-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EPLb4lTQuqw3kQ4fDd8iPXaPxEhaZyksDSyf2jRa1+yxyqJTEEqkA0MmRaoY2Mm7 qU+Pobd0s5t2l3UWz5yB1A== 0001015402-04-001835.txt : 20040505 0001015402-04-001835.hdr.sgml : 20040505 20040504175529 ACCESSION NUMBER: 0001015402-04-001835 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040505 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN ECOLOGY CORP CENTRAL INDEX KEY: 0000742126 STANDARD INDUSTRIAL CLASSIFICATION: REFUSE SYSTEMS [4953] IRS NUMBER: 953889638 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-11688 FILM NUMBER: 04778939 BUSINESS ADDRESS: STREET 1: 805 W IDAHO STREET 2: STE 200 CITY: BOSIE STATE: ID ZIP: 83702 BUSINESS PHONE: 2083318400 MAIL ADDRESS: STREET 1: 805 W IDAHO STREET 2: STE 200 CITY: BOISE STATE: ID ZIP: 83702 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 March 31, 2004 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________to__________________ Commission File Number 0-11688 AMERICAN ECOLOGY CORPORATION ---------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-3889638 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) Lakepointe Centre I, 300 E. Mallard, Suite 300 Boise, Idaho 83706 ------------ ----- (Address of principal executive offices) (Zip Code) (208) 331-8400 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] At April 30, 2004 Registrant had outstanding 17,209,150 shares of its Common Stock. AMERICAN ECOLOGY CORPORATION QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2004 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION PAGE Item 1. Financial Statements Consolidated Balance Sheets (Unaudited) 4 Consolidated Statements of Operations (Unaudited) 5 Consolidated Statements of Cash Flows (Unaudited) 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3. Quantitative and Qualitative Disclosures About Market Risk 22 Item 4. Controls and Procedures 22 PART II. OTHER INFORMATION Item 1. Legal Proceedings 22 Item 2. Changes in Securities and Use of Proceeds 23 Item 3. Defaults Upon Senior Securities 23 Item 4. Submission of Matters to a Vote of Security Holders 23 Item 5. Other Information 23 Item 6. Exhibits and Reports on Form 8-K 23 Signatures 24 2 OFFICERS - -------- Stephen A. Romano Chief Executive Officer, President and Chief Operating Officer James R. Baumgardner Senior Vice President, Chief Financial Officer Treasurer and Secretary Michael J. Gilberg Vice President and Controller Steven D. Welling Vice President, Sales & Marketing John M. Cooper Vice President and Chief Information Officer DIRECTORS - --------- Roger P. Hickey, Chairman President, Chicago Partners David B. Anderson President, Highland Capital Enterprises Corp. Rotchford L. Barker Independent Businessman Roy C. Eliff Independent Businessman Edward F. Heil Independent Businessman 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 (UNAUDITED) ($ IN 000'S EXCEPT PER SHARE AMOUNTS) MARCH 31,2004 December 31,2003 --------------- ------------------ ASSETS Current Assets: Cash and cash equivalents $ 10,771 $ 6,674 Receivables, net 8,576 12,596 Income taxes receivable 52 2 Prepayments and other 861 1,049 Deferred income taxes 2,057 3,222 Assets held for sale or closure 735 938 --------------- ------------------ Total current assets 23,052 24,481 Cash and investment securities, pledged 131 170 Property and equipment, net 27,500 28,317 Facility development costs 6,478 6,478 Other assets 565 561 Deferred income taxes 5,062 5,062 Assets held for sale or closure 1,557 1,557 --------------- ------------------ Total assets $ 64,345 $ 66,626 =============== ================== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of long term debt $ 1,474 $ 1,475 Accounts payable 1,605 1,678 Accrued liabilities 6,501 4,788 Accrued closure and post closure obligation, current portion 1,828 1,828 Liabilities of assets held for sale or closure, current portion 928 1,907 --------------- ------------------ Total current liabilities 12,336 11,676 Long term debt 3,835 4,200 Long term accrued liabilities 513 454 Accrued closure and post closure obligation, excluding current portion 9,405 9,296 Liabilities of assets held for sale or closure, excluding current portion 4,608 4,649 --------------- ------------------ Total liabilities 30,697 30,275 --------------- ------------------ Commitments and contingencies Shareholders' equity: Convertible preferred stock, 1,000,000 shares authorized Common stock, $.01 par value, 50,000,000 authorized, 17,175,150 and 17,033,118 shares issued and outstanding 172 170 Additional paid-in capital 49,681 54,824 Accumulated deficit (16,205) (18,643) --------------- ------------------ Total shareholders' equity 33,648 36,351 --------------- ------------------ Total Liabilities and Shareholders' Equity $ 64,345 $ 66,626 =============== ================== See notes to consolidated financial statements.
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AMERICAN ECOLOGY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) ($ IN 000'S EXCEPT PER SHARE AMOUNTS) Three Months Ended MARCH 31, 2004 March 31, 2003 --------------- ---------------- Revenue $ 13,905 $ 10,771 Direct operating costs 7,612 5,984 --------------- ---------------- Gross profit 6,293 4,787 Selling, general and administrative expenses 2,872 4,497 --------------- ---------------- Operating income 3,421 290 Interest income 36 -- Interest expense 49 121 Loss on write off of Ward Valley facility development costs -- 20,951 Other income 45 -- --------------- ---------------- Income (loss) before income tax and discontinued operations 3,453 (20,782) Income tax expense (benefit) 1,164 (8) --------------- ---------------- Income (loss) before discontinued operations 2,289 (20,774) Gain from discontinued operations - El Centro Landfill -- 4,944 Gain (loss) from discontinued operations - Oak Ridge LLRW Facility 149 (1,337) --------------- ---------------- Net income (loss) 2,438 (17,167) Preferred stock dividends -- 64 --------------- ---------------- Net income (loss) available to common shareholders $ 2,438 $ (17,231) =============== ================ Basic earnings (loss) from continuing operations .13 (1.34) Basic earnings from discontinued operations .01 .23 --------------- ---------------- Basic earnings (loss) per share $ .14 $ (1.11) =============== ================ Diluted earnings (loss) from continuing operations .13 (1.34) Diluted earnings from discontinued operations .01 .23 --------------- ---------------- Diluted earnings (loss) per share $ .14 $ (1.11) =============== ================ Dividends paid per common share $ -- $ -- =============== ================ See notes to consolidated financial statements.
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AMERICAN ECOLOGY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED, $ IN 000'S) Three Months Ended March 31, ---------------------------- 2004 2003 -------- --------- Cash flows from operating activities: Net income (loss) $ 2,438 $(17,167) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization, and accretion 1,488 1,707 Income from discontinued operations (149) (3,607) Write off of Ward Valley project -- 20,951 Changes in assets and liabilities: Receivables 4,020 3,211 Other assets 173 131 Closure and post closure obligation (148) (204) Income taxes payable 1,115 (10) Accounts payable and accrued liabilities 1,699 875 -------- --------- Net cash provided by operating activities 10,636 5,887 Cash flows from investing activities: Capital expenditures (513) (2,277) Proceeds from sale of assets 110 -- Transfers from cash and investment securities, pledged 39 -- -------- --------- Net cash used in investing activities (364) (2,277) Cash flows from financing activities: Payments of indebtedness (366) (1,531) Retirement of series D preferred stock -- (6,406) Retirement of common stock warrants (5,500) -- Stock options exercised 359 3,650 -------- --------- Net cash used in financing activities (5,507) (4,287) -------- --------- Increase (decrease) in cash and cash equivalents 4,765 (677) Net cash provided by (used in) discontinued operations (668) 7,676 Cash and cash equivalents at beginning of period 6,674 135 -------- --------- Cash and cash equivalents at end of period $10,771 $ 7,134 ======== ========= Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 49 $ 121 Income taxes paid 50 2 Non-cash investing and financing activities: 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 2003 Annual Report on Form 10-K for the year ended December 31, 2003, filed with the Securities and Exchange Commission. Certain reclassifications of prior quarter amounts have been made to conform with current quarter presentation, none of which affect previously recorded net income. NOTE 2. EARNINGS PER SHARE Basic earnings per share are computed based on net income available to common shareholders and the weighted average number of common shares outstanding during the quarter. Diluted earnings per share reflect the assumed issuance of common shares for outstanding options and conversion of warrants. The computation of diluted earnings per share does not assume exercise or conversion of securities whose exercise price is greater than the average common share market price as the assumed conversion of these securities would increase earnings per share. The computation of diluted loss per share does not assume exercise or conversion of any securities as the assumed conversion of securities would decrease loss per share.
Three Months Ended March 31, ($in thousands except per share amounts) 2004 2003 ------- --------- Income (loss) before discontinued operations $ 2,289 $(20,774) Income from operations of discontinued segments 149 3,607 ------- --------- Net income (loss) 2,438 (17,167) Preferred stock dividends -- 64 ------- --------- Net income (loss) available to common shareholders $ 2,438 $(17,231) ======= ========= Weighted average shares outstanding- Common shares 17,090 15,476 Effect of dilutive shares Stock options 525 -- ------- --------- Average shares 17,615 15,476 ======= ========= Basic earnings (loss) per share from continuing operations .13 $ (1.34) Basic earnings (loss) per share from discontinued operations .01 .23 ------- --------- Basic earnings (loss) per share $ .14 $ (1.11) ======= ========= Diluted earnings (loss) per share from continuing operations .13 $ (1.34) Diluted earnings (loss) per share from discontinued operations .01 .23 ------- --------- Diluted earnings (loss) per share $ .14 $ (1.11) ======= =========
NOTE 3. EQUITY On February 17, 2004 the Company redeemed a warrant to purchase 1,349,843 shares of common stock at $1.50 a share for $5,500,000. The closing market price of the Company's common stock of February 17, 2004 was $6.99. The warrant had been issued in 1998 to its former bank as part of a debt restructuring agreement. The redeemed 7 warrant, which represented approximately 8% of the Company's shares outstanding, has been surrendered and will not be reissued. The warrant redemption reduced the Company's cash on hand by $5,500,000 and reduced additional paid-in-capital by a like amount, with no effect on the Statement of Operations. NOTE 4. OPERATING SEGMENTS The Company operates within two segments, Operating Disposal Facilities and Non-Operating Disposal Facilities, based on its internal reporting structure and nature of services offered. The Operating Disposal Facility segment represents facilities accepting hazardous and radioactive waste. The Non-Operating Disposal Facility segment represents facilities that are not accepting hazardous and/or radioactive waste or are awaiting approval to open. On December 27, 2002, the Company committed to discontinue commercial operations within its Processing and Field Services segment which aggregated, volume-reduced, and performed remediation and other services on radioactive material, but excluded processing performed at its disposal facilities. All prior segment information has been restated in order to present the operations at the Oak Ridge facility, including the Field Services division, as discontinued operations. Effective December 31, 2002, the Company classified the El Centro municipal landfill as an asset held for sale due to the expected sale of the facility which occurred on February 13, 2003. All prior segment information has been restated in order to present the operations of the El Centro landfill as discontinued operations. Income taxes are assigned to Corporate, but all other items are included in the segment where they originated. Inter-company transactions have been eliminated from the segment information and are not significant between segments. 8 Summarized financial information concerning the Company's reportable segments is shown in the following table ($ in thousands).
Operating Non-Operating Discontinued Disposal Disposal Processing and Facilities Facilities Field Services Corporate Total - ------------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, 2004 - --------------------------------- Revenue $ 13,891 $ 14 $ -- $ -- $ 13,905 Direct operating cost 7,503 109 -- -- 7,612 ----------------- --------------- ---------------- ---------------- ----------- Gross profit (loss) 6,388 (95) -- -- 6,293 S,G&A 1,224 5 -- 1,643 2,872 ----------------- --------------- ---------------- ---------------- ----------- Income (loss) from operations 5,164 (100) -- (1,643) 3,421 Interest and other income/(expense) 25 17 -- (10) 32 ----------------- --------------- ---------------- ---------------- ----------- Income (loss) before income tax and discontinued operations 5,189 (83) -- (1,653) 3,453 Income tax expense (benefit) -- -- -- 1,164 1,164 Discontinued operations -- -- 149 -- 149 ----------------- --------------- ---------------- ---------------- ----------- Net Income (loss) $ 5,189 $ (83) $ 149 $ (2,817) $ 2,438 ================= =============== ================ ================ =========== Depreciation and accretion $ 1,478 $ 2 $ -- $ 8 $ 1,488 Capital Expenditures $ 481 $ -- $ -- $ 32 $ 513 Total Assets $ 36,307 $ 6,529 $ 2,292 $ 19,217 $ 64,345 - ------------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, 2003 - --------------------------------- Revenue $ 10,767 $ 4 $ -- $ -- $ 10,771 Direct operating cost 5,882 102 -- -- 5,984 ----------------- --------------- ---------------- ---------------- ----------- Gross profit (loss) 4,885 (98) -- -- 4,787 S,G&A 1,826 1,517 -- 1,154 4,497 ----------------- --------------- ---------------- ---------------- ----------- Income (loss) from operations 3,059 (1,615) -- (1,154) 290 Interest and other income/(expense) (44) -- -- (77) (121) Write off of Ward Valley facility -- 20,951 -- -- 20,951 ----------------- --------------- ---------------- ---------------- ----------- Income (loss) before income tax and discontinued operations 3,015 (22,566) -- (1,231) (20,782) Income tax expense (benefit) -- -- -- (8) (8) Discontinued operations 4,944 -- (1,337) -- 3,607 ----------------- --------------- ---------------- ---------------- ----------- Net Income (loss) $ 7,959 $ (22,566) $ (1,337) $ (1,223) $ (17,167) ================= =============== ================ ================ =========== Depreciation and accretion $ 1,802 $ 1 $ -- $ 11 $ 1,814 Capital Expenditures $ 2,614 $ 23 $ 473 $ -- $ 3,110 Total Assets $ 36,230 $ 6,519 $ 4,231 $ 16,910 $ 63,890
NOTE 5. STOCK OPTION PLANS The Company has two stock-based compensation plans, which are accounted for under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees and related Interpretations. No stock-based employee compensation cost is reflected in net income. The following table illustrates the effect on net income and earnings per share if the Company applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based compensation for the quarters ended March 31, 2004 and 2003:
($in thousands, except per share amounts) 2004 2003 ------- --------- Net income (loss), as reported $2,438 $(17,167) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (94) (525) ------- --------- Pro forma net income (loss) $2,344 $(17,692) ======= ========= 9 EARNINGS (LOSS) PER SHARE: Basic - as reported $ .14 $ (1.11) ======= ========= Basic - pro forma $ .14 $ (1.14) ======= ========= Diluted - as reported $ .14 $ (1.11) ======= ========= Diluted - pro forma $ .13 $ (1.14) ======= =========
The stock option plan summary and changes during quarters ended March 31 are as follows:
2004 2003 ----------- ----------- Options outstanding, beginning of quarter 1,266,281 753,150 Granted -- 758,724 Exercised (141,100) (67,500) Canceled -- (9,500) ----------- ----------- Options outstanding, end of quarter 1,125,181 1,434,874 =========== =========== Weighted average exercise price of options, beginning of quarter $ 3.90 $ 3.42 Weighted average exercise price of options granted $ 4.42 Weighted average exercise price of options exercised $ 2.49 $ 1.68 Weighted average exercise price of options canceled $ 3.12 Weighted average exercise price of options, end of quarter $ 4.08 $ 4.03 Options exercisable at end of quarter 819,841 865,831 =========== =========== Options available for future grant at end of quarter 509,676 453,626 =========== ===========
The following table summarizes information about the stock options outstanding under the Company's option plans as of March 31, 2004:
Weighted average Weighted Weighted remaining average average Range of exercise contractual life Number exercise price Number exercise price price per share (years) outstanding per share exercisable per share - ------------------ ----------------- ----------- --------------- ----------- --------------- 1.00 - $1.47 3.5 67,500 $ 1.32 67,500 $ 1.32 1.60 - $2.25 5.7 84,000 $ 2.04 84,000 $ 2.04 2.42 - $3.50 8.4 354,582 $ 2.92 245,791 $ 2.89 3.75 - $5.00 7.1 424,846 $ 4.30 297,923 $ 4.22 6.50 8.9 139,253 $ 6.50 69,627 $ 6.50 10.13 0.9 55,000 $ 10.13 55,000 $ 10.13 ----------- ----------- 1,125,181 819,841 =========== ===========
As of March 31, 2004, the 1992 Stock Option Plan for Employees had options outstanding to purchase 701,681 common shares with 188,976 shares remaining available for issuance under option grants. The 1992 Stock Option Plan for Directors had options outstanding to purchase 423,500 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 the following weighted-average assumptions used for grants during the quarter ended March 31 2003, with no options being granted during the quarter ended March 31, 2004: 10
2004 2003 ---------- ---------- Expected volatility -- 105% Risk-free interest rates -- 4.25% Expected lives -- 10 years Dividend yield -- 0% Weighted-average fair value of options granted during the quarter (Black-Scholes) -- $ 2.68
NOTE 6. INCOME TAXES The Company recognized $1,164,000 of income tax expense during the quarter ended March 31, 2004 and reduced the current deferred tax asset a corresponding amount. At March 31, 2004, the Company has approximately $23,000,000 of deferred tax assets and a corresponding $15,900,000 valuation allowance which reduces the net deferred tax asset to $7,119,000. $7,119,000 represents the expected utilization of deferred tax assets in the foreseeable future. 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. The Company will continue to assess the valuation allowance at least annually. NOTE 7. LITIGATION Significant developments have occurred on the following legal matters since December 31, 2003: 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 stemming from the State's alleged abandonment of the Ward Valley low-level radioactive waste ("LLRW") disposal project. The case was tried in Superior Court for the County of San Diego ("the Superior Court") during February and March 2003. On March 26, 2003, the Superior Court issued a decision against the Company. Based on the uncertainty of recovery following the Superior Court's adverse decision, the Company wrote off the $20,951,000 deferred site development asset on March 31, 2003. On June 26, 2003, the Company filed a notice of appeal with the California Fourth Appellate District Court. The opening appellate brief was filed March 15, 2004. The State's opposition brief is due June 14, 2004. The Company's reply brief will be filed July 5, unless extended by the Appellate Court. The Company expects oral arguments in the 2nd half of 2004 or early 2005. No assurance can be given that the Company will prevail on appeal or reach a settlement to recover any portion of its investment. 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") and seeks declaratory relief and damages. 11 In September 2002, the US District Court for the District of Nebraska entered judgment against Nebraska in favor of the CIC for $153 million, including approximately $50 million for prejudgment interest. Of this amount, US Ecology's share was $6.2 million plus $6.1 million for prejudgment interest. The Company carries $6.5 million on its balance sheet for capitalized facility development costs. The State of Nebraska subsequently appealed this judgment. On February 18, 2004, the Eighth U.S. Circuit Court of Appeals affirmed the District Court ruling in its entirety. On March 3, 2004, the State of Nebraska filed a petition for rehearing by the full Eighth U.S. Circuit Court of Appeals (en banc). On April 21, 2004, the Eighth Circuit Court of Appeals denied Nebraska's petition for rehearing. The State of Nebraska may petition the U.S. Supreme Court to review the matter. No assurance can be given that the trial and appellate court judgments will be affirmed on appeal or that US Ecology will recover its contributions or interest thereon. NOTE 8. COMMITMENTS AND CONTINGENCIES Effective January 1, 2003, the Company established the American Ecology Corporation Management Incentive Plan ("MIP"). The Plan provides for selected participants to receive bonuses based on pre-tax operating income levels. Bonuses under the plan are to be paid out over three years with a maximum in any one year of $1,125,000 in bonuses if pre-tax operating income exceeds $12,000,000 including all costs for the MIP. During the quarter ended March 31, 2004, the Company accrued $292,000 for the Management Incentive Plan which would be paid to the selected participants if the Company's pre-tax operating income exceeds $12,000,000 for 2004. The Company's contract with the US Army Corps of Engineers (USACE) expires during the second quarter of 2004 unless extended for an additional 5 years at the option of the USACE. The Company has been notified in writing by the USACE that it intends to exercise its five year renewal option. NOTE 9. CLOSURE AND POST CLOSURE OBLIGATIONS Closure and post closure obligations are recorded when environmental assessments and/or remedial efforts are probable, and the costs can be reasonably estimated consistent with Statement of Financial Accounting Standards No. 5. The Company performs periodic reviews of both non-operating and operating facilities and revises accruals for estimated post-closure, remediation and other costs when necessary. The Company's recorded liabilities are based on best estimates of current costs and are updated periodically to reflect current technology, laws and regulations, inflation and other economic factors. Changes to reported closure and post closure obligations were as follows ($ in thousands):
Accrued Closure and Closure Obligation of Assets Total Closure and Post Post Closure Obligation Held for Sale or Closure Closure Obligations ------------------------- ------------------------------ ------------------------ December 31, 2003 obligation $ 11,124 $ 4,621 $ 15,745 Accretion of obligation 257 17 274 Payment of obligation (148) (44) (192) Adjustment of obligation -- -- -- ------------------------- ------------------------------ ------------------------ March 31, 2004 obligation $ 11,233 $ 4,594 $ 15,827 ========================= ============================== ========================
At March 31, 2004, $131,000 of pledged cash and investment securities were legally restricted for purposes of settling the closure and post closure obligation. NOTE 10. DISCONTINUED OPERATIONS As of March 31, 2004, "Assets held for sale or closure" consisted of the assets and liabilities of the discontinued Oak Ridge processing and field services operations. Accordingly, the revenue, costs and expenses and cash flows for the Oak Ridge operation have been excluded from continuing operations results and reported as "Gain (loss) from discontinued operations" and "Net cash provided by (used in) discontinued operations". Prior periods have been restated to reflect the discontinued operations. The assets and liabilities of discontinued operations included within 12 the consolidated balance sheet as of March 31, 2004 are as follows ($ in thousands):
Processing and Field Services Facility --------------------- Current assets -------------- Current assets $ 183 Property & equipment, net 552 --------------------- 735 ===================== Non-current assets ------------------ Property, plant & equipment, net 1,509 Other 48 --------------------- 1,557 ===================== Current liabilities ------------------- Accounts payable & accruals 890 Current portion long term debt 38 --------------------- 928 ===================== Non-current liabilities ----------------------- Closure/post closure obligations 4,593 Long-term debt 10 Other 5 --------------------- 4,608 =====================
Operating results for the discontinued operations were as follows for three months ending March 31:
Processing and Field El Centro Disposal Total Discontinued ($in thousands) Services Operations Facility Operations 2004 ---- Revenues, net $ -- $ -- $ -- Operating income (loss) 149 -- 149 Net income (loss) 149 -- 149 Basic earnings (loss) per share .01 .-- .01 Diluted earnings (loss) per share .01 .-- .01 2003 ---- Revenues, net $ 779 $ 469 $ 1,248 Operating income (loss) (1,316) 78 (1,238) Net income (loss) (1,337) 4,944 3,607 Basic earnings (loss) per share (.09) .32 .23 Diluted earnings (loss) per share (.09) .32 .23
On December 27, 2002, the Company discontinued commercial waste processing at its LLRW Processing Facility and Field Services operations based in Oak Ridge, Tennessee. During 2003, the Company removed all accumulated customer waste from the facility and obtained extensive radiological surveys to improve the facility's marketability. On March 12, 2004, the Company entered into a non-binding letter of intent with a potential buyer to acquire the assets held for sale in Oak Ridge, Tennessee. The potential sale, as contemplated by the letter of intent, would require the Company to provide cash, defined assets, including certain land, buildings and equipment, in exchange for the buyer assuming specified liabilities. The non-binding letter of intent expires May 31, 2004, unless extended by both parties in writing. While active discussions continue with the potential buyer, there is no assurance that the Company will be able to sell the Oak Ridge facility on terms favorable to the Company. Costs incurred at the Oak Ridge facility to prepare the facility for sale during the three months ended March 31 are summarized as follows: ($ in thousands) 13
2004 2003 ------ ------ Net operating costs in excess of previous accruals $ 34 $ 201 Additional impairment of property and equipment -- 225 Accounts receivable collected in excess of valuation allowance (207) -- Increase in estimated cost to dispose of removed waste 24 911 ------ ------ Net Income for the period ended March 31, 2004 $ 149 $1,337 ====== ======
Cost changes for Oak Ridge facility on-site activities and disposal liabilities for removed wastes are as follows:
($in thousands) December 31, 2003 Cash Payments Adjustments March 31, 2004 ----------------- -------------- -------------- -------------- Waste disposal liability 623 (139) 24 508 On-site discontinued operation cost liability 442 (221) 34 255 December 31, 2002 Cash Payments Adjustments March 31, 2003 Waste disposal liability 1,827 (29) 1,596 3,394 On-site discontinued operation cost liability 1,800 (800) 201 1,201
The adjustments represent differences between the estimated costs accrued at December 31, actual costs incurred during the first quarter, and changes in estimated future costs for removed waste disposition. 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, 2003 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, 2003. Unless otherwise described, changes discussed relate to the increase or decrease from the three month period ended March 31, 2003 to the three month period ended March 31, 2004. INTRODUCTION - ------------ The Company is a hazardous, PCB, industrial and radioactive waste management company providing transportation, treatment and disposal services to commercial and government entities including, but not limited to, nuclear power plants, refineries, chemical manufacturing plants, steel mills, the U.S. Department of Defense, biomedical facilities, 14 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 52 years. A significant portion of the Company's revenue is attributable to discrete waste clean-up projects ("Event Business") which vary substantially in size and duration. The one-time nature of Event Business necessarily creates variability in revenue and earnings. This can produce large quarter to quarter swings. Management's strategy is to continue expanding its recurring customer business ("Base Business") while simultaneously securing both large and small Event Business projects. When the Company's Base Business covers fixed costs, much of the Event Business revenue falls through to the bottom line. This strategy takes advantage of the largely fixed cost nature of the business. OVERALL COMPANY PERFORMANCE - ----------------------------- The Company's financial performance for the three months ended March 31, 2004 was substantially improved over the first three months of 2003. Quarter to quarter comparisons are difficult and are materially affected by several events including high litigation expenses in early 2003 and a related asset write off, costs to prepare the Company's Oak Ridge, Tennessee discontinued low-level radioactive waste processing operation for sale, a gain on sale of the El Centro landfill assets in early 2003 and the recognition of income tax expense in 2004. 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 $1,498,000 were incurred and included in SG&A during the three months ending March 31, 2003. The Company has appealed the Ward Valley ruling. Minimal future legal costs are expected based on a fixed price plus success contingency legal representation agreement entered and paid in July, 2003 for the appeal. 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. During the three months ended March 31, 2003, the Company identified and incurred an additional $1,337,000 in costs to remove waste from the facility and prepare the facility for sale. This primarily reflected improved information on the cost to remove specific wastes which became known when the wastes were prepared for shipment to off-site service providers. Income Tax Expense: During 2002 the Company evaluated the deferred tax asset and - ------------------- offsetting valuation allowance and determined that it was probable that sufficient taxable income would be generated to utilize $8,284,000 of the deferred tax asset in the foreseeable future. During 2003, the $20,951,000 write-off of Ward Valley facility development costs resulted in a book as well as tax loss for 2003 and no portion of the deferred tax asset was utilized. Based on the Company's $3,453,000 first quarter 2004 pre-tax income and expectation of continued profitability, $1,164,000 of income tax expense was recognized for the three months ended March 31, 2004. 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, and Income Taxes 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 15 liability exists for closing, maintaining and monitoring the disposal unit once this space has been filled. Major assumptions and judgments used to calculate cell development assets and closure liabilities are as follows: - - Personnel and equipment costs incurred to construct disposal cells are capitalized as a cell development asset. - - The cell development asset is amortized as each available cubic yard of disposal space is filled. Periodic independent engineering survey and inspection reports are used to determine the remaining volume available. These reports take into account waste volume, compaction rates and space reserved for capping filled cells. Additionally, changes in the estimated useful lives of the cells or related expansion plans have a direct effect on the amortization expense related to those cells during future periods. - - The closure liability is the present value based on a current cost estimate prepared by an independent engineering firm of the costs to close, maintain and monitor filled disposal units. Management estimates the timing of payment, accretes the current cost estimate by an estimated cost of living (1.5%), and then discounts (9.3%) the accreted current cost estimate back to a present value. The final payments of the closure liability are estimated as being paid in 2056 based upon current permitted capacity and estimated annual usage. 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 $442,000 of expenses were recognized as of December 31, 2003 under EITF 94-3 that would not have been recognized until incurred had the Company adopted FAS 146 prior to December 27, 2002. During the three months ended March 31, 2004, the Company incurred $188,000 of the expenses recognized under EITF 94-3 as of December 31, 2003. During the three months ended March 31, 2003, the Company reduced the allowance for doubtful accounts of its former Processing and Field Services segment by $207,000 due to the collection of accounts receivable in excess of previous allowances for doubtful accounts. At March 31, 2004 the Company was continuing its efforts to collect the remaining $101,000 of accounts receivable, all of which is included in its allowance for doubtful accounts. 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 Company has appealed the trial court's ruling. The US District Court for the District of Nebraska entered judgment against the State of Nebraska in favor of the Central Interstate Compact and other plaintiffs including the Company. The Company's share of the judgment was $12.3 million. The Company carries $6.5 million on its balance sheet for capitalized facility development costs. The State of Nebraska subsequently appealed this judgment. On February 18, 2004, the Eighth U.S. Circuit Court of Appeals affirmed the District Court ruling in its entirety. On March 3, 2004, the State of Nebraska filed a petition for rehearing by the full Eighth U.S. Circuit Court of Appeals (en banc). On April 21, 2004 the Eighth Circuit Court of Appeals denied Nebraska's request for full Court of Appeals rehearing. The State of Nebraska may seek review by the U.S. Supreme Court. 16 No assurance can be given that the Company will prevail in the above litigation or otherwise recover its investment in the California or Nebraska projects. 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. 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 at that time, it would likely not utilize portions of the deferred tax assets prior to their expiration. The valuation allowance is based on management's contemporaneous evaluation of whether it is more likely than not that the Company will be able to utilize some, or all of the deferred tax assets. During 2002, the Company assessed the valuation allowance and reversed approximately $8,284,000 of the valuation allowance that the Company expected to utilize in the foreseeable future. During 2003, the Company did not have tax or book income due to the write-off of the Ward Valley facility development asset and therefore did not utilize the deferred tax asset. The Company continues to carry a $15,900,000 valuation allowance against an approximately $23,000,000 deferred tax asset. During the three months ended March 31, 2004, the Company recognized approximately 34% of pre-tax income as income tax expense of $1,164,000. The Company will continue to assess the valuation allowance at least annually. RESULTS OF OPERATIONS - ----------------------- The following table presents, for the periods indicated, the operating costs as a percentage of revenues in the consolidated income statement:
Three Months Ended ---------------------------------- ($ in 000's) March 31, 2004 March 31, 2003 -------------- ------------------ $ % $ % ------- ----- --------- ------- Revenue 13,905 10,771 Direct operating costs 7,612 54.7% 5,984 55.6% ------- --------- Gross profit 6,293 45.3% 4,787 44.4% SG & A 2,872 20.7% 4,497 41.8% ------- --------- Operating income 3,421 24.6% 290 2.7% Interest income 36 0.3% -- 0.0% Interest expense 49 0.4% 121 1.1% Loss on write off of Ward Valley -- 0.0% 20,951 194.5% Other income (expense) 45 0.3% -- 0.0% ------- --------- Net income (loss) before income taxes 3,453 24.8% (20,782) -192.9% Income tax expense (benefit) 1,164 8.4% (8) -0.1% ------- --------- Net income (loss) before discontinued operations 2,289 16.5% (20,774) -192.9% ======= =========
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2004 AND 2003 - ----------------------------------------------------------------- REVENUE - ------- For the three months ended March 31, 2004, the Company reported consolidated revenue of $13,905,000, a 29% increase over the $10,771,000 reported for the same period in 2003. All four operating disposal sites generated higher revenue during the first quarter of 2004. The higher quarterly revenue resulted from a combination of increased waste volume and higher average selling price ("ASP") for the Company's treatment and disposal services. At the 3 hazardous waste disposal facilities volumes and ASP for services each increased 5% over the same quarter last year. The increase in waste volume resulted from an increase in both recurring (or "Base") business and project (or "Event") work performed during the quarter. The increase in ASP reflected a favorable mix of niche treatment and disposal business. The balance of the increase in consolidated revenue resulted from increased transportation 17 revenue as the Company employed its strategy of selective bundling disposal and transportation to secure targeted disposal contracts. During the three months ending March 31, 2004 and 2003, revenue from a contract with the U.S. Army Corps of Engineers accounted for $3,991,000 and $4,156,000 or 29% and 39% of revenue, respectively. The Army and other federal agencies continue to ship waste under this contract to the Company's Grand View, Idaho facility. Also during the first quarter of 2004, one contract for a New York clean-up project represented $1,438,000 or 10% of revenue. Operating Disposal Facilities - ------------------------------- The Richland, Washington LLRW disposal facility's revenue increased substantially for the three months ended March 31, 2004 above the same period in 2003. This increase in revenue was due to approximately 50% increased receipts of both rate-regulated and non rate regulated wastes. For 2004, the Washington Utilities and Transportation Commission have approved a revenue requirement of $5,476,000 for the Richland facility's rate-regulated low-level radioactive waste interstate compact business. $1,443,000 of this revenue was recorded in the three months ended March 31, 2004. At the Company's Grand View, Idaho disposal facility, higher waste volumes more than offset slightly lower ASPs, allowing the site to increase revenue 29% from the same quarter last year. During the first quarter of 2004, the facility disposed of 21% more tons than the same period last year. Management expects the U.S. Army Corps of Engineers and other federal agencies to continue shipping to the facility, and that the Army will renew its contact with the Company for these services for an additional five years. A privately funded clean-up in New York also contributed to first quarter revenue growth, but is not expected to result in significant revenue during the second quarter of 2004. At the Beatty, Nevada hazardous treatment and disposal facility, revenue increased 32% for the three months ended March 31, 2004 from the same period in 2003. The increased revenue was due to both waste volumes increasing by 14% as well as by average prices increasing by 16%. The increased volume was from both remediation projects and increased activity from existing customers. The higher ASP resulted from a higher percentage of waste requiring specialized treatment services. At the Robstown, Texas hazardous treatment and disposal facility, revenue increased 5% for the three months ended March 31, 2004 from the same period in 2003. The increased revenue reflected a better mix of wastes received at the site, driving ASP up 80%. This much higher ASP more than offset a 40% reduction in waste volumes received at the site compared to the first quarter of 2003. During the first quarter of 2003, the site received a high volume, low-priced project at the site that did not recur in the first quarter of 2004. DIRECT OPERATING COSTS - ------------------------ For the three months ended March 31, 2004, consolidated direct operating costs increased 27% to $7,612,000 (55% of revenue) compared to $5,984,000 (56% of revenue) for the same period in 2003 primarily reflecting increased waste volumes. Relative to revenue, direct operating costs dropped slightly reflecting the largely fixed cost nature of the Company's business. The Company continues its efforts to minimize direct costs through operational improvements and efficiencies. Operating Disposal Facilities - ------------------------------- Direct costs at the Richland, Washington; Robstown, Texas; and Beatty, Nevada facilities essentially remained flat from the same quarter last year. The increase in consolidated direct operating costs for the Company was largely driven by an increase in direct costs at the Grand View, Idaho facility of $1,504,000. This increase was due to increased waste volumes and related transportation costs. Approximately $1,474,000 of the increase in direct operating costs at Grand View was for transportation costs primarily related to the New York clean-up project. During the quarter ended March 31, 2004 the Company was able to reduce the costs of reagents and other additives used to treat waste, resulting in lower variable costs for certain waste streams. 18 Non Operating Disposal Facilities - ------------------------------------ Non Operating Disposal Facilities incur current period expenses for the accretion of engineering, laboratory and other contractor expenses and labor costs required to meet the Company's obligations subsequent to operational use. For the three months ended March 31, 2004 and 2003, the Company reported $10,000 and $-0- of expenses on proposed development projects, and $109,000 and $102,000 of costs in 2004 and 2003 to remediate or close facilities subsequent to use. GROSS PROFIT - ------------- Significantly higher quarterly revenue allowed the Company to generate a 31% increase in gross profit, pushing quarterly gross profit to $6,293,000 compared with a gross profit of $4,787,000 for the same quarter last year. Increased disposal revenue at all operating disposal facilities produced more fall through due to the largely fixed cost nature of the business. Gross margin increased slightly to 45% of revenue compared to 44% of revenue despite an increase, quarter over quarter, in lower margin transportation revenue. SELLING, GENERAL AND ADMINISTRATIVE COSTS (SG&A) - ----------------------------------------------------- For the three months ended March 31, 2004, the Company reported SG&A of $2,872,000 (21% of revenue), a 36% decrease from the $4,497,000 (42% of revenue) for the same three months of 2003. The decrease in SG&A primarily resulted from a $1,520,000 decrease in legal expenses quarter to quarter. Legal expenses for the first quarter of 2004 dropped to $84,000 compared to $1,604,000 in the first quarter of 2003. The Company has resolved multiple lawsuits, reducing legal fees and freeing up management time and resources to focus on growing the business. The Company incurred costs during 2003 to upgrade and centralize information and accounting systems. The cost of these business system upgrades was largely born in 2003, while the savings and efficiencies are being realized in 2004. The primary benefit is management access to more timely and detailed information on operations. Operating Disposal Facilities - ------------------------------- During the quarter ended March 31, 2004, Operating Disposal Facilities SG&A decreased $602,000 due to business reorganizations, cost containment efforts and centralization of accounting at Corporate. Corporate - --------- During the quarter ended March 31, 2004, Corporate SG&A increased $489,000. This includes $292,000 accrued for the Management Incentive Plan which would be paid to selected participants if the Company's pre-tax operating income exceeds $12,000,000 including all costs associated with the Management Incentive Plan for 2004. The remaining increase in Corporate SG&A represents costs that were previously borne by the Operating Disposal Facilities, but are now assigned to Corporate. 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 March 31, 2004 and 2003, the Company reported $5,000 and $1,517,000 of SG&A expenses, respectively, at Non Operating Disposal Facilities. The majority of 2003 expenses were legal costs associated with the Ward Valley, California litigation. INTEREST INCOME - ---------------- For the three months ended March 31, 2004, the Company earned $36,000 of interest income, an increase from $-0- in the same period of 2003 due to substantially higher cash balances. Interest income is earnings on tax refunds, cash balances, restricted investments, and notes receivable. The Company typically maintains minimal amounts, for which income is a function of prevailing market rates. Based on anticipated low interest rates, the Company does not anticipate significant interest income in 2004. 19 INTEREST EXPENSE - ----------------- For the three months ended March 31, 2004, the Company reported interest expense of $49,000, a decrease of $72,000 from the corresponding period in 2003. The primary cause of this decrease was the reduction in average debt outstanding by $2,000,000 from March 31, 2003 to 2004. For the three months ending March 31, 2004, the interest rate paid on its single outstanding term loan was 3.38%. Additional reductions in interest expense could occur as debt balances continue to be paid down, however the Company will experience increased interest expense should interest rates increase. At March 31, 2004, the line of credit had a zero balance. OTHER INCOME (LOSS) - --------------------- Other Income is composed of the following ($ in thousands):
Three Months Ended March 31, 2004 2003 --------------- --------------- Data processing services $ 20 $ -- Cash receipts for sale or rent of property rights 16 -- Other miscellaneous income, net 9 -- --------------- --------------- Total other income (loss) $ 45 $ -- =============== ===============
INCOME TAXES - ------------- The components of the income tax provision (benefit) were as follows (in thousands):
Three Months Ended March 31, 2004 2003 ------------- ----------------- Federal tax expense $ 1,164 $ -- State tax expense (benefit) -- (8) ------------- ----------------- Income tax expense $ 1,164 $ (8) ============= =================
The tax effects of temporary differences between income for financial reporting and income 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 2003, the $20,951,000 write-off of Ward Valley facility development costs resulted in a book as well as tax loss for 2003 and no portion of the deferred tax asset was utilized. Based on the Company's $3,453,000 first quarter 2004 pre-tax income and the expectation of continued profitability for the year, $1,164,000 of income tax expense was recognized during the three months ended March 31, 2004. The net operating loss carry forward at March 31, 2004 was approximately $41,000,000. Of this net operating loss 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. Due to the Company's net operating loss carry forwards, income tax expense of approximately 2% of pretax income tax expense is expected to be paid in cash, while the other approximately 32% of pretax income tax expense will be offset against the net operating loss carry forwards. The Company will continue to assess the deferred tax asset and related valuation allowance as circumstance dictate, but at least annually. 20 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 generally more affected by market conditions than seasonality. CAPITAL RESOURCES AND LIQUIDITY - ---------------------------------- At March 31, 2004, cash and cash equivalents totaled $10,771,000, an increase of $4,097,000 from December 31, 2003. The increase in cash reflects collection of accounts receivable and continued profitability. During the first three months of 2004, the Company's days sales outstanding ("DSO") decreased at March 31, 2004, to 56 days compared to December 31, 2003 at 68 days. Continued improvement in cash and receivable balances is a priority. Management expects that new information systems and appointment of a corporate credit and collections manager will allow the Company to maintain DSO at approximately 60 days. As of March 31, 2004 the Company's liquidity, as measured by the current ratio, was 1.9 to 1.0. The debt to equity ratio decreased to 0.9:1.0 at March 31, 2004. The primary changes to working capital as well as the debt to equity ratio were caused by the $5,500,000 in cash paid to redeem a common stock warrant, partially offset by first quarter 2004 earnings. The debt to equity ratio is defined as total liabilities divided by stockholders equity. SOURCES OF CASH On March 31, 2004, the Company had a $8,000,000 revolving line of credit in place with Wells Fargo Bank in Boise, Idaho maturing June 15, 2005. The line of credit is secured by the Company's accounts receivable. At March 31, 2004, the outstanding balance on the revolving line of credit was $-0-. The Company borrows and repays according to business demands and availability of cash. It currently reserves $3,508,000 for a letter of credit used as collateral for an insurance policy and a lien bond. Company operations have produced an average of almost $2,500,000 a quarter in cash flow over the past three years. Management expects 2004 quarterly cash flow from operations to, on average, be higher. The $10,771,000 in cash on hand at December 31, 2003 was comprised of short term investments which were not required for operations of $10,959,000, and a net checks outstanding amount of ($188,000). USES OF CASH On February 17, 2004 the Company redeemed a warrant to purchase 1,349,843 shares of common stock at $1.50 a share for $5,500,000. The closing market price of the Company's common stock of February 17, 2004 was $6.99. The warrant had been issued in 1998 to its former bank as part of a debt restructuring agreement. The redeemed warrant, which represented approximately 8% of the Company's shares outstanding, has been surrendered and will not be reissued. The warrant redemption reduced the Company's cash on hand by $5,500,000 and reduced additional paid-in-capital by a like amount, with no effect on the Statement of Operations. Management currently expects its capital spending needs to be between $5,500,000 and $6,500,000 in 2004. It is expected that $3.7 million of 2004 capital spending will be allocated to the Texas hazardous waste facility for treatment capacity expansion, disposal cell construction, future disposal cell engineering, equipment, and development of a rail transfer facility. The Company also intends to make capital improvements at its Grand View, Idaho facility to increase throughput. The Company's Oak Ridge facility continues to require cash, though at a much lower level than in 2003. Use of cash at Oak Ridge is expected to decrease since waste shipped off site has largely been processed and disposed. If the Company is unable to sell the facility and is required to commence closure activities, cash use could increase later in 2004 or 2005. Also, a substantial amount of cash or payment of liabilities may be required to complete a sale. At March 31, 2004, the Company's Oak Ridge facility had liabilities (excluding the estimated cost to close the facility) 21 expected to be paid in 2004 of $735,000. The Company is attempting to sell the Oak Ridge facility, but would expect to spend the estimated $4,594,000 accrued in long term liabilities to close the facility over time if a sale is not completed. 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 typically the minimum requirement imposed by insurance or government agencies. At March 31, 2004, $131,000 was held in short term pledged investment accounts and approximately $11,000,000 was held in investments whose terms ranged from overnight to one week. Together these items earn interest at approximately 1%, and comprise 17% of assets. The Company does have interest rate risk on debt instruments. On October 28, 2002, the Company substantially refinanced the 8.25% fixed rate $8,500,000 Industrial Revenue Bond with a $7,000,000 five year term loan from the Company's primary lender. The term loan provides for a variable interest rate of the bank's prime rate or an offshore rate plus an applicable margin based on the Company's performance. At March 31, 2004 the interest rate incurred on the term loan was 3.38% on the outstanding term loan balance of $5,133,000. A hypothetical increase of 1% in interest rates would increase annual interest expense paid by the Company by approximately $44,000. ITEM 4. CONTROLS AND PROCEDURES. (a) Within the 90 day period prior to the filing of this report, Company management, under the direction of the Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934 (Exchange Act). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer believe that the Company's disclosure controls and procedures are effective in timely alerting them to material information required to be disclosed in the Company's Exchange Act filings. (b) The Company maintains a system of internal controls that are designed to provide reasonable assurance that its records and filings accurately reflect the transactions engaged in. For the quarter ending March 31, 2004, there were no significant changes to internal controls or in other factors that could significantly affect these internal controls. PART II OTHER INFORMATION. - ----------------------------- ITEM 1. LEGAL PROCEEDINGS. Significant developments have occurred on the following legal matters since December 31, 2003: 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 stemming from the State's alleged abandonment of the Ward Valley low-level radioactive waste ("LLRW") disposal project. The case was tried in Superior Court for the County of San Diego ("the Superior Court") during February and March 2003. On March 26, 2003, the Superior Court issued a decision against the Company. Based on the uncertainty of recovery following the Superior Court's adverse decision, the Company wrote off the $20,951,000 deferred site development asset on March 31, 2003. On June 26, 2003, the Company filed a notice of appeal with the California Fourth Appellate District Court. The 22 opening appellate brief was filed March 15, 2004. The State's opposition brief is due June 14, 2004. The Company's reply brief will be filed July 5, unless extended by the Appellate Court. The Company expects oral arguments in the 2nd half of 2004 or early 2005. No assurance can be given that the Company will prevail on appeal or reach a settlement to recover any portion of its investment. 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") and seeks declaratory relief and damages. In September 2002, the US District Court for the District of Nebraska entered judgment against Nebraska in favor of the CIC for $153 million, including approximately $50 million for prejudgment interest. Of this amount, US Ecology's share was $6.2 million plus $6.1 million for prejudgment interest. The Company carries $6.5 million on its balance sheet for capitalized facility development costs. The State of Nebraska subsequently appealed this judgment. On February 18, 2004, the Eighth U.S. Circuit Court of Appeals affirmed the District Court ruling in its entirety. On March 3, 2004, the State of Nebraska filed a petition for rehearing by the full Eighth U.S. Circuit Court of Appeals (en banc). On April 21, 2004, the Eighth Circuit Court of Appeals denied Nebraska's petition for rehearing. The State of Nebraska may petition the U.S. Supreme Court to review the matter. No assurance can be given that the trial and appellate court judgments will be affirmed on appeal or that US Ecology will recover its contributions or interest thereon. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. On February 17, 2004 the Company redeemed a warrant to purchase 1,349,843 shares of common stock at $1.50 a share for $5,500,000. The warrant had been issued in 1998 to its former bank as part of a debt restructuring agreement. The redeemed warrant, which represented approximately 8% of the Company's shares outstanding, has been surrendered and will not be reissued. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None ITEM 5. OTHER INFORMATION. If at June 30, 2004, the Company's unaffiliated market capitalization is greater than $75,000,000, the Company will become an accelerated filer effective January 1, 2005. As of April 30, 2004, the Company's unaffiliated market capitalization was approximately $101,000,000. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) The following exhibits are filed as part of this report: --------------------------------------------------------------------------- Exhibit No. Description ------------ ------------------------------------------------------------ 31.1 Certifications of March 31, 2004 Form 10-Q by Chief Executive Officer dated April 30, 2004 ------------ ------------------------------------------------------------ 31.2 Certifications of March 31, 2004 Form 10-Q by Chief Financial Officer dated April 30, 2004 --------------------------------------------------------------------------- 23 --------------------------------------------------------------------------- 32.1 Certifications of March 31, 2004 Form 10-Q by Chief Executive Officer dated April 30, 2004 ------------ ------------------------------------------------------------ 32.2 Certifications of March 31, 2004 Form 10-Q by Chief Financial Officer dated April 30, 2004 --------------------------------------------------------------------------- (b) Reports on Form 8-K. Press Release, dated February 17, 2004, entitled "AMERICAN ECOLOGY POSTS SOLID FOURTH QUARTER EARNINGS OF $3.1 MILLION" Press Release, dated February 18, 2004, entitled "AMERICAN ECOLOGY REDEEMS COMMON STOCK WARRANT FOR $5.5 MILLION " Press Release, dated February 19, 2004, entitled "U.S. Court of Appeals Affirms Judgment against Nebraska in Low-Level Radioactive Waste Lawsuit" Press Release, dated April 20, 2004, entitled "AMERICAN ECOLOGY POSTS $3.4 MILLION FIRST QUARTER OPERATING INCOME" 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: April 30, 2004 By:/s/ Stephen A. Romano ------------------------ Stephen A. Romano President, Chief Executive Officer and Chief Operating Officer Date: April 30, 2004 By:/s/ James R. Baumgardner --------------------------- James R. Baumgardner Senior Vice President, Chief Financial Officer, Secretary and Treasurer 24 EXHIBIT INDEX Exhibit Description - ------- ----------- 31.1 Certifications of March 31, 2004 Form 10-Q by Chief Executive Officer dated April 30, 2004 31.2 Certifications of March 31, 2004 Form 10-Q by Chief Financial Officer dated April 30, 2004 32.1 Certifications of March 31, 2004 Form 10-Q by Chief Executive Officer dated April 30, 2004 32.2 Certifications of March 31, 2004 Form 10-Q by Chief Financial Officer dated April 30, 2004 25 EX-31.1 2 doc2.txt Exhibit 31.1 I, Stephen A. Romano, certify that: 1. I have reviewed this quarterly report on Form 10-Q of American Ecology Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and c) disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. April 30, 2004 /S/ Stephen A. Romano - --------------------------- Chief Executive Officer EX-31.2 3 doc3.txt Exhibit 31.2 I, James R. Baumgardner, certify that: 1. I have reviewed this quarterly report on Form 10-Q of American Ecology Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and c) disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. April 30, 2004 /S/ James R. Baumgardner - ----------------------------- Chief Financial Officer EX-32.1 4 doc4.txt Exhibit 32.1 Written Statement of the Chief Executive Officer Pursuant to 18 U.S.C. Sec.1350 Solely for the purposes of complying with 18 U.S.C. Sec.1350, I, the undersigned Chief Executive Officer of American Ecology Corporation (the "Company"), hereby certify, based on my knowledge, that the Quarterly Report on Form 10-Q of the Company for the period ended March 31, 2004 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Stephen A. Romano - --------------------- Stephen A. Romano April 30, 2004 EX-32.2 5 doc5.txt Exhibit 32.2 Written Statement of the Chief Financial Officer Pursuant to 18 U.S.C. Sec.1350 Solely for the purposes of complying with 18 U.S.C. Sec.1350, I, the undersigned Chief Financial Officer of American Ecology Corporation (the "Company"), hereby certify, based on my knowledge, that the Quarterly Report on Form 10-Q of the Company for the period ended March 31, 2004 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ James R. Baumgardner - ------------------------ James R. Baumgardner April 30, 2004 -----END PRIVACY-ENHANCED MESSAGE-----