UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended March 31, 2005
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
____________________________to____________________________
Commission File Number 0-11688
AMERICAN ECOLOGY CORPORATION
----------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-3889638
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Lakepointe Centre I,
300 E. Mallard, Suite 300
Boise, Idaho 83706
------------ -----
(Address of principal executive offices) (Zip Code)
(208) 331-8400
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [_]
At May 6, 2005 Registrant had outstanding 17,475,294 shares of its Common Stock.
AMERICAN ECOLOGY CORPORATION
QUARTERLY REPORT ON FORM 10-Q FOR THE
THREE MONTHS ENDED MARCH 31, 2005
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements
Consolidated Balance Sheets
(Unaudited) 4
Consolidated Statements of Operations
(Unaudited) 5
Consolidated Statements of Cash Flows
(Unaudited) 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits 23
Signatures 24
2
OFFICERS
- --------
Stephen A. Romano
Chief Executive Officer, President and Chief Operating Officer
James R. Baumgardner
Senior Vice President, Chief Financial Officer
Treasurer and Secretary
Michael J. Gilberg
Vice President and Controller
Steven D. Welling
Vice President, Sales & Marketing
John M. Cooper
Vice President and Chief Information Officer
DIRECTORS
- ---------
Rotchford L. Barker, Chairman
Independent Businessman
David B. Anderson
President, Highland Capital Enterprises Corp.
Roy C. Eliff
Independent Businessman
Edward F. Heil
Independent Businessman
Kenneth C. Leung
Managing Director of Investment Banking, Sanders Morris Harris
Richard Riazzi
Independent Businessman
Stephen A. Romano
Chief Executive Officer, President and Chief Operating Officer
Jimmy D. Ross
U.S. Army, Retired
Stephen M. Schutt
Vice President, Nuclear Fuel Services, Inc.
CORPORATE OFFICE
- ----------------
Lakepointe Centre I
American Ecology Corporation
300 East Mallard Drive, Suite 300
Boise, Idaho 83706
(208) 331-8400
(208) 331-7900 (fax)
www.americanecology.com
- -----------------------
COMMON STOCK
- ------------
American Ecology Corporation's common stock trades on the Nasdaq National Market
under the symbol ECOL.
FINANCIAL REPORTS
- -----------------
A copy of American Ecology Corporation Annual and Quarterly Reports, as filed on
Form 10-K and 10-Q with the Securities and Exchange Commission, may be obtained
by writing:
Lakepointe Centre I
300 E. Mallard, Suite 300
Boise, Idaho 83706
or at www.americanecology.com
-----------------------
TRANSFER AGENT
- --------------
American Stock Transfer & Trust Company
59 Maiden Lane
New York, New York 10038
(718) 921-8289
or at www.amstock.com
---------------
AUDITOR
- -------
Moss Adams LLP
1001 Fourth Avenue, Suite 2900
Seattle, WA 98154
3
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
($ IN 000'S) (UNAUDITED)
March 31, 2005 December 31, 2004
--------------- ------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 2,920 $ 2,160
Short term investments 10,323 10,967
Receivables, net 8,742 8,963
Insurance receivable 1,161 1,285
Prepayments and other 1,077 1,469
Deferred income taxes 5,613 5,613
--------------- ------------------
Total current assets 29,836 30,457
Property and equipment, net 28,735 27,363
Facility development costs 6,478 6,478
Other assets 462 462
Deferred income taxes 12,041 12,473
--------------- ------------------
Total assets $ 77,552 $ 77,233
=============== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long term debt $ 1,458 $ 1,457
Accounts payable 2,556 3,022
Deferred revenue 1,296 724
State burial fees payable 1,112 1,446
Management incentive plan payable 89 934
Customer refunds 2,512 2,512
Accrued liabilities 1,251 725
Accrued closure and post closure obligation, current portion 2,323 2,323
--------------- ------------------
Total current liabilities 12,597 13,143
Long term debt 2,369 2,734
Long term accrued liabilities 523 441
Accrued closure and post closure obligation, excluding current portion 9,314 9,304
--------------- ------------------
Total liabilities 24,803 25,622
--------------- ------------------
Commitments and contingencies
Shareholders' equity:
Convertible preferred stock, 1,000,000 shares authorized,
Common stock, $.01 par value, 50,000,000 authorized, 17,441,294
and 17,398,494 shares issued and outstanding 174 174
Additional paid-in capital 51,297 51,015
Retained earnings 1,278 422
--------------- ------------------
Total shareholders' equity 52,749 51,611
--------------- ------------------
Total Liabilities and Shareholders' Equity $ 77,552 $ 77,233
=============== ==================
See notes to consolidated financial statements
4
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
($ IN 000'S EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
Three Months Ended
--------------------
March 31, 2005 March 31, 2004
-------------------- ---------------
Revenue $ 12,554 $ 13,905
Direct operating costs 8,713 7,612
-------------------- ---------------
Gross profit 3,841 6,293
Selling, general and administrative expenses 2,514 2,872
Business interruption insurance claim (41) --
-------------------- ---------------
Income from operations 1,368 3,421
Interest income 85 36
Interest expense 47 49
Other income 17 45
-------------------- ---------------
Income before income tax and discontinued operations 1,423 3,453
Income tax expense 567 1,164
-------------------- ---------------
Income before discontinued operations 856 2,289
Income from discontinued operations (net of tax of $0) -- 149
-------------------- ---------------
Net income $ 856 $ 2,438
==================== ===============
Basic earnings per share from continuing operations .05 .13
Basic earnings per share from discontinued operations -- .01
-------------------- ---------------
Basic earnings per share $ .05 $ .14
==================== ===============
Diluted earnings per share from continuing operations .05 .13
Diluted earnings per share from discontinued operations -- .01
-------------------- ---------------
Diluted earnings per share $ .05 $ .14
==================== ===============
Dividends paid per common share $ -- $ --
==================== ===============
See notes to consolidated financial statements
5
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN 000'S) (UNAUDITED)
Three Months Ended March 31,
2005 2004
-------------- -----------------
Cash flows from operating activities:
Net income $ 856 $ 2,438
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, amortization, and accretion 1,376 1,488
Income from discontinued operations -- (149)
Income tax benefit on exercise of stock options 130 --
Deferred income taxes 432 --
Changes in assets and liabilities:
Receivables 221 4,020
Other assets 345 173
Closure and post closure obligation (260) (148)
Income taxes payable/receivable -- 1,115
Accounts payable and accrued liabilities (465) 1,699
-------------- -----------------
Net cash provided by operating activities 2,635 10,636
Cash flows from investing activities:
Capital expenditures (2,529) (513)
Proceeds from the sale of assets 222 110
Transfers between cash and short term investments, net 644 39
-------------- -----------------
Net cash used by investing activities (1,663) (364)
Cash flows from financing activities:
Payments of indebtedness (364) (366)
Warrants purchased and canceled -- (5,500)
Stock options exercised 152 359
-------------- -----------------
Net cash used by financing activities (212) (5,507)
-------------- -----------------
Increase in cash and cash equivalents 760 4,765
Net cash used by discontinued operations -- (668)
Cash and cash equivalents at beginning of year 2,160 6,674
-------------- -----------------
Cash and cash equivalents at end of quarter $ 2,920 $ 10,771
============== =================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest expense $ 47 $ 49
Income taxes paid 4 50
See notes to consolidated financial statements
6
AMERICAN ECOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments and disclosures necessary to present fairly
the financial position, results of operations, and cash flows of American
Ecology Corporation and its wholly-owned subsidiaries (the "Company"). These
financial statements and notes should be read in conjunction with the financial
statements and notes included in the Company's 2004 Annual Report on Form 10-K
for the year ended December 31, 2004, filed with the Securities and Exchange
Commission.
Certain reclassifications of prior quarter amounts have been made to conform
with current quarter presentation, none of which affect previously recorded net
income.
NOTE 2. EARNINGS PER SHARE
Basic earnings per share are computed based on net income available to common
shareholders and the weighted average number of common shares outstanding during
the quarter. Diluted earnings per share reflect the assumed issuance of common
shares for outstanding options and conversion of warrants. The computation of
diluted earnings per share does not assume exercise or conversion of securities
whose exercise price is greater than the average common share market price as
the assumed conversion of these securities would increase earnings per share.
The computation of diluted loss per share does not assume exercise or conversion
of any securities as the assumed conversion of securities would decrease loss
per share.
Three Months Ended March 31,
($in thousands except per share amounts) 2005 2004
------------- ----------------
Income before discontinued operations $ 856 $ 2,289
Income from operations of discontinued segments -- 149
------------- ----------------
Net income available to common shareholders $ 856 $ 2,438
============= ================
Weighted average shares outstanding-
Common shares 17,410 17,090
Effect of dilutive stock options 540 525
------------- ----------------
Average shares 17,950 17,615
============= ================
Basic earnings per share from continuing operations .05 .13
Basic earnings per share from discontinued operations -- .01
------------- ----------------
Basic earnings per share $ .05 $ .14
============= ================
Diluted earnings per share from continuing operations .05 .13
Diluted earnings per share from discontinued operations -- .01
------------- ----------------
Diluted earnings per share $ .05 $ .14
============= ================
NOTE 3. OPERATING SEGMENTS
The Company operates within two segments, Operating Disposal Facilities and
Non-Operating Disposal Facilities, based on its internal reporting structure and
nature of services offered. The Operating Disposal Facility segment represents
facilities accepting hazardous and radioactive waste. The Non-Operating Disposal
Facility segment represents facilities that are no longer accepting hazardous
and/or radioactive waste or formerly proposed new disposal facilities.
7
On December 27, 2002, the Company committed to discontinue commercial operations
within its Processing and Field Services segment which aggregated,
volume-reduced, and performed remediation and other services on radioactive
material, but excluded processing performed at its disposal facilities. All
prior segment information has been restated in order to present the operations
at the Oak Ridge facility, including the Field Services division, as
discontinued operations. On June 30, 2004 the Oak Ridge assets were sold.
Income taxes are assigned to Corporate, but all other items are included in the
segment where they originated. Inter-company transactions have been eliminated
from the segment information and are not significant between segments.
Summarized financial information concerning the Company's reportable segments is
shown in the following table:
($in thousands) Operating Non-Operating Discontinued
Disposal Disposal Processing and
Facilities Facilities Field Services Corporate Total
Three months ended March 31, 2005
- ---------------------------------
Revenue $ 12,537 $ 17 $ -- $ -- $12,554
Direct operating cost 8,607 106 -- -- 8,713
------------ --------------- --------------- ----------- --------
Gross profit (loss) 3,930 (89) -- -- 3,841
S,G&A, 1,107 5 -- 1,402 2,514
Business interruption insurance
claim (41) -- -- -- (41)
------------ --------------- --------------- ----------- --------
Income (loss) from operations 2,864 (94) -- (1,402) 1,368
Interest and other income/(expense) 10 -- -- 28 38
Other income 17 -- -- -- 17
------------ --------------- --------------- ----------- --------
Income (loss) before income tax and
discontinued operations 2,891 (94) -- (1,374) 1,423
Income tax expense (benefit) -- -- -- 567 567
Discontinued operations -- -- -- -- --
------------ --------------- --------------- ----------- --------
Net Income (loss) $ 2,891 $ (94) $ -- $ (1,941) $ 856
============ =============== =============== =========== ========
Depreciation and accretion $ 1,273 $ 95 $ -- $ 8 $ 1,376
Capital Expenditures $ 2,529 $ -- $ -- $ -- $ 2,529
Total Assets $ 38,732 $ 6,531 $ -- $ 32,289 $77,552
Three months ended March 31, 2004
- ---------------------------------
Revenue $ 13,891 $ 14 $ -- $ -- $13,905
Direct operating cost 7,503 109 -- -- 7,612
------------ --------------- --------------- ----------- --------
Gross profit (loss) 6,388 (95) -- -- 6,293
S,G&A 1,224 5 -- 1,643 2,872
------------ --------------- --------------- ----------- --------
Income (loss) from operations 5,164 (100) -- (1,643) 3,421
Interest and other income/(expense) 25 17 -- (10) 32
------------ --------------- --------------- ----------- --------
Income (loss) before income tax and
discontinued operations 5,189 (83) -- (1,653) 3,453
Income tax expense (benefit) -- -- -- 1,164 1,164
Discontinued operations -- -- 149 -- 149
------------ --------------- --------------- ----------- --------
Net Income (loss) $ 5,189 $ (83) $ 149 $ (2,817) $ 2,438
============ =============== =============== =========== ========
Depreciation and accretion $ 1,386 $ 94 $ -- $ 8 $ 1,488
Capital Expenditures $ 481 $ -- $ -- $ 32 $ 513
Total Assets $ 36,307 $ 6,529 $ 2,292 $ 19,217 $64,345
NOTE 4. STOCK OPTION PLANS
8
The Company has two stock-based compensation plans, which are accounted for
under the recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees and related Interpretations. No
stock-based employee compensation cost is reflected in net income.
In December 2004, the Financial Accounting Standards Board ("FASB") revised SFAS
No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 will require
the Company to recognize the fair value of options issued to employees or the
Board of Directors over the period in which the option is earned. The Company
previously accounted for stock-based compensation under APB Opinion No. 25,
which is superseded by SFAS No. 123. On April 14, 2005, the effective date of
SFAS 123 was extended and will now be effective for the Company as of January 1,
2006. Under the revised SFAS No. 123 at March 31, 2005, the Company has issued
but unvested options that, if earned, will result in the following compensation
expense being recognized:
Pro Forma
($in thousands) Compensation Expense
---------------------
Fair value of options to be earned during the first quarter of 2006 $ 47
The following table illustrates the effect on net income and earnings per share
if the Company applied the fair value recognition provisions of FASB Statement
No. 123, Accounting for Stock-Based Compensation, to stock-based compensation
for the quarters ended March 31, 2005 and 2004:
($in thousands, except per share amounts) 2005 2004
------ -------
Net income (loss), as reported $ 856 $2,438
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects (133) (94)
------ -------
Pro forma net income (loss) $ 723 $2,344
====== =======
EARNINGS (LOSS) PER SHARE:
Basic - as reported $ .05 $ .14
====== =======
Basic - pro forma $ .04 $ .14
====== =======
Diluted - as reported $ .05 $ .14
====== =======
Diluted - pro forma $ .04 $ .13
====== =======
The stock option plan summary and changes during quarters ended March 31 are as
follows:
2005 2004
--------- -----------
Options outstanding, beginning of quarter 913,708 1,266,281
Granted 7,500 --
Exercised (42,800) (141,100)
Canceled -- --
--------- -----------
Options outstanding, end of quarter 878,408 1,125,181
========= ===========
Weighted average exercise price of options, beginning of quarter $ 4.40 $ 3.90
Weighted average exercise price of options granted $ 11.53 $ --
Weighted average exercise price of options exercised $ 3.54 $ 2.49
Weighted average exercise price of options canceled $ -- $ --
Weighted average exercise price of options, end of quarter $ 4.50 $ 4.08
Options exercisable at end of quarter 725,496 819,841
========= ===========
Options available for future grant at end of quarter 492,176 509,676
========= ===========
The following table summarizes information about the stock options outstanding
under the Company's option plans as of March 31, 2005:
9
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 2.6 37,500 $ 1.32 37,500 $ 1.32
$1.60 - $2.25 3.6 38,500 $ 2.14 38,500 $ 2.14
$2.42 - $3.50 7.5 246,109 $ 2.90 191,471 $ 2.87
$3.75 - $4.50 6.8 344,546 $ 4.34 281,085 $ 4.30
$6.50 7.9 139,253 $ 6.50 104,440 $ 6.50
$9.20 - $12.15 9.3 72,500 $ 9.75 72,500 $ 9.75
----------- -----------
878,408 725,496
=========== ===========
As of March 31, 2005, the 1992 Stock Option Plan for Employees had options
outstanding to purchase 575,208 common shares with 188,976 shares remaining
available for issuance under option grants. The 1992 Stock Option Plan for
Directors had options outstanding to purchase 303,200 common shares with 303,200
shares remaining available for issuance under option grants.
The fair value of each option grant is estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants during the quarter ended March 31 2005, with no options being granted
during the quarter ended March 31, 2004:
2005 2004
---- ----
Expected volatility 50% --
Risk-free interest rates 4.1% --
Expected lives 10 years --
Dividend yield 2.7% --
Weighted-average fair value of options granted
during the quarter (Black-Scholes) $ 5.28 --
NOTE 5. LITIGATION
Significant developments have occurred on the following legal matters since
December 31, 2004:
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
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
10
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 oral
argument has been scheduled for May 9, 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 is undertaking efforts 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
timely finalize acceptable payment arrangements 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
11
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 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 and
imposed sanctions on Manchak. Manchak appealed the March 8, 2004 order, which
the Federal Circuit agreed to hear. On March 18, 2005 the United States Court
of Appeals for the Federal Circuit affirmed the lower Court's ruling rejecting
Manchak's claim. The Company now considers the matter closed.
DAVID W. CROW V. AMERICAN ECOLOGY CORPORATION, U.S. DISTRICT COURT OF HARRIS
- --------------------------------------------------
COUNTY, TEXAS; 280TH JUDICIAL DISTRICT.
In the complaint, David. 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, Crow first contacted the Company regarding the stock options. The
Company informed Crow by letter that pursuant to the Company's 1992 Employee
Stock Option Plan, his options had expired thirty days after his employment with
the Company ended.
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. Crow estimates his damages between $1,050,000 and $1,258,500; an
amount 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 a portion of the claim and has
notified its carrier of the claim. The Company further believes that the
allegations are without merit and intends to vigorously defend itself in the
matter. However, no assurance can be given that it will prevail or that
insurance proceeds will be recognized.
NOTE 6. COMMITMENTS AND CONTINGENCIES
On January 21, 2005, the Company committed to a five year operating lease for
150 to 200 rail cars at $475 a month for each car leased. A formal lease
agreement has not yet been prepared, and the specific number of rail cars
subject to the lease has not yet been determined.
NOTE 7. CLOSURE AND POST CLOSURE OBLIGATIONS
Closure and post closure obligations are recorded when environmental assessments
and/or remedial efforts are probable, and the costs can be reasonably estimated
consistent with Statement of Financial Accounting Standards No. 5. The Company
performs periodic reviews of both non-operating and operating facilities and
revises accruals for estimated post-closure, remediation and other costs when
necessary. The Company's recorded liabilities are based on best estimates of
current costs and are updated periodically to reflect current technology, laws
and regulations, inflation and other economic factors.
Changes to reported closure and post closure obligations were as follows ($ in
thousands):
Accrued Closure and
Post Closure Obligation
-------------------------
December 31, 2004 obligation $ 11,627
Accretion of obligation 270
Payment of obligation (260)
Adjustment of obligation --
-------------------------
March 31, 2005 obligation $ 11,637
=========================
12
At March 31, 2005, none of the Company's assets were legally restricted for
purposes of settling the closure and post closure obligation.
NOTE 8. DISCONTINUED OPERATIONS
During 2002, the Company offered for sale its Processing Facility and Field
Services operations based in Oak Ridge, Tennessee. On December 27, 2002, the
facility ceased revenue-producing operations and further waste acceptance. All
Oak Ridge waste was subsequently shipped to off-site processors and disposers to
help sell the facility assets. These assets were subsequently sold to Toxco,
Inc. on June 30, 2004. As of March 31, 2005, there were no "Assets held for
sale or closure" associated with the discontinued Oak Ridge operations. The
revenue, costs and expenses and cash flows for the Oak Ridge operations have
been excluded from continuing operations results and reported as "Gain (loss)
from discontinued operations" and "Net cash provided by (used in) discontinued
operations". Prior periods have been restated to reflect this. The assets and
liabilities of discontinued operations included in the consolidated balance
sheet as of March 31 are as follows ($ in thousands):
Processing and Field Services Facility
------------------------------------------
Three Months Ended March 31,
------------------- ---------------------
2005 2004
------------------- ---------------------
Current assets
- --------------
Current assets $ -- $ 183
Property & equipment, net -- 552
------------------- ---------------------
-- 735
=================== =====================
Non-current assets
- ------------------
Property, plant & equipment, net -- 1,509
Other -- 48
------------------- ---------------------
-- 1,557
=================== =====================
Current liabilities
- -------------------
Accounts payable & accruals -- 890
Current portion long term debt -- 38
------------------- ---------------------
-- 928
=================== =====================
Non-current liabilities
- -----------------------
Closure/post closure obligations -- 4,593
Long-term debt -- 10
Other -- 5
------------------- ---------------------
-- 4,608
=================== =====================
Operating results for the discontinued operations were as follows for three
months ending March 31:
($in thousands) Processing and Field
Services Operations
2005
- ----
Revenues, net $ --
Operating income (loss) --
Net income (loss) --
Basic earnings (loss) per share --
Diluted earnings (loss) per share --
2004
- ----
Revenues, net $ --
Operating income (loss) 149
Net income (loss) 149
Basic earnings (loss) per share .01
Diluted earnings (loss) per share .01
13
Costs incurred at the Oak Ridge facility to prepare the facility for sale during
the three months ended March 31 are summarized as follows: ($ in thousands)
2005 2004
----- ------
Net operating costs in excess of previous accruals $ -- $ 34
Accounts receivable collected in excess of valuation allowance -- (207)
Increase in estimated cost to dispose of removed waste -- 24
----- ------
Net Income for the period ended March 31, $ -- $ 149
===== ======
Cost changes for Oak Ridge facility on-site activities and disposal liabilities
for removed wastes are as follows:
($in thousands) December 31, 2004 Cash Payments Adjustments March 31, 2005
----------------- -------------- ----------- --------------
Waste disposal liability -- -- -- --
On-site discontinued
operation cost liability -- -- -- --
($in thousands) December 31, 2003 Cash Payments Adjustments March 31, 2004
----------------- -------------- ----------- --------------
Waste disposal liability 623 (139) 24 508
On-site discontinued
operation cost liability 442 (221) 34 255
The adjustments represent differences between the estimated costs accrued at
December 31, actual costs incurred during the first quarter, and changes in
estimated future costs for removed waste disposition.
NOTE 9. PARTIAL SERVICE INTERRUPTION AT ROBSTOWN, TEXAS HAZARDOUS WASTE FACILITY
Hazardous waste treatment operations at the Company's Robstown Texas facility
were suspended following a July 1, 2004 fire in the facility's waste treatment
building. Treatment revenue had previously represented approximately 50% of the
Texas facility's revenue. Direct disposal operations, which continued without
interruption after the fire, generate the balance of the facility's revenue.
While the Company is insured for property and equipment damage and business
interruption, insurance deductibles, operational upgrades, and loss of customer
business have, and will continue to negatively impact financial performance. The
facility resumed limited treatment services in December 2004, but will not
resume all permitted service until the new treatment building is operational.
This is projected to occur in the third quarter of 2005.
The Company filed a property insurance claim and received $265,000 of the
$954,000 recognized as of March 31, 2005. An additional $503,000 was received in
April 2005. The balance of the claim is under review by the insurance carrier.
The Company has also filed approximately $2,300,000 in claims under its business
interruption insurance policy for July 2004 through March 2005, of which only
$472,000 has been recognized as of March 31, 2005. This claim is also under
review by the insurance company. The Company anticipates recognizing the value
of the claims after the insurance carrier accepts or confirms the affected
amounts. No assurance can be given, however, that the Company will be able to
recognize the pending insurance claims.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
14
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 to
applicable laws, 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 or
diminution of major contracts, ability to collect on insurance claims, and the
availability of cost effective rail transportation service. The Form 10-K for
the year ending December 31, 2004 contains additional risk factors and an
expanded disclosure of these risks. When the Company uses words like "will",
"may," "believes," "expects," "anticipates," "should," "estimates," "project,"
"plans," their opposites and similar expressions, the Company is making
forward-looking statements. These terms are most often used in statements
relating to business plans, strategies, anticipated benefits or projections
about the anticipated revenues, earnings or other aspects of our operating
results. The Company makes these statements in an effort to keep stockholders
and the public informed about our business based on management's current
expectations about future events. Such statements should be viewed with caution
and are not guarantees of future performance or events. As noted elsewhere in
this report, our business is subject to uncertainties, risks and other
influences, many of which the Company has no control over. Additionally, these
factors, either alone or taken together, could have a material adverse effect on
the Company and could change whether any forward-looking statement ultimately
turns out to be true. The Company undertakes no obligation to publicly release
updates or revisions to these statements. The following discussion should be
read in conjunction with the audited consolidated financial statements and the
notes thereto filed on Form 10-K for the year ending December 31, 2004.
Unless otherwise described, changes discussed relate to the increase or decrease
from the three month period ended March 31, 2004 to the three month period ended
March 31, 2005.
INTRODUCTION
- ------------
The Company is a hazardous, PCB, industrial and radioactive waste management
company providing transportation, treatment and disposal services to commercial
and government entities including, but not limited to nuclear power plants,
refineries, chemical manufacturing plants, steel mills, the U.S. Department of
Defense, biomedical facilities, universities and research institutions. The
majority of its revenues are derived from fees charged at the Company's four
fixed waste disposal facilities. The Company and its predecessors have been in
business for 52 years.
A significant portion of the Company's revenue is attributable to discrete waste
clean-up projects ("Event Business") which vary substantially in size and
duration. The one-time nature of Event Business necessarily creates variability
in revenue and earnings. This can produce large quarter to quarter swings.
Management's strategy is to continue expanding its recurring business ("Base
Business") while simultaneously securing both large and small Event Business
projects. When the Company's Base Business covers fixed costs, more of the Event
Business revenue falls through to the bottom line. This strategy takes advantage
of the largely fixed cost nature of the disposal business.
OVERALL COMPANY PERFORMANCE
- ---------------------------
The Company's financial performance for the three months ended March 31, 2005
was substantially lower than the first three months of 2004. This quarter to
quarter difference primarily reflects a less favorable waste service mix and
higher treatment and transportation costs incurred during the three months ended
March 31, as discussed below.
CRITICAL ACCOUNTING POLICIES
- ------------------------------
In preparing the financial statements, management makes many estimates and
assumptions that affect the Company's financial position and results of
operations. Accounting for the July 1, 2004 Texas Fire, Disposal Facility
Accounting, and Litigation involve subjective judgments, estimates and
assumptions that would likely produce a materially different financial position
and result of operations if different judgments, estimates, or assumptions were
used. These matters are discussed below.
ACCOUNTING FOR THE JULY 1, 2004 TEXAS FIRE
15
A July 1, 2004 fire in the Robstown, Texas facility's waste treatment building
resulted in an insurance claim for Property and Equipment damaged in the fire.
As of December 31, 2004 the Company had fully impaired the $679,000 in book
value of assets damaged in the fire and recognized $954,000. This amount
represents the stated values submitted to the insurance carrier at the inception
of coverage and the probable recovery expected by management. As of May 6, 2005,
$768,000 in property insurance proceeds had been received by the Company.
As of March 31, 2005, the Company has filed approximately $2,300,000 in business
interruption insurance claims with its insurance carrier, of which $472,000 of
incremental costs due to the fire have been recognized. The Company has not
recognized significant lost revenue associated with suspension of treatment
services following the fire pending determination of the actual amounts
recovered from its insurance company.
DISPOSAL FACILITY ACCOUNTING
In general terms, a disposal cell development asset exists for the cost of
building usable disposal space and a closure liability exists for closing,
maintaining and monitoring the disposal unit once this space has been filled.
Major assumptions and judgments used to calculate cell development assets and
closure liabilities are as follows:
- - Personnel and equipment costs incurred to construct disposal cells are
capitalized as a cell development asset.
- - The cell development asset is amortized as each available cubic yard
of disposal space is filled. Periodic independent engineering survey and
inspection reports are used to determine the remaining volume available.
These reports take into account waste volume, compaction rates and space
reserved for capping filled cells. Additionally, changes in the estimated
useful lives of the cells or related expansion plans have a direct effect
on the amortization expense related to those cells during future periods.
- - The closure liability is the present value based on a current cost
estimate prepared by an independent engineering firm of the costs to close,
maintain and monitor filled disposal units. Management estimates the timing
of payment, accretes the current cost estimate by an estimated cost of
living (1.5%), and then discounts (9.3%) the accreted current cost estimate
back to a present value. The final payments of the closure liability are
estimated as being paid in 2056 based upon current permitted capacity and
estimated annual usage.
LITIGATION
The Company is involved in litigation requiring estimates of timing and loss
potential whose disposition is controlled by the judicial process. During 2003,
the Company wrote off $20,951,000 due to an adverse trial court decision which
cast substantial doubt on the Company's ability to recover its investment in the
formerly proposed Ward Valley, California disposal project. The Company has
appealed the trial court's ruling.
The US District Court for the District of Nebraska entered judgment against the
State of Nebraska in favor of the Central Interstate Compact and other
plaintiffs including the Company. The Company's share of the judgment was $12.3
million. 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. Payments are
subject to appropriation by the Nebraska legislature. The Company carries $6.5
million on its balance sheet for capitalized facility development costs and
expects to recognize the difference between the balance sheet amount and the
full value of its claim when final payment arrangements are entered into with
the CIC and funds are appropriated by the Nebraska legislature.
No assurance can be given that the Company will prevail in the above litigation
or otherwise recover its investment in the California project, or that funds
will be appropriated and acceptable payment arrangements made under the Nebraska
settlement. The decision to accrue costs or write off assets is based on
specific facts and circumstances pertaining to each case and management's
evaluation of present circumstances.
RESULTS OF OPERATIONS
- -----------------------
16
The following table presents, for the periods indicated, the operating costs as
a percentage of revenues in the consolidated income statement:
($in 000's) Three Months Ended
------------------
March 31, 2005 March 31, 2004
------------------- ------------------
$ % $ %
--------- -------- -------- --------
Revenue 12,554 13,905
Direct operating costs 8,713 69.4% 7,612 54.7%
--------- --------
Gross profit 3,841 30.6% 6,293 45.3%
SG & A 2,514 20.0% 2,872 20.7%
Business interruption insurance claim (41) (0.3)% -- 0.0%
--------- --------
Operating income 1,368 10.9% 3,421 24.6%
Interest income 85 0.7% 36 0.3%
Interest expense 47 0.4% 49 0.4%
Other income (expense) 17 0.1% 45 0.3%
--------- --------
Net income (loss) before income taxes 1,423 11.3% 3,453 24.8%
Income tax expense (benefit) 567 4.5% 1,164 8.4%
--------- --------
Net income (loss) before discontinued operations 856 6.8% 2,289 16.5%
========= ========
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2005 AND 2004
- --------------------------------------------------------
REVENUE
- -------
For the three months ended March 31, 2005, the Company reported consolidated
revenue of $12,554,000, a 10% decrease from the $13,905,000 reported for the
same period in 2004. Three of four operating disposal sites generated lower
revenue during the first quarter of 2005. The lower quarterly revenue resulted
from a combination of slightly lower waste volumes and average selling prices
("ASP") for the Company's treatment and disposal services and decreased
shipments to the Company's disposal facility in Richland, Washington. At the
three hazardous waste disposal facilities, volumes decreased 1% and ASP
decreased 1% over the same quarter last year. The decrease in waste volume
resulted from reduced shipments to the Company's Idaho and Texas facilities
during the quarter. The decrease in ASP reflected a change in the mix of
treatment and direct disposal services. During the three months ending March 31,
2005 and 2004, revenue from a contract with the U.S. Army Corps of Engineers
accounted for $2,650,000 and $3,991,000 or 21% and 29% of revenue, respectively.
Also during the first quarter of 2004, one New York clean-up project represented
$1,438,000 or 10% of revenue. This project was completed prior to 2005.
Operating Disposal Facilities
- -------------------------------
Richland, Washington LLRW disposal facility revenue decreased substantially for
the three months ended March 31, 2005 versus the same period in 2004. This
decrease was due to a 52% decrease in rate-regulated wastes and despite a 17%
increase in non rate-regulated waste receipt. For 2005, the Washington Utilities
and Transportation Commission has approved a revenue requirement of $5,346,000
for the Richland facility's rate-regulated low-level radioactive waste business,
of which $684,000 was recorded in the three months ended March 31, 2005.
Management currently expects the Richland facility to reach its approved 2005
revenue requirement.
At the Grand View, Idaho disposal facility, 5% lower waste volumes and lower
transportation revenue were partially offset by 5% higher ASP. Total revenue
dropped 6%, however, from the same quarter last year. A private clean-up in New
York contributed to first quarter 2004 revenue. Management expects the U.S. Army
Corps of Engineers and other customers to increase their rate of shipment to the
Grand View, Idaho disposal facility for the balance of 2005.
At the Beatty, Nevada hazardous treatment and disposal facility, total revenue
increased 5% for the three months ended March 31, 2005 from the same period in
2004. The increased revenue was due to a 28% waste volume
17
increase, however, ASP decreased by 23%. The increased volume was from both
clean-up projects and increased shipments from recurring base business. The
lower ASP resulted from a higher percentage of waste from lower priced clean-up
projects.
At the Robstown, Texas hazardous treatment and disposal facility, revenue
decreased 21% for the three months ended March 31, 2005 from the same period in
2004. The decreased revenue reflected a less favorable mix of wastes received at
the site which reduced ASP by 3%, and a 19% decrease in waste volume following
the July 1, 2005 treatment building fire. The Texas facility resumed limited
treatment operations on December 1, 2004. A new treatment building is being
constructed and is expected to be operational during the third quarter of 2005.
DIRECT OPERATING COSTS
- ----------------------
For the three months ended March 31, 2005, consolidated direct operating costs
increased 14% to $8,713,000 (69% of revenue) compared to $7,612,000 (55% of
revenue) for the same period in 2004. This was primarily caused by increased
labor, transportation and waste treatment additive costs at the Company's
Beatty, Nevada and Grand View, Idaho hazardous waste facilities. Higher
transportation costs reflected fuel surcharges, an expanded leased railcar
fleet, increased railcar operating lease expenses, and mobilization costs
incurred in anticipation of the several large remediation projects. Only a
portion of these expenses could be passed on to customers. Also affecting the
quarter was $175,000 spent to secure preferred access to two east coast rail
transfer points. Relative to revenue, direct operating costs increased
substantially. This reflects the largely fixed cost nature of the Company's
business. The Company continues its efforts to minimize direct costs through
operational improvements and efficiencies such as an improved design for the new
treatment building at the Robstown, Texas facility and improved reagent usage at
the Beatty, Nevada facility.
Operating Disposal Facilities
- -------------------------------
Direct costs at each of the four operating facilities increased from the same
quarter last year. This increase in consolidated direct operating costs was
driven by an increase in direct costs at the Grand View, Idaho facility of
$495,000 primarily related to transportation, and an increase in direct costs at
the Beatty, Nevada facility of $391,000 primarily related to higher treatment
reagent usage. For Idaho, $175,000 was spent securing preferred long-term access
to two east coast rail transfer facilities, and approximately $575,000 was spent
on other transportation-related activities during the first quarter of 2005.
This included fuel surcharges and the costs of a temporarily underutilized rail
fleet secured for clean-up shipping in the second quarter of 2005 and beyond.
While most of a facility's direct costs are fixed, transportation and treatment
reagents are substantially variable. The extent to which these costs are
recovered as revenue is based on individual contract conditions, the
characteristics of wastes received for treatment, and other factors.
Non Operating Disposal Facilities
- ------------------------------------
Non Operating Disposal Facilities incur current period expenses for the
accretion of engineering, laboratory and other contractor expenses and labor
costs required to meet the Company's obligations subsequent to operational use.
For the three months ended March 31, 2005 and 2004, the Company reported $14,000
and $10,000 of expenses on proposed development projects, and $92,000 and
$109,000 of costs in 2005 and 2004 to remediate or close facilities subsequent
to use.
GROSS PROFIT
- -------------
Lower revenue compounded by higher direct costs resulted in a 39% reduction in
gross profit, pushing quarterly gross profit down to $3,841,000 compared with a
gross profit of $6,293,000 for the same quarter last year. Decreased disposal
revenue at three of four operating disposal facilities produced less fall
through due to the largely fixed cost nature of the business. Higher variable
costs also reduced gross profit. Gross margin decreased from 45% to 31% of
revenue due to the lower revenue received in a period when spending increased to
prepare for increased waste volumes in subsequent periods.
SELLING, GENERAL AND ADMINISTRATIVE COSTS (SG&A)
- ------------------------------------------------
18
For the three months ended March 31, 2005, the Company reported SG&A of
$2,514,000 (20% of revenue), a 12% decrease from the $2,872,000 (21% of revenue)
for the same three months of 2004. The decrease in SG&A primarily resulted from
a $292,000 accrual in 2004 for the Management Incentive Plan which was not
accrued in 2005. The Company will accrue costs for the 2005 Management Incentive
Plan if and when pro rata operating income of $12,000,000, including the costs
of the plan, is achieved.
Operating Disposal Facilities
- -------------------------------
During the quarter ended March 31, 2005, Operating Disposal Facilities SG&A
decreased $117,000 due to centralization of specific sales functions at the
corporate office, offset by miscellaneous increases in SG&A.
Corporate
- ---------
During the quarter ended March 31, 2005, Corporate SG&A decreased $241,000.
$292,000 of the reduction is due to the lack of an accrual for the Management
Incentive Plan discussed above. During the quarter ended March 31, 2005 the
Company incurred costs of $105,000 for documentation and audit of the Company's
internal controls as mandated by Section 404 of the Sarbanes-Oxley Act of 2002.
Non Operating Disposal Facilities
- ------------------------------------
Non Operating Disposal Facilities incur primarily legal costs to recover the
Company's investment in formerly proposed disposal site development projects in
Ward Valley, California and Butte, Nebraska. For each of the three months ended
March 31, 2005 and 2004, the Company reported $5,000 of such SG&A expenses.
INTEREST INCOME
- ---------------
For the three months ended March 31, 2005, the Company earned $85,000 of
interest income, an increase from $36,000 in the same period of 2004 due to
higher cash balances and higher interest rates available on short term
investments. Interest income is earnings on cash balances, short-term
investments, and notes receivable for which income is a function of prevailing
market rates. Based on current interest rates, the Company does not anticipate
significant interest income in 2005.
INTEREST EXPENSE
- -----------------
For the three months ended March 31, 2005, the Company reported interest expense
of $47,000, a decrease of $2,000 from the corresponding period in 2004. The
primary cause of this decrease was the reduction in average debt outstanding by
$1,400,000 from March 31, 2004 to 2005. For the three months ending March 31,
2005, the interest rate paid on its single outstanding term loan was 4.56%, an
increase of 1.18% from the 3.38% at March 31, 2004. Additional reductions may
occur as debt balances continue to be paid down, however the Company will
experience increased interest expense should interest rates increase. At March
31, 2005, the line of credit had a zero balance.
OTHER INCOME (LOSS)
- -------------------
Other Income is composed of the following ($ in thousands):
Three Months Ended March 31,
2005 2004
------------- ----------------
Data processing services $ -- $ 20
Cash receipts for sale or rent of property rights 17 16
Other miscellaneous income, net -- 9
------------- ----------------
Total other income (loss) $ 17 $ 45
============= ================
INCOME TAXES
- ------------
19
The components of the income tax provision were as follows ($ in thousands):
Three Months Ended March 31,
2005 2004
------------- ----------------
Federal tax expense $ 521 $ 1,164
State tax expense 46 --
------------- ----------------
Income tax expense $ 567 $ 1,164
============= ================
The tax effects of temporary differences between income for financial reporting
and income taxes give rise to deferred tax assets and liabilities. The potential
realization of a significant portion of net deferred tax assets is based in part
on the Company's estimates of the timing of reversals of certain temporary
differences and on the generation of taxable income before such reversals.
The net operating loss carry forward at March 31, 2005 was approximately
$36,000,000 and expires at various dates between 2011 and 2020. Due to the
Company's net operating loss carry forwards, 2005 income tax expense of
approximately 2% of pretax income tax expense is expected to be paid in cash,
while the other approximately 35% of income tax expense will be offset against
the net operating loss carry forwards.
The Company will continue to assess the deferred tax asset for utilization as
needed but at least annually.
SEASONAL EFFECTS
- ----------------
Operating revenues are generally lower in the winter months than the warmer
summer months when more short duration, one-time remediation projects tend to
occur. While both disposal and processing revenue are generally more affected
by market conditions than seasonality, weather related clean-up project delays
did have an adverse impact on the first quarter of 2005.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
At March 31, 2005, cash and short term investments totaled $13,243,000, an
increase of $116,000 from December 31, 2004. The small increase in cash reflects
the Company's continued profitability.
During the first three months of 2005, the Company's days sales outstanding
("DSO") increased at March 31, 2005, to 64 days compared to December 31, 2004 at
60 days.
As of March 31, 2005 the Company's liquidity, as measured by the current ratio,
was 2.4 to 1.0. The debt to equity ratio decreased to 0.5:1.0 at March 31, 2005.
There have not been any substantial changes to working capital or debt to equity
ratio during the three months ended March 31, 2005. The debt to equity ratio is
defined as total liabilities divided by stockholders equity.
SOURCES OF CASH
On March 31, 2005, the Company had an $8,000,000 revolving line of credit with
Wells Fargo Bank in Boise, Idaho maturing June 15, 2005. Management is
negotiating with the Bank to renew and extend the line of credit. The line of
credit is secured by the Company's accounts receivable. At March 31, 2005, the
outstanding balance on the revolving line of credit was $-0-. The Company
borrows and repays according to business demands and availability of cash. It
currently reserves $5,000,000 for a letter of credit used as collateral for an
insurance policy.
Company operations produced an average of almost $4,000,000 a quarter in cash
flow over the past three years. Management expects 2005 quarterly cash flow from
operations to, on average, be higher. The $13,243,000 in cash and short term
investments at March 31, 2005 was comprised of short term investments which were
not required for operations of $10,323,000, cash immediately available for
operations of $3,469,000, and a net checks outstanding amount of ($549,000).
20
USES OF CASH
Management currently expects its capital spending to be up to an additional
$9,000,000 in 2005 with $3,100,000 projected to be spent completing a cell
expansion at the Idaho hazardous waste facility. Cell expansion at each of the
Company's other sites are also underway or projected in 2005.
The Company paid a $0.25 annual dividend on October 15, 2004. The Company's
Board of Directors is evaluating dividend policy and is considering changing
from an annual to quarterly dividend. While management anticipates that an
announcement will be made on dividend policy on or around its annual
shareholders meeting on May 25, 2005, such announcement is contingent upon
approval from its commercial bank, Wells Fargo. Management is working with its
bank to modify its existing credit agreement to allow for a change in the
Company's dividend policy, however no assurance can be given that the Company
can have such approval prior to May 25, 2005.
The Company believes that cash on hand and cash flow from operations, augmented
as needed by periodic borrowings under the line of credit, will be sufficient to
meet the Company's cash needs for the foreseeable future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company does not maintain equities, commodities, derivatives, or any other
instruments for trading or any other purposes, and does not enter into
transactions denominated in currencies other than the U.S. Dollar.
The Company has minimal interest rate risk on investments or other assets due to
the Company's preservation of capital approach to investments. At March 31,
2005, approximately $13,200,000 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,
$3,733,000 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 $30,000.
ITEM 4. CONTROLS AND PROCEDURES.
(a) As of the end of the period covered by this quarterly report, Company
management, under the direction of the Chief Executive Officer and Chief
Financial Officer, carried out an evaluation of the effectiveness of the design
and operation of the Company's disclosure controls and procedures pursuant to
Rule 13a-14 of the Securities Exchange Act of 1934 (Exchange Act). Based upon
that evaluation, the Chief Executive Officer and Chief Financial Officer believe
that the Company's disclosure controls and procedures are effective in timely
alerting them to material information required to be disclosed in the Company's
Exchange Act filings.
(b) The Company maintains a system of internal controls that are designed to
provide reasonable assurance that its records and filings accurately reflect the
transactions engaged in. For the quarter ending March 31, 2005, there were no
changes to internal controls or in other factors that could materially affect
these internal controls.
On April 25, 2005 the Company filed an Amended Form 10-K with the Securities and
Exchange Commission that contained the opinions of management and the Company's
Independent Registered Public Accounting firm regarding the Company's internal
controls over financial reporting. Both Management and the Independent
Registered Public Accounting firm found that the Company's controls over
financial reporting at December 31, 2004 were effective and that no material
weaknesses existed.
PART II OTHER INFORMATION.
- --------------------------
ITEM 1. LEGAL PROCEEDINGS.
21
Significant developments have occurred on the following legal matters since
December 31, 2004:
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
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 oral
argument has been scheduled for May 9, 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.
22
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 is undertaking efforts 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
timely finalize acceptable payment arrangements 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.
Manchak appealed the March 8, 2004 order and the Federal Circuit agreed to hear
the appeal. On March 18, 2005 the United States Court of Appeals for the
Federal Circuit affirmed the lower Court's ruling rejecting Manchak's claim.
The Company considers the matter closed.
DAVID W. CROW V. AMERICAN ECOLOGY CORPORATION, U.S. DISTRICT COURT OF HARRIS
- --------------------------------------------------
COUNTY, TEXAS; 280TH JUDICIAL DISTRICT.
In the complaint, David. 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, Crow first contacted the Company regarding the stock options. The
Company informed Crow by letter that pursuant to the Company's 1992 Employee
Stock Option Plan, Crow's options had expired thirty days after his employment
with the Company ended.
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. Crow estimates his damages between $1,050,000 and $1,258,500; an
amount 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 a portion of the claim and has
notified its carrier of the claim. The Company further believes that the
allegations are without merit and intends to vigorously defend itself in the
matter. However, no assurance can be given that it will prevail or that
insurance proceeds will be recognized.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None
23
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS.
The following exhibits are filed as part of this report:
- ----------------------------------------------------------------------------------------------------
Exhibit No. Description
- ----------- ---------------------------------------------------------------------------------------
31.1 Certifications of March 31, 2005 Form 10-Q by Chief Executive Officer dated May 6, 2005
- ----------- ---------------------------------------------------------------------------------------
31.2 Certifications of March 31, 2005 Form 10-Q by Chief Financial Officer dated May 6, 2005
- ----------- ---------------------------------------------------------------------------------------
32.1 Certifications of March 31, 2005 Form 10-Q by Chief Executive Officer dated May 6, 2005
- ----------- ---------------------------------------------------------------------------------------
32.2 Certifications of March 31, 2005 Form 10-Q by Chief Financial Officer dated May 6, 2005
- ----------------------------------------------------------------------------------------------------
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN ECOLOGY CORPORATION
(Registrant)
Date: May 6, 2005 By:/s/ Stephen A. Romano
------------------------
Stephen A. Romano
President, Chief Executive Officer
and Chief Operating Officer
Date: May 6, 2005 By:/s/ James R. Baumgardner
---------------------------
James R. Baumgardner
Senior Vice President,
Chief Financial Officer,
Secretary and Treasurer
24
EXHIBIT INDEX
Exhibit Description
- ------- -----------
31.1 Certifications of March 31, 2005 Form 10-Q by Chief Executive Officer dated May 6, 2005
31.2 Certifications of March 31, 2005 Form 10-Q by Chief Financial Officer dated May 6, 2005
32.1 Certifications of March 31, 2005 Form 10-Q by Chief Executive Officer dated May 6, 2005
32.2 Certifications of March 31, 2005 Form 10-Q by Chief Financial Officer dated May 6, 2005
25