10-Q 1 doc1.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 2003 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________________to_____________________ Commission File Number 0-11688 AMERICAN ECOLOGY CORPORATION ---------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-3889638 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) Lakepointe Centre I, 300 E. Mallard, Suite 300 Boise, Idaho 83706 ------------ ----- (Address of principal executive offices) (Zip Code) (208) 331-8400 -------------- (Registrant's telephone number, including area code) Indicate by a check mark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] At November 12, 2003 Registrant had outstanding 16,972,946 shares of its Common Stock. AMERICAN ECOLOGY CORPORATION QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION PAGE Item 1. Financial Statements Consolidated Balance Sheets (Unaudited) 4 Consolidated Statements of Operations (Unaudited) 5 Consolidated Statements of Cash Flows (Unaudited) 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 19 Item 3. Quantitative and Qualitative Disclosures About Market Risk 28 Item 4. Controls and Procedures 28 PART II. OTHER INFORMATION Item 1. Legal Proceedings 28 Item 2. Changes in Securities and Use of Proceeds 30 Item 3. Defaults Upon Senior Securities 30 Item 4. Submission of Matters to a Vote of Security Holders 30 Item 5. Other Information 30 Item 6. Exhibits and Reports on Form 8-K 31 Signatures 31 2 OFFICERS -------- Stephen A. Romano Chief Executive Officer, President and Chief Operating Officer James R. Baumgardner Senior Vice President, Chief Financial Officer Treasurer and Secretary Michael J. Gilberg Vice President and Controller DIRECTORS --------- Roger P. Hickey, Chairman President, Chicago Partners David B. Anderson Principal, Lochborn Partners LLC Rotchford L. Barker Independent Businessman Roy C. Eliff Independent Businessman Edward F. Heil Sole Member E.F. Heil, LLC Stephen A. Romano Chief Executive Officer, President and Chief Operating Officer Stephen M. Schutt Vice President Nuclear Fuel Services, Inc. CORPORATE OFFICE ---------------- Lakepointe Centre I American Ecology Corporation 300 East Mallard Drive, Suite 300 Boise, Idaho 83706 (208) 331-8400 (208) 331-7900 (fax) www.americanecology.com ----------------------- COMMON STOCK ------------ American Ecology Corporation's common stock trades on the Nasdaq National Market under the symbol ECOL. FINANCIAL REPORTS ----------------- A copy of American Ecology Corporation Annual and Quarterly Reports, as filed on Form 10-K and 10-Q with the Securities and Exchange Commission, may be obtained by writing: Lakepointe Centre I 300 E. Mallard, Suite 300 Boise, Idaho 83706 or at www.americanecology.com ----------------------- TRANSFER AGENT -------------- Mellon Investor Services LLC Overpeck Centre 85 Challenger Road Ridgefield Park, New Jersey 07660 (201) 296-4000 or at www.mellon-investor.com ----------------------- AUDITOR ------- Moss Adams LLP 1001 Fourth Avenue, Suite 2900 Seattle, WA 98154 3
PART I. FINANCIAL INFORMATION ----------------------------- ITEM 1. FINANCIAL STATEMENTS. AMERICAN ECOLOGY CORPORATION CONSOLIDATED BALANCE SHEETS ($ IN 000'S EXCEPT PER SHARE AMOUNTS) September 30,2003 December 31, 2002 ------------------- ------------------- (Unaudited) ASSETS Current Assets: Cash and cash equivalents $ 6,503 $ 135 Receivables, net 13,425 10,460 Income taxes receivable 1 740 Prepayments and other 1,257 498 Deferred income taxes -- 2,745 Assets held for sale or closure 1,845 10,722 ------------------- ------------------- Total current assets 23,031 25,300 Cash and investment securities, pledged 244 244 Property and equipment, net 28,017 26,998 Facility development costs 6,478 27,430 Deferred income taxes 8,284 5,539 Other assets 53 129 Assets held for sale or closure 2,254 1,485 ------------------- ------------------- Total Assets $ 68,361 $ 87,125 =================== =================== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current portion of long term debt $ 1,494 $ 1,985 Accounts payable 3,599 2,192 Accrued liabilities 6,080 4,166 Accrued closure and post closure obligation, current portion 882 882 Income taxes payable -- 23 Current liabilities of assets held for sale or closure 3,662 7,965 ------------------- ------------------- Total current liabilities 15,717 17,213 Revolving line of credit -- 603 Long term accrued liabilities 470 2,372 Long term debt 4,567 5,972 Accrued closure and post closure obligation, excluding current portion 9,364 9,318 Liabilities of assets held for sale or closure, excluding current portion 5,114 5,699 ------------------- ------------------- Total liabilities 35,232 41,177 ------------------- ------------------- Commitments and contingencies Stockholders' equity: Convertible preferred stock, 1,000,000 shares authorized, Designated as follows: Series D cumulative convertible preferred stock, $.01 par value, 0 and 100,001 shares issued and outstanding; -- 1 Common stock, $.01 par value, 50,000,000 authorized, 16,967,946 and 14,539,264 shares issued and outstanding 170 145 Additional paid-in capital 54,686 55,789 Accumulated deficit (21,727) (9,987) ------------------- ------------------- Total stockholders' equity 33,129 45,948 ------------------- ------------------- Total Liabilities and Stockholders' Equity $ 68,361 $ 87,125 =================== ===================
See notes to consolidated financial statements. 4
AMERICAN ECOLOGY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) ($ IN 000'S EXCEPT PER SHARE AMOUNTS) Three Months Ended Sept 30, Nine Months Ended Sept 30, 2003 2002 2003 2002 ---------------- --------------- --------------- --------------- (Restated) (Restated) Revenue $ 17,324 $ 11,048 $ 40,115 $ 35,077 Direct operating costs 10,383 6,417 22,423 18,433 ---------------- --------------- --------------- --------------- Gross profit 6,941 4,631 17,692 16,644 Selling, general and administrative expenses 3,302 2,691 11,088 8,439 ---------------- --------------- --------------- --------------- Income from operations 3,639 1,940 6,604 8,205 Interest income 312 7 334 31 Interest expense 60 221 219 726 Loss on write off of Ward Valley facility development costs -- -- 20,951 -- Other income (loss) 20 35 113 (290) ---------------- --------------- --------------- --------------- Net income (loss) before income tax, discontinued operations, and cumulative effect of change in accounting principal 3,911 1,761 (14,119) 7,220 Income tax expense (benefit) 18 (226) 73 (226) ---------------- --------------- --------------- --------------- Net income (loss) before discontinued operations and cumulative effect of change in accounting principal 3,893 1,987 (14,192) 7,446 Gain (loss) from discontinued operations - El Centro Landfill (15) 178 4,945 497 (Loss) from discontinued operations - Oak Ridge LLRW Facility (400) (1,099) (2,429) (1,898) ---------------- --------------- --------------- --------------- Net Income (loss) before cumulative effect of change in accounting principle 3,478 1,066 (11,676) 6,045 Cumulative effect of change in accounting principle -- -- -- 13,141 ---------------- --------------- --------------- --------------- Net income (loss) 3,478 1,066 (11,676) 19,186 Preferred stock dividends -- 100 64 297 ---------------- --------------- --------------- --------------- Net income (loss) available to common shareholders $ 3,478 $ 966 $ (11,740) $ 18,889 ================ =============== =============== =============== Basic earnings (loss) from continuing operations .23 .12 (.86) .51 Basic earnings (loss) from discontinued operations (.02) (.06) .15 (.10) Basic earnings from cumulative effect of accounting change -- -- -- .92 ---------------- --------------- --------------- --------------- Basic earnings (loss) per share $ .21 $ .06 $ (.71) $ 1.33 ================ =============== =============== =============== Diluted earnings (loss) from continuing operations .22 .12 (.86) .45 Diluted earnings (loss) from discontinued operations (.02) (.06) .15 (.09) Diluted earnings from cumulative effect of accounting change -- -- -- .83 ---------------- --------------- --------------- --------------- Diluted earnings (loss) per share $ .20 $ .06 $ (.71) $ 1.19 ================ =============== =============== =============== Dividends paid per common share $ -- $ -- $ -- $ -- ================ =============== =============== ===============
See notes to consolidated financial statements. 5
AMERICAN ECOLOGY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED, $ IN 000'S) Nine Months Ended September 30, ------------------------------------- 2003 2002 ----------------- ------------------ Cash flows from operating activities: (Restated) Net income (loss) $ (11,676) $ 19,186 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation, amortization and accretion 5,324 4,480 (Income) loss from discontinued operations (2,516) 1,401 Cumulative effect of change in accounting principle -- (13,141) Write off of Ward Valley project 20,951 -- Changes in assets and liabilities: Receivables (2,907) 167 Other assets (758) (287) Accounts payable and accrued liabilities 3,011 (4,076) Closure and post closure obligation (803) (789) Income taxes payable 716 (230) ----------------- ------------------ Net cash provided by operating activities 11,342 6,711 Cash flows from investing activities: Capital expenditures (4,941) (2,469) ----------------- ------------------ Net cash used by investing activities (4,941) (2,469) Cash flows from financing activities: Payments of indebtedness (2,667) (6,072) Retirement of series D preferred stock (6,406) -- Stock options and warrants exercised 3,671 1,133 ----------------- ------------------ Net cash provided by (used in) financing activities (5,402) 4,939 ----------------- ------------------ Increase (Decrease) in cash and cash equivalents 999 (697) Net cash provided by (used in) discontinued operations 5,369 (335) Cash and cash equivalents at beginning of period 135 4,217 ----------------- ------------------ Cash and cash equivalents at end of period $ 6,503 $ 3,185 ================= ================== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 219 $ 726 Income taxes paid 96 4 Non-cash investing and financing activities: Stock issuance-director's compensation 30 44 Assets acquired through capital lease 167 -- Preferred stock dividends accrued -- 297 Transfer of prepaid assets to settle closure liability -- 462
See notes to consolidated financial statements. 6 AMERICAN ECOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments and disclosures necessary to present fairly the financial position, results of operations, and cash flows of American Ecology Corporation and its wholly-owned subsidiaries (the "Company"). These financial statements and notes should be read in conjunction with the financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002, filed with the Securities and Exchange Commission. The previously reported 2002 quarterly information has been restated. See Note 9. Certain reclassifications of prior quarter amounts have been made to conform to current quarter presentation, none of which affect previously recorded net income. NOTE 2. EARNINGS PER SHARE Basic earnings per share are computed based on net income available to common stockholders and the weighted average number of common shares outstanding during the quarter. Diluted earnings per share reflect the assumed issuance of common shares for outstanding options and conversion of warrants. The computation of diluted earnings per share does not assume exercise or conversion of securities whose exercise price is greater than the average common share market price as the assumed conversion of these securities would increase earnings per share. The computation of diluted loss per share does not assume exercise or conversion of any securities as the assumed conversion of securities would decrease loss per share.
THREE MONTHS ENDED NINE MONTHS ENDED ------------------------ ----------------------- ($in thousands except per share amounts) 2003 2002 2003 2002 ----------- ----------- ---------- ----------- (Restated) (Restated) Income (loss) before discontinued operations and cumulative effect of accounting change $ 3,893 $ 1,987 $ (14,192) $ 7,446 Income (loss) from operations of discontinued segments (415) (921) 2,516 (1,401) Cumulative effect of accounting change -- -- -- 13,141 ----------- ----------- ---------- ----------- Net income (loss) 3,478 1,066 (11,676) 19,186 Preferred stock dividends -- 100 64 297 ----------- ----------- ---------- ----------- Net income (loss) available to common shareholders $ 3,478 $ 966 $ (11,740) $ 18,889 =========== =========== ========== =========== Weighted average shares outstanding- Common shares 16,974 14,518 16,473 14,236 Effect of dilutive shares Series E Warrants -- 1,015 -- 948 Chase Bank Warrants 732 583 -- 544 Stock Options 172 120 -- 109 ----------- ----------- ---------- ----------- Average shares 17,878 16,236 16,473 15,837 =========== =========== ========== =========== Basic earnings (loss) per share from continuing operations $ .23 $ .12 $ (.86) $ .51 Basic earnings (loss) per share from discontinued operations (.02) (.06) .15 (.10) Basic earnings per share from cumulative effect of accounting change -- -- -- .92 ----------- ----------- ---------- ----------- Basic earnings (loss) per share $ .21 $ .06 $ (.71) $ 1.33 =========== =========== ========== =========== Diluted earnings (loss) per share from continuing operations $ .22 $ .12 $ (.86) $ .45 Diluted earnings (loss) per share from discontinued operations (.02) (.06) .15 (.09) Diluted earnings per share from cumulative effect of accounting change -- -- -- .83 ----------- ----------- ---------- ----------- Diluted earnings (loss) per share $ .20 $ .06 $ (.71) $ 1.19 =========== =========== ========== ===========
7 NOTE 3. EQUITY In 1996, the Company issued 300,000 shares of Series E Redeemable Convertible Preferred Stock ("Series E Preferred Stock") that were 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, then in February 2003, the remaining 2,350,000 Series E Warrants were exercised. 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 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 $6,406,000. NOTE 4. OPERATING SEGMENTS The Company operates with two segments based on its internal reporting structure and nature of services offered, Operating Disposal Facilities and Non-Operating Disposal Facilities. The Operating Disposal Facility segment includes facilities accepting industrial, hazardous and radioactive waste. The Non-Operating Disposal Facility segment includes facilities that are no longer accepting waste, no longer owned by the Company, or represent proposed new disposal site development projects presently under litigation. On December 27, 2002, the Company discontinued commercial operations in its Low Level Radioactive Waste ("LLRW") Processing and Field Services segment which aggregated, volume-reduced, and performed remediation and other services on radioactive material. All prior segment information has been restated in order to present the operations at the Oak Ridge facility, including the former Field Services division, as discontinued operations. Effective December 31, 2002, the Company classified the El Centro municipal landfill as an asset held for sale due to the expected sale of the facility, which occurred on February 13, 2003. All prior segment information has been restated in order to present the El Centro landfill as a discontinued operation. Income taxes are assigned to Corporate, but all other items are included in the segment where they originated. Inter-company transactions have been eliminated from the segment information and are not significant between segments. 8 Summarized financial information concerning the Company's reportable segments is shown in the following table ($ in thousands).
Operating Non-Operating Discontinued Disposal Disposal Processing and Facilities Facilities Field Services Corporate Total ----------------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED SEPTEMBER 30, 2003 ------------------------------------- Revenue $ 17,319 $ 5 $ -- $ -- $ 17,324 Direct operating cost 10,260 123 -- -- 10,383 --------------- ---------------- ---------------- ----------- --------- Gross profit (loss) 7,059 (118) -- -- 6,941 S,G&A 1,820 1 -- 1,481 3,302 --------------- ---------------- ---------------- ----------- --------- Income (loss) from operations 5,239 (119) -- (1,481) 3,639 Interest expense (income) 1 -- -- (253) (252) Other income (1) 21 -- -- 20 --------------- ---------------- ---------------- ----------- --------- Income (loss) before income tax and discontinued operations 5,237 (98) -- (1,228) 3,911 Income tax expense -- -- -- 18 18 Discontinued operations (15) -- (400) -- (415) --------------- ---------------- ---------------- ----------- --------- Net Income (loss) 5,222 (98) (400) (1,246) 3,478 =============== ================ ================ =========== ========= Depreciation, amortization, and accretion $ 1,495 $ 4 $ -- $ 10 $ 1,509 Capital Expenditures $ 1,790 $ -- $ -- $ -- $ 1,790 Total Assets $ 41,021 $ 6,517 $ 4,099 $ 16,724 $ 68,361 ----------------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED SEPTEMBER 30, 2002 (RESTATED) ------------------------------------------------ Revenue $ 10,954 $ 94 $ -- $ -- $ 11,048 Direct operating cost 5,953 464 -- -- 6,417 --------------- ---------------- ---------------- ----------- --------- Gross profit (loss) 5,001 (370) -- -- 4,631 S,G&A 1,560 (42) -- 1,089 2,691 --------------- ---------------- ---------------- ----------- --------- Income (loss) from operations 3,441 (412) -- (1,089) 1,940 Interest expense (income) 214 -- -- -- 214 Other income (expense) 32 2 -- 1 35 --------------- ---------------- ---------------- ----------- --------- Income (loss) before income tax and discontinued operations 3,259 (410) -- (1,088) 1,761 Income tax expense (benefit) -- -- -- (226) (226) Discontinued operations 273 -- (1,194) -- (921) --------------- ---------------- ---------------- ----------- --------- Net Income (loss) $ 3,532 $ (410) $ (1,194) $ (862) $ 1,066 =============== ================ ================ =========== ========= Depreciation, amortization, and accretion $ 1,571 $ 114 $ 137 $ 17 $ 1,839 Capital Expenditures $ 708 $ 6 $ 79 $ 30 $ 823 Total Assets $ 46,214 $ 27,544 $ 7,840 $ 5,823 $ 87,421
Operating Non-Operating Discontinued Disposal Disposal Processing and Facilities Facilities Field Services Corporate Total ----------------------------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, 2003 ------------------------------------ Revenue $ 40,055 $ 60 $ -- $ -- $ 40,115 Direct operating cost 22,071 352 -- -- 22,423 --------------- ---------------- ---------------- ----------- --------- Gross profit (loss) 17,984 (292) -- -- 17,692 S,G&A 5,477 1,802 -- 3,809 11,088 --------------- ---------------- ---------------- ----------- --------- Income (loss) from operations 12,507 (2,094) -- (3,809) 6,604 Interest expense (income) 39 -- -- (154) (115) Other Income (expense) 28 85 -- -- 113 9 Write off of Ward Valley facility -- 20,951 -- -- 20,951 --------------- ---------------- ---------------- ----------- --------- Income (loss) before income tax and discontinued operations 12,496 (22,960) -- (3,655) (14,119) Income tax expense (benefit) -- -- -- 73 73 Discontinued operations 4,945 -- (2,429) -- 2,516 --------------- ---------------- ---------------- ----------- --------- Net Income (loss) 17,441 (22,960) (2,429) (3,728) (11,676) =============== ================ ================ =========== ========= Depreciation, amortization, and accretion $ 5,398 $ 6 $ -- $ 30 $ 5,434 Capital Expenditures $ 5,853 $ 23 $ 451 $ -- $ 6,327 Total Assets $ 41,021 $ 6,517 $ 4,099 $ 16,724 $ 68,361 ----------------------------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, 2002 (RESTATED) ----------------------------------------------- Revenue $ 34,803 $ 274 $ -- $ -- $ 35,077 Direct operating cost 17,389 1,044 -- -- 18,433 --------------- ---------------- ---------------- ----------- --------- Gross profit (loss) 17,414 (770) -- -- 16,644 S,G&A 5,656 97 -- 2,686 8,439 --------------- ---------------- ---------------- ----------- --------- Income (loss) from operations 11,758 (867) -- (2,686) 8,205 Interest expense 655 -- -- 40 695 Other income (expense) 67 (485) -- 128 (290) --------------- ---------------- ---------------- ----------- --------- Income (loss) before income tax, discontinued operations and cumulative effect of change in accounting principle 11,170 (1,352) -- (2,598) 7,220 Income tax expense (benefit) -- -- -- (226) (226) Discontinued operations 497 -- (1,898) -- (1,401) Cumulative effect of change in accounting principle $ 14,983 $ 1,548 $ (3,390) $ -- $ 13,141 --------------- ---------------- ---------------- ----------- --------- Net Income (loss) $ 26,650 $ 196 $ (5,288) $ (2,372) $ 19,186 =============== ================ ================ =========== ========= Depreciation, amortization, and accretion $ 4,689 $ 343 $ 406 $ 49 $ 5,487 Capital Expenditures $ 2,279 $ 6 $ 314 $ 30 $ 2,629 Total Assets $ 46,214 $ 27,544 $ 7,840 $ 5,823 $ 87,421
NOTE 5. STOCK OPTION PLANS The Company has two stock-based compensation plans, which are accounted for under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees and related Interpretations. No stock-based employee compensation cost is reflected in net income. The following table illustrates the effect on net income and earnings per share if the Company applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based compensation for the three and nine months ended September 30, 2003 and 2002:
Three Months Ended Nine Months Ended ----------------------- ----------------------- 2003 2002 2003 2002 ---------- ----------- ---------- ----------- Net income (loss), as reported $ 3,478 $ 1,066 $ (11,676) $ 19,186 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (127) (47) (885) (283) ---------- ----------- ---------- ----------- Pro forma net income (loss) $ 3,351 $ 1,019 $ (12,561) $ 18,903 ========== =========== ========== =========== EARNINGS (LOSS) PER SHARE: Basic - as reported $ .21 $ .06 $ (.71) $ 1.33 ========== =========== ========== =========== Basic - pro forma $ .20 $ .06 $ (.77) $ 1.31 ========== =========== ========== =========== Diluted - as reported $ .20 $ .06 $ (.71) $ 1.19 ========== =========== ========== =========== Diluted - pro forma $ .19 $ .06 $ (.77) $ 1.17 ========== =========== ========== ===========
10
The stock option plan summary and changes during the three and nine months ended September 30 are as follows: Three Months Ended Nine Months Ended ------------------------ ------------------------ 2003 2002 2003 2002 ----------- ----------- ----------- ----------- Options outstanding, beginning of period 1,470,724 954,150 753,150 1,128,650 Granted -- 17,500 813,724 147,500 Exercised -- (105,500) (68,500) (107,500) Canceled (2,000) (101,000) (29,650) (403,500) ----------- ----------- ----------- ----------- Options outstanding, end of period 1,468,724 765,150 1,468,724 765,150 =========== =========== =========== =========== Weighted average exercise price of options, beginning of period $ 3.90 $ 3.08 $ 3.42 $ 2.90 Weighted average exercise price of options granted $ -- $ 2.66 $ 4.30 $ 1.92 Weighted average exercise price of options exercised $ -- $ 1.27 $ 1.68 $ 1.29 Weighted average exercise price of options canceled $ 2.30 $ 1.27 $ 7.35 $ 2.16 Weighted average exercise price of options, end of period $ 3.90 $ 3.56 $ 3.90 $ 3.56 Options exercisable at end of period 936,692 764,650 936,692 764,650 =========== =========== =========== =========== Options available for future grant at end of period 418,776 1,191,850 418,776 1,191,850 =========== =========== =========== ===========
The following table summarizes stock options outstanding under the Company's option plans as of September 30, 2003:
Weighted average Weighted Weighted remaining average average Range of exercise contractual life Number exercise price Number exercise price price per share (years) outstanding per share exercisable per share ------------------ ----------------- ----------- --------------- ----------- --------------- $1.00 - $1.47 3.7 119,500 $ 1.33 119,500 $ 1.33 $1.60 - $2.25 6.4 127,000 $ 1.99 127,000 $ 1.99 $2.42 - $3.50 8.6 461,329 $ 2.94 271,769 $ 2.89 $3.75 - $5.00 7.6 532,884 $ 4.30 311,731 $ 4.15 $6.50 9.4 173,011 $ 6.50 51,692 $ 6.50 $10.13 0.7 55,000 $ 10.13 55,000 $ 10.13 ----------- ----------- 1,468,724 936,692 =========== ===========
As of September 30, 2003, the 1992 Stock Option Plan for Employees had options outstanding to purchase 943,724 common shares with 98,076 shares remaining available for issuance under option grants. The 1992 Stock Option Plan for Directors had options outstanding to purchase 525,000 common shares with 320,700 shares remaining available for issuance under option grants. The fair value of each option grant is estimated using the Black-Scholes option-pricing model with 2003 assumptions of a ten year option term, volatility of 83-105% and a discount rate of 3.75-4.25%. NOTE 6. INCOME TAXES Income tax expense differs from that calculated using applicable income tax 11 rates to pretax income due primarily to the presence of net operating loss carry-forwards and a valuation allowance. The Company has historically recorded a valuation allowance for certain deferred tax assets due to inherent uncertainties regarding future operating results, and limitations on utilization of acquired net operating loss carry forwards for tax purposes. The realization of a significant portion of net deferred tax assets is based in part on the Company's estimates of the timing of reversals of certain temporary differences and on the generation of taxable income before such reversals. During 2002, the Company reevaluated the deferred tax asset valuation allowance and determined it was "more likely than not" that a portion of the deferred tax asset would be realizable. Consequently, the Company decreased the portion of the valuation allowance related to its operating facilities. The Company's net operating loss ("NOL") carry forward is approximately $44,000,000 at September 30, 2003. Of this carry forward, approximately $2,745,000 is limited pursuant to the net operating loss limitation rules of Internal Revenue Code Section 382 and begins to expire in 2006. The remaining unrestricted net operating loss carry forward expires at various dates between 2010 and 2020 At September 30, 2003, the Company had approximately $24,000,000 of deferred tax assets and a corresponding valuation allowance of $15,761,000, leaving a net deferred tax asset of $8,284,000 representing the expected utilization of deferred tax assets in the foreseeable future. On March 26, 2003, the Company wrote off $20,951,000 in Ward Valley, California disposal site development costs and therefore does not expect to realize previously estimated taxable income in 2003. Management expects the $8,284,000 of deferred tax asset to be realized in years subsequent to 2003, and has classified the total net deferred tax asset as a long term asset on its balance sheet. NOTE 7. LITIGATION Significant developments have occurred on the following legal matters since December 31, 2002: US ECOLOGY, INC. V. THE STATE OF CALIFORNIA, ET AL., CASE NO.GIC747562, SUPERIOR --------------------------------------------------- COURT OF THE STATE OF CALIFORNIA FOR THE COUNTY OF SAN DIEGO In May 2000, subsidiary US Ecology, Inc., sued the State of California, et. al. ("the State") for monetary damages exceeding $162 million. The suit stems from the State's abandonment of the Ward Valley low-level radioactive waste ("LLRW") disposal project. California law requires the state to build a disposal site for LLRW produced in California, Arizona, North Dakota and South Dakota; member states of the Southwestern Compact. US Ecology was selected in 1985 to locate and license the site using its own funds on a reimbursable basis. In 1993, US Ecology obtained a license from the State and entered a ground lease. The State successfully defended the license against court challenges and, until Governor Gray Davis took office, actively pursued conveyance of the site from the federal government. In September 2000, the Superior Court granted California's motion to dismiss all causes of action, which the Company appealed. In September 2001, the California Fourth Appellate District Court remanded the case for trial on promissory estoppel grounds. The case was tried in Superior Court for the County of San Diego during February and March 2003. On March 26, 2003, the Superior Court issued a Statement of Decision finding that the Company failed to establish causation and that its claim is further barred by the doctrine of unclean hands. The latter finding was based on actions the Court concluded had created obstacles to an agreement between the federal government and the State to convey the site. The Court also found that key elements of the Company's promissory estoppel claim had been proven at trial. Specifically, the Court ruled that the State made a clear and unambiguous promise to US Ecology in 1988 to use its best efforts to acquire the site, that Governor Davis' administration abandoned this promise, and that the Company's reliance on the State's promise was reasonable and foreseeable. However, the Court found that the State's breach of its best efforts promise was not a substantial factor in causing damages to US Ecology since the federal government had continued to resist the land transfer. Based on the uncertainty of recovery following the trial court's adverse 12 decision, the Company wrote off the $20,951,000 deferred site development asset at March 31, 2003. On May 2, 2003, the Company filed a motion to vacate and enter new judgment with the trial court, arguing that the March 26 decision misapplied the law to the facts. On May 30, 2003, this motion was denied without comment. On June 26, 2003, the Company filed a notice of appeal with the California Fourth Appellate District Court. The Company's financial interest in the pending claim against the State was improved by an amendment to the November 13, 1998 Ward Valley Interest Agreement and Assignment entered into by American Ecology and its former primary lender. This June 27, 2003 amendment, entered into by the Company and the successor in interest to that lender, 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. Thereafter, any remaining amount recovered shall be divided equally between the Company and the former lender. The 1998 agreement had provided that the first $29.6 million less up to $1.0 million in legal fees and expenses would be owed to the former lender, with any remaining recovery reserved to the Company. In early July, the Company engaged the law firm of Cooley Godward on a fixed price plus contingency basis to pursue the appeal, paying the fixed fee at the time of engagement. A briefing schedule has not been set. No assurance can be given that the Company will prevail on appeal or reach a settlement to recover any portion of its investment. MANCHAK V. US ECOLOGY, INC., U.S. DISTRICT COURT FOR THE DISTRICT OF NEVADA, -------------------------------- CIVIL ACTION NO. 96-494. In March 1996, Frank Manchak, Jr. ("Plaintiff" or "Manchak") filed suit alleging infringement of a sludge treatment patent to stabilize hazardous waste at the Company's Beatty, Nevada hazardous waste disposal facility. Plaintiff sought unspecified damages for infringement, treble damages, interest, costs and attorney fees. On October 17, 2002, the US District Court for the District of Nevada granted the Company's motion for summary judgment to dismiss the suit. Manchak's motion for reconsideration was denied on January 8, 2003. Manchak appealed; however, plaintiff failed to timely file its appellant's brief and the Company moved to dismiss the appeal. On July 2, 2003, the US Court of Appeals for the Federal Circuit granted the Company's motion to dismiss, and denied plaintiff's request for an extension of time and relief from page/word brief limitations. On July 20, 2003 the plaintiff filed a motion for reconsideration with the appellate court and later filed for en banc review by the Court of Appeals for the Federal Circuit. Both the motion for reconsideration and en banc review were denied by the Court of Appeals on September 3, 2003. The Company considers the matter closed. ENTERGY ARKANSAS, INC. ET AL, CENTRAL INTERSTATE LOW-LEVEL RADIOACTIVE WASTE -------------------------------------------------------------------------------- COMMISSION AND US ECOLOGY, INC. ("PLAINTIFFS") V. STATE OF NEBRASKA, ET AL., ------------------------------------------------------------------------------ CASE NO. 4:98CV3411, U.S. DISTRICT COURT, DISTRICT OF NEBRASKA This action was brought in federal court in December of 1999 by electric utilities that generate low-level radioactive waste ("LLRW") within the Central Interstate Low-Level Radioactive Waste Compact (CIC). CIC member states are Nebraska, Kansas, Oklahoma, Arkansas, and Louisiana. The action seeks declaratory relief and damages for bad faith in the State of Nebraska's processing and ultimate denial of US Ecology's application to site, develop and operate a LLRW disposal facility near Butte, Nebraska. US Ecology is the CIC's contractor and developer. The CIC was originally named as a defendant and subsequently realigned as a plaintiff. US Ecology intervened as a plaintiff. The CIC sought to recover contributions made by the utilities and US Ecology to the CIC for pre-licensing project costs of approximately $95 million and $6.2 million, respectively, and removal of the State of Nebraska from the licensing process. The Eighth Circuit Court of Appeals subsequently dismissed the utilities' and US Ecology's independent claims against Nebraska for breach of the good faith provision of the Compact, and for denial of due process based on sovereign immunity. The utilities and US Ecology subsequently filed cross claims against the CIC for breach of contract and the imposition of a constructive trust. On September 30, 2002, the US District Court for the District of Nebraska entered judgment against Nebraska in favor of the CIC for $153 million, including approximately $50 million for prejudgment interest. Of this amount, US Ecology's share was for a $6.2 million contribution and $6.1 for prejudgment interest. The $6.2 million contribution is included in the balance sheet amount of $6,478,000 of capitalized facility development costs. The Court also dismissed the utilities' and US Ecology's cross claims for breach of contract and imposition of a constructive trust, finding that it was premature to decide 13 the merits of these claims and leaving the question open for future resolution if necessary. The State appealed the judgment to the Eighth Circuit Court of Appeals. The case was argued before the Eighth Circuit on June 12, 2003. No assurance can be given that the trial court's decision will be affirmed on appeal or that US Ecology will recover its contributions or interest thereon. MATTIE CUBA, ET AL. V. AMERICAN ECOLOGY ENVIRONMENTAL SERVICES CORPORATION, ET -------------------------------------------------------------------------------- AL., CAUSE NO. 2000-092, 4TH JUDICIAL DISTRICT COURT, RUSK COUNTY, TEXAS ---- This suit was brought in November 2000 by 28 named plaintiffs against the Company and named subsidiaries, the former owners and approximately 60 former customers of its Winona, Texas facility. Plaintiffs seek recovery for personal injuries, property damages and exemplary damages based on negligence, gross negligence, nuisance and trespass. The Company filed a motion for summary judgment in July 2002 based on lack of evidence. In November 2002, the trial court granted partial summary judgment, dismissing certain causes of action and reducing the number of plaintiffs, but preserving other causes of action. The Company subsequently filed a motion for summary judgment seeking dismissal against all of the adult plaintiffs on statute of limitations grounds. On March 26, 2003, the court granted this motion and dismissed the adult plaintiffs. Seven minors and one intervenor remain party to the lawsuit. The Company believes plaintiffs' remaining case is without merit and will continue to vigorously defend the matter. No assurance can be given that the Company will prevail or that the matter can be favorably resolved. The Company's current insurance carrier is paying for defense of this matter subject to the Company's $250,000 deductible, which has been fully accrued in prior periods. NOTE 8. COMMITMENTS AND CONTINGENCIES Effective January 1, 2003, the Company established the American Ecology Corporation Management Incentive Plan. The Plan provides for selected participants to receive bonuses based on pre-tax operating income levels. Bonuses under the plan are to be paid out over three years with maximum bonus payments in any one year of $1,125,000 if pre-tax operating income exceeds $12,000,000. In February 2003, the Company entered into employment agreements with four executive employees. The agreements expire December 31, 2004 and 2005, and provided for aggregate minimum annual salaries of $639,000. On September 30, 2003, the Company terminated the employment of one of the four executives and recognized $235,000 in expenses for payroll and related benefits. At September 30, 2003 the commitment for the three remaining employment contracts is for aggregate minimum annual salaries of $484,000. The Company's primary financial assurance policies expired on September 27, 2003, but were extended to December 19, 2003. As part of the extension, the Company was required to increase the collateral for the policies from $1,150,000 to $3,258,000. The Company issued an irrevocable standby letter of credit in favor of the insurance company to meet its collateral obligation. The Company is negotiating with the insurance company to extend the financial policies. If the current policies are not renewed or replaced by December 19, 2003, the insurance company may require additional collateral. No assurance can be given that the Company will reach agreement with the insurance company. While the Company has been negotiating with the insurance company for renewal of the financial assurance policies, the total value of the policies has decreased from $51,000,000 at December 31, 2002 to $32,000,000 at September 30, 2003 due to the sale of the Company's El Centro Municipal Landfill, and performance of closure work at several Company facilities covered by the financial assurance. The Company's contract with the US Army Corps of Engineers (USACE) expires during the second quarter of 2004 unless extended for an additional 5 years at the option of the USACE. While the Company believes that the USACE will extend the contract for an additional 5 years, there is no assurance that the contract will be extended. NOTE 9. ACCOUNTING CHANGES AND RESTATEMENT Effective January 1, 2002, the Company implemented Statement of Financial 14 Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" (FAS 143) under the early adoption provisions. FAS 143 requires a liability to be recognized as part of the fair value of future asset retirement obligations, and an associated asset to be recognized as part of the carrying amount of the underlying asset. Previously the Company recorded a closure and post closure obligation for the pro-rata amount of space used of the total permitted space available. On January 1, 2002, in accordance with FAS 143, this obligation was valued at the current closure cost, increased by a cost of living adjustment for the estimated time of payment, and discounted back to its present value. In further accordance with FAS 143, upon calculation of the asset retirement obligation the Company also recorded an associated asset for the retirement obligation. This asset is amortized over the estimated useful life of the related long-lived asset. FAS 143 allows aggregation of certain assets in calculating and subsequently amortizing this asset. During the fourth quarter of 2002, the Company reassessed its methodology for applying FAS 143 and disaggregated certain individual facility assets. In recalculating the overall asset under the revised methodology, the Company recorded a $3,182,000 reduction with no corresponding change in the recorded liability. Consequently, the initial 2002 gain on implementation of the new accounting standard recorded in the first quarter of 2002 was reduced by $3,182,000, and the amortization associated with the asset was reduced from what was previously recorded during the first three quarters of 2002. The following restatements were made to account for this change in FAS 143 implementation methodology (in thousands):
3 Months Ending Nine Months Ending September 30, 2002 September 30, 2002 ------------------- -------------------- Reported Net Income $ 1,032 $ 22,284 Effect of Restatement: Cumulative Effect of Accounting Change -- (3,182) Amortization 34 84 ------------------- -------------------- Restated Net Income $ 1,066 $ 19,186 =================== ==================== Reported Diluted EPS $ .06 $ 1.39 Effect of Restatement: Cumulative Effect of Accounting Change -- (.20) Amortization -- .01 ------------------- -------------------- Restated EPS $ .06 $ 1.20 =================== ====================
NOTE 10. CLOSURE AND POST CLOSURE OBLIGATIONS Closure and post closure obligations are recorded when environmental assessments and/or remedial actions 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 its accruals for estimated post-closure, remediation and other costs when necessary. The Company's recorded liabilities are based on best estimates of current costs and are updated periodically to reflect current technology, laws and regulations, inflation and other economic factors. Changes to reported closure and post closure obligations were as follows (in thousands):
Accrued Closure and Closure Obligation of Assets Total Closure and Post Post Closure Obligation Held for Sale or Closure Closure Obligations ------------------------- ------------------------------ ------------------------ December 31, 2002 obligation $ 10,200 $ 6,560 $ 16,760 Accretion of obligation 716 85 801 Payment of obligation (803) (461) (1,264) Adjustment of obligation 133 (1,107) (974) ------------------------- ------------------------------ ------------------------ September 30, 2003 obligation $ 10,246 $ 5,077 $ 15,323 ========================= ============================== ========================
On February 13, 2003, the Company sold substantially all of the assets of the El Centro landfill. The sale included transfer of the accrued landfill closure and post closure obligation, which was $1,107,000 at the date of the sale. 15 At September 30, 2003, $244,000 of pledged cash and investment securities were legally restricted. The pledged cash has been set aside to settle any closure and post closure obligations that are not directly paid by the Company. NOTE 11. OPERATING LEASE BUY OUT On August 3, 2000, the Company entered into a $2,000,000 equipment sale and leaseback transaction based on the sale of specified equipment and rolling stock to a third party lessor. The Company received $2,000,000 in proceeds from the asset sale and entered into an operating lease for the use of the equipment beginning August 8, 2000 with monthly payments scheduled through September 8, 2006. The Company realized a $1,098,000 gain on the sale of the equipment to be amortized over the life of the lease. On March 28, 2003 the Company exercised an early buyout of the operating lease for $1,159,000 and recorded equipment purchases with a book value of $702,000 along with a reduction in the deferred gain of $457,000. In conjunction with the early buyout, the Company recorded an impairment charge of $225,000 on certain equipment at the discontinued Oak Ridge facility. NOTE 12. DISCONTINUED OPERATIONS As of September 30, 2003, "Assets held for sale or closure" consisted of certain assets at the El Centro municipal waste disposal facility (which the Company sold to a wholly-owned subsidiary of Allied Waste Industries, Inc. on February 13, 2003), and the assets and liabilities of the discontinued Oak Ridge processing and field services operations classified as "Held for sale or closure". Accordingly, the revenue, costs and expenses and cash flows for each of these operations have been excluded from continuing operations results and reported as "Income (loss) from discontinued operations" and "Net cash used by discontinued operations". Prior periods have been restated to reflect the discontinued operations. The assets and liabilities of discontinued operations included within the consolidated balance sheet as of September 30, 2003 are as follows (in thousands):
Processing and Field El Centro Disposal Total Assets Held Services Facility Facility for Sale or Closure --------------------- ------------------- -------------------- Current assets -------------- Current assets $ 1,058 $ 235 $ 1,293 Property & equipment, net 552 -- 552 --------------------- ------------------- -------------------- 1,610 235 1,845 ===================== =================== ==================== Non-current assets ------------------ Property, plant & equipment, net 1,509 -- 1,509 Other 48 697 745 --------------------- ------------------- -------------------- 1,557 697 2,254 ===================== =================== ==================== Current liabilities ------------------- Accounts payable & accruals 3,624 -- 3,624 Current portion long term debt 38 -- 38 --------------------- ------------------- -------------------- 3,662 -- 3,662 ===================== =================== ==================== Non-current liabilities ----------------------- Closure/post closure obligations 5,077 -- 5,077 Long-term debt 33 -- 33 Other 4 -- 4 --------------------- ------------------- -------------------- 5,114 -- 5,114 ===================== =================== ====================
Operating results for the discontinued operations were as follows for three and nine months ending September 30:
Processing and Field El Centro Disposal Total Discontinued ($in thousands) Services Operations Facility Operations ---------------------- -------------------- -------------------- Three Months Ending September 30, 2003 -------------------------------------- Revenues, net $ (22) $ (7) $ (29) Operating income (loss) (556) (15) (571) Net income (loss) (400) (15) (415) 16 Basic earnings (loss) per share (.02) -- (.02) Diluted earnings (loss) per share (.02) -- (.02) Three Months Ending September 30, 2002 -------------------------------------- Revenues, net $ 4,105 $ 620 $ 4,725 Operating income (loss) (614) 188 (426) Net income (loss) (1,194) 273 (921) Basic earnings (loss) per share (.08) .02 (.06) Diluted earnings (loss) per share (.08) .02 (.06) Nine Months Ending September 30, 2003 ------------------------------------- Revenues, net $ 1,997 $ 462 $ 2,488 Operating income (loss) (2,349) 59 (1,719) Net income (loss) (2,429) 4,945 2,931 Basic earnings (loss) per share (.14) .29 .18 Diluted earnings (loss) per share (.14) .29 .18 Nine Months Ending September 30, 2002 ------------------------------------- Revenues, net $ 14,018 $ 1,836 $ 15,854 Operating income (loss) (1,093) 483 (610) Net income (loss) (1,898) 497 (1,401) Basic earnings (loss) per share (.12) .03 (.09) Diluted earnings (loss) per share (.12) .03 (.09)
El Centro Disposal Facility. On February 13, 2003, the Company sold its El ------------------------------ Centro municipal and industrial waste landfill to a subsidiary of Allied Waste Industries, Inc. ("Allied") for $10 million cash at closing and future volume-based royalty payments. Under the Agreement, Allied will pay the Company minimum royalties of at least $215,000 annually. Once Allied has paid the Company $14,000,000 in royalties, it will no longer be obligated to pay minimum annual royalties, but will still be required to pay royalties if disposal volumes exceed the minimum volume threshold. The Purchase Agreement provides incentives for Allied to bring Texas Class 1 industrial waste to the Company's adjacent hazardous waste facility. The Company sold $7,047,000 of property and equipment in exchange for $10,000,000 of cash, royalties valued at $858,000, and the assumption by Allied of $1,098,000 of closure liabilities. A gain of $4,909,000 was recognized in discontinued operations related to this sale. The royalties, valued at $858,000, represent the present value of 5 years of minimum royalty payments. Annual payments in excess of $215,000 or payments subsequent to 2007 would be included in Other Income at the time of receipt. This royalty represents substantially all of the assets held by the discontinued El Centro disposal facility. Royalty payments are expected to be received for at least five years. After fiscal year 2003, the El Centro disposal facility should realize interest income and other income from the royalty payments which would not be classified as discontinued operations due to their recurring nature. The $92,000 in royalties received since the sale has been recorded as a reduction in the royalties due. For segment reporting purposes, El Centro landfill operating results were previously classified as "Operating Disposal Facilities". Oak Ridge Processing Facility and Field Services. During 2002, the Company ----------------------------------------------------- offered for sale its LLRW Processing Facility and Field Services operations based in Oak Ridge, TN, but was unable to consummate a sale based on continued commercial operations. On December 27, 2002, the Company discontinued commercial waste processing. Since then, the Company has removed accumulated waste from the facility and undertaken extensive radiological surveys to improve the facility's marketability. All customer waste was removed by July 2003. Radiological survey work was nearing completion at September 30, 2003. Detailed information on the 17 amount and character of waste removed was used to refine initial cost estimates. This resulted in an additional accrual of $911,000 for the three months ending March 31, 2003, $465,000 for the three months ending June 30, 2003 and $0 for the three months ending September 30, 2003. On June 10, 2003, the Company entered into a non-binding letter of intent with a potential buyer based on sale of the Oak Ridge facility's assets, including certain licenses, buildings and equipment, for a nominal sales price along with buyer assumption of specified liabilities. On November 3, 2003 the parties extended the non-binding letter of intent until December 3, 2003. There is no assurance that the Company will be able to sell the Oak Ridge facility on terms favorable to the Company. On March 28, 2003, the Company recorded an additional impairment charge of $225,000 on certain Oak Ridge equipment acquired under the early buyout of an operating lease. On December 27, 2002, management informed all 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 of 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 the facility for sale during the three and nine months ended September 30, 2003 are summarized as follows: (in thousands $000)
Three Months Nine Months ------------- ------------ Net operating costs in excess of previous accrual $ 400 $ 828 Additional impairment of property and equipment -- 225 Increase in estimated cost for disposal of waste at facility -- 1,376 ------------- ------------ Disposal costs for the period ended September 30, 2003 $ 400 $ 2,429 ============= ============
Cost changes for Oak Ridge facility on-site activities and disposal liabilities for removed wastes are as follows:
($in thousands) December 31, 2002 Cash Payments Adjustments September 30, 2003 ----------------- -------------- ----------- ------------------ Waste disposal liability 1,827 (3,089) 3,923 2,661 On-site discontinued operation cost liability 1,800 (2,296) 828 332
The adjustments represent differences between the estimated costs accrued at December 31, 2002, actual costs incurred during 2003, and changes in estimated future costs for 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. NOTE 13. FACILITY DEVELOPMENT COSTS The Company is involved in litigation requiring estimates of timing and loss potential whose disposition is controlled by the judicial process. During the quarter ended March 31, 2003, the Company wrote off its entire $20,951,000 Ward Valley deferred site development asset following an adverse trial court decision which cast substantial doubt on the Company's ability to recover its investment. Decisions to accrue costs or write off assets are based on specific facts and circumstances pertaining to each case and management's evaluation of present circumstances. See Note 7. 18 The Company continues to believe that the facility development costs which were capitalized for development of the proposed Butte, Nebraska disposal facility will be realized, although no assurance can be given that a favorable trial court decision will be affirmed on appeal. See Note 7. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. This document contains forward-looking statements that involve known and unknown risks and uncertainties which may cause actual results in future periods to differ materially from those indicated herein. These risks include, but are not limited to, the ability to sell Oak Ridge processing facility assets, compliance with and changes to applicable laws, regulations and permits, exposure to litigation, access to capital, access to insurance and financial assurances, new technologies, competitive environment, labor disputes, general economic conditions, and loss or diminution of major contracts. The Form 10-K for the year ending December 31, 2002 contains additional risk factors and an expanded disclosure of these risks. When the Company uses words like "will", "may," "believes," "expects," "anticipates," "should," "estimates," "project," "plans," their opposites and similar expressions, the Company is making forward-looking statements. These terms are most often used in statements relating to business plans, strategies, anticipated benefits or projections about the anticipated revenues, earnings or other aspects of our operating results. The Company makes these statements in an effort to keep stockholders and the public informed about our business based on management's current expectations about future events. Such statements should be viewed with caution and are not guarantees of future performance or events. As noted elsewhere in this report, our business is subject to uncertainties, risks and other influences, many of which the Company has no control over. Additionally, these factors, either alone or taken together, could have a material adverse effect on the Company and could change whether any forward-looking statement ultimately turns out to be true. The Company undertakes no obligation to publicly release updates or revisions to these statements. The following discussion should be read in conjunction with the audited consolidated financial statements and the notes thereto filed on Form 10-K for the year ending December 31, 2002. Unless otherwise described, changes discussed relate to the increase or decrease from the three and nine month period ended September 30, 2002 to the three and nine month period ended September 30, 2003. INTRODUCTION ------------ The Company is a hazardous, PCB, industrial and radioactive waste management company providing transportation, treatment and disposal services to commercial and government entities including, but not limited to, nuclear power plants, petro-chemical refineries, steel mills, the U.S. Department of Defense, biomedical facilities, universities and research institutions. The majority of its revenues are derived from fees charged for use of the Company's four fixed waste disposal facilities. The Company and its predecessors have been in business for 51 years. OVERALL COMPANY PERFORMANCE --------------------------- The Company's financial performance for the three and nine months ended September 30, 2003 was substantially different than the first three and nine months of 2002. Quarter to quarter comparisons are difficult and are materially affected by a series of events that include a large single event project undertaken in early 2002 at the Company's Richland, Washington facility, a large, single event project started in August 2003 at the Company's Grand View, Idaho facility, unusually high litigation expenses in early 2003 and related write off, costs to discontinue the Company's Oak Ridge, Tennessee low-level radioactive waste processing businesses, a gain on sale of the El Centro landfill assets in early 2003, and changes in accounting standards. These events are discussed in more detail below. Ward Valley Litigation Expenses: Due to the adverse California state court ---------------------------------- decision on March 26, 2003, the Company wrote off $20,951,000 of facility development costs for the Ward Valley project. This is reported as Loss on write off of Ward Valley facility development costs in the Consolidated Statement of Operations. Litigation and related costs totaling $0 and $1,786,000 were incurred and included in SG&A during the three and nine months, respectively, ending September 30, 2003. The Company has appealed the Ward Valley ruling. Minimal future costs are expected based on a fixed price legal representation agreement entered and paid in July, 2003 for this appeal. 19 Army Corps of Engineers Fort Greely, Alaska Project: The Company performed a ------------------------------------------------------- large waste packaging and disposal project at its Richland, Washington facility during the quarter ended March 31, 2002. This represented 29% of first quarter 2002 revenues and produced significantly higher quarterly earnings for the Richland operation. New Jersey PCB Clean-up Project: The Company's Grand View, Idaho facility is -------------------------------- performing an approximately $10,000,000 transportation and disposal project in the third and fourth quarters of 2003. This project represented $5,400,000 or 31% of third quarter 2003 revenues. FAS 143: The Company implemented FAS 143 on January 1, 2002. FAS 143 requires a -------- liability to be recognized as part of the fair value of future asset retirement obligations and an associated asset to be recognized as part of the carrying amount of the underlying asset. The implementation of FAS 143 resulted in a $13,141,000 cumulative effect of change in accounting principle gain during the quarter ended March 31, 2002. Sale of El Centro: On February 13, 2003, the Company sold the El Centro --------------------- municipal waste landfill to Allied Waste and recognized a $4,909,000 gain on sale. This gain was included in discontinued operations during the quarter ended March 31, 2003. Oak Ridge Disposal Plan: On December 27, 2002, the Company discontinued --------------------------- operations at the Oak Ridge facility and recognized $7,018,000 of additional estimated costs to implement its asset and liability disposal plan. During the three and nine months ended September 30, 2003, the Company identified and incurred an additional $400,000 and $2,429,000, respectively, in costs to remove waste from the facility and prepare the facility for sale. This primarily reflects pricing information on the specific quantity and type of waste which became known when the wastes were prepared for shipment to off-site service providers. The Company's contract with the US Army Corps of Engineers (USACE) expires during the second quarter of 2004 unless extended for an additional 5 years at the option of the USACE. While the Company believes that the USACE will extend the contract for an additional 5 years, there is no assurance that the contract will be extended. A significant portion of the Company's revenue is attributable to discrete waste clean-up projects ("Event Business"). 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 customer business ("Base Business") while simultaneously securing Event Business. When the Company's Base Business covers fixed costs, much of the Event Business revenue falls through to the bottom line. This strategy, which takes advantage of the high fixed cost nature of the business, was demonstrated in the three months ending September 30, 2003 when the large event project undertaken by the Company's Grand View, Idaho facility contributed significantly to earnings. CRITICAL ACCOUNTING POLICIES ------------------------------ In preparing the financial statements, management makes many estimates and assumptions that affect the Company's financial position and results of operations. Disposal Facility Accounting, Accounting for Discontinued Operations, Litigation, Income Taxes, and Project Accounting involve subjective judgments, estimates and assumptions that would likely produce a materially different financial position and result of operations if different judgments, estimates, or assumptions were used. These matters are discussed below. DISPOSAL FACILITY ACCOUNTING In general terms, a disposal cell development asset exists for the cost of building usable disposal space and a closure liability exists for closing, maintaining and monitoring the disposal unit once this space has been filled. Major assumptions and judgments used to calculate cell development assets and closure liabilities are as follows: - Personnel and equipment costs incurred to construct disposal cells are capitalized as a cell development asset. - The cell development asset is amortized as each available cubic yard of disposal space is filled. Periodic independent engineering 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. 20 - 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. ACCOUNTING FOR DISCONTINUED OPERATIONS Accounting for discontinued operations requires numerous subjective and complex judgments, estimates and assumptions that materially affect financial results and position of discontinued operations. At December 27, 2002, the Company discontinued operation of its former Processing and Field Services segment in Oak Ridge, Tennessee facility. The discontinued operations were accounted for under Emerging Issues Task Force ("EITF") 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 when the decision to exit the segment was made. EITF 94-3 was chosen as the guiding literature rather than Statement of Financial Accounting Standards No. 146 Accounting for Costs Associated with Exit or Disposal Activities (FAS 146), which requires a liability to be recognized at the time that the liability is incurred. FAS 146 is required for exit activities entered into after December 31, 2002 but was optional for exit activities prior to December 31, 2002. Approximately $1,800,000 of liabilities was recognized as of December 31, 2002 under EITF 94-3 that would not have been recognized until incurred had the Company adopted FAS 146 prior to December 27, 2002. The Company recognized $400,000 and $1,204,000 in incremental liabilities and $0 and $225,000 for impairment of equipment as of the three and nine months ending September 30, 2003, respectively, for discontinuation of its Oak Ridge LLRW Processing and Field Services operations. The Oak Ridge facility completed removal of customer waste in July 2003. Due to the ongoing nature of efforts to prepare the facility for sale, the cost estimate to exit from the segment may change further, potentially by a material amount. LITIGATION The Company is involved in litigation requiring estimates of timing and loss potential whose disposition is controlled by the judicial process. During the quarter ended March 31, 2003, the Company wrote off $20,951,000 due to an adverse trial court decision which cast substantial doubt on the Company's ability to recover its investment in the Ward Valley, California disposal project. 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. On September 30, 2002, the US District Court for the District of Nebraska entered judgment against Nebraska in favor of the CIC for $153 million, including approximately $50 million for prejudgment interest. Of this amount, US Ecology's share was for a $6.2 million contribution and $6.1 for prejudgment interest. The $6.2 million contribution is included in the balance sheet amount of $6,478,000 of capitalized facility development costs. The State appealed the judgment to the Eighth Circuit Court of Appeals. The case was argued before the Eighth Circuit on June 12, 2003. No assurance can be given that the trial court's decision will be affirmed on appeal or that US Ecology will recover its contributions or interest thereon. 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 and prospects for the Company's business, it would likely not utilize portions of the deferred tax assets prior to their expiration. The valuation allowance is based on management's contemporaneous evaluation of whether it is more likely than not that the Company will be able to utilize some, or all of the deferred tax assets. During 2002, the Company assessed the valuation 21 allowance and reversed approximately $8,284,000 of the valuation allowance that the Company expected to utilize in the foreseeable future. During the three months ended March 31, 2003, the Company reclassified the entire net deferred tax asset as long term, given that no taxable income is expected during 2003 following write off of the Ward Valley project. RESULTS OF OPERATIONS ----------------------- The following table presents, for the periods indicated, the operating costs as a percentage of revenues in the consolidated income statement:
Three Months Ended Nine Months Ended ------------------ ----------------- (Restated) (Restated) ---------- ---------- ($ in 000's) September 30, 2003 September 30, 2002 September 30, 2003 September 30, 2002 ---------------------- ----------------------- ----------------------- ----------------------- $ % $ % $ % $ % --------- ----------- ---------- ----------- ---------- ----------- ---------- ----------- Revenue 17,324 11,048 40,115 35,077 Direct operating costs 10,383 59.9% 6,417 58.1% 22,423 55.9% 18,433 52.6% --------- ---------- ---------- ---------- Gross profit 6,941 40.1% 4,631 41.9% 17,692 44.1% 16,644 47.4% SG & A 3,302 19.1% 2,691 24.4% 11,088 27.6% 8,439 24.1% --------- ---------- ---------- ---------- Income from operations 3,639 21.0% 1,940 17.6% 6,604 16.5% 8,205 23.4% Interest income 312 1.8% 7 0.1% 334 0.8% 31 0.1% Interest expense 60 0.3% 221 2.0% 219 0.5% 726 2.1% Loss on write off of Ward Valley -- 0.0% -- 0.0% 20,951 52.2% -- 0.0% Other income (expense) 20 0.1% 35 0.3% 113 0.3% (290) -0.8% --------- ---------- ---------- ---------- Net income (loss) before income taxes 3,911 22.6% 1,761 15.9% (14,119) -35.2% 7,220 20.6% Income tax expense 18 0.1% (226) -2.0% 73 0.2% (226) -0.6% --------- ---------- ---------- ---------- Net income (loss) before discontinued operations and cumulative effect of accounting change 3,893 22.5% 1,987 18.0% (14,192) -35.4% 7,446 21.2% ========= ========== ========== ==========
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 ------------------------------------------------------------ REVENUE ------- For the three months ended September 30, 2003, the Company reported consolidated revenue of $17,324,000, a 57% increase from the $11,048,000 reported for the same period in 2002. During the three months ending September 30, 2003 and 2002, $4,225,000 and $3,853,000 or 24% of revenue, represented work performed under contract with the U.S. Army Corps of Engineers. The Army and other federal agencies continue to ship waste under this contract to the Company's Grand View, Idaho facility. During the three months ending September 30, 2003, $5,400,000 or 31% of revenue, represented work performed under one contract for a New Jersey PCB clean-up project. Operating Disposal Facilities ------------------------------- The Richland, Washington LLRW disposal facility's revenue increased substantially for the three months ended September 30, 2003 above the same period in 2002. This increase in revenue was due to receipts of relatively higher levels of radiation in the waste shipments received. Also, while a significant portion of the Richland facility's revenue is regulated by the Washington Utilities and Transportation Commission, the facility accepts certain wastes that are not subject to rate regulation. Revenues from this non rate regulated waste increased. At the Grand View, Idaho disposal facility, revenue increased 96% from the same period last year. During the third quarter of 2003, the facility disposed of 77% more tons than the same period last year. Management expects the Army Corps of Engineers and other federal agencies to continue shipping to the facility under these contracts facility through the fourth quarter of 2003 and beyond. The New 22 Jersey PCB clean-up contract is expected to result in an additional $4,600,000 of revenue during the fourth quarter of 2003. At the Beatty, Nevada hazardous treatment and disposal facility, revenue decreased $538,000 for the three months ended September 30, 2003 from the same period in 2002, although revenue did increase from the second quarter of 2003. The lower revenue was primarily due to decreased waste volumes caused by general economic weakness and fewer projects to bid. However, the Company and the site did experience an increase in bid activity in the quarter. No assurance can be given that these bids will result in increased revenue in future periods At the Robstown, Texas hazardous treatment and disposal facility, revenue increased $440,000 for the three months ended September 30, 2003 over the same period in 2002. The increase in revenue and waste volume resulted from an increase in both Base and Event work performed during the quarter, as the Company began to see increased volume from remediation projects and increased activity from existing customers. DIRECT OPERATING COSTS ---------------------- For the three months ended September 30, 2003, consolidated direct operating costs increased 62% to $10,383,000 (60% of revenue) compared to $6,417,000 (58% of revenue) for the same period in 2002. The relatively higher direct operating costs reflect the low margin revenue on the New Jersey PCB clean-up project which was still very beneficial to the Company due to the size of the project. The Company continues its efforts to minimize direct costs through operational improvements. Operating Disposal Facilities ------------------------------- Direct costs at the Richland, Washington; Robstown, Texas; and Beatty, Nevada facilities essentially remained flat. The increase in consolidated direct operating costs for the Company were driven by an increase in direct costs at the Grand View, Idaho facility of $4,244,000. This increase was due to increased volumes of waste received and related transportation costs. Approximately $3,300,000 of the increase in direct operating costs at Grand View was for transportation costs related to the New Jersey PCB clean-up project. Non Operating Disposal Facilities ------------------------------------ Non Operating Disposal Facilities incur primarily engineering, laboratory and other contractor expenses and labor costs required to meet the Company's obligations subsequent to operational use. For the three months ended September 30, 2003 and 2002, the Company reported $8,000 and $344,000 of expenses related to litigation on proposed development projects, and $114,000 and $58,000 of costs in 2003 and 2002 to remediate or close facilities subsequent to use. GROSS PROFIT ------------- For the quarter, the significantly higher revenue allowed the Company to generate a 50% increase in gross profit, pushing quarterly gross profit to $6,941,000 compared with a gross profit of $4,631,000 last year. The increased disposal revenue at the Grand View, Richland, and Robstown facilities allowed the Company to take advantage of the relatively high fixed cost nature of the business and realize more fall through to the bottom line. Relative to revenue, gross margin declined slightly to 40% of revenue compared to 42% of revenue during the same quarter last year due to the New Jersey PCB project's low but still significant margin. SELLING, GENERAL AND ADMINISTRATIVE COSTS (SG&A) ------------------------------------------------ For the three months ended September 30, 2003, the Company reported SG&A of $3,302,000 (19% of revenue), a 23% increase in absolute dollars from the $2,691,000 (24% of revenue) for the same three months of 2002, but a decrease relative to revenue. The increase in SG&A resulted from a number of factors including $235,000 accrued for payroll and benefits on an employment contract terminated on September 30, 2003, and an additional $50,000 of costs associated with the Company's financial assurance program. 23 Non Operating Disposal Facilities ------------------------------------ Non Operating Disposal Facilities incur primarily legal costs to protect the Company's investment in disposal site development projects in Ward Valley, California and Butte, Nebraska. For the three months ended September 30, 2003 and 2002, the Company reported $1,000 and $42,000 of SG&A expenses, respectively, at Non Operating Disposal Facilities. Substantially all 2002 expenses were legal costs associated with the Nebraska litigation. COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 ----------------------------------------------------------- REVENUE ------- For the nine months ended September 30, 2003, the Company reported consolidated revenue of $40,115,000, 14% higher than the $35,077,000 reported for the same period in 2002. During the nine months ending September 30, 2003 and 2002, $12,083,000 and $10,724,000 or 30% and 21% of revenue, respectively, represented work performed under contract with the U.S. Army Corps of Engineers. During the nine months ending September 30, 2003, $5,400,000 or 14% of revenue, represented work performed for the New Jersey PCB clean-up project. Operating Disposal Facilities ------------------------------- At the Company's Grand View, Idaho disposal facility, revenue increased 68% over the same nine months last year. During the first nine months of 2003, the facility disposed of substantially increased waste volumes, mostly under the Army Corps of Engineers contract, due to increased shipments from both the Army and other federal agencies utilizing the contract. It is expected that the federal government will continue to ship significant volumes of waste to the facility for the remainder of 2003 and in 2004. The Richland, Washington facility's revenue decreased $1,890,000 for the nine months ended September 30, 2003 from the same period in 2002. The decrease in revenue was primarily due to a large clean-up project performed for the Army Corps of Engineers (Fort Greely, Alaska Project), unrelated to the Company's Idaho site contract, during the first quarter of 2002. This business was not replaced in 2003. A majority of the Richland facility's revenue is controlled by a stipulated rate agreement with the Washington Utility and Transportation Commission that caps annual rate regulated revenue at $5,438,000 in 2003. In the nine months ending September 30, 2003, revenue at the Beatty, Nevada disposal facility was $657,000 lower than the same nine months in 2002, primarily due to decreased waste volumes received for treatment and disposal. General economic weakness resulted in reduced waste production and fewer remedial projects. The Beatty site continues to experience transportation and state tax disadvantages in competing for business in the California industrial waste market. At the Robstown, Texas hazardous treatment and disposal facility, revenue decreased $1,999,000 for the nine months ended September 30, 2003 from the same period in 2002. This decrease was due to reduced event business. Like Richland, a large first half 2002 event project was not replaced in 2003. General economic weakness was also a factor. DIRECT OPERATING COSTS ---------------------- For the nine months ended September 30, 2003, consolidated direct operating costs increased 22% to $22,423,000 (60% of revenue) compared to $18,433,000 (58% of revenue) in the same period in 2002. The relatively higher direct operating costs reflect the significant amount of low margin revenue realized on the New Jersey PCB clean-up project during the period. The Company continues its efforts to minimize direct costs through improved operational efficiency. Operating Disposal Facilities ------------------------------- Direct costs at the Richland, Washington; Robstown, Texas and Beatty, Nevada facilities essentially remained flat. The increase in direct operating costs was caused by increases in direct cost at the Grand View, Idaho facility of 24 $4,743,000 due to increased waste volumes and related transportation costs. Approximately $3,300,000 of the increase in direct operating costs at Grand View was for New Jersey PCB clean-up project transportation costs which are variable in nature. Non Operating Disposal Facilities ------------------------------------ Non Operating Disposal Facilities incur primarily engineering, laboratory and other contractor expenses and labor costs required to meet the Company's obligations subsequent to operational use. For the nine months ended September 30, 2003 and 2002, the Company reported $32,000 and $814,000 of expenses related to licensing facilities for initial use and $320,000 and $233,000 in 2003 and 2002 to remediate or close facilities subsequent to use. GROSS PROFIT ------------- For the nine months ending September 30, 2003 gross profit increased $1,048,000 to $17,692,000 (44% of revenue) from $16,644,000 million (47% of revenue) during the same nine months last year. The increased gross profit in the first nine months of 2003 reflect a large project, increased shipments under the Army Corps of Engineers contract at the Grand View facility, and the fixed cost nature of the Company's disposal facilities. SELLING, GENERAL AND ADMINISTRATIVE COSTS (SG&A) ------------------------------------------------ For the nine months ended September 30, 2003, the Company reported SG&A of $11,088,000 (28% of revenue), a 31% increase from the $8,439,000 (24% of revenue) for the same nine months of 2002. The primary increase in SG&A is due to $1,790,000 in 2003 legal and related fees associated with the Ward Valley trial. Also contributing to the higher SG&A were higher insurance costs, costs to upgrade accounting and information systems, and costs associated with staffing changes, including relocation and the buyout of an executive contract. While spending on information systems was higher in the nine months 2003 than the same nine months of 2002, management expects that the investment in information systems infrastructure will improve efficiencies and not be recurring in future periods. COMPARISON OF THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 --------------------------------------------------------------------- INTEREST INCOME --------------- For the nine months ended September 30, 2003, the Company earned $334,000 of interest income, an increase from $31,000 in the same period of 2002. During the three months ended September 30, 2003, the Company received the remaining $95,000 in 1996 Federal Income Tax refunds plus interest of $302,000. Interest income is earnings on tax refunds, cash balances, restricted investments, and notes receivable of which the Company traditionally maintains minimal amounts and are a function of prevailing market rates. The Company received approximately $10,000,000 from the February 13, 2003 sale of the El Centro municipal waste landfill. This cash was utilized to support operations, for capital expenditures and to fund retirement of Series D Preferred Stock and accrued dividends. The balance has been maintained in very short term investments. Based on anticipated cash balances and low interest rates, the Company does not anticipate significant interest income in the future. INTEREST EXPENSE ----------------- For the three months ended September 30, 2003, the Company reported interest expense of $60,000, a decrease of $161,000 from the corresponding period in 2002. The primary cause of this decrease was the refinancing of the $8,500,000 industrial revenue bond ("IRB") for the Grand View, Idaho facility, which bore an interest rate of 8.25%. The IRB was substantially refinanced in November, 2002 through a $7,000,000, five year, fully amortizing term loan from the Company's primary lender, Wells Fargo Bank. The term loan provides a variable interest rate at either the bank's prime rate or an offshore rate plus an applicable margin based upon the Company's performance. For the three and nine months ended September 30, 2003, the interest rate paid on the majority of the outstanding term loan was 3.5%. Additional reductions in interest expense reflect management's initiative to retire high cost debt and incur no new debt 25 other than periodic short term borrowings under the Company's line of credit. At September 30, 2003, the line of credit had a zero balance. OTHER INCOME (LOSS) ------------------- Other Income is composed of the following ($ in thousands):
Three Months Ended September 30, Nine Months Ended September 30, 2003 2002 2003 2002 ---------------- ------------------ ---------------- ------------------ Litigation accrual related to GM settlement $ -- $ -- $ -- $ (740) Payment received, National Union settlement -- -- -- 250 Other litigation related settlements -- -- -- 100 Insurance claim refunds -- -- -- 27 Data processing services -- 28 8 55 Cash receipts for sale or rent of property rights 20 -- 100 -- Other miscellaneous income, net -- 7 5 18 ---------------- ------------------ ---------------- ------------------ Total other income (loss) $ 20 $ 35 $ 113 $ (290) ================ ================== ================ ==================
INCOME TAXES ------------ The components of the income tax provision (benefit) were as follows (in thousands):
Three Months Ended September 30, Nine Months Ended September 30, 2003 2002 2003 2002 ----------------- ------------------ ---------------- ------------------ State tax expense (benefit) $ 18 $ (226) $ 73 $ (226) ================= ================== ================ ==================
The tax effects of temporary differences between income for financial reporting and taxes give rise to deferred tax assets and liabilities. The Company has historically recorded a valuation allowance for certain deferred tax assets due to uncertainties regarding future operating results, and for limitations on utilization of acquired net operating loss carry forwards for tax purposes. The potential realization of a significant portion of net deferred tax assets is based in part on the Company's estimates of the timing of reversals of certain temporary differences and on the generation of taxable income before such reversals. In 2002, the Company reevaluated the deferred tax asset valuation allowance, determined it was then "more likely than not" that a portion of the deferred tax asset would be realizable, and decreased the portion of the valuation allowance related to its operating facilities. During the quarter ended March 31, 2003, the Company wrote off its entire $20,951,000 Ward Valley asset. This large write off effectively assures the Company of a tax loss in 2003. Due to this expected loss, the $8,284,000 net deferred tax asset has been classified as long term. Management expects to realize a portion of this asset in 2004. The net operating loss carry forward was approximately $44,000,000 at September 30, 2003. Of this carry forward, approximately $2,745,000 is limited pursuant to the net operating loss limitation rules of Internal Revenue Code Section 382 and begins to expire in 2006. The remaining unrestricted net operating loss carry forward expires at various dates between 2010 and 2020. SEASONAL EFFECTS ---------------- Operating revenues are generally lower in the winter months than the warmer summer months when more short duration, one-time remediation projects tend to occur. However, both disposal and processing revenue are more affected by market conditions than seasonality. 26 CAPITAL RESOURCES AND LIQUIDITY ------------------------------- At September 30, 2003, cash and cash equivalents totaled $6,503,000, an increase of $6,368,000 from December 31, 2002. The increase in cash was primarily due to the sale of El Centro for $10,000,000 in cash. The Company expects the primary uses of cash balances during the remainder of 2003 to be for disposition of waste removed from the Oak Ridge, Tennessee facility. In September of 2003, the Company's insurance policy for financial assurance at its hazardous waste disposal facilities was extended to December 19, 2003. This required the Company to post additional collateral through a standby letter of credit. It is expected that the cost and cash collateral requirements to renew this insurance will increase. Depending on collateral requirements, the new terms could have a material, adverse impact on the Company's available cash. On February 28, 2003, the Company repurchased all 100,001 shares of Series D Preferred Stock outstanding for a net cash outflow of $2,800,000 after netting out $3,525,000 in cash received for 2,350,000 common shares issued for exercise of the Series E Warrants. Repurchase of the Series D Preferred Stock eliminated an 8 3/8% debt instrument due to the preferred stockholders, and removed the potential dilution that the conversion of these shares would have had on common stockholders. In addition to regularly scheduled debt payments, the Company early retired $1,014,000 of relatively high cost debt in the first nine months of 2003 and retired an additional $658,000 of debt secured by equipment included in the sale of the El Centro landfill. These preferred stock and debt reduction actions reflect continuing management initiatives to improve the Company's balance sheet and maximize asset utilization. On March 28, 2003 the Company exercised an early buyout of an operating lease for $1,159,000 and recorded equipment purchases with a book value of $702,000 along with a reduction in the deferred gain of $457,000. In conjunction with the early buyout, the Company recorded an impairment charge of $225,000 on certain equipment utilized at the discontinued Oak Ridge operation which was included in the early lease buyout. The early lease buyout accomplished a primary objective of repaying Wells Fargo Bank $500,000 required by the Bank as a condition of approving the Company's repurchase of the Series D Preferred Stock. In addition, the Company cleared title to certain leased equipment at the Oak Ridge facility to support ongoing efforts to sell the facility. Lastly, buyout of the operating lease eliminated an expensive source of capital, improving the Company's overall cost of capital. During the first nine months of 2003, the Company's days sales outstanding ("DSO") decreased at September 30, 2003, compared to December 31, 2002. Continued improvement in cash and receivable balances is a priority. Management expects that implementation of its new information system and hiring of a credit and collections manager will continue to improve DSO. As of September 30, 2003 and December 31, 2002, the Company's liquidity, as measured by the current ratio, remained at 1.5 to 1.0. The primary changes to working capital were earnings, the sale of El Centro for $10,000,000, repurchase of the Series D Preferred Stock which resulted in a net cash outflow of $2,800,000, debt retirement, and $4,941,000 in capital expenditures paid with cash. The majority of these capital expenditures were for construction of new disposal capacity at the Grand View, Idaho facility. The debt to equity ratio increased to 1.1:1.0 at September 30, 2003, compared to 0.9:1.0 at fiscal year-end 2002. The increase in the Company's debt to equity ratio reflects the $20,951,000 write off of the Ward Valley asset. This outweighed the Company's operating earnings and repayment of approximately $5,900,000 in liabilities during the first nine months of 2003. The debt to equity ratio is defined as total liabilities divided by stockholders equity On September 30, 2003, the Company had a $6,000,000 revolving line of credit in place with Wells Fargo Bank in Boise, Idaho maturing June 15, 2004. The line of credit is secured by the Company's accounts receivable. At September 30, 2003 and December 31, 2002, the outstanding balance on the revolving line of credit was $0 and $603,000, respectively. The Company borrows and repays according to business demands and availability of cash. It currently reserves $3,508,000 as a letter of credit used as collateral for an insurance policy and a lien bond. A $4,500,000 disposal capacity expansion at the Grand View, Idaho facility was completed in the third quarter of 2003. The Company expects higher capital spending at its Robstown, Texas facility as efforts continue to upgrade the facility and increase operational efficiency. The Company's Oak Ridge facility continues to require cash. Usage of cash is expected to increase as waste shipped off site is managed and billed. At September 30, 2003, the Company's Oak Ridge facility had liabilities expected to be paid in 2003 of $3,700,000. 27 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 as the amount held is traditionally the minimum requirement imposed by insurance or government agencies. At September 30, 2003, $244,000 is held in short term pledged investment accounts. An additional $4,500,000 is held in short term investments available for utilization by the Company in 2003 for capital expenditures and payment of accrued liabilities. Together these items earn interest at approximately 2%, and comprise 7% of assets. The Company has interest rate risk on debt instruments. On October 28, 2002, the Company substantially refinanced the 8.25% fixed rate $8,500,000 Industrial Revenue Bond with a $7,000,000 five year term loan from the Company's primary lender. The term loan provides for a variable interest rate of the bank's prime rate or an offshore rate plus an applicable margin that is based upon the Company's performance. At September 30, 2003 the interest rate incurred by the Company was 3.5% on the outstanding term loan balance of $5,833,000. As of September 30, 2003, each 1% change in the term loan interest rate would result in an annual $51,000 change in interest expense. ITEM 4. CONTROLS AND PROCEDURES. (a) 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 timely alerting them to material information required to be disclosed in the Company's Exchange Act filings. (b) The Company maintains a system of internal controls that is designed to provide reasonable assurance that its records and filings accurately reflect the transactions engaged in. For the quarter ending September 30, 2003, 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 as well as operational procedures. PART II OTHER INFORMATION. -------------------------- ITEM 1. LEGAL PROCEEDINGS. Significant developments have occurred on the following legal matters since December 31, 2002: US ECOLOGY, INC. V. THE STATE OF CALIFORNIA, ET AL., CASE NO.GIC747562, SUPERIOR --------------------------------------------------- COURT OF THE STATE OF CALIFORNIA FOR THE COUNTY OF SAN DIEGO In May 2000, subsidiary US Ecology, Inc., sued the State of California, et. al. ("the State") for monetary damages exceeding $162 million. The suit stems from the State's abandonment of the Ward Valley low-level radioactive waste ("LLRW") disposal project. California law requires the state to build a disposal site for LLRW produced in California, Arizona, North Dakota and South Dakota; member states of the Southwestern Compact. US Ecology was selected in 1985 to locate and license the site using its own funds on a reimbursable basis. In 1993, US Ecology obtained a license from the State and entered a ground lease. The State successfully defended the license against court challenges and, until Governor Gray Davis took office, actively pursued conveyance of the site from the federal government. In September 2000, the Superior Court granted California's motion to dismiss all causes of action, which the Company appealed. In September 2001, the California Fourth Appellate District Court remanded the 28 case for trial on promissory estoppel grounds. The case was tried in Superior Court for the County of San Diego during February and March 2003. On March 26, 2003, the Superior Court issued a Statement of Decision finding that the Company failed to establish causation and that its claim is further barred by the doctrine of unclean hands. The latter finding was based on actions the Court concluded had created obstacles to an agreement between the federal government and the State to convey the site. The Court also found that key elements of the Company's promissory estoppel claim had been proven at trial. Specifically, the Court ruled that the State made a clear and unambiguous promise to US Ecology in 1988 to use its best efforts to acquire the site, that Governor Davis' administration abandoned this promise, and that the Company's reliance on the State's promise was reasonable and foreseeable. However, the Court found that the State's breach of its best efforts promise was not a substantial factor in causing damages to US Ecology since the federal government had continued to resist the land transfer. Based on the uncertainty of recovery following the trial court's adverse decision, the Company wrote off the $20,951,000 deferred site development asset at March 31, 2003. On May 2, 2003, the Company filed a motion to vacate and enter new judgment with the trial court, arguing that the March 26 decision misapplied the law to the facts. On May 30, 2003, this motion was denied without comment. On June 26, 2003, the Company filed a notice of appeal with the California Fourth Appellate District Court. The Company's financial interest in the pending claim against the State was improved by an amendment to the November 13, 1998 Ward Valley Interest Agreement and Assignment entered into by American Ecology and its former primary lender. This June 27, 2003 amendment, entered into by the Company and the successor in interest to that lender, 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. Thereafter, any remaining amount recovered shall be divided equally between the Company and the former lender. The 1998 agreement had provided that the first $29.6 million less up to $1.0 million in legal fees and expenses would be owed to the former lender, with any remaining recovery reserved to the Company. In early July, the Company engaged the law firm of Cooley Godward on a fixed price plus contingency basis to pursue the appeal, paying the fixed fee at the time of engagement. A briefing schedule has not been set. No assurance can be given that the Company will prevail on appeal or reach a settlement to recover any portion of its investment. MANCHAK V. US ECOLOGY, INC., U.S. DISTRICT COURT FOR THE DISTRICT OF NEVADA, -------------------------------- CIVIL ACTION NO. 96-494. In March 1996, Frank Manchak, Jr. ("Plaintiff" or "Manchak") filed suit alleging infringement of a sludge treatment patent to stabilize hazardous waste at the Company's Beatty, Nevada hazardous waste disposal facility. Plaintiff sought unspecified damages for infringement, treble damages, interest, costs and attorney fees. On October 17, 2002, the US District Court for the District of Nevada granted the Company's motion for summary judgment to dismiss the suit. Manchak's motion for reconsideration was denied on January 8, 2003. Manchak appealed; however, plaintiff failed to timely file its appellant's brief and the Company moved to dismiss the appeal. On July 2, 2003, the US Court of Appeals for the Federal Circuit granted the Company's motion to dismiss, and denied plaintiff's request for an extension of time and relief from page/word brief limitations. On July 20, 2003 the plaintiff filed a motion for reconsideration with the appellate court and later filed for en banc review by the Court of Appeals for the Federal Circuit. Both the motion for reconsideration and en banc review were denied by the Court of Appeals on September 3, 2003. The Company considers the matter closed. ENTERGY ARKANSAS, INC. ET AL, CENTRAL INTERSTATE LOW-LEVEL RADIOACTIVE WASTE -------------------------------------------------------------------------------- COMMISSION AND US ECOLOGY, INC. ("PLAINTIFFS") V. STATE OF NEBRASKA, ET AL., ------------------------------------------------------------------------------ CASE NO. 4:98CV3411, U.S. DISTRICT COURT, DISTRICT OF NEBRASKA This action was brought in federal court in December of 1999 by electric utilities that generate low-level radioactive waste ("LLRW") within the Central Interstate Low-Level Radioactive Waste Compact (CIC). CIC member states are Nebraska, Kansas, Oklahoma, Arkansas, and Louisiana. The action seeks declaratory relief and damages for bad faith in the State of Nebraska's processing and ultimate denial of US Ecology's application to site, develop and operate a LLRW disposal facility near Butte, Nebraska. US Ecology is the CIC's 29 contractor and developer. The CIC was originally named as a defendant and subsequently realigned as a plaintiff. US Ecology intervened as a plaintiff. The CIC sought to recover contributions made by the utilities and US Ecology to the CIC for pre-licensing project costs of approximately $95 million and $6.2 million, respectively, and removal of the State of Nebraska from the licensing process. The Eighth Circuit Court of Appeals subsequently dismissed the utilities' and US Ecology's independent claims against Nebraska for breach of the good faith provision of the Compact, and for denial of due process based on sovereign immunity. The utilities and US Ecology subsequently filed cross claims against the CIC for breach of contract and the imposition of a constructive trust. On September 30, 2002, the US District Court for the District of Nebraska entered judgment against Nebraska in favor of the CIC for $153 million, including approximately $50 million for prejudgment interest. Of this amount, US Ecology's share was for a $6.2 million contribution and $6.1 for prejudgment interest. The $6.2 million contribution is included in the balance sheet amount of $6,478,000 of capitalized facility development costs. The Court also dismissed the utilities' and US Ecology's cross claims for breach of contract and imposition of a constructive trust, finding that it was premature to decide the merits of these claims and leaving the question open for future resolution if necessary. The State appealed the judgment to the Eighth Circuit Court of Appeals. The case was argued before the Eighth Circuit on June 12, 2003. No assurance can be given that the trial court's decision will be affirmed on appeal or that US Ecology will recover its contributions or interest thereon. MATTIE CUBA, ET AL. V. AMERICAN ECOLOGY ENVIRONMENTAL SERVICES CORPORATION, ET -------------------------------------------------------------------------------- AL., CAUSE NO. 2000-092, 4TH JUDICIAL DISTRICT COURT, RUSK COUNTY, TEXAS --- This suit was brought in November 2000 by 28 named plaintiffs against the Company and named subsidiaries, the former owners and approximately 60 former customers of its Winona, Texas facility. Plaintiffs seek recovery for personal injuries, property damages and exemplary damages based on negligence, gross negligence, nuisance and trespass. The Company filed a motion for summary judgment in July 2002 based on lack of evidence. In November 2002, the trial court granted partial summary judgment, dismissing certain causes of action and reducing the number of plaintiffs, but preserving other causes of action. The Company subsequently filed a motion for summary judgment seeking dismissal against all of the adult plaintiffs on statute of limitations grounds. On March 26, 2003, the court granted this motion and dismissed the adult plaintiffs. Seven minors and one intervenor remain party to the lawsuit. The Company believes plaintiffs' remaining case is without merit and will continue to vigorously defend the matter. No assurance can be given that the Company will prevail or that the matter can be favorably resolved. The Company's current insurance carrier is paying for defense of this matter subject to the Company's $250,000 deductible, which has been fully accrued in prior periods. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. On February 28, 2003, the Company repurchased all 100,001 shares of Series D Preferred Stock for the original sales price of $47.50 a share plus accrued but unpaid dividends of $16.56 a share. A total cost of $6,406,000 was incurred to complete the repurchase. During February, 2003, three remaining Series E warrant holders exercised 2,350,000 Series E warrants with an exercise price of $1.50 per share. Consequently, the Company issued 2,350,000 shares of common stock and received $3,525,000 in cash. There are no Series E warrants outstanding. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. NONE ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. NONE ITEM 5. OTHER INFORMATION. NONE 30 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) The following exhibits are filed as part of this report: Exhibit 31.1 Certification of September 30, 2003 Form 10-Q by Chief Executive Officer dated November 12, 2003 Exhibit 31.2 Certification of September 30, 2003 Form 10-Q by Chief Financial Officer dated November 12, 2003 Exhibit 32.1 Certification of September 30, 2003 Form 10-Q by Chief Executive Officer dated November 12, 2003 Exhibit 32.2 Certification of September 30, 2003 Form 10-Q by Chief Financial Officer dated November 12, 2003 (b) Reports on Form 8-K. On July 28, 2003, the Company issued an 8-K to announce second quarter 2003 earnings. On October 23, 2003, the Company issued an 8-K to announce third quarter 2003 earnings. SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMERICAN ECOLOGY CORPORATION (Registrant) Date: November 12, 2003 By: /s/ Stephen A. Romano ------------------------------- Stephen A. Romano President, Chief Executive Officer and Chief Operating Officer Date: November 12, 2003 By:/s/ James R. Baumgardner ------------------------------- James R. Baumgardner Senior Vice President, Chief Financial Officer, Secretary and Treasurer 31 EXHIBIT INDEX Exhibit Description ------- ----------- Exhibit 31.1 Certification of September 30, 2003 Form 10-Q by Chief Executive Officer dated November 12, 2003 Exhibit 31.2 Certification of September 30, 2003 Form 10-Q by Chief Financial Officer dated November 12, 2003 Exhibit 32.1 Certification of September 30, 2003 Form 10-Q by Chief Executive Officer dated November 12, 2003 Exhibit 32.2 Certification of September 30, 2003 Form 10-Q by Chief Financial Officer dated November 12, 2003 32