) -- (5,043) 9,749
Investment income -- -- -- 347 347
Interest expense 36 -- -- 230 266
Loss on writeoff of Ward Valley -- 20,951 -- -- 20,951
Other income 35 89 -- -- 124
------------ --------------- ---------------- ----------- ---------
Income (loss) before income tax and
discontinued operations 17,419 (23,490) -- (4,926) (10,997)
Income tax expense -- -- -- 72 72
------------ --------------- ---------------- ----------- ---------
Income (loss) before discontinued
operations 17,419 (23,490) -- (4,998) (11,069)
Gain (loss) from discontinued operations 4,994 -- (2,517) -- 2,477
------------ --------------- ---------------- ----------- ---------
Net income (loss) $ 22,413 $ (23,490) $ (2,517) $ (4,998) $ (8,592)
============ =============== ================ =========== =========
Depreciation and accretion $ 6,515 $ 400 $ -- $ 81 $ 6,996
Capital Expenditures $ 6,582 $ 35 $ 451 $ -- $ 7,068
Total Assets $ 40,377 $ 6,550 $ 2,495 $ 17,204 $ 66,626
2002
- ----
Revenue $ 46,494 $ 295 $ -- $ -- $ 46,789
Direct operating cost 23,436 1,787 -- -- 25,223
------------ --------------- ---------------- ----------- ---------
Gross profit (loss) 23,058 (1,492) -- -- 21,566
S,G&A 8,000 103 -- 4,528 12,631
------------ --------------- ---------------- ----------- ---------
Income (loss) from operations 15,058 (1,595) -- (4,528) 8,935
Investment income 13 -- -- 18 31
Interest expense 711 -- -- 109 820
Other income (expense) 58 (385) -- (230) (557)
------------ --------------- ---------------- ----------- ---------
Income (loss) before income tax,
discontinued operations and cumulative
effect 14,418 (1,980) -- (4,849) 7,589
Income tax benefit -- -- -- 8,505 8,505
------------ --------------- ---------------- ----------- ---------
Income (loss) before discontinued
operations and cumulative effect 14,418 (1,980) -- 3,656 16,094
Gain (loss) from discontinued operations 466 -- (10,930) -- (10,464)
------------ --------------- ---------------- ----------- ---------
Income (loss) before cumulative effect 14,884 (1,980) (10,930) 3,656 5,630
Cumulative effect of change in accounting
principle 14,983 1,548 (3,390) -- 13,141
------------ --------------- ---------------- ----------- ---------
Net income (loss) $ 29,867 $ (432) $ (14,320) $ 3,656 $ 18,771
============ =============== ================ =========== =========
Depreciation and accretion $ 6,443 $ 458 $ 518 $ 361 $ 7,780
Capital Expenditures $ 3,010 $ 6 $ 300 $ 30 $ 3,346
Total Assets $ 44,832 $ 27,467 $ 4,649 $ 10,177 $ 87,125
24
The following table sets forth Continuing Operations in the Statements of
Operations for the three years ended December 31, 2004, as a percentage of
revenue:
Percentage of Revenues for the
Year Ended December 31,
-------------------------------
2004 2003 2002
--------- --------- ---------
Revenue 100.0% 100.0% 100.0%
Operating costs 57.0 58.7 53.9
--------- --------- ---------
Gross profit 43.0 41.3 46.1
Selling, general and administrative expenses 19.5 24.2 27.0
Business interruption insurance claim 0.8 -- --
--------- --------- ---------
Income from operations 24.3 17.1 19.1
Other income (expense), net 0.7 (36.4) (2.9)
--------- --------- ---------
Income (loss) from continuing operations before income taxes 25.0 (19.3) 16.2
Income tax expense (benefit) (16.3) 0.1 (18.2)
--------- --------- ---------
Income from continuing operations 41.3 (19.4) 34.4
========= ========= =========
RESULTS OF OPERATING DISPOSAL FACILITY SEGMENT OPERATIONS
The following discussion and analysis addresses the Company's Operating Disposal
facility operations and does not include the results of Discontinued Operations,
Non-Operating Facilities or Corporate for the 12 months ended December 31, 2004,
2003 and 2002.
Revenue
- -------
During the 12 months ended December 31, 2004, revenue from Operating Disposal
facilities totaled $54,090,000. This was 5% lower than the $56,973,000 posted in
2003 and 16% higher than the $46,494,000 reported in 2002. Of
25
the $10,479,000 increase in Operating Disposal facility revenue from 2002 to
2003, $10,053,000 reflected a single transportation and disposal project
performed in the second half of 2003 by the Idaho facility. For 2004, the
Company secured other significant projects and base business customers, but was
not able to make up all of the revenue reduction following completion of the
single large 2003 project. Despite a slight decrease in average selling price,
increases in volume at the Idaho and Nevada facilities preserved revenue levels
at these facilities from 2003 to 2004. Texas facility revenues were
substantially reduced following the July 1, 2004 fire in the permitted
containment building. The fire resulted in a 42% decrease in waste volumes and a
15% decrease in revenues from 2003 to 2004. The Texas facility resumed limited
waste treatment on December 1, 2004 and expects to resume full treatment
services late in the second quarter of 2005 following construction of a new
waste treatment building.
Direct Operating Costs
- ------------------------
Direct operating costs represent costs at Company disposal facilities that are
directly related to waste treatment and disposal. They include transportation,
labor, equipment depreciation, fuel, treatment, waste treatment additives,
testing, analysis, and amortization of disposal cell "airspace" costs. Except
for transportation, airspace and treatment additives, most of the Company's
direct costs are fixed and do not materially vary with changes in waste volume.
In 2004, direct operating costs dropped to $29,806,000 from $32,571,000 in 2003.
Direct operating costs in 2002 were $23,436,000. A large 2003 project amounting
to $10,053,000 in revenue was completed with rail transportation and disposal
following a strategic decision to 'bundle' rail and disposal costs on certain
projects to more aggressively compete for business served by the Idaho site.
Management believes that the bundling of rail services with disposal allows the
Company to offer potential customers both lower overall pricing and value-added
service. Bundling increases the Company's direct operating costs and reduces
gross margin relative to revenue due to the lower margins realized on the
transportation component of the services as compared to the disposal services
margins. Management considers growth in operating earnings to be more important
and will continue to pursue this plan in 2005 as a key element of the Company's
strategy to increase earnings.
Selling, General and Administrative Expenses ("SG&A")
- -----------------------------------------------------
In late 2001, the newly installed management embarked on an aggressive effort to
reduce SG&A. As a result of cost control initiatives, SG&A associated with
Operating Disposal facility operations declined by 34% in 2004 and 13% in 2003.
All facilities decreased SG&A costs. Decreases in overhead spending were
achieved through improved procurement of goods and services, decreased reliance
on external consultants and legal counsel and other cost control measures. In
2003, the Company installed centralized information and accounting systems that
have increased the availability and timeliness of business information. During
2004, improved invoicing and monitoring of accounts receivable balances produced
a $757,000 decrease in bad debt expense from 2003 to 2004.
Operating Income
- -----------------
For the 12 months ended December 31, 2004, operating income from continuing
operations totaled $13,148,000 or 24% of revenue compared to $9,749,000 (17% of
revenue) in 2003 and $8,935,000 (19% of revenue) in 2002. Operating income from
the Operating Disposal facility segment in 2004 was $20,134,000, a 16% increase
over the $17,420,000 posted for 2003. This replicated the 16% increase over the
$15,058,000 posted in 2002. Increasing disposal volumes combined with relatively
lower disposal costs and SG&A has driven the increase in operating income since
2002. The Company generated an operating margin from the Operating Disposal
segment of 37% in 2004, compared to 31% in 2003 and 32% in 2002.
RESULTS FROM NON-OPERATING DISPOSAL FACILITIES
Revenue
- -------
Revenue generated by Non-Operating Disposal facilities represents amounts
billable to third parties for services performed by the Company's non-operating
segment. In Nebraska, the Company is reimbursed by the Central Interstate
Compact Commission ("CIC") for allowable costs the Company incurs to support the
CIC on the proposed Butte, Nebraska disposal site, related litigation and a
subsequent settlement reached with the State of Nebraska (see Legal Proceedings
above). The States of Illinois and Nevada pay the Company to maintain and
monitor closed low-level radioactive waste sites that were returned to those
states for perpetual care and maintenance. This revenue is
26
generally not material. For the 12 months ended December 31, 2004, revenue
generated from closed sites was $77,000, which was a $3,000 increase and
$218,000 decrease from revenue generated in 2003 and 2002, respectively.
Reimbursement of litigation support expenses incurred on the Nebraska project by
the CIC accounts for the higher revenue in 2002 compared to 2003 and 2004.
Operating Costs and SG&A
- ------------------------
Non-Operating Disposal Facilities incur primarily legal and consulting expenses
to maintain or license the facilities for initial use, and labor costs required
to properly close and maintain facilities subsequent to use. During the year
ended December 31, 2004, the Company recognized $715,000 of direct operating
costs at the Sheffield facility due to an increased estimate of the costs
necessary to properly remediate and monitor the facility. For the years ended
2004, 2003 and 2002, the Company reported $1,043,000, $2,628,000 and $1,595,000,
respectively, in operating losses for the formerly proposed California and
Nebraska disposal site development projects and to close and maintain facilities
subsequent to operational use. Legal expenses of $26,000, $1,919,000 and
$1,383,000 were incurred in 2004, 2003 and 2002, respectively, related to the
formerly proposed California and Nebraska disposal sites. The Company appealed
an adverse trial court ruling in the California litigation in 2003. Significant
legal expenses are not expected in 2005 unless the appeals court rules in the
Company's favor and remands the case for further proceedings to establish
damages. The Company does not expect significant legal expenses following
settlement of the Nebraska litigation in August 2004.
RESULTS FOR CORPORATE
- ---------------------
SG&A
- ----
Over the last two years, management has controlled and reduced SG&A across the
Company. The Company also centralized accounting, information systems and
certain operational and sales functions in the Boise office. This resulted in
reassignment of related costs from the operating disposal facilities to the
Corporate Office. Centralized information systems implemented in 2003 have
increased the availability and timeliness of operating information and
accelerated customer invoicing. The Company has also resolved multiple
longstanding lawsuits, reducing legal fees and freeing up time and resources to
focus on growing the business. During the 12 months ended December 31, 2004,
Corporate SG&A totaled $5,943,000, or $900,000 higher than the $5,043,000 posted
in 2003, and $1,415,000 higher than the $4,528,000 reported in 2002. For the 12
months ended December 31, 2004 the Company accrued $934,000 for payment of
bonuses to selected executives under the American Ecology Corporation Management
Incentive Plan ("MIP"). The Company also incurred costs for independent
contractors and the Company's independent registered public accountant in excess
of $175,000 to support efforts to comply with Section 404 Internal Controls
requirements and the related assessment by its independent registered public
accountant. On March 1, 2005, the Company paid the majority of the $934,000 in
bonuses to the executives participating in the MIP. For the years ended
December 31, 2003 and 2002, no bonus was earned or paid under the MIP.
RESULTS OF DISCONTINUED OPERATIONS
In 2002, the Company entered into discussions with various parties regarding the
potential sale of its municipal solid waste landfill in Texas and with other
parties regarding potential sale of its discontinued LLRW processing business in
Tennessee. The Company reclassified these business operations as discontinued
operations consistent with Generally Accepted Accounting Principles ("GAAP") set
forth in FAS No. 144, "Accounting for the Impairment or Disposal of Long Lived
Assets" and Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity."
El Centro Solid Waste Landfill, Robstown, Texas
- -----------------------------------------------
On February 13, 2003, the Company sold its El Centro municipal and industrial
waste landfill to a wholly-owned subsidiary of Allied Waste Industries, Inc.
("Allied"). The Company sold Prepaid Assets of $117,000 and Property, Plant, and
Equipment of $6,930,000 which was subject to Closure/Post Closure Obligations of
$1,098,000 for $10,000,000 cash and future royalty payments valued at $858,000.
A $4,909,000 gain on sale was recognized in discontinued operations during the
first quarter of 2003.
27
Under the Agreement with Allied, Allied agreed to pay the Company minimum
royalties of at least $215,000 annually. Once Allied has paid the Company
$14,000,000, it will no longer have an obligation to pay annual minimum
royalties but will still be required to pay royalties based upon El Centro waste
volumes. The Royalty Asset, valued at $858,000 as of February 13, 2003,
represented the present value of 5 years of minimum royalty payments. As of
December 31, 2003, the Royalty Asset was reclassified from Discontinued
Operations to the Operating Disposal Facility Segment based on the ongoing
nature of the payments. Annual payments in excess of $215,000, or payments
subsequent to 2007, are included in Other Income at the time of receipt. During
2004 and 2003, Allied paid the Company $300,000 and $237,000 in royalties,
respectively.
The table below provides financial information on the operations of the El
Centro landfill included in Discontinued Operations for the three years ended
December 31, 2004:
($ in thousands) Year Ended December 31,
2004 2003 2002
-------- --------- ----------
Revenue $ -- $ 462 $ 2,563
Direct Operating costs -- 244 1,351
-------- --------- ----------
Gross profit -- 218 1,212
Selling, general and administrative expenses -- 155 705
-------- --------- ----------
Income (loss) from operations -- 63 507
Other income (expenses) -- 4,931 (41)
-------- --------- ----------
Gain (loss) from discontinued operations $ -- $ 4,994 $ 466
======== ========= ==========
By monetizing its investment in the El Centro landfill, the Company obtained
resources to invest in its core hazardous and radioactive waste business,
improve its capital structure, and meet its obligations in Oak Ridge, Tennessee.
Low-level Radioactive Waste Processing and Field Services, Oak Ridge Tennessee
- ------------------------------------------------------------------------------
AERC, acquired from Quadrex Corp. in 1994, processed LLRW to reduce the volume
of waste requiring disposal at licensed radioactive waste facilities. The plant,
situated on 16 acres of Company property in Oak Ridge, Tennessee, primarily
served the commercial nuclear power industry. AERC lost more than $57 million
since its purchase in 1994, including substantial operating and net losses in
2001 and 2002. Management concluded that a lack of core business integration
with the Company's disposal facilities and the highly competitive nature of the
LLRW processing business would continue to prevent AERC from achieving
profitability in the foreseeable future. Accordingly, action was taken to
discontinue commercial operations and prepare the facility for sale.
In December 2002, the Company ceased commercial LLRW processing at Oak Ridge.
Throughout 2003 and 2004, the Company incurred significant costs to ship waste
from the plant site to off-site service providers and to prepare the plant for
its intended sale. In addition, substantial management time and resources were
devoted to identifying a qualified buyer for the discontinued business'
property, plant and equipment.
On June 30, 2004, the Company transferred substantially all the primary assets
and liabilities of its discontinued Oak Ridge Tennessee processing and field
services operations to Toxco, Inc ("Toxco"). The Company transferred $2,060,000
in Property and $1,650,000 in Cash to Toxco in exchange for Toxco's assumption
of $4,640,000 of Closure and Other Liabilities. The Company recorded a $930,000
gain on the sale which is included as a Gain from discontinued operations in the
Consolidated Statements of Operations.
The table below provides financial information on the combined operations of the
LLRW processing facility and Field Services included in Discontinued Operations
for the three years ended December 31, 2004:
$ in thousands Year Ended December 31,
2004 2003 2002
--------- ---------- ----------
Revenue $ -- $ 1,941 $ 17,018
Direct Operating costs -- 2,038 16,687
--------- ---------- ----------
Gross profit (loss) -- (97) 331
Selling, general and administrative expenses (117) 1,939 3,627
--------- ---------- ----------
Gain (loss) from operations 117 (2,036) (3,296)
Other gains (expenses) 930 (39) (616)
Accrued charges -- 442 7,018
--------- ---------- ----------
Gain (loss) from discontinued operations $ 1,047 $ (2,517) $ (10,930)
========= ========== ==========
28
RESULTS OF CONSOLIDATED OPERATIONS
Selling, General & Administrative Expenses
- ----------------------------------------------
In 2004, overall SG&A decreased by $3,266,000 to $10,553,000, primarily due to
$1,794,000 of 2003 legal expenses for the Ward Valley, California lawsuit that
did not recur in 2004. Significant items included in 2004 SG&A are $934,000
accrued for payments under the American Ecology Corporation Management Incentive
plan and a $757,000 decrease in Bad Debt Expense due to continued improvement in
the Company's receivables. SG&A relative to revenue continued to drop,
decreasing to 20% of revenue in 2004, compared to 24% and 27% of revenue in 2003
and 2002, respectively.
Interest Income
- ---------------
Interest income represents earnings on cash balances, investments, and notes
receivable, which the Company traditionally maintained in minimal amounts prior
to 2003. 2004 Interest income of $203,000 primarily represents available cash
and short term investment balances earning interest at approximately 2%. While
2003 Interest income was $347,000, $302,000 of this amount was earned on a 1996
Federal Income Tax refund received in the third quarter of 2003. Interest income
in 2002 was $31,000. The Company does not anticipate significant future interest
income, as available cash and investment balances are invested in accounts
earning interest at low, short term rates.
Interest Expense
- ----------------
Interest expense was $194,000, $266,000, and $820,000 in 2004, 2003 and 2002,
respectively. In October 2002, the Company refinanced an 8.25%, $8,500,000
industrial revenue bond with a variable rate $7,000,000, 5-year fully amortizing
term loan. At December 31, 2004, the interest rate on the term loan was 4.6%.
Also contributing to the lower interest expense since 2002 was the retirement of
additional debt of $1,062,000 in 2003 and $6,628,000 in 2002, reflecting
initiatives to more efficiently utilize cash and reduce higher cost debt
obligations. Interest expense is expected to decrease in 2005 based on scheduled
payments on the term loan and other debt.
Other Income (Expense)
- ----------------------
Other income (expense) was $99,000, $124,000, and ($557,000) for 2004, 2003 and
2002, respectively. The Other income account is used to record business
activities that are not a part of the Company's current year ordinary and usual
revenues and expenses. The following table summarizes these transactions outside
the normal business scope.
($ in thousands)
AS OF DECEMBER 31,
OTHER INCOME 2004 2003 2002
- ------------ ------ ------ ------
Insurance claims $ -- $ -- $ 31
Settlement related to GM litigation -- -- (740)
Payment received on National Union litigation -- -- 250
Impairment of equity investment -- -- (358)
Other litigation related settlements -- -- 100
Payments received in excess of royalty agreement 85 22 --
Other miscellaneous income (expense), net (53) (14) (12)
Cash receipts for sale and rent of property rights 23 108 117
Data services sold 44 8 55
------ ------ ------
Total Other Income (Expense) $ 99 $ 124 $(557)
====== ====== ======
29
The Company has sought to resolve pending litigation to better focus resources
and energies on its core treatment and disposal business. Other Expense for 2002
reflects resolution of 7 of 11 lawsuits pending in 2002 and resolution of
another in 2003.
Income Taxes
- -------------
Effective income tax rates were (65)%, 1%, and (112)% for the fiscal years 2004,
2003 and 2002 respectively.
At December 31, 2004 the Company has approximately $20,000,000 in net deferred
tax assets for income tax purposes, of which approximately $1,800,000 of state
tax benefits are not currently expected to be utilized and for which a valuation
allowance remains.
An $8,284,000 reduction in the valuation allowance was recorded at December 31,
2002. This reflected management's belief that it was more likely than not that
approximately $8,284,000 of the deferred tax asset would be utilized in the
foreseeable future.
Until June 30, 2004, uncertainties about future income and disposition of AERC
assets in Oak Ridge limited the reliability of estimates on potential future use
of net operating loss carry forwards. Following the June 30, 2004 sale of the
discontinued Oak Ridge Processing Facility, management reassessed the valuation
allowance and determined that most of the Company's deferred tax assets would
likely be utilized prior to expiration. As a result, a $14,117,000 reduction in
the valuation allowance was recorded during the year ended December 31, 2004.
The Company periodically assesses the adequacy of the valuation allowance. Due
to the amount of federal deferred tax assets available to the Company, regular
federal income tax is not expected to be due during 2005. However, federal
alternative minimum tax of approximately 2% of income will continue to be paid
during 2005.
The Company paid $335,000, $93,000, and $6,000 in Federal, state and local
income and franchise taxes for fiscal years 2004, 2003 and 2002, respectively.
Cumulative Effect of Accounting Change
- --------------------------------------
On January 1, 2002, the Company early adopted FAS 143, "Accounting for Asset
Retirement Obligations." This change is more fully described in Note 8 to the
financial statements with a pro-forma effect as shown on the face of the income
statement. Compliance with FAS 143 is mandatory for fiscal years beginning after
June 15, 2002. Implementation of FAS 143 had the following effects upon the
Company:
- A stronger balance sheet through a reduction in liabilities and an
increase in the Company's reported book net worth. Management believes
the reduction in liabilities was helpful in renewing the Company's
line of credit on more favorable terms and in successfully refinancing
an industrial revenue bond in October 2002.
- Improved comparability of results with competitors is provided by
uniform application of the FAS 143 standard in place of the varying
practices previously employed in the waste industry.
- Future expenses will increase on a period basis as the $13,141,000
cumulative effect recognized on January 1, 2002 flows through expenses
over a currently projected 55 years. The current estimated expense
increase is approximately $240,000 per year.
CAPITAL RESOURCES AND LIQUIDITY
As of December 31, 2004, the Company's working capital position had materially
improved, increasing to $17,314,000, compared to working capital of $12,805,000
and $8,087,000 at December 31, 2003 and 2002, respectively. This continued
improvement was primarily due to retained earnings from operations and
classification of a portion of the deferred tax asset as a current asset.
30
The Company's current ratio improved to 2.3:1.0 in 2004 compared with 2.1:1.0
and 1.5:1.0 for 2003 and 2002, respectively. Liquidity, as measured by day's
receivables outstanding ("DRO"), improved to 60 days in 2004 from 68 and 74 days
in 2003 and 2002, respectively. Management will continue to focus on DRO in
2005.
In addition to improving liquidity, the Company's leverage has markedly improved
as measured by its total liabilities to equity ratio. At December 31, 2004, the
Company's total liabilities to equity ratio had decreased to 0.5 to 1 from 0.8
to 1 and 0.9 to 1 at December 31, 2003 and 2002, respectively. This decrease in
leverage reflects retention of earnings, and the net retirement or reduction of
$15,555,000 of liabilities since 2001. This reduction in liabilities was
primarily the result of the December 2002 discontinuation of the Oak Ridge,
Tennessee business and related June 30, 2004 asset sale.
SOURCES OF CASH
As of December 31, 2004, the Company continues to maintain a credit agreement
with Wells Fargo Bank with a maturity date of June 15, 2005. The line of credit
is secured by the Company's accounts receivable. At December 31, 2004 and 2003,
the outstanding balance on the revolving line of credit was $0. The Company
borrows and repays according to business demands and availability of cash. The
Company anticipates entering into a new credit agreement prior to expiration of
the current agreement on June 15, 2005. The Company currently commits
$5,000,000 of the $8,000,000 maximum line of credit as collateral for insurance
policies.
In October 2002, the Company refinanced its $8,500,000 Idaho Industrial Revenue
Bond with a $7.0 million fully amortizing five year term loan from Wells Fargo
Bank. The remaining $1,500,000 was funded with cash on hand. At December 31,
2004, $2,683,000 was reported as long term debt (it is not scheduled to be
repaid within a year), with $1,400,000 reported within the current portion of
long term debt. The term loan agreement permits debt prepayment without penalty
and allows the Company to borrow at a floating interest rate based on the
Company's Funded Debt ratio. Depending upon this ratio, the Company can borrow
either at an interest rate range based on the bank's prime rate to prime rate
plus 1%, or at a range of 2% to 3.25% over an offshore interest rate. At
December 31, 2004 the interest rate on the term loan was 4.6%. The Company has
pledged substantially all of its fixed assets at the Grand View, Beatty,
Richland, and Robstown hazardous and radioactive waste disposal facilities as
collateral for the term loan. The term loan is cross-collateralized with the
Company's line of credit.
On February 13, 2003, the Company sold its El Centro municipal and industrial
waste landfill located near Corpus Christi, Texas to a wholly-owned subsidiary
of Allied Waste Industries, Inc. ("Allied") for $10,000,000 cash at closing and
future volume-based royalty payments. Under the Agreement, Allied is paying
American Ecology minimum royalties of at least $215,000 annually. Once Allied
has paid the Company $14,000,000 it will no longer have an obligation to pay
annual minimum royalties, but will still be required to pay royalties based upon
waste volumes. Allied paid the Company $300,000 and $237,000 in royalties during
2004 and 2003, respectively.
The Company had 2,350,000 series E Warrants due to expire July 1, 2003 with an
exercise price of $1.50 a share. In February 2003, holders of all 2,350,000
warrants exercised the warrants. The holders were issued 2,350,000 shares of
stock in exchange for their warrants and $3,525,000 in cash.
The Company's operations have produced an average of approximately $15,000,000 a
year in cash flow over the past three years. Management expects cash flow from
operations in 2005 to match or exceed this performance. Additionally,
$13,127,000 in cash on hand and short term investments existed at December 31,
2004.
USES OF CASH
Management has budgeted capital spending of approximately $12,000,000 in 2005.
Of this amount, $3.9 million, or 33% of 2005 capital spending, is allocated for
disposal cell construction at the Company's Idaho facility and $3,300,000, or
28% of 2005 capital spending, is allocated for construction of new waste
treatment buildings at the Texas and Nevada facilities. 2004 capital spending
totaled $4,984,000, primarily for design and construction of a $1,000,000
disposal cell at the Texas facility and $900,000 for improvements to a county
road used by the Idaho facility.
31
On December 19, 2004, the Company renewed its financial assurance insurance
policies. As a condition of renewal, the Company agreed to maintain $5,000,000
in collateral through a standby letter of credit and accepted a premium
increase. The extent to which such cost and collateral requirements continue to
increase is unknown, and could have a material, adverse impact on the Company's
available cash and earnings.
On August 31, 2004 the Company declared a dividend of $.25 per common share to
stockholders of record on September 30, 2004 and payable October 15, 2004. The
dividend, paid out of cash on hand, totaled $4,345,000.
On February 17, 2004 the Company redeemed a warrant to purchase 1,349,843 shares
of common stock at $1.50 a share for $5,500,000. The closing market price of the
Company's common stock at February 17, 2004 was $6.99. The warrant was issued in
1998 to the Company's former bank as part of a debt restructuring agreement. The
redeemed warrant, which represented approximately 8% of the Company's shares
outstanding, was surrendered and will not be reissued. The warrant redemption
reduced the Company's cash on hand by $5,500,000 and reduced Additional Paid in
Capital by a like amount, with no effect on the Statement of Operations.
On June 30, 2004, the Company transferred substantially all the assets and
liabilities of its discontinued Oak Ridge Tennessee processing operations to
Toxco, Inc ("Toxco"). The Company transferred $2,060,000 in Property and
$1,650,000 in Cash to Toxco in exchange for Toxco's assumption of $4,640,000 of
Closure and Other Liabilities. The Company recorded a $930,000 gain on the sale
which is included as a Gain from discontinued operations in the Consolidated
Statements of Operations. Net cash outflows from the discontinued processing
operations were approximately $3,000,000, $6,000,000, and $3,000,000 during
2004, 2003 and 2002, respectively. The Company does not expect further cash
outlays for the discontinued Oak Ridge facility,
On February 28, 2003, the Company repurchased all 100,001 shares of Series D
Preferred Stock outstanding for a total purchase price of $6,406,000. Repurchase
of the Series D Preferred Stock eliminated an 8 3/8% debt instrument due to the
preferred stockholders, and eliminated the potential dilution that conversion of
these shares would have had on common stockholders.
On January 21, 2005, the Company committed to a five year operating lease for
150 to 200 rail cars at $475 a month per car. A formal lease agreement has not
yet been signed, and the specific number of rail cars subject to the lease is
still to be determined.
As of December 31, 2004, the Company expects to pay the following contractual
obligations and commitments:
Payments due by Year ($in thousands)
2005 2006-2007 2008-2009 Beyond 2009 Total
------ ---------- ---------- ------------- -------
RECORDED LIABILITIES
- --------------------
Long Term Debt $1,457 $ 2,734 $ -- $ -- $ 4,191
Closure and Post Closure Liabilities 2,323 1,901 2,878 36,747 43,849
COMMITMENTS
- -----------
Operating Lease Commitments 726 501 87 -- 1,314
------ ---------- ---------- ------------- -------
Total Contractual Obligations $4,506 $ 5,136 $ 2,965 $ 36,747 $49,354
====== ========== ========== ============= =======
NOTE: Closure and Post Closure Liabilities are shown in the above table at
their expected payment amount rather than the discounted liability amount shown
on the balance sheet.
Since 2002, significant cash has been generated through earnings and the sale of
assets. Proceeds were used primarily to construct new disposal cells, improve
the Company's capital structure and prepare the Company's former Oak Ridge
assets for sale. The Company believes that cash on hand, short term investments,
cash flow from operations and borrowings under the line of credit will be
sufficient to meet projected cash needs for the foreseeable future.
OTHER MATTERS
Environmental Matters
- ----------------------
32 The Company maintains reserves and insurance policies for costs
associated with future closure and post-closure obligations at both current and
formerly operated disposal facilities. These reserves and insurance policies are
based on independent engineering evaluations and interpretations of current
regulatory requirements which are updated annually. Accounting for closure and
post-closure costs includes final disposal unit capping, soil and groundwater
monitoring, and other monitoring and routine maintenance costs required after a
site discontinues accepting waste. The Company believes it has made adequate
provisions through reserves and the insurance policies for these obligations.
The Company estimates that its future closure and post-closure costs for all
insured facilities included in Continuing Operations were approximately
$44,000,000 at December 31, 2004, with a median payment year of 2027. This
compares to recorded closure and post-closure costs for facilities in Continuing
Operations of $11,627,000, $11,023,000 and $10,200,000 for 2004, 2003 and 2002,
respectively. The Company's financial assurance insurance policy for closure and
post closure obligations expires in December 2005.
Management believes that undertaking its environmental obligations will not have
a material adverse effect on the financial condition of the Company. Operation
of disposal facilities creates operational, monitoring, maintenance, and closure
and post-closure obligations that could result in unforeseen monitoring and
corrective action costs. The Company cannot predict the likelihood or effect of
all such costs, new laws or regulations, or other future events affecting its
facilities.
Seasonal Effects
- -----------------
Operating revenue is generally lower in the winter months and increases in the
summer months when short term weather-influenced cleanup projects are most
frequently undertaken. While large multi-year cleanup projects tend to continue
in winter months, the volume of waste shipped for disposal may decrease due to
weather-imposed operating constraints. While waste volumes tend to decrease in
winter months, market conditions generally have a larger effect on revenue than
does seasonality.
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
In December 2004, the Financial Accounting Standards Board ("FASB") revised SFAS
No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 will require
the Company to recognize the fair value of options issued to employees or the
Board of Directors over the period in which the option is earned. The Company
previously accounted for stock-based compensation using the intrinsic value
method under APB Opinion No. 25, which is superseded by the revised SFAS No. 123
for options earned subsequent to June 30, 2005. Under the revised SFAS No. 123
at December 31, 2004, the Company has issued-but unvested options that, if
earned, will result in the following compensation expense being recognized
through the first quarter of 2006 when all remaining options will be vested:
Pro Forma
($ in thousands) Compensation Expense
--------------------
Fair value of options earned during the third quarter of 2005 $ 94
Fair value of options earned during the fourth quarter of 2005 $ 94
Fair value of options earned during the first quarter of 2006 $ 47
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of SFAS No. 123
to stock-based compensation for the years ended December 31:
2004 2003 2002
-------- -------- --------
Net income (loss), as reported $23,410 $(8,592) $18,771
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects (855) (980) (283)
-------- -------- --------
Pro forma net income (loss) $22,555 $(9,572) $18,488
======== ======== ========
33
EARNINGS PER SHARE:
Basic - as reported $ 1.36 $ (.52) $ 1.28
======== ======== ========
Basic - pro forma $ 1.31 $ (.58) $ 1.26
======== ======== ========
Diluted - as reported $ 1.32 $ (.52) $ 1.15
======== ======== ========
Diluted - pro forma $ 1.27 $ (.58) $ 1.13
======== ======== ========
CRITICAL ACCOUNTING POLICIES
In preparing the financial statements, management makes many estimates and
assumptions that affect the Company's financial position and results of
operations. It is unlikely that such changes would materially change the
Company's financial position and results of operations. Accounting for the Texas
Fire, Disposal Facility Accounting, Accounting for Discontinued Operations,
Litigation, and Income Taxes involve subjective judgments, estimates and
assumptions that would likely produce a materially different financial position
and result of operation if different judgments, estimates, or assumptions were
used. These matters are discussed below. Additional information concerning
significant accounting policies is set forth in Note 2 to the Consolidated
Financial Statements.
ACCOUNTING FOR THE JULY 1, 2004 TEXAS FIRE
On July 1, 2004 a fire at the Robstown, Texas facility's waste treatment
building resulted in a property claim for Property and Equipment damaged in the
fire. As of December 31, 2004 the Company has fully impaired the $679,000 in
book value of assets damaged in the fire and recognized $954,000 of property
insurance proceeds. The Company has requested approximately $1,200,000 in
reimbursement from its insurance carrier under the property loss policy for this
claim. The $954,000 recognized during 2004 represents the stated values provided
to the insurance carrier by the Company at the inception of coverage and the
minimum recovery expected by management. As of December 31, 2004, $100,000 in
property insurance proceeds had been received by the Company.
As of December 31, 2004, the Company has filed approximately $2,200,000 in
business interruption insurance claims with its insurance carrier of which
$431,000 has been recognized. The Company has only recognized the recovery of
$431,000 of incremental costs due to the fire, but has not recognized
significant lost revenue associated with the Company's inability to take certain
waste streams following the fire.
DISPOSAL FACILITY ACCOUNTING
In general terms, a 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 is filled. Major assumptions
and judgments used to calculate cell development assets and closure liabilities
are as follows:
- - Personnel and equipment costs incurred to construct new disposal cells are
identified and capitalized as a cell development asset.
- - The cell development asset is depreciated as each available cubic yard of
disposal space is filled. Periodic independent engineering surveys and
inspection reports are used to determine the remaining volume available.
These reports take into account volume, compaction rates and space reserved
for capping filled disposal cells.
- - The closure liability is the present value of a current cost estimate
prepared by an independent engineering firm of the costs to close, maintain
and monitor disposal cells. Management estimates payment timing and then
accretes the current cost estimate by an estimated cost of living increase
(1.5%). It then discounts (at 9.3%) the accreted current cost estimate back
to its present value. Final closure liability obligations are currently
estimated as being paid through 2056.
On January 1, 2002, the Company early adopted FAS 143, "Accounting for Asset
Retirement Obligations". This change is more fully described in Note 8 to the
financial statements with a pro-forma effect as shown on the face of the income
statement. Compliance with FAS 143 is mandatory for fiscal years beginning
after June 15, 2002. Under FAS 143, future expenses will increase on a period
basis as the $13,141,000 cumulative effect flows through
34
expenses over the currently projected period of 55 years. The current estimated
expense increase is approximately $240,000 per year.
ACCOUNTING FOR DISCONTINUED OPERATIONS
Accounting for Discontinued Operations requires numerous subjective and complex
judgments, estimates and assumptions that materially affect financial position
and Discontinued Operations.
At December 27, 2002, the Company discontinued operations at its former
Processing and Field Services segment in Oak Ridge, Tennessee. 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 the
decision to exit the segment was made. EITF 94-3 was chosen as the guiding
literature rather than Statement of Financial Accounting Standards No. 146
Accounting for Costs Associated with Exit or Disposal Activities (FAS 146). The
latter standard requires a liability to be recognized at the time the liability
is incurred. FAS 146 is required for exit activities entered into after December
31, 2002 but is optional for exit activities prior to December 31, 2002.
Approximately $1,800,000 of liabilities were recognized as of December 31, 2002,
and an additional $442,000 was recognized as of December 31, 2003 under EITF
94-3. These liabilities would not have been recognized until incurred had the
Company adopted FAS 146 prior to December 27, 2002.
As of December 27, 2002, the Company recognized $7,018,000 in incremental
liabilities relating to discontinuance of the Oak Ridge operation. The Company
initially assumed that the Oak Ridge plant site would be cleared of waste and
sold in 2003. During 2003, the Company expected to spend $1,800,000 to comply
with conditions of its licenses and permits. An additional $1,227,000 was
expected to be spent removing waste from the site and arranging for its
disposal. Property and equipment was reduced by $1,593,000 to net realizable
value. During 2003, the facility was prepared for sale. However, a sale did not
occur until June 30, 2004.
LITIGATION
The Company is involved in litigation requiring estimates of timing and loss
potential whose timing and ultimate disposition is controlled by the judicial
process. During 2003, the Company recorded a loss of $20,951,000 following an
adverse trial court ruling in California that, while appealed, nonetheless cast
significant doubt on the Company's ability to recover its investment in the
formerly proposed Ward Valley LLRW disposal site. The Company continues to hold
a $6,478,000 deferred site development asset which may not be realized if the
Company does not recover its fair share of the monetary damages specified in an
August 2004 settlement agreement between the Central Interstate Compact
Commission ("CIC") and the State of Nebraska or, alternately, the disposal
project does not become operational. The settlement agreement requires Nebraska
to make its initial payment to the CIC in August 2005. The decision to accrue
costs or write off assets is based on 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 past belief that due to a history of
tax losses, uncertainty regarding the disposition of the Oak Ridge assets, and
prospects for the Company's business at that time, it likely would not utilize
portions of the deferred tax assets prior to their expiration. The valuation
allowance is based on management's contemporaneous evaluation of whether it is
more likely than not that the Company will be able to utilize some, or all of
the deferred tax assets. During 2002, the Company assessed the valuation
allowance and reversed approximately $8,284,000 of the valuation allowance that
the Company expected to utilize in the foreseeable future. During 2003, the
Company did not have tax or book income due to the write-off of the Ward Valley
facility development asset. As a result, the Company did not utilize the
deferred tax asset. At June 30, 2004, the Company reassessed the valuation
allowance based on the sale of its Oak Ridge assets, 2004 year-to-date pretax
income, and projections of continued profitability and reversed a substantial
amount of the remaining valuation allowance. This reversal resulted in an income
tax (benefit) of $(8,832,000) for the year ended December 31, 2004. A valuation
allowance of approximately $1,800,000 continues to be maintained by the Company
for state tax benefits that are not currently projected to be utilized prior to
expiration.
OFF BALANCE SHEET ARRANGEMENTS
35
The Company does not have any off balance sheet arrangements or interests in
variable interest entities that would require consolidation. The Company
operates through wholly owned subsidiaries.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not maintain equities, commodities, derivatives, or any other
similar instruments for trading or any other purposes, and also does not enter
into transactions denominated in currencies other than the U.S. Dollar.
The Company has minimal interest rate risk on investments or other assets due to
the Company's preservation of capital approach to investments. At December 31,
2004, approximately $13,100,000 was held in cash or short term investments at
terms ranging from overnight to three months. Together, these items earned
interest at approximately 2% and comprised 17% of assets.
The Company has interest rate risk on debt instruments due to the $7,000,000
five year amortizing term loan due Wells Fargo Bank. At December 31, 2004,
$4,083,000 of variable rate debt was owed under the term loan, accruing interest
at the rate of 4.6%. A hypothetical change of 1% in interest rates would change
annual interest expense paid by the Company by approximately $34,000.
36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
American Ecology Corporation
We have audited the accompanying consolidated balance sheets of American Ecology
Corporation and subsidiaries as of December 31, 2004, 2003, and 2002, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of American Ecology
Corporation and subsidiaries as of December 31, 2004, 2003 and 2002, and the
results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.
Moss Adams, LLP
Los Angeles, California
January 28, 2005
37
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
($ IN 000'S EXCEPT PER SHARE AMOUNTS)
As of December 31,
-----------------------
2004 2003
----------- ----------
ASSETS
Current Assets:
Cash and cash equivalents $ 2,160 $ 6,674
Short term investments 10,967 --
Receivables, net 8,963 12,596
Insurance receivable 1,285 --
Prepayments and other 1,469 1,051
Deferred income taxes 5,613 3,222
Assets held for sale or closure -- 938
----------- ----------
Total current assets 30,457 24,481
Property and equipment, net 27,363 28,317
Facility development costs 6,478 6,478
Other assets 462 731
Deferred income taxes 12,473 5,062
Assets held for sale or closure -- 1,557
----------- ----------
Total assets $ 77,233 $ 66,626
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long term debt $ 1,457 $ 1,475
Accounts payable 3,022 1,678
Deferred revenue 724 497
State burial fees payable 1,446 1,387
Management incentive plan payable 934 --
Customer refunds 2,512 1,741
Accrued liabilities 725 1,163
Accrued closure and post closure obligation, current portion 2,323 1,828
Current liabilities of assets held for sale or closure -- 1,907
----------- ----------
Total current liabilities 13,143 11,676
Long term debt 2,734 4,200
Long term accrued liabilities 441 454
Accrued closure and post closure obligation, excluding current portion 9,304 9,296
Liabilities of assets held for sale or closure, excluding current portion -- 4,649
----------- ----------
Total liabilities 25,622 30,275
----------- ----------
Commitments and contingencies
Shareholders' equity:
Convertible preferred stock, 1,000,000 shares authorized,
Common stock, $.01 par value, 50,000,000 authorized, 17,398,494
and 17,033,118 shares issued and outstanding 174 170
Additional paid-in capital 51,015 54,824
Retained earnings (deficit) 422 (18,643)
----------- ----------
Total shareholders' equity 51,611 36,351
----------- ----------
Total Liabilities and Shareholders' Equity $ 77,233 $ 66,626
=========== ==========
The accompanying notes are an integral part of these financial statements.
38
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
($ IN 000'S EXCEPT PER SHARE AMOUNTS)
For the Year Ended December 31,
-----------------------------------------
2004 2003 2002
------------ ------------- ------------
Revenue $ 54,167 $ 57,047 $ 46,789
Direct operating costs 30,897 33,479 25,223
------------ ------------- ------------
Gross profit 23,270 23,568 21,566
Selling, general and administrative expenses 10,553 13,819 12,631
Business interruption insurance claim (431) -- --
------------ ------------- ------------
Income from operations 13,148 9,749 8,935
Interest income 203 347 31
Interest expense (194) (266) (820)
Fire related property insurance claims net of impairment 275 -- --
Loss on write off of Ward Valley facility development costs -- (20,951) --
Other income (expense) 99 124 (557)
------------ ------------- ------------
Income (loss) before income tax, discontinued operations and cumulative
effect of change in accounting principle 13,531 (10,997) 7,589
Income tax expense (benefit) (8,832) 72 (8,505)
------------ ------------- ------------
Income (loss) before discontinued operations and cumulative effect of
change in accounting principle 22,363 (11,069) 16,094
Income (loss) from discontinued operations (net of tax of $0) 1,047 2,477 (10,464)
------------ ------------- ------------
Income (loss) before cumulative effect of change in accounting principle 23,410 (8,592) 5,630
Cumulative effect of change in accounting principle (net of tax of $0) -- -- 13,141
------------ ------------- ------------
Net income (loss) 23,410 (8,592) 18,771
Preferred stock dividends -- 64 398
------------ ------------- ------------
Net income (loss) available to common shareholders $ 23,410 $ (8,656) $ 18,373
============ ============= ============
Basic earnings (loss) per share $ 1.36 $ (.52) $ 1.28
============ ============= ============
Diluted earnings (loss) per share $ 1.32 $ (.52) $ 1.15
============ ============= ============
Dividends paid per common share $ 0.25 $ -- $ --
============ ============= ============
The accompanying notes are an integral part of these financial statements.
39
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN 000'S)
For the Year Ended December 31,
-----------------------------------------
2004 2003 2002
------------- ------------ ------------
Cash flows from operating activities:
Net income (loss) $ 23,410 $ (8,592) $ 18,771
Adjustments to reconcile net income (loss)to net
cash provided by operating activities:
Depreciation, amortization, and accretion 5,957 6,973 6,604
(Income) loss from discontinued operations (1,047) (2,477) 10,464
Loss on disposal of property and equipment and gain on property claim, net (204) -- --
Income tax benefit on exercise of stock options 634 -- --
Loss on write off of Ward Valley facility development costs -- 20,951 --
Cumulative effect of change in accounting principle -- -- (13,141)
Deferred income taxes (9,800) -- (8,284)
Stock compensation -- 38 68
Changes in assets and liabilities:
Receivables 3,633 (2,078) (2,517)
Other assets (605) (206) 553
Closure and post closure obligation (526) (537) (1,598)
Income taxes payable/receivable -- 715 (227)
Accounts payable and accrued liabilities 2,884 (218) (3,063)
------------- ------------ ------------
Net cash provided by operating activities 24,336 14,569 7,630
Cash flows from investing activities:
Capital expenditures (4,984) (6,270) (2,737)
Proceeds from the sale of assets 383 -- --
Transfers between cash and short term investments, net (10,967) -- --
------------- ------------ ------------
Net cash used by investing activities (15,568) (6,270) (2,737)
Cash flows from financing activities:
Proceeds from issuances and indebtedness -- -- 7,615
Dividends paid (4,345) -- --
Payments of indebtedness (1,484) (3,053) (15,128)
Warrants purchased and canceled (5,500) -- --
Stock purchased and canceled -- (231) --
Retirement of Series D Preferred Stock -- (6,406) --
Stock options and warrants exercised 1,061 4,002 1,091
------------- ------------ ------------
Net cash used by financing activities (10,268) (5,688) (6,422)
------------- ------------ ------------
Increase (decrease) in cash and cash equivalents (1,500) 2,611 (1,529)
Net cash provided (used) by discontinued operations (3,014) 3,928 (2,812)
Cash and cash equivalents at beginning of year 6,674 135 4,476
------------- ------------ ------------
Cash and cash equivalents at end of year $ 2,160 $ 6,674 $ 135
============= ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest expense $ 194 $ 266 $ 820
Income taxes paid 335 93 6
Non-cash investing and financing activities:
Preferred stock dividends accrued -- -- 398
Acquisition of equipment with notes/capital leases -- 168 --
Impairment of assets involved in July 1, 2004 fire 679 -- --
Recognition of insurance proceeds for assets involved in July 1, 2004 fire 854 -- --
The accompanying notes are an integral part of these financial statements.
40
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
($ IN 000'S)
ADDITIONAL RETAINED
PREFERRED COMMON PAID-IN EARNINGS
STOCK STOCK CAPITAL (DEFICIT) TOTAL
----------- ---------- ------------ ---------- --------
Balance, January 1, 2002 $ 1 $ 138 $ 54,637 $ (28,360) $26,416
Net income -- -- -- 18,771 18,771
Common stock issuance -- 7 1,152 -- 1,159
Dividends on preferred stock -- -- -- (398) (398)
----------- ---------- ------------ ---------- --------
Balance, December 31, 2002 $ 1 $ 145 $ 55,789 $ (9,987) $45,948
=========== ========== ============ ========== ========
Net loss -- -- -- (8,592) (8,592)
Common stock issuance -- 25 4,015 -- 4,040
Dividends on preferred stock -- -- -- (64) (64)
Retirement of preferred stock (1) -- (4,749) -- (4,750)
Common stock cancelled -- -- (231) -- (231)
----------- ---------- ------------ ---------- --------
Balance, December 31, 2003 $ -- $ 170 $ 54,824 $ (18,643) $36,351
=========== ========== ============ ========== ========
Net income -- -- -- 23,410 23,410
Common stock issuance -- 4 1,057 -- 1,061
Dividends on common stock -- -- -- (4,345) (4,345)
Retirement of bank warrant -- -- (5,500) -- (5,500)
Tax benefit from stock options -- -- 634 -- 634
----------- ---------- ------------ ---------- --------
Balance, December 31, 2004 $ -- $ 174 $ 51,015 $ 422 $51,611
=========== ========== ============ ========== ========
The accompanying notes are an integral part of these financial statements
41
AMERICAN ECOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS
American Ecology Corporation, through its subsidiaries (collectively, the
"Company" or "AEC"), provides radioactive, hazardous and industrial waste
management services to commercial and government entities, such as nuclear power
plants, medical and academic institutions, steel mills, refineries and chemical
manufacturing plants. The Company's headquarters are located in Boise, Idaho.
The Company's principal operating subsidiaries are US Ecology Nevada, Inc., a
Delaware corporation; US Ecology Texas, a Texas Limited Partnership; US Ecology
Washington, Inc., a Delaware corporation; and US Ecology Idaho, Inc., a Delaware
corporation.
The Company operates within two segments: Operating Disposal Facilities and
Non-Operating Disposal Facilities. Prior to December 27, 2002, the Company
operated a Low-Level Radioactive Waste ("LLRW") Processing and Field Services
business. The Operating Disposal Facilities are currently accepting hazardous,
PCB, industrial and low-level radioactive waste and naturally occurring and
accelerator produced radioactive materials ("NORM/NARM"). The Non-Operating
Disposal Facilities segment includes non-operating disposal facilities, a closed
hazardous waste processing and deep-well injection facility, and two proposed
new disposal facilities.
The Operating Disposal Facilities segment includes the Company's hazardous waste
treatment and disposal facilities in Beatty, Nevada; Grand View, Idaho, and
Robstown, Texas, and its LLRW and NORM/NARM disposal facility in Richland,
Washington. On February 13, 2003, the Company sold its El Centro, Texas
municipal solid waste landfill facility. This facility was previously included
in the Operating Disposal Facilities segment but was classified as a
discontinued operation as of December 31, 2002 due to its pending sale.
The Non-Operating Disposal Facilities segment includes the closed hazardous
waste disposal, processing, and deep-well injection facilities located in
Sheffield, Illinois; Bruneau, Idaho; Beatty, Nevada; and Winona, Texas. The
Company currently incurs costs for remediation and long-term monitoring and
maintenance at its closed facilities. Two formerly proposed disposal facilities
located in Butte, Nebraska and Ward Valley, California are involved in ongoing
litigation.
The Processing and Field Services segment previously aggregated, volume-reduced,
and performed remediation and contamination removal services primarily for
nuclear power plants. Processing and Field Services operations are included in
the results of discontinued operations.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The accompanying financial statements are prepared
- ----------------------------
on a consolidated basis. All significant inter-company balances and transactions
have been eliminated in consolidation. The Company's fiscal year-end is December
31.
Cash and Cash Equivalents. The Company considers cash and cash equivalents to
- ---------------------------
be balances with financial institutions available within 30 days of request.
Short Term Investments Short term investments of $10,967,000 at December 31,
- ------------------------
2004 shown as a current asset in the accompanying consolidated balance sheet
consist of investments of quasi governmental institutions such as the Federal
Home Loan Bank. These investments have had maximum maturities of approximately
three months and are expected to earn a slightly higher rate of return than
investments in overnight securities.
Financial Instruments. The recorded amounts of cash and cash equivalents,
- ----------------------
short-term investments, accounts receivable, short-term borrowings, accounts
payable and accrued liabilities as presented in the consolidated financial
statements approximate fair value because of the short-term nature of these
instruments. The recorded amount of short and long-term borrowings approximates
fair value as the interest rates approximate current competitive rates.
42
Receivables. - Receivables are stated at an amount management expects to
- -----------
collect. Based on management's assessment of the credit history of the customers
having outstanding balances, it has concluded that potential unreserved future
losses on balances outstanding at year-end will not be material.
Revenue Recognition. Revenues are recognized by operating segment, as follows:
- --------------------
Disposal facility revenues result primarily from fees charged to customers for
waste treatment and/or disposal services. Fees are generally charged on a
per-ton or per-yard basis based on contracted prices. Revenues are recognized as
services are performed and the waste is buried. Burial fees collected from
customers and paid to the respective states are not included in revenue.
The Richland, Washington disposal facility is regulated by the Washington
Utilities and Transportation Commission ("WUTC"), which sets and regulates rates
for its disposal of low-level radioactive wastes. Annual revenue levels are
established based on an agreement with the WUTC at amounts sufficient to cover
the costs of operation and provide the Company with a reasonable profit.
Per-unit rates charged to LLRW customers during the year are based on disposal
volumes and radioactivity projections submitted by the Company and approved by
the WUTC. If annual revenue exceeds the approved levels set by the WUTC, the
Company is required to refund the excess collections to facility users on a
pro-rata basis.
Unbilled receivables. Unbilled receivables are recorded for work performed under
- --------------------
contracts that have not yet been invoiced to customers, and arise due to the
timing of billings. Substantially all unbilled receivables at December 31, 2004
were billed in the following month.
Deferred revenue. Advance billings or collections are recorded as deferred
- -----------------
revenue, and recognized when related services are provided.
Operations held-for-sale. In August 2001, the Financial Accounting Standards
- --------------------------
Board issued Statement of Financial Accounting Standards No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets ("FAS No. 144"). The Company
adopted the provision of FAS No. 144 effective January 1, 2002. It is the
Company's policy to classify the businesses the Company is marketing for sale as
operations held-for-sale when: 1. management commits to a plan to sell or
dispose of the operations; 2. the operations are made available for immediate
sale; 3. an active program to locate a buyer has been initiated and; 4. the sale
of the operations within one year is probable. The sale of certain assets within
one year may be contingent on regulatory approvals. The carrying values of these
assets are written down to estimated fair value, less estimated costs to sell.
Estimates and certain contingencies exist that could cause actual results to
materially differ from the estimated results for these operations. The Company
discontinues depreciation on fixed assets for businesses that are classified as
held-for-sale.
Property, Plant and Equipment. Property plant and equipment are recorded at
- ---------------------------------
cost and depreciated on the straight-line method over estimated useful lives.
Lease obligations for which the Company assumes or retains substantially all the
property rights and risks of ownership are capitalized. Replacements and major
repairs of property and equipment are capitalized and retirements are made when
the useful life has been exhausted. Minor components and parts are charged to
expense as incurred. During 2004, 2003 and 2002, maintenance and repair
expenses charged to continuing operations were $1,009,000, $1,053,000 and
$337,000, respectively. During 2004 significant expenses were incurred for
repairs and maintenance on water management systems, and in 2003 significant
expenses were incurred for repairs and maintenance on buildings and monitoring
wells.
The Company assumes no salvage value for its depreciable fixed assets. The
estimated useful lives for significant property and equipment categories are as
follows (in years):
Useful Lives
------------
Vehicles and other equipment 3 to 10
Disposal facility and equipment 3 to 20
Buildings and improvement 5 to 40
Disposal cell development costs and accounting. Qualified disposal cell
- ---------------------------------------------------
development costs are recorded and capitalized at cost. Capitalized cell
development costs, net of recorded amortization, are added to estimated future
costs of the
43
permitted disposal cell to be incurred over the remaining construction of the
cell to determine the amount to be amortized over the remaining estimated cell
life. Estimated future costs are developed using input from independent
engineers, and internal technical and accounting managers. Management reviews
these estimates at least annually. Amortization is recorded on a unit of
consumption basis, typically applying cost as a rate per cubic yard. Disposal
facility site costs are expected to be fully amortized upon final closure of the
facility, as no salvage value applies. Costs associated with ongoing disposal
operations are charged to expense as incurred.
The Company has material financial commitments for closure and post-closure
obligations for facilities it owns or operates. The Company estimates its future
cost requirements for closure and post-closure monitoring based on Resource
Conservation and Recovery Act ("RCRA") and conforming state requirements and
applicable permits. RCRA requires that companies provide the responsible
regulatory agency an acceptable financial assurance for closure and post-closure
monitoring of each facility for thirty years following closure. Estimates for
final closure and post-closure costs are developed using input from the
Company's technical and accounting managers and are reviewed by management at
least once per year. These estimates involve projections of costs that will be
incurred after the disposal facility ceases operations during the required
post-closure monitoring period. In August 2001, the Financial Accounting
Standards Board (FASB) issued FAS No. 143, Accounting for Asset Retirement
Obligations (FAS 143), which established standards for accounting for an
obligation associated with the retirement of a long-lived tangible asset. The
Company adopted these standards effective January 1, 2002. In accordance with
FAS 143, the present value of the estimated closure and post-closure costs are
accreted using the interest method of allocation so that 100% of the future cost
has been incurred at the time of payment.
The Company has historically been successful in receiving approvals for proposed
disposal facility expansions; however, there can be no assurance that the
Company will be successful in obtaining future expansion approvals. In some
cases, the Company may be unsuccessful in obtaining an expansion permit
modification or the Company may determine that such a permit modification
previously considered probable is no longer probable. The Company's technical
and accounting managers review the estimates and assumptions used in developing
this information at least annually, and the Company believes them to be
reasonable. If such estimates prove to be incorrect, the costs incurred in the
pursuit of a denied expansion permit would be charged against earnings.
Additionally, the disposal facility's future operations would reflect lower
profitability due to expenses relating to the decrease in life, or impairment of
the facility.
Impairment of Long-lived assets. Long-lived assets consist primarily of property
- -------------------------------
and equipment, facility development costs and deferred site development costs.
The recoverability of long-lived assets is evaluated periodically through
analysis of operating results and consideration of other significant events or
changes in the business environment. If an operating unit has indications of
possible impairment, such as current operating losses, the Company will evaluate
whether impairment exists on the basis of undiscounted expected future cash
flows from operation of the remaining amortization period. If an impairment loss
exists, the carrying amount of the related long-lived assets is reduced to its
estimated fair value based upon discounted cash flows from operations. During
2004 the Company recorded an impairment charge of $679,000 for assets involved
in the July 1, 2004 Texas fire. During 2003 and 2002, the Company recorded
impairment charges of $225,000 and $1,593,000 relating to certain discontinued
operations.
Income taxes. Income taxes are accounted for using an asset and liability
- --------------
approach, which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of temporary differences between the
financial statement and tax basis of assets and liabilities at the applicable
tax rates. A valuation allowance is recorded against deferred tax assets if,
based on the weight of the available evidence, it is more likely than not that
some or all of the deferred tax assets will not be realized. Income tax expense
is the income tax payable or refundable for the period plus or minus the change
during the period in deferred income tax assets and liabilities.
Insurance. The Company is self-insured for health-care coverage of employees.
- ---------
Stop-loss insurance is carried, which assumes liability for claims in excess of
$75,000 per individual or on an aggregate basis based on the monthly population.
Accrued costs related to the self-insured health care coverage amounted to
$131,000 and $138,000 at December 31, 2004 and 2003. The Company also maintains
a Pollution and Remediation Legal Liability Policy pursuant to RCRA regulations
subject to a $250,000 self-insured retention. In addition, the Company is
insured for consultant's environmental liability subject to a $100,000
self-insured retention.
New Accounting Pronouncements.
- ------------------------------
In December 2004, the Financial Accounting Standards Board ("FASB") revised SFAS
No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 will require
the Company to recognize the fair value of options issued to
44 employees or the Board of Directors over the period in which the
option is earned. The Company previously accounted for stock-based compensation
under APB Opinion No. 25, which is superseded by SFAS No. 123 for options earned
subsequent to June 30, 2005. Under the revised SFAS No. 123 at December 31,
2004, the Company has issued but unvested options that, if earned, will result
in the following compensation expense being recognized through the first quarter
of 2004 when all remaining options will be vested :
Pro Forma
($in thousands) Compensation Expense
---------------------
Fair value of options to be earned during the third quarter of 2005 $ 94
Fair value of options to be earned during the fourth quarter of 2005 $ 94
Fair value of options to be earned during the first quarter of 2006 $ 47
Stock Options. At December 31, 2003, the Company has two stock-based employee
- ---------------
compensation plans. These are more fully described in Note 13. The Company
currently accounts for those plans 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
earning per share if the Company had applied the fair value recognition
provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation,
to stock-based employee compensation for the years ended December 31:
2004 2003 2002
-------- -------- --------
Net income (loss), as reported $23,410 $(8,592) $18,771
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects (855) (980) (283)
-------- -------- --------
Pro forma net income (loss) $22,555 $(9,572) $18,488
======== ======== ========
EARNINGS PER SHARE:
Basic - as reported $ 1.36 $ (.52) $ 1.28
======== ======== ========
Basic - pro forma $ 1.31 $ (.58) $ 1.26
======== ======== ========
Diluted - as reported $ 1.32 $ (.52) $ 1.15
======== ======== ========
Diluted - pro forma $ 1.27 $ (.58) $ 1.13
======== ======== ========
Reclassification. Reclassifications have been made to prior year financial
- -----------------
statements to conform to the current year presentation. These reclassifications
have no impact on reported equity or net income available to common
shareholders.
NOTE 3. EARNINGS PER SHARE
Basic earnings per share is computed based on net income and the weighted
average number of common shares outstanding. 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 that would have an anti-dilutive effect on earnings
per share.
Year Ended December 31,
-----------------------
($in thousands except per share amounts) 2004 2003 2002
------- --------- ---------
Income (loss) before discontinued operations and cumulative $22,363 $(11,069) $ 16,094
effect of accounting change
Gain (loss) from operations of discontinued segments 1,047 2,477 (10,464)
Cumulative effect of accounting change -- -- 13,141
------- --------- ---------
Net income (loss) 23,410 (8,592) 18,771
Preferred stock dividends -- 64 398
------- --------- ---------
Net income (loss) available to common shareholders $23,410 $ (8,656) $ 18,373
======= ========= =========
Weighted average shares outstanding-
Common shares 17,226 16,604 14,311
45
Effect of dilutive shares
Series E Warrants -- -- 981
Chase Bank Warrants -- -- 564
Stock Options 500 -- 114
------- --------- ---------
Fully diluted shares 17,726 16,604 15,970
======= ========= =========
Basic earnings (loss) per share from continuing operations $ 1.30 $ (.67) $ 1.09
Basic earnings (loss) per share from discontinued operations .06 .15 (.73)
Basic earnings per share from cumulative effect of accounting change -- -- .92
------- --------- ---------
Basic earnings (loss) per share $ 1.36 $ (.52) $ 1.28
======= ========= =========
Diluted earnings (loss) per share from continuing operations $ 1.26 $ (.67) $ .99
Diluted earnings (loss) per share from discontinued operations .06 .15 (.66)
Diluted earnings per share from cumulative effect of accounting
change -- -- .82
------- --------- ---------
Diluted earnings (loss) per share $ 1.32 $ (.52) $ 1.15
======= ========= =========
NOTE 4. USE OF ESTIMATES AND ASSUMPTIONS
Use of Estimates. The preparation of financial statements in conformity with
- ------------------
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements, as well as the reported
amounts of revenue and expenses during the reporting period. Listed below are
the estimates and assumptions that management considers to be significant in the
preparation of its financial statements.
- Allowance for Doubtful Accounts -- The Company estimates losses for
uncollectible accounts based on the aging of the accounts receivable and an
evaluation of the likelihood of success in collecting the receivable.
- Insurance Receivable -- The Company estimates proceeds for property and
business interruption insurance resulting from the July 1, 2004 fire at the
Robstown, Texas facility.
- Recovery of Long-Lived Assets -- The Company evaluates the recovery of
its long-lived assets periodically by analyzing its operating results and
considering significant events or changes in the business environment.
- Operations Held-for-Sale and Discontinued Operations -- The Company
writes down the carrying value of its held-for-sale operations to the estimate
of the fair value of such operations. Additionally, estimates and accruals are
made related to future operations that could significantly change and result in
increased or decreased charges during future periods.
- Income Taxes -- The Company assumes the deductibility of certain costs in
its income tax filings and estimates the future recovery of deferred tax assets.
- Legal Accruals -- The Company estimates the amount of potential exposure
it may have with respect to litigation, claims and assessments.
- Disposal Cell Development and Final-Closure/Post-Closure Amortization -
The Company expenses amounts for disposal cell usage and final closure and
post-closure costs for each cubic yard of waste buried at its disposal
facilities. In determining the amount to expense for each cubic yard of waste
buried, the Company estimates the cost to develop each disposal cell and the
final closure and post-closure costs for each disposal cell. The expense for
each cubic yard is then calculated based on the remaining permitted capacity and
total permitted capacity. Estimates for final closure and post-closure costs are
developed using input from third party engineering consultants, and Company
technical and accounting managers. Management reviews estimates at least
annually. Estimates for final disposal cell closure and post-closure consider
when the costs would actually be paid and, where appropriate, inflation and
discount rates.
46
Actual results could differ materially from the estimates and assumptions that
the Company uses in the preparation of its financial statements. As it relates
to estimates and assumptions in amortization rates and environmental remediation
liabilities, significant engineering, operations and accounting input is
required. The Company reviews these estimates and assumptions no less than
annually. In many circumstances, the ultimate outcome of these estimates and
assumptions may not be known for decades into the future. Actual results could
differ materially from these estimates and assumptions due to changes in
environmental-related regulations, changes in future operational plans, and
inherent imprecision associated with estimating environmental matters so far
into the future.
NOTE 5. CONCENTRATIONS AND CREDIT RISK
Major Customers. The Company manages the disposal of hazardous and radioactive
- ----------------
waste under a contract with the U.S. Army Corps of Engineers Formerly Utilized
Site Remedial Action Program ("FUSRAP"), the transportation and disposal of
waste for remediation projects, and the disposal of steel mill dust (KO61) under
various contracts. The following customers accounted for more than 10% of
revenue during any of the three years ending December 31:
% OF REVENUE FOR YEAR ENDING
CUSTOMER 2004 2003 2002
-------- ------------ --------
U.S. Army Corps of Engineers 31 27 27
Nucor Steel Company 6 7 13
Shaw E & I -- 18 -
Receivable balances from these customers as of December 31, were as follows ($
in thousands):
CUSTOMER 2004 2003
------ ------
U.S. Army Corps of Engineers $1,892 $2,916
Nucor Steel Company $ 257 $ 375
Shaw E & I -- $3,598
Credit Risk Concentration. The Company maintains most of its cash and short
- ---------------------------
term investments with Wells Fargo Bank in Boise, Idaho. Substantially all of
the balances are uninsured and are not used as collateral for other obligations.
Short term investments are quasi-governmental debt obligations, such as the
Federal Home Loan Bank, with a maximum maturity of approximately three months.
Concentrations of credit risk with respect to accounts receivable are believed
to be limited due to the number, diversification and character of the obligors
and the Company's credit evaluation process. Typically, the Company has not
required customers to provide collateral for such obligations.
Labor Concentrations. As of December 31, 2004, the Paper, Allied-Industrial
- ----------------------
Chemical & Energy Workers International Union, AFL-CIO, CLC (PACE), represents
11 employees at one of the Company's facilities, and 167 other employees did not
belong to a union.
NOTE 6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 2004 and 2003, were as follows:
($in thousands) 2004 2003
--------- ---------
Construction in progress $ 2,538 $ 1,381
Land and improvements 5,604 4,986
Cell development costs 20,323 19,503
Buildings and improvements 12,170 13,535
Vehicles and other equipment 17,057 16,938
--------- ---------
57,692 56,343
Less: Accumulated depletion, depreciation and amortization
(30,329) (28,026)
--------- ---------
Property, Plant and Equipment $ 27,363 $ 28,317
========= =========
Depreciation expense was $4,905,000, $5,995,000, and $4,864,000 for 2004, 2003
and 2002, respectively.
47
NOTE 7. FACILITY DEVELOPMENT COSTS
A wholly owned subsidiary of the Company, US Ecology, was licensed in 1993 to
construct and operate the low-level radioactive waste ("LLRW") facility for the
Southwestern Compact ("Ward Valley facility"), and was selected to obtain a
license to develop and operate the Central Interstate Compact LLRW facility
("Butte facility").
Ward Valley Site - The State of California, where the Ward Valley Site is
- ---------------------
located, has abandoned efforts to obtain the project property from the U.S.
Department of the Interior. For the Company to realize its investment, the
Company will need to recover monetary damages from the State of California. The
Company is pursuing litigation in state court to recover its investment in Ward
Valley and will continue to seek recovery.
The Company has alleged that the State of California abandoned its duty to
acquire the project property from the U.S. Department of the Interior and is
seeking recovery of monetary damages in excess of $162 million in a suit filed
in State court. The trial court ruled against the Company on March 26, 2003.
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
on March 31, 2003. The Company has appealed this ruling. Briefing on the appeal
was completed in 2004 and management expects oral argument to be scheduled in
the second quarter of 2005.
Butte Site - The Company submitted an application to the State of Nebraska to
- --------------
construct and operate this facility, developed under contract to the Central
Interstate LLRW Compact Commission ("CIC"). Following proposed license denial by
the State of Nebraska, the CIC, the Company and a number of nuclear power
utilities funding the project sued the State of Nebraska alleging bad faith in
the license review process. A federal court order was issued enjoining the State
license review process. On September 30, 2002, the federal district court
awarded plaintiffs $153 million in damages. The Company anticipates that it will
receive approximately $12 million of the award based on its contributions to the
project and pre-judgment interest. On February 18, 2004, the Eighth U.S. Circuit
Court of Appeals affirmed the district court ruling in its entirety.
On August 9, 2004 Nebraska and the CIC entered into a settlement under which the
State agreed to make four equal payments of $38.5 million to the CIC beginning
August 1, 2005 and annually thereafter for three years. The $154 million
settlement reflects a principal amount of $140.5 million, plus interest of 3.75%
compounded annually and beginning August 1, 2004. The principal may be reduced
to $130 million if Nebraska and the CIC negotiate suitable access to a proposed
future Texas LLRW disposal site. Settlement payments are subject to
appropriation. Should the Nebraska legislature fail to appropriate the required
payments, the CIC retains rights to pursue enforcement by any and all legal
remedies available. Under the settlement, Nebraska waived any claim to sovereign
immunity in a suit brought to enforce payment and agreed to dismiss its petition
for U.S. Supreme Court review. Management expects to finalize payment
arrangements with the CIC prior to the intended August 2005 disbursement.
The timing and outcome of the above matters are unknown. The Company has alleged
that the State of California has abandoned the project. A state law has been
enacted effectively precluding disposal facility development at that site.
However, the Company believes that its damages claim is strong and will continue
to pursue recovery of damages through its litigation. The Company is pursuing
its fair share of the Nebraska-CIC settlement in discussions with the CIC,
however, payment is subject to appropriation of settlement funds by the Nebraska
legislature and agreement with the CIC on the amount and timing of payment. In
the event the Company fails to secure its fair share of the settlement, the
Company is unable to recoup its investment through legal recourse, or the Butte
project is not resurrected and placed in operation, it may have a material
adverse effect on the Company's financial position.
The following table shows the ending capitalized balances for facility
development costs as of December 31, 2004 and 2003 (in thousands):
Capitalized Costs
-----------------
2004 2003
------ ------
Ward Valley, CA Project $ -- $ --
Butte, Nebraska Project 6,478 6,478
------ ------
Total $6,478 $6,478
====== ======
48
NOTE 8. CUMULATIVE EFFECT OF ACCOUNTING CHANGE AND CLOSURE AND POST CLOSURE
OBLIGATION
Accrued closure and post-closure liability represents the expected future costs,
including corrective actions and remediation, associated with closure and
post-closure of the Company's Operating and Non-Operating disposal facilities.
Liabilities 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 "Accounting for Contingencies"
("FAS 5"). The Company performs periodic reviews of both non-operating and
operating sites and revises accruals for estimated post-closure, remediation or
other costs as necessary. The Company's recorded liabilities are based on best
estimates of current costs and are updated periodically to include the effects
of existing technology, presently enacted laws and regulations, inflation and
other economic factors.
The Company does not bear significant financial responsibility for closure and
post-closure of the disposal facilities located on State owned land at Beatty,
Nevada or State leased federal land at Richland, Washington. Nevada and
Washington collect fees from a portion of the disposal charges on a quarterly
basis from the Company. Such fees are deposited in dedicated, State controlled
funds to cover the future costs of closure and post-closure care and
maintenance. Such fees are periodically reviewed by the States and are based
upon engineering cost estimates set by the States.
The Company implemented Statement of Financial Accounting Standards 143,
Accounting for Asset Retirement Obligations (FAS 143), effective 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. Previously, the Company
recorded a Closure and Post Closure Obligation for the pro-rata amount of
disposal space used to the original space available. On January 1, 2002, in
accordance with FAS 143, this obligation was valued at the current estimated
closure cost, increased by a cost of living adjustment for the estimated time of
payment, and discounted back to present value. A previously unrecognized asset
was also recorded.
Liabilities are recorded when environmental assessments and/or remedial efforts
are probable, and the costs can be reasonably estimated consistent with FAS 5.
The Company performs periodic reviews of both non-operating and operating sites
and revises accruals for estimated post-closure, remediation and other costs as
necessary. 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):
2004 2003
-------- --------
Obligation, beginning of year $15,745 $16,760
Accretion of obligation 1,029 1,051
Payment of obligation (961) (1,148)
Adjustment of obligation (4,186) (918)
-------- --------
December 31obligation $11,627 $15,745
======== ========
The adjustment of obligation is a change in the expected timing of cash
expenditures based upon actual and estimated cash expenditures. The primary
adjustments were a reduction in the obligation of $1,098,000 due to the sale of
the discontinued El Centro municipal landfill in 2003 and a reduction in the
obligation of $4,621,000 due to the sale of the discontinued Oak Ridge
processing business in 2004.
The reported closure and post closure obligation is recorded in the consolidated
balance sheet for the years ended December 31 as follows:
($in thousands) 2004 2003
------- -------
Accrued closure and post closure obligation, current portion $ 2,323 $ 1,828
Accrued closure and post closure obligation, non-current portion 9,304 9,296
Liabilities related to assets held for sale or closure, non-current portion -- 4,621
------- -------
$11,627 $15,745
======= =======
49
The reported closure and post closure asset is recorded in the consolidated
balance sheet for the years ended December 31 as follows:
($in thousands) 2004 2003
------- -------
Closure and post closure asset, beginning of year $1,698 $2,011
Adjustments to closure and post closure asset (209) (313)
------- -------
Closure and post closure asset, end of year $1,489 $1,698
Adjustment to accumulated amortization of closure and post closure asset 181 --
Amortization of closure and post closure asset (94) (139)
Prior year accumulated amortization of closure and post closure asset (338) (199)
------- -------
Net closure and post closure asset, end of year $1,238 $1,360
======= =======
Cumulative effect of change in accounting principle as of January 1, 2002
included in the consolidated statement of operations is as follows ($ in
thousands):
Reduction in closure and post closure obligation $11,130
Initial recognition of closure and post closure asset 2,011
-------
Cumulative effect of implementation of FAS 143 $13,141
=======
NOTE 9. LONG TERM DEBT
On October 28, 2002, the Company entered into a five year, fully amortizing,
$7,000,000 term loan agreement with Wells Fargo Bank to substantially refinance
its $8,500,000 Idaho industrial revenue bond obligation. The term loan provides
for a variable interest rate based upon the bank's prime rate or an offshore
rate plus an applicable margin that depends upon the Company's performance. The
Company has pledged substantially all of its fixed assets at the Grand View,
Beatty, Richland, and Robstown hazardous and radioactive waste facilities as
collateral. The term loan is cross-collateralized with the Company's line of
credit. The Company paid the $1,500,000 balance owing on the industrial revenue
bond with cash on hand.
Long-term debt at December 31 consisted of the following (in thousands):
INTEREST RATE AT DEC. 31, 2004 2004 2003
------------------------------- -------- --------
Term Loan VARIABLE 4.6% $ 4,084 $ 5,483
Notes payable and other FIXED 7.0% AVERAGE 107 192
-------- --------
4,191 5,675
Less: Current maturities (1,457) (1,475)
-------- --------
Long term debt $ 2,734 $ 4,200
======== ========
Future minimum payments on long-term debt is as follows (in thousands):
Year Ended December 31,
- -----------------------
2005 $1,457
2006 1,451
2007 1,283
Thereafter --
------
Total Debt $4,191
======
NOTE 10. REVOLVING LINE OF CREDIT
The Company has a line of credit with Wells Fargo Bank with a maximum amount
available of $8,000,000 and a maturity date of June 15, 2005. The line of credit
is collateralized by the Company's accounts receivable and is
cross-collateralized with the Company's term loan. Monthly interest only
payments are required and based on a pricing grid, under which the interest rate
decreases or increases based on the Company's ratio of funded debt to earnings
before
50
interest, taxes, depreciation and amortization. The Company can elect to borrow
monies utilizing the Prime Rate or the offshore London Inter-Bank Offering Rate
("LIBOR") plus an applicable spread. At December 31, 2004, the applicable
interest rate on the line of credit was 5.25%. The credit agreement contains
certain financial covenants that the Company has adhered to quarterly, including
a maximum leverage ratio, a minimum current ratio and a minimum fixed charge
coverage ratio. This credit agreement allows for annual dividends on any of the
Company's outstanding capital stock as long as an event of default has not
occurred, and will not occur as a result of the dividend.
At December 31, 2004 and 2003, the outstanding balance on the revolving line of
credit was $0. At December 31, 2004 and 2003, the availability under the line of
credit was $3,000,000 and $4,492,000, respectively, with $5,000,000 and
$3,508,000 of line of credit availability restricted for the outstanding letters
of credit utilized as collateral for the Company's financial assurance policies.
The Company has continued to borrow on, and repay the line of credit according
to business demands and availability of cash.
NOTE 11.OPERATING LEASES
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 recorded in conjunction
with the original sale-lease back transaction. In conjunction with the early
buyout, the Company recorded an impairment charge of $225,000 on certain
equipment at the discontinued and subsequently sold Oak Ridge facility.
Other lease agreements primarily cover office equipment and office space. Future
minimum lease payments as of December 31, 2004 were as follows ($ in thousands):
Minimum Lease Payment
----------------------
2005 $ 726
2006 368
2007 133
2008 47
2009 40
----------------------
Total Minimum Payments $ 1,314
======================
Rental expense from continuing operations amounted to $490,000, $621,000, and
$461,000 during 2004, 2003 and 2002, respectively.
NOTE 12. EQUITY
On August 31, 2004 the Company declared a dividend of $.25 per common share to
stockholders of record on September 30, 2004 and payable October 15, 2004. The
dividend, paid out of cash on hand, totaled $4,345,000.
In 1996, the Company issued 300,000 shares of Series E Redeemable Convertible
Preferred Stock ("Series E Preferred Stock") that were later 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 April
2002 one Series E holder exercised 650,000 warrants. In February 2003, the
remaining 2,350,000 Series E Warrants were exercised and the Company issued
2,350,000 shares of common stock and received $3,525,000 in cash. No Series E
warrants are now outstanding.
In September 1995, the Board of Directors authorized 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 present and past members of the Board of Directors. In 1999, one
Series D holder converted 5,263 preferred shares to 69,264 common shares. 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 common stock, which
was equivalent to a conversion price of $3.71 per share due to dilution by
subsequent sales of common stock.
In January 2003, the Company offered to repurchase all outstanding Series D
Preferred Stock for the original sales price of $47.50 a share plus accrued but
unpaid dividends. Repurchase was subject to approval by the Company's Board of
Directors and primary bank. The offer was accepted by all Series D holders and
approved by the Board of Directors and
51
the bank. On February 28, 2003, the Company repurchased the remaining 100,001
shares of Series D Preferred Stock for $47.50 a share plus accrued but unpaid
dividends of $16.56 a share, for a total payment of $6,406,000.
On February 17, 2004 the Company redeemed a warrant to purchase 1,349,843 shares
of common stock at $1.50 a share for $5,500,000. The closing market price of the
Company's common stock at February 17, 2004 was $6.99. The warrant had been
issued in 1998 to the Company's former bank as part of a debt restructuring
agreement. The redeemed warrant, which represented approximately 8% of the
Company's shares outstanding, has been surrendered and will not be reissued. The
warrant redemption reduced the Company's cash on hand by $5,500,000 and reduced
Additional Paid in Capital by a like amount, with no effect on the Statement of
Operations.
NOTE 13. STOCK OPTION PLANS
The Company presently maintains two stock option plans. The exercise price,
term and other conditions applicable to each option granted under the Company's
plans are approved by the Board of Directors at the time of the grant of each
option and may vary with each option granted. No options may have a term longer
than ten years.
In 1992, the Company adopted the two plans as the 1992 Stock Option Plan for
Employees and the 1992 Stock Option Plan for Directors. On May 13, 1999, 500,000
shares were added to the Employee's Plan of 1992 for a total of 1,300,000 shares
authorized. Options under the employee plan are designated as incentive or
non-qualified in nature at the discretion of the Compensation Committee, and
only employees may receive options under the 1992 Stock Option Plan for
Employees. On May 24, 2001, 350,000 shares were added to the Directors Plan of
1992 for a total of 1,000,000 shares authorized. Both plans provide for
cancelled options to be returned to the plan for re-issue.
The stock option plan summary and changes during years ended December 31 are as
follows:
2004 2003 2002
----------- ----------- -----------
Options outstanding, beginning of year 1,266,281 753,150 1,128,650
Granted 65,000 813,724 147,500
Exercised (362,573) (180,043) (108,500)
Canceled (55,000) (120,550) (414,500)
----------- ----------- -----------
Options outstanding, end of year 913,708 1,266,281 753,150
=========== =========== ===========
Average price of outstanding options $ 4.40 $ 3.90 $ 3.42
Average price of options granted $ 9.54 $ 4.30 $ 3.14
Average price of options exercised $ 2.72 $ 2.65 $ 1.29
Average price of options canceled $ 10.13 $ 5.43 $ 2.46
Options exercisable at end of year 608,368 808,271 753,150
=========== =========== ===========
Options available for future grant at end 499,676 509,676 1,202,850
=========== =========== ===========
of year
52
The following table summarizes information about the stock options outstanding
under the Company's option plans as of December 31, 2004:
Weighted
average Weighted Weighted
remaining average average
Range of exercise contractual life Number exercise price Number exercise price
price per share (years) outstanding per share exercisable per share
- ------------------ ----------------- ----------- --------------- ----------- ---------------
1.00 - $1.47 2.9 37,500 $ 1.32 37,500 $ 1.32
1.60 - $2.25 3.8 38,500 $ 2.14 38,500 $ 2.14
2.42 - $3.50 7.7 256,109 $ 2.88 147,318 $ 2.79
3.75 - $5.00 6.8 377,346 $ 4.30 250,423 $ 4.20
6.50 8.1 139,253 $ 6.50 69,627 $ 6.50
9.20 - $12.15 9.5 65,000 $ 9.54 65,000 $ 9.54
----------- -----------
913,708 608,368
=========== ===========
As of December 31, 2003, the 1992 Stock Option Plan for Employees had options
outstanding for 575,208 shares with 188,976 shares remaining available. Under
the 1992 Stock Option Plan for Directors, options were outstanding for 338,500
shares with 310,700 shares remaining available.
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 in 2004, 2003 and 2002:
2004 2003 2002
----------- ------------ -----------
Expected volatility 72% - 73% 83% - 105% 49% - 102%
Risk-free interest rates 4.4%-4.72% 3.75%-4.25% 4.75%
Expected lives 10 YEARS 7-10 years 10 years
Dividend yield 0-2.7% 0% 0%
Weighted-average fair value of options granted
during the year (Black-Scholes) $ 7.38 $ 2.18 $ 1.92
NOTE 14. EMPLOYEE'S BENEFIT PLANS
401(k) Plan. The Company maintains a 401(k) plan for employees who voluntarily
- ------------
contribute a portion of their compensation, thereby deferring income for federal
income tax purposes. The plan is called The American Ecology Corporation 401(k)
Savings Plan ("the Plan"). The Plan covers substantially all of the Company's
employees after one full quarter of employment. Participants may contribute a
percentage of salary up to the IRS limits. The Company's contribution matches
55% of participant contributions up to 6% of compensation.
Company contributions for the Plan in 2004, 2003 and 2002 were $193,000,
$125,000, and $522,000, respectively. The contributions for 2002 included
$294,000 paid as part of the union settlement at the discontinued Oak Ridge
operations.
53
NOTE 15. INCOME TAXES
The components of the income tax provision (benefit) were as follows (in
thousands):
Year Ended December 31,
2004 2003 2002
-------- ----- --------
Current - State $ 4 $ 72 $ (221)
Current - Federal 115
Deferred - State (421)
Deferred - Federal (8,530) -- (8,284)
-------- ----- --------
$(8,832) $ 72 $(8,505)
======== ===== ========
The following table reconciles between the effective income tax (benefit) rate
and the applicable statutory federal and state income tax (benefit) rate:
Year Ended December 31,
2004 2003 2002
----- ----- ------
Income tax statutory rate 34% (34)% 34%
Reversal of valuation allowance for deferred tax assets (104) -- (109)
Timing differences between book and tax basis -- 34 (34)
State income tax and loss carry forward 3 1 (3)
Other, net 2 -- --
----- ----- ------
Total effective tax rate (65)% 1% (112)%
===== ===== ======
The tax effects of temporary differences between income for financial reporting
and taxes that gave rise to significant portions of the deferred tax assets and
liabilities as of December 31 were as follows (in thousands):
2004 2003
---- ----
CURRENT
- -------
Assets:
Net operating loss carry forward $ 4,533 $ 2,242
Accruals, allowances and other 1,080 980
------------- ---------
Total gross deferred tax assets - current portion 5,613 3,222
Less valuation allowance -- --
------------- ---------
Net deferred tax asset - current portion $ 5,613 $ 3,222
============= =========
NON-CURRENT
- -----------
Assets:
Environmental compliance and other site related costs,
principally due to accruals for financial reporting purposes $ 2,365 $ 4,033
Depreciation and amortization 1,111 1,411
Net operating loss carry forward 10,501 13,100
Accruals, allowances and other 300 2,570
------------- ---------
Total gross deferred tax assets - non-current portion 14,277 21,114
Less valuation allowance (1,804) (15,921)
------------- ---------
Liability:
Capitalized interest -- (131)
------------- ---------
Net deferred tax assets - non-current portion $ 12,473 $ 5,062
============= =========
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 2004 and 2002, the Company reevaluated the deferred tax
asset valuation allowance and determined it was "more likely than not" that
additional portions of the deferred tax asset would be realizable given the
Company's
54
profitability and expectation of future profitability. Consequently, the Company
decreased the valuation allowance during these two years for the amount that was
expected to be utilized. The Company continues to maintain a valuation
allowance for approximately $1,800,000 in state tax benefits that are not
expected to be utilizable prior to expiration.
The Company's net operating loss carry forward ("NOL") is scheduled to expire in
the following years:
Expiration Date ($in thousands) Federal NOL
- --------------- ------------
2011 $ 8,234
2012 7,828
2013 6,927
2014 3,208
2015 498
2016 78
2017 2,257
2018 8,642
Total federal net operating loss carry forward $ 37,672
NOTE 16. COMMITMENTS AND CONTINGENCIES
In the ordinary course of conducting business, the Company is involved in
judicial and administrative proceedings involving federal, state or local
governmental authorities. Actions may also be brought by individuals or groups
in connection with permitting of planned facilities, alleging violations of
existing permits, or alleging damages suffered from exposure to hazardous
substances purportedly released from Company operated sites, as well as other
litigation. The Company maintains insurance intended to cover property and
damage claims asserted as a result of its operations.
Periodically management reviews and may establish reserves for legal and
administrative matters, or fees expected to be incurred in connection therewith.
At this time, management believes that resolution of these matters will not have
a material adverse effect on the Company's financial position, results of
operations or cash flows.
Effective January 1, 2003, the Company established the American Ecology
Corporation Management Incentive Plan ("MIP"). The MIP provides for selected
participants to receive bonuses tied to pre-tax operating income levels. Bonuses
under the plan are to be paid out over three years with a maximum in any one
year of $1,125,000 in bonuses if pre-tax operating income calculated in
accordance with the plan is in excess of $12,000,000. During the year ended
December 31, 2004, the Company has accrued liabilities of $934,000 for the MIP
to be paid to the selected participants.
The Company has entered into employment agreements with three executive
employees that provide for aggregate minimum annual salaries of $484,000. The
agreements expire December 31, 2005 if either the Company or the executive
employees provide notice that they would like the agreements terminated. If
neither party provides notice to the other at least 60 days prior to December
31, 2005, the agreements will automatically extend until December 31, 2006.
LITIGATION
- ----------
US ECOLOGY, INC. V. THE STATE OF CALIFORNIA, ET AL., CASE NO.GIC747562, SUPERIOR
- ---------------------------------------------------
COURT OF THE STATE OF CALIFORNIA FOR THE COUNTY OF SAN DIEGO
In 2000, subsidiary US Ecology, Inc., sued the State of California for monetary
damages exceeding $162 million. The suit stems from California's alleged
abandonment of the formerly proposed Ward Valley low-level radioactive waste
("LLRW") disposal project. State and federal law requires the State to build a
disposal facility for LLRW produced in California, Arizona, North Dakota and
South Dakota; member states of the Southwestern Compact. US Ecology was selected
to site and license the facility using its own funds on a reimbursable basis and
obtained a license in 1993.
On March 26, 2003, the Superior Court ruled 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
55
obstacles to an agreement to convey the proposed site from the federal
government to the State. The Court also ruled that key elements of the Company's
promissory estoppel claim were 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 the State had abandoned this promise,
and that the Company's reliance on the State's promise was foreseeable. However,
the Court found that the State's breach of its 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
on March 31, 2003.
In June 2003, the Company filed a notice of appeal with the California Fourth
Appellate District Court. The law firm of Cooley Godward was engaged on a fixed
price plus contingency basis to pursue the appeal. The fixed fee was expensed at
the time of engagement in July 2003. The matter is now fully briefed and the
Company expects that oral argument will be held in the spring of 2005. A
decision will be due 90 days following oral argument.
The Company's financial interest in the matter was materially improved by a 2003
amendment to the 1998 Ward Valley Interest Agreement and Assignment entered into
by the Company and its former primary lender. This amendment, entered into with
the former lender's successor, 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 case. 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.
No assurance can be given that the Company will prevail on appeal or reach a
settlement to recover any portion of its investment or legal expenses.
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 sought
declaratory relief and damages for bad faith in the State of Nebraska's
processing and denial of US Ecology's application to develop and operate a LLRW
disposal facility near Butte, Nebraska. US Ecology is the CIC's contractor and
intervened as a plaintiff.
In September 2002, the US District Court for the District of Nebraska entered
judgment against Nebraska in favor of the CIC for $153 million, including
approximately $50 million for prejudgment interest. Of this amount, US Ecology's
share was $6.2 million plus $6.1 million for prejudgment interest. The Company
carries $6.5 million on its balance sheet for capitalized facility development
costs. The State appealed the judgment to the Eighth Circuit Court of Appeals
where it was argued in June 2003.
On February 18, 2004, the Eighth U.S. Circuit Court of Appeals affirmed the
District Court ruling in its entirety. On August 9, 2004 Nebraska and the CIC
entered into a settlement under which the State agreed to make four equal
payments of $38.5 million to the CIC beginning August 1, 2005 and annually
thereafter for three years. The $154 million settlement reflects a principal
amount of $140.5 million, plus interest of 3.75% compounded annually and
beginning August 1, 2004. The principal may be reduced to $130 million if
Nebraska and the CIC negotiate suitable access to a proposed future Texas LLRW
disposal site. Settlement payments are subject to appropriation. Should the
Nebraska legislature fail to appropriate the required payments, the CIC retains
rights to pursue enforcement by any and all legal remedies available. Under the
settlement, Nebraska waived any claim to sovereign immunity in a suit brought to
enforce payment and agreed to dismiss its petition for U.S. Supreme Court
review. The Company expects to finalize payment arrangements with the CIC
prior to the intended August 2005 disbursement.
No assurance can be given that the Nebraska legislature will appropriate the
funds required to comply with the settlement agreement or that the Company can
finalize acceptable payment arrangements with the CIC.
56
MANCHAK V. US ECOLOGY, INC., U.S. DISTRICT COURT FOR THE DISTRICT OF NEVADA,
- --------------------------------
CASE NO. CV-S-97-0655.
In April 1996, Frank Manchak, Jr. ("Manchak") filed suit against subsidiary US
Ecology, Inc., alleging infringement of a sludge treatment patent to stabilize
hazardous waste at the Company's Beatty, Nevada hazardous waste facility.
Manchak sought unspecified damages for infringement, treble damages, interest,
costs and attorney fees. In October 2002, the United States District Court for
the District of Nevada entered a summary judgment in favor of the Company.
Manchak filed a motion for reconsideration that was denied. Manchak's subsequent
appeal to the U.S. Court of Appeals for the Federal Circuit was dismissed, and
his requests for reconsideration and en banc review were finally rejected in
October 2003. On January 8, 2004, Manchak filed a Rule 60(b) motion in the
Nevada District Court seeking relief from that Court's orders granting summary
judgment of non-infringement and denying reconsideration. On March 8, 2004, the
District Court rejected Manchak's Rule 60(b) motion, prohibited further filings
with the Court on the matter and imposed sanctions on Manchak. Based on this,
the Company believed the matter was closed. However, Manchak appealed the
District Court's March 8, 2004 order and the Federal Circuit has agreed to hear
the appeal. Oral argument is scheduled for March 8, 2005. No assurance can be
given that the Company will prevail in this matter.
DAVID W. CROW V. AMERICAN ECOLOGY CORPORATION, U.S. DISTRICT COURT OF HARRIS
- --------------------------------------------------
COUNTY, TEXAS; 280TH JUDICIAL DISTRICT.
In the complaint, Mr. Crow alleges he was hired by the Company as its General
Counsel in October 1995 and that his compensation package included 150,000
options to purchase Company common stock with an oral agreement by the prior CEO
that the stock options would be exercisable for ten years.
In May 2000, Mr. Crow first contacted the Company regarding the stock options.
The Company informed Mr. Crow by letter that pursuant to the Company's 1992
Employee Stock Option Plan, Mr. Crow's options had expired thirty days after his
employment with the Company ended.
Mr. Crow's lawsuit was initially filed in Harris County District Court on or
about May 4, 2004. The Company removed the lawsuit to federal court based on
diversity jurisdiction. The Complaint alleges four counts: breach of written
contract, breach of oral contract, fraudulent inducement, and declaratory
judgment that Crow is entitled to purchase 150,000 shares of AEC stock at a
strike price of $4 per share.
Mr. Crow, the Plaintiff, estimates his damages in the Complaint as between
$1,050,000 and $1,258,500. These figures are calculated by taking the difference
of the Company's current and 52 week high stock trading price and the $4/share
alleged option strike price.
The Company believes it has insurance against the claim and has notified its
carrier of the claim. The Company believes that allegations are without merit
and intends to vigorously defend itself in the matter. However, no assurance can
be given that it will prevail.
NOTE 17. RECEIVABLES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Receivables for the year ended December 31 consisted of the following ($ in
thousands):
2004 2003
------- --------
Accounts receivable - trade $8,834 $13,137
Unbilled revenue 344 65
------- --------
9,178 13,202
Allowance for uncollectible accounts (215) (606)
------- --------
Receivables, net $8,963 $12,596
======= ========
The allowance for doubtful accounts is a provision for uncollectible accounts
receivable and unbilled receivables. The allowance, as a general company policy,
is increased by a monthly accrual equal to approximately 1/2% of sales. The
allowance is decreased by accounts receivable as they are written off. The
allowance is adjusted periodically to reflect actual experience ($ in thousands)
57
Allowance for
Description doubtful accounts
- ----------- -------------------
Balance January 1, 2002 $ 1,176
Less 2002 benefit (301)
Less allowance for discontinued operations (240)
Less accounts written off 2002 (228)
-------------------
Balance December 31, 2002 $ 407
Plus 2003 provision 427
Less accounts written off 2003 (228)
-------------------
Balance December 31, 2003 $ 606
===================
Plus 2004 benefit (324)
Less accounts written off 2004 (67)
-------------------
Balance December 31, 2004 $ 215
===================
NOTE 18. DISCONTINUED OPERATIONS
As of December 31, 2002, the components of "Assets Held for Sale or Closure"
consisted of certain assets relating to the El Centro municipal waste disposal
facility, which the Company sold to a wholly-owned subsidiary of Allied Waste
Industries, Inc. on February 13, 2003, and the assets and liabilities relating
to the Oak Ridge processing facility and field services operations, which the
Company had implemented a wind down and disposal plan beginning on December 27,
2002 and sold to Toxco, Inc. on June 30, 2004. Accordingly, the revenue, costs
and expenses and cash flows relating to the El Centro and Oak Ridge facility and
field services operations have been excluded from the results from continuing
operations and have been reported as "Gain (loss) from discontinued operations"
and as "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
December 31, 2004 and 2003 are as follows (in thousands):
Processing and Field El Centro Disposal Total Assets Held for
Services Facility Facility Sale or Closure
----------------------- --------------------- -------------------------
2004 2003 2004 2003 2004 2003
Current assets
- --------------
Current assets $ -- $ 386 $ -- $ -- $ -- $ 386
Property & equipment, net -- 552 -- -- -- 552
----------- ---------- ---------- --------- ----------- ------------
-- 938 -- -- -- 938
=========== ========== ========== ========= =========== ============
Non-current assets
- ------------------
Property, plant & equipment, net -- 1,508 -- -- -- 1,508
Other -- 49 -- -- -- 49
----------- ---------- ---------- --------- ----------- ------------
-- 1,557 -- -- -- 1,557
=========== ========== ========== ========= =========== ============
Current liabilities
- -------------------
Accounts payable & accruals -- 1,870 -- -- -- 1,870
Current portion long term debt -- 37 -- -- -- 37
----------- ---------- ---------- --------- ----------- ------------
-- 1,907 -- -- -- 1,907
=========== ========== ========== ========= =========== ============
Non-current liabilities
- -----------------------
Closure/post closure obligations -- 4,621 -- -- -- 4,621
Long-term debt -- 23 -- -- -- 23
Other -- 5 -- -- -- 5
----------- ---------- ---------- --------- ----------- ------------
-- 4,649 -- -- -- 4,649
=========== ========== ========== ========= =========== ============
Depreciation and amortization expense relating to assets classified as "Held for
Sale or Closure" amounted to $0, $0, and $1,202,000 during 2004, 2003 and 2002,
respectively.
Operating results for the discontinued operations were as follows for years
ending December 31:
58
Processing and Field El Centro Disposal Total Discontinued
Services Operations Facility Operations
---------------------- ------------------- --------------------
2004
- ----
Revenues, net $ -- $ -- $ --
Operating income 117 -- 117
Net income 1,047 -- 1,047
Basic earnings per share .06 -- .06
Diluted earnings per share .06 -- .06
2003
- ----
Revenues, net $ 1,941 $ 462 $ 2,403
Operating income (loss) (2,014) 63 (1,951)
Net income (loss) (2,517) 4,994 2,477
Basic earnings (loss) per share (.15) .30 .15
Diluted earnings (loss) per share (.15) .30 .15
2002
- ----
Revenues, net $ 17,018 $ 2,563 $ 19,581
Operating income (loss) (3,296) 507 (2,789)
Net income (loss) (10,930) 466 (10,464)
Basic earnings (loss) per share (.76) .03 (.73)
Diluted earnings (loss) per share (.69) .03 (.66)
El Centro Disposal Facility. During 2002, management initiated a plan to
actively market the municipal waste disposal facility located outside Robstown,
Texas, and closed a sale transaction on February 13, 2003 for substantially all
of the assets held at the facility. For segment reporting purposes, the El
Centro municipal waste disposal facility operating results were previously
classified as "Operating Disposal Facilities".
Oak Ridge Processing Facility and Field Services. During 2002, the Company
offered for sale its Processing Facility and Field Services operations based in
Oak Ridge, Tennessee. On December 27, 2002, the Company announced it was ceasing
revenue-producing operations at this facility and would no longer be accepting
waste. Based upon the amount of waste present at the facility and the
preferences of potentially qualified buyers, the Company removed the accumulated
customer and Company waste to help sell the facility. Shipment of the waste off
site for processing and disposal was completed in 2003. Management sold the
remaining facility components to Toxco, Inc. on June 30, 2004.
In conjunction with the plan to sell the facility, an updated third party
engineering study was performed in December 2002, which resulted in an
additional $2,038,000 estimated liability related to closure and post closure
costs during 2002. This liability pertains to certain materials located on the
premises which were previously received or used in the operation of the
business. During 2003, certain materials covered by the third party engineering
study were disposed of, resulting in a reduction of the estimated closure
liability of $936,000.
During 2002, the Company recorded an impairment charge of $1,593,000 on certain
buildings, improvements and equipment at the facility. The estimated fair value
of the buildings, improvements and equipment was based upon the estimated net
realizable value after substantial facility clean-up activities take place.
Additionally, certain assets expected to be disassembled and disposed were fully
impaired as a result of the wind down and disposal plan. Depreciation on the
long-lived assets at the processing facility ceased as the current recorded
values, net of the impairment charges, represent the net realizable value.
On December 27, 2002, management informed all employees that the Company was
discontinuing commercial processing at the Oak Ridge facility and implemented a
substantial reduction in the facility's labor force. Terminated union employees
were compensated for prior service, provided health coverage through January 31,
2003, and presented with a proposed severance package. Terminated non-union
employees were paid severance in accordance with written Company policy. For
employees covered under the collective bargaining agreement, the Company entered
into good faith severance negotiations with union representatives. Both sides
amended their original proposals during these negotiations. On July 16, 2003, a
final severance agreement was executed with the union providing $152,000 in
59
severance to the terminated union employees and a release from all claims
related to their employment with the Company. During the third quarter of 2003,
the Company paid and recognized this obligation and associated payroll taxes in
the amount of approximately $175,000.
Costs incurred at the Oak Ridge facility to prepare and sell the facility during
the year ended December 31 are summarized as follows:
($in thousands) 2004 2003
-------- ------
Accounts receivable collected in excess of valuation allowance $ (283) $ --
Net operating costs in excess of previous accrual 181 1,040
Additional impairment of property and equipment -- 225
Gain on sale of facility (930) --
Increase (decrease) in estimated cost for disposal of waste at facility (15) 1,252
-------- ------
Disposal costs (gain) for the year ended December 31 $(1,047) $2,517
======== ======
Cost changes for Oak Ridge facility on-site activities and disposal liabilities
for removed wastes are as follows:
($in thousands) December 31, 2003 Cash Payments Adjustments December 31, 2004
----------------- -------------- ------------ -----------------
Waste disposal liability 623 (608) (15) --
On-site discontinued
operation cost liability 442 (623) 181 --
($in thousands) December 31, 2002 Cash Payments Adjustments December 31, 2003
----------------- -------------- ----------- -----------------
Waste disposal liability 1,827 (5,003) 3,799 623
On-site discontinued
operation cost liability 1,800 (2,398) 1,040 442
The adjustments represent differences between the estimated costs accrued and
actual costs incurred, and changes in estimated future costs for planned
facility and waste disposition. The adjustment amounts in the above roll forward
analysis do not directly correspond to the Income statement due to the
offsetting impact of revenue recognized from discontinued operations for
customer waste shipments.
For business segment reporting purposes, the processing and field services
operating results were previously classified as "Processing and Field Services".
NOTE 19. OPERATING SEGMENTS
The Company operates with two segments, Operating Disposal Facilities, and
Non-Operating Disposal Facilities. These segments have been determined by
evaluating the Company's internal reporting structure and nature of services
offered. The Operating Disposal Facility segment represents Disposal Facilities
accepting hazardous and radioactive waste. The Non-Operating Disposal Facility
segment represents facilities which are not accepting hazardous and/or
radioactive waste or are awaiting approval to open.
As of December 27, 2002, the Company announced it was discontinuing operations
at the Processing and Field Services segment which aggregated, volume-reduced,
and performed remediation and other services on radioactive material, but
excluded processing performed at the disposal facilities. All prior segment
information has been restated to present the operations at the Oak Ridge
facility, including the Field Services division, as discontinued operations.
Effective December 31, 2002, the Company classified the El Centro municipal
landfill as an asset held for sale due to the expected sale of the facility
which occurred on February 13, 2003. All prior segment information has been
restated in order to present the operations of the El Centro landfill as
discontinued operations.
60
Income taxes are assigned to Corporate, but all other items are included in the
segment where they originated. Inter-company transactions have been eliminated
from the segment information and are not significant between segments.
Summarized financial information concerning the Company's reportable segments is
shown in the following table:
($in thousands) Operating Non-Operating Discontinued
- --------------- Disposal Disposal Processing and
Facilities Facilities Field Services Corporate Total
2004
- ----
Revenue $ 54,090 $ 77 $ -- $ -- $ 54,167
Direct operating cost 29,806 1,091 -- -- 30,897
------------ --------------- ---------------- ----------- ---------
Gross profit (loss) 24,284 (1,014) -- -- 23,270
S,G&A 4,581 29 -- 5,943 10,553
Business interruption insurance claim (431) -- -- -- (431)
------------ --------------- ---------------- ----------- ---------
Income (loss) from operations 20,134 (1,043) -- (5,943) 13,148
Investment income 68 -- -- 135 203
Interest expense 14 -- -- 180 194
Insurance claims net of impairment 275 -- -- -- 275
Other income 42 19 -- 38 99
------------ --------------- ---------------- ----------- ---------
Income (loss) before income tax and 20,505 (1,024) -- (5,950) 13,531
discontinued operations
Income tax expense (benefit) -- -- -- (8,832) (8,832)
------------ --------------- ---------------- ----------- ---------
Income (loss) before discontinued 20,505 (1,024) -- 2,882 22,363
operations
Gain (loss) from discontinued operations -- -- 1,047 -- 1,047
------------ --------------- ---------------- ----------- ---------
Net income (loss) $ 20,505 $ (1,024) $ 1,047 $ 2,882 $ 23,410
============ =============== ================ =========== =========
Depreciation and accretion $ 5,550 $ 375 $ -- $ 32 $ 5,957
Capital Expenditures $ 4,952 $ -- $ -- $ 32 $ 4,984
Total Assets $ 37,217 $ 6,526 $ -- $ 33,490 $ 77,233
2003
- ----
Revenue $ 56,973 $ 74 $ -- $ -- $ 57,047
Direct operating cost 32,571 908 -- -- 33,479
------------ --------------- ---------------- ----------- ---------
Gross profit (loss) 24,402 (834) -- -- 23,568
S,G&A 6,982 1,794 -- 5,043 13,819
------------ --------------- ---------------- ----------- ---------
Income (loss) from operations 17,420 (2,628) -- (5,043) 9,749
Investment income -- -- -- 347 347
Interest expense 36 -- -- 230 266
Loss on writeoff of Ward Valley -- 20,951 -- -- 20,951
Other income 35 89 -- -- 124
------------ --------------- ---------------- ----------- ---------
Income (loss) before income tax and 17,419 (23,490) -- (4,926) (10,997)
discontinued operations
Income tax expense -- -- -- 72 72
------------ --------------- ---------------- ----------- ---------
Income (loss) before discontinued 17,419 (23,490) -- (4,998) (11,069)
operations
Gain (loss) from discontinued operations 4,994 -- (2,517) -- 2,477
------------ --------------- ---------------- ----------- ---------
Net income (loss) $ 22,413 $ (23,490) $ (2,517) $ (4,998) $ (8,592)
============ =============== ================ =========== =========
Depreciation and accretion $ 6,515 $ 400 $ -- $ 81 $ 6,996
Capital Expenditures $ 6,582 $ 35 $ 451 $ -- $ 7,068
Total Assets $ 40,377 $ 6,550 $ 2,495 $ 17,204 $ 66,626
2002
- ----
Revenue $ 46,494 $ 295 $ -- $ -- $ 46,789
Direct operating cost 23,436 1,787 -- -- 25,223
------------ --------------- ---------------- ----------- ---------
Gross profit (loss) 23,058 (1,492) -- -- 21,566
61
S,G&A 8,000 103 -- 4,528 12,631
------------ --------------- ---------------- ----------- ---------
Income (loss) from operations 15,058 (1,595) -- (4,528) 8,935
Investment income 13 -- -- 18 31
Interest expense 711 -- -- 109 820
Other income (expense) 58 (385) -- (230) (557)
------------ --------------- ---------------- ----------- ---------
Income (loss) before income tax, 14,418 (1,980) -- (4,849) 7,589
discontinued operations and cumulative
effect
Income tax benefit -- -- -- 8,505 8,505
------------ --------------- ---------------- ----------- ---------
Income (loss) before discontinued 14,418 (1,980) -- 3,656 16,094
operations and cumulative effect
Gain (loss) from discontinued operations 466 -- (10,930) -- (10,464)
------------ --------------- ---------------- ----------- ---------
Income (loss) before cumulative effect 14,884 (1,980) (10,930) 3,656 5,630
Cumulative effect of change in accounting 14,983 1,548 (3,390) -- 13,141
------------ --------------- ---------------- ----------- ---------
principle
Net income (loss) $ 29,867 $ (432) $ (14,320) $ 3,656 $ 18,771
============ =============== ================ =========== =========
Depreciation and accretion $ 6,443 $ 458 $ 518 $ 361 $ 7,780
Capital Expenditures $ 3,010 $ 6 $ 300 $ 30 $ 3,346
Total Assets $ 44,832 $ 27,467 $ 4,649 $ 10,177 $ 87,125
NOTE 20. SUBSEQUENT EVENTS
On January 21, 2005, the Company committed to a five year operating lease for
150 to 200 rail cars at $475 a month for each car leased. A formal lease
agreement has not yet been prepared, and the specific number of rail cars
subject to the lease has not yet been determined.
NOTE 21. UNAUDITED SELECTED QUARTERLY FINANCIAL DATA
The unaudited consolidated quarterly results of operations for 2004 and 2003
were:
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
2004 2003 2004 2003 2004 2003 2004 2003
------- -------- -------- -------- ------- -------- ------- --------
Revenue 13,905 10,771 13,795 12,020 12,929 17,324 13,538 16,908
Gross profit 6,293 4,787 6,346 5,964 5,533 6,941 5,098 5,876
Income (loss) before discontinued
operations 2,289 (20,774) 15,122 2,689 1,695 3,893 3,257 3,123
Income tax (benefit) 1,164 (8) (11,338) 63 884 18 458 (1)
Discontinued operations 149 3,607 920 (676) (1) (415) (21) (39)
Net income (loss) 2,438 (17,167) 16,042 2,013 1,694 3,478 3,236 3,084
EARNINGS PER SHARE - BASIC
Income (loss) before, discontinued
operations, cumulative effect and
preferred dividends .13 (1.34) .88 .16 .10 .23 .19 .18
Discontinued operations .01 .23 .05 (.04) (.00) (.02) (.00) (.00)
Net income (loss) .14 (1.11) .93 .12 .10 .21 .19 .18
EARNINGS PER SHARE - DILUTED
Income (loss) before discontinued
operations .13 (1.34) .85 .15 .10 .22 .18 .17
Discontinued operations .01 .23 .05 (.04) (.00) (.02) (.00) (.00)
Net income (loss) .14 (1.11) .90 .11 .10 .20 .18 .17
Basic and diluted earnings per common share for each of the quarters presented
above is based on the respective weighted average number of common shares for
the quarters. The dilutive potential common shares outstanding for
62
each period and the sum of the quarters may not necessarily be equal to the full
year basic and diluted earnings per common share amounts.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the quarter 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 alerting
them timely to material information required to be disclosed in the Company's
Exchange Act filings.
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. During the year ending December 31, 2004, there were
improvements to the Company's systems used to record and summarize transactions.
The improvements have enabled the Company to identify and modify internal
controls, operational procedures and environmental compliance programs.
Section 404 of Sarbanes-Oxley Act of 2002 and related rules issued bythe
Securities and Exchange Commission requiremanagementto issue a report onits
internal controls over financial reporting. In addition, the independent
registered public accounting firm auditing the Company's financial statements
must attest to and report on management's assessment of internal controls over
financial reporting. Management has conducted a rigorous review of its internal
controls and continues to incur significant costs and management continues to
devote substantial resources to comply with Section 404.At this time, the
Company is not prepared to issue our report on the effectiveness of our internal
controls over financial reporting, nor is our independent registered public
accounting firm able to attest to the effectiveness of our internal controls
over financial reporting. The Company anticipates filing an amended Form 10K on
or before May 2, 2005 in compliance with the SEC's exceptive order dated
November 30, 2004 which provided an extension of time to file the required
reports.
ITEM 9B. OTHER INFORMATION
None
PART III
Items 10 through 14 of Part III have been omitted from this report because the
Company will file with the Securities and Exchange Commission, no later than 120
days after the close of its fiscal year, a definitive proxy statement. The
information required by Items 10 through 14 of this report, which will appear in
the definitive proxy statement, is incorporated by reference into Part III of
this report.
63
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
1. Financial statements and reports of Independent Auditors
Independent Auditors' Reports
Consolidated Balance Sheets - December 31, 2004 and 2003
Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2004, 2003
and 2002
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003,
and 2002
Notes to Consolidated Financial Statements
2. Financial statement schedules
Other schedules are omitted because they are not required or because the information is
included in the financial statements or notes thereto
3. Exhibits
- -------------------------------------------------------------------------------------------------------------------------
Exhibit Description Incorporated by Reference from
No. Registrant's
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
3.1 Restated Certificate of Incorporation, as amended 1989 Form 10-K
- -------------------------------------------------------------------------------------------------------------------------
3.2 Certificate of Amendment to Restated Certificate of Incorporation dated Form S-4 dated 12-24-92
June 4, 1992
- -------------------------------------------------------------------------------------------------------------------------
3.3 Amended and Restated Bylaws dated February 28, 1995 1994 Form 10-K
- -------------------------------------------------------------------------------------------------------------------------
10.1 Sublease dated February 26, 1976, between the State of Washington, the Form 10 filed 3-8-84
United States Dept. of Commerce and Economic Development, and
Nuclear Engineering Company with Amendments dated January 11,
1980, and January 14, 1982.
- -------------------------------------------------------------------------------------------------------------------------
10.2 Lease Agreement as amended between American Ecology Corporation 2002 Form 10-K
and the State of Nevada
- -------------------------------------------------------------------------------------------------------------------------
10.6 State of Washington Radioactive Materials License issued to US 1986 Form 10-K
Ecology, Inc. dated January 21, 1987
- -------------------------------------------------------------------------------------------------------------------------
10.11 Agreement between the Central Interstate Low-Level Radioactive 2nd Quarter 1988 10-Q
Waste Compact Commission and US Ecology, Inc. for the development
of a facility for the disposal of low-level radioactive waste dated
January 28, 1988 ("Central Interstate Compact Agreement")
- -------------------------------------------------------------------------------------------------------------------------
10.12 Amendment to Central Interstate Compact Agreement May 1, 1990 1994 Form 10-K
- -------------------------------------------------------------------------------------------------------------------------
10.13 Second Amendment to Central Interstate Compact Agreement dated 1994 Form 10-K
June 24, 1991
- -------------------------------------------------------------------------------------------------------------------------
10.14 Third Amendment to Central Interstate Compact Agreement dated July 1994 Form 10-K
1, 1994
- -------------------------------------------------------------------------------------------------------------------------
10.18 Memorandum of Understanding between American Ecology 1989 Form 10-K
Corporation and the State of California dated August 15, 1988
- -------------------------------------------------------------------------------------------------------------------------
10.35 Lease Agreement for Corporate Office Space between American 2nd Qtr 2002 Form 10-Q filed 8-14-02
Ecology Corporation and M&S Prime Properties dated April 18, 2002
- -------------------------------------------------------------------------------------------------------------------------
10.50a First Security Bank Credit Agreement 3rd Qtr 2000 Form 10-Q filed 11-13-00
- -------------------------------------------------------------------------------------------------------------------------
10.50c Term Loan Agreement between American Ecology Corporation and Form 8-K filed 10-25-02
Wells Fargo Bank dated October 22, 2002
- -------------------------------------------------------------------------------------------------------------------------
10.50d Sixth Amendment to Credit Agreement between American Ecology Form 8-K filed 12-16-03
Corporation and Wells Fargo Bank dated December 16, 2003
- -------------------------------------------------------------------------------------------------------------------------
64
10.50e Seventh Amendment to Credit Agreement between American Ecology Form 8-K filed 8-31-04
Corporation and Wells Fargo Bank dated August 30, 2004
- -------------------------------------------------------------------------------------------------------------------------
10.50f First Amendment to Term Loan Agreement between American Ecology Form 8-K filed 8-31-04
Corporation and Wells Fargo Bank dated August 30, 2004
- -------------------------------------------------------------------------------------------------------------------------
10.50g Eighth Amendment to Credit Agreement between American Ecology Form 8-K filed 12-16-04
Corporation and Wells Fargo Bank dated December 16, 2004
- -------------------------------------------------------------------------------------------------------------------------
10.52 *Amended and Restated American Ecology Corporation 1992 Director Proxy Statement dated 3-28-01
Stock Option Plan
- -------------------------------------------------------------------------------------------------------------------------
10.53 *Amended and Restated American Ecology Corporation 1992 Proxy Statement dated 4-16-03
Employee Stock Option Plan
- -------------------------------------------------------------------------------------------------------------------------
10.55 *Management Incentive Plan Effective January 1, 2003 2002 Form 10-K
- -------------------------------------------------------------------------------------------------------------------------
10.56 *Form of Management Incentive Plan Participation Agreement Dated 2002 Form 10-K
February 11, 2003
- -------------------------------------------------------------------------------------------------------------------------
10.57 *Form of Executive Employment Agreement Dated February 11, 2003 2002 Form 10-K
- -------------------------------------------------------------------------------------------------------------------------
10.58 *Form of Stock Option Agreement Dated February 11, 2003 2002 Form 10-K
- -------------------------------------------------------------------------------------------------------------------------
10.70 Form of Royalty Agreement for El Centro Landfill Dated February 13, Form 8-K filed 2-13-03
2003
- -------------------------------------------------------------------------------------------------------------------------
14.1 Code of Ethics for Chief Executive and Senior Financial Officers Proxy Statement dated 4-2-04
- -------------------------------------------------------------------------------------------------------------------------
14.2 Code of Ethics for Directors 2004 Form 10-K
- -------------------------------------------------------------------------------------------------------------------------
21 List of Subsidiaries 2004 Form 10-K
- -------------------------------------------------------------------------------------------------------------------------
23.1 Consent of Moss Adams LLP
- -------------------------------------------------------------------------------------------------------------------------
31.1 Certifications of December 31, 2003 Form 10-K by Chief Executive
Officer dated March 1, 2005
- -------------------------------------------------------------------------------------------------------------------------
31.2 Certifications of December 31, 2003 Form 10-K by Chief Financial
Officer dated March 1, 2005
- -------------------------------------------------------------------------------------------------------------------------
32.1 Certifications of December 31, 2003 Form 10-K by Chief Executive
Officer dated March 1, 2005
- -------------------------------------------------------------------------------------------------------------------------
32.2 Certifications of December 31, 2003 Form 10-K by Chief Financial
Officer dated March 1, 2005
- -------------------------------------------------------------------------------------------------------------------------
*Management contract or compensatory plan.
65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this annual report to be signed
on its behalf by the undersigned, thereunto duly authorized.
AMERICAN ECOLOGY CORPORATION
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Stephen A.Romano President, Chief Executive March 1, 2005
- ------------------------ -------------
Officer
STEPHEN A. ROMANO Chief Operating Officer,
Director
/s/ James R. Baumgardner Senior Vice President, March 1, 2005
- ------------------------ Chief Financial -------------
JAMES R. BAUMGARDNER Officer, Treasurer and
Secretary
/s/ Michael J. Gilberg Vice President and March 1, 2005
- ------------------------ Controller -------------
MICHAEL J. GILBERG
/s/ John M. Cooper Vice President and Chief March 1, 2005
- ------------------------ Information Officer -------------
JOHN M. COOPER
/s/ Steven D. Welling Vice President and Director March 1, 2005
- ------------------------ of Sales -------------
STEVEN D. WELLING
/s/ Rotchford L. Barker Chairman of the Board of March 1, 2005
- ------------------------ Directors -------------
ROTCHFORD L. BARKER
/s/ David B. Anderson Director March 1, 2005
- ------------------------ -------------
DAVID B. ANDERSON
/s/ Roy C. Eliff Director March 1, 2005
- ------------------------ -------------
ROY C. ELIFF
/s/ Edward F. Heil Director March 1, 2005
- ------------------------ -------------
EDWARD F. HEIL
Director March 1, 2005
- ------------------------ -------------
KENNETH C. LEUNG
/s/ Richard Riazzi Director March 1, 2005
- ------------------------ -------------
RICHARD RIAZZI
/s/ Jimmy D. Ross Director March 1, 2005
- ------------------------ -------------
JIMMY D. ROSS
/s/ Stephen M. Schutt Director March 1, 2005
- ------------------------ -------------
STEPHEN M. SCHUTT
66