-----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, RkZwPvHjARkwxCSZSwVF4Z/SrZxPoavDE6h3JpLw8S4IvvHoDeBDEmVl6idcv7bb aHYeVqPSYAs4hQeMXXzSOQ== 0001015402-05-002287.txt : 20050506 0001015402-05-002287.hdr.sgml : 20050506 20050506165813 ACCESSION NUMBER: 0001015402-05-002287 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050506 DATE AS OF CHANGE: 20050506 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: 05808757 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 body.txt AMERICAN ECOLOGY CORPORATION 10-Q 03-31-2005 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 2005 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________________________to____________________________ Commission File Number 0-11688 AMERICAN ECOLOGY CORPORATION ---------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-3889638 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) Lakepointe Centre I, 300 E. Mallard, Suite 300 Boise, Idaho 83706 ------------ ----- (Address of principal executive offices) (Zip Code) (208) 331-8400 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [_] At May 6, 2005 Registrant had outstanding 17,475,294 shares of its Common Stock. AMERICAN ECOLOGY CORPORATION QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2005 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION PAGE Item 1. Financial Statements Consolidated Balance Sheets (Unaudited) 4 Consolidated Statements of Operations (Unaudited) 5 Consolidated Statements of Cash Flows (Unaudited) 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3. Quantitative and Qualitative Disclosures About Market Risk 22 Item 4. Controls and Procedures 22 PART II. OTHER INFORMATION Item 1. Legal Proceedings 22 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23 Item 3. Defaults Upon Senior Securities 23 Item 4. Submission of Matters to a Vote of Security Holders 23 Item 5. Other Information 23 Item 6. Exhibits 23 Signatures 24 2 OFFICERS - -------- Stephen A. Romano Chief Executive Officer, President and Chief Operating Officer James R. Baumgardner Senior Vice President, Chief Financial Officer Treasurer and Secretary Michael J. Gilberg Vice President and Controller Steven D. Welling Vice President, Sales & Marketing John M. Cooper Vice President and Chief Information Officer DIRECTORS - --------- Rotchford L. Barker, Chairman Independent Businessman David B. Anderson President, Highland Capital Enterprises Corp. Roy C. Eliff Independent Businessman Edward F. Heil Independent Businessman Kenneth C. Leung Managing Director of Investment Banking, Sanders Morris Harris Richard Riazzi Independent Businessman Stephen A. Romano Chief Executive Officer, President and Chief Operating Officer Jimmy D. Ross U.S. Army, Retired Stephen M. Schutt Vice President, Nuclear Fuel Services, Inc. CORPORATE OFFICE - ---------------- Lakepointe Centre I American Ecology Corporation 300 East Mallard Drive, Suite 300 Boise, Idaho 83706 (208) 331-8400 (208) 331-7900 (fax) www.americanecology.com - ----------------------- COMMON STOCK - ------------ American Ecology Corporation's common stock trades on the Nasdaq National Market under the symbol ECOL. FINANCIAL REPORTS - ----------------- A copy of American Ecology Corporation Annual and Quarterly Reports, as filed on Form 10-K and 10-Q with the Securities and Exchange Commission, may be obtained by writing: Lakepointe Centre I 300 E. Mallard, Suite 300 Boise, Idaho 83706 or at www.americanecology.com ----------------------- TRANSFER AGENT - -------------- American Stock Transfer & Trust Company 59 Maiden Lane New York, New York 10038 (718) 921-8289 or at www.amstock.com --------------- AUDITOR - ------- Moss Adams LLP 1001 Fourth Avenue, Suite 2900 Seattle, WA 98154 3
AMERICAN ECOLOGY CORPORATION CONSOLIDATED BALANCE SHEETS ($ IN 000'S) (UNAUDITED) March 31, 2005 December 31, 2004 --------------- ------------------ ASSETS Current Assets: Cash and cash equivalents $ 2,920 $ 2,160 Short term investments 10,323 10,967 Receivables, net 8,742 8,963 Insurance receivable 1,161 1,285 Prepayments and other 1,077 1,469 Deferred income taxes 5,613 5,613 --------------- ------------------ Total current assets 29,836 30,457 Property and equipment, net 28,735 27,363 Facility development costs 6,478 6,478 Other assets 462 462 Deferred income taxes 12,041 12,473 --------------- ------------------ Total assets $ 77,552 $ 77,233 =============== ================== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of long term debt $ 1,458 $ 1,457 Accounts payable 2,556 3,022 Deferred revenue 1,296 724 State burial fees payable 1,112 1,446 Management incentive plan payable 89 934 Customer refunds 2,512 2,512 Accrued liabilities 1,251 725 Accrued closure and post closure obligation, current portion 2,323 2,323 --------------- ------------------ Total current liabilities 12,597 13,143 Long term debt 2,369 2,734 Long term accrued liabilities 523 441 Accrued closure and post closure obligation, excluding current portion 9,314 9,304 --------------- ------------------ Total liabilities 24,803 25,622 --------------- ------------------ Commitments and contingencies Shareholders' equity: Convertible preferred stock, 1,000,000 shares authorized, Common stock, $.01 par value, 50,000,000 authorized, 17,441,294 and 17,398,494 shares issued and outstanding 174 174 Additional paid-in capital 51,297 51,015 Retained earnings 1,278 422 --------------- ------------------ Total shareholders' equity 52,749 51,611 --------------- ------------------ Total Liabilities and Shareholders' Equity $ 77,552 $ 77,233 =============== ================== See notes to consolidated financial statements
4
AMERICAN ECOLOGY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS ($ IN 000'S EXCEPT PER SHARE AMOUNTS) (UNAUDITED) Three Months Ended -------------------- March 31, 2005 March 31, 2004 -------------------- --------------- Revenue $ 12,554 $ 13,905 Direct operating costs 8,713 7,612 -------------------- --------------- Gross profit 3,841 6,293 Selling, general and administrative expenses 2,514 2,872 Business interruption insurance claim (41) -- -------------------- --------------- Income from operations 1,368 3,421 Interest income 85 36 Interest expense 47 49 Other income 17 45 -------------------- --------------- Income before income tax and discontinued operations 1,423 3,453 Income tax expense 567 1,164 -------------------- --------------- Income before discontinued operations 856 2,289 Income from discontinued operations (net of tax of $0) -- 149 -------------------- --------------- Net income $ 856 $ 2,438 ==================== =============== Basic earnings per share from continuing operations .05 .13 Basic earnings per share from discontinued operations -- .01 -------------------- --------------- Basic earnings per share $ .05 $ .14 ==================== =============== Diluted earnings per share from continuing operations .05 .13 Diluted earnings per share from discontinued operations -- .01 -------------------- --------------- Diluted earnings per share $ .05 $ .14 ==================== =============== Dividends paid per common share $ -- $ -- ==================== ===============
See notes to consolidated financial statements 5
AMERICAN ECOLOGY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS ($ IN 000'S) (UNAUDITED) Three Months Ended March 31, 2005 2004 -------------- ----------------- Cash flows from operating activities: Net income $ 856 $ 2,438 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization, and accretion 1,376 1,488 Income from discontinued operations -- (149) Income tax benefit on exercise of stock options 130 -- Deferred income taxes 432 -- Changes in assets and liabilities: Receivables 221 4,020 Other assets 345 173 Closure and post closure obligation (260) (148) Income taxes payable/receivable -- 1,115 Accounts payable and accrued liabilities (465) 1,699 -------------- ----------------- Net cash provided by operating activities 2,635 10,636 Cash flows from investing activities: Capital expenditures (2,529) (513) Proceeds from the sale of assets 222 110 Transfers between cash and short term investments, net 644 39 -------------- ----------------- Net cash used by investing activities (1,663) (364) Cash flows from financing activities: Payments of indebtedness (364) (366) Warrants purchased and canceled -- (5,500) Stock options exercised 152 359 -------------- ----------------- Net cash used by financing activities (212) (5,507) -------------- ----------------- Increase in cash and cash equivalents 760 4,765 Net cash used by discontinued operations -- (668) Cash and cash equivalents at beginning of year 2,160 6,674 -------------- ----------------- Cash and cash equivalents at end of quarter $ 2,920 $ 10,771 ============== ================= Supplemental disclosures of cash flow information: Cash paid during the year for: Interest expense $ 47 $ 49 Income taxes paid 4 50
See notes to consolidated financial statements 6 AMERICAN ECOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments and disclosures necessary to present fairly the financial position, results of operations, and cash flows of American Ecology Corporation and its wholly-owned subsidiaries (the "Company"). These financial statements and notes should be read in conjunction with the financial statements and notes included in the Company's 2004 Annual Report on Form 10-K for the year ended December 31, 2004, filed with the Securities and Exchange Commission. Certain reclassifications of prior quarter amounts have been made to conform with current quarter presentation, none of which affect previously recorded net income. NOTE 2. EARNINGS PER SHARE Basic earnings per share are computed based on net income available to common shareholders and the weighted average number of common shares outstanding during the quarter. Diluted earnings per share reflect the assumed issuance of common shares for outstanding options and conversion of warrants. The computation of diluted earnings per share does not assume exercise or conversion of securities whose exercise price is greater than the average common share market price as the assumed conversion of these securities would increase earnings per share. The computation of diluted loss per share does not assume exercise or conversion of any securities as the assumed conversion of securities would decrease loss per share.
Three Months Ended March 31, ($in thousands except per share amounts) 2005 2004 ------------- ---------------- Income before discontinued operations $ 856 $ 2,289 Income from operations of discontinued segments -- 149 ------------- ---------------- Net income available to common shareholders $ 856 $ 2,438 ============= ================ Weighted average shares outstanding- Common shares 17,410 17,090 Effect of dilutive stock options 540 525 ------------- ---------------- Average shares 17,950 17,615 ============= ================ Basic earnings per share from continuing operations .05 .13 Basic earnings per share from discontinued operations -- .01 ------------- ---------------- Basic earnings per share $ .05 $ .14 ============= ================ Diluted earnings per share from continuing operations .05 .13 Diluted earnings per share from discontinued operations -- .01 ------------- ---------------- Diluted earnings per share $ .05 $ .14 ============= ================
NOTE 3. OPERATING SEGMENTS The Company operates within two segments, Operating Disposal Facilities and Non-Operating Disposal Facilities, based on its internal reporting structure and nature of services offered. The Operating Disposal Facility segment represents facilities accepting hazardous and radioactive waste. The Non-Operating Disposal Facility segment represents facilities that are no longer accepting hazardous and/or radioactive waste or formerly proposed new disposal facilities. 7 On December 27, 2002, the Company committed to discontinue commercial operations within its Processing and Field Services segment which aggregated, volume-reduced, and performed remediation and other services on radioactive material, but excluded processing performed at its disposal facilities. All prior segment information has been restated in order to present the operations at the Oak Ridge facility, including the Field Services division, as discontinued operations. On June 30, 2004 the Oak Ridge assets were sold. Income taxes are assigned to Corporate, but all other items are included in the segment where they originated. Inter-company transactions have been eliminated from the segment information and are not significant between segments. Summarized financial information concerning the Company's reportable segments is shown in the following table:
($in thousands) Operating Non-Operating Discontinued Disposal Disposal Processing and Facilities Facilities Field Services Corporate Total Three months ended March 31, 2005 - --------------------------------- Revenue $ 12,537 $ 17 $ -- $ -- $12,554 Direct operating cost 8,607 106 -- -- 8,713 ------------ --------------- --------------- ----------- -------- Gross profit (loss) 3,930 (89) -- -- 3,841 S,G&A, 1,107 5 -- 1,402 2,514 Business interruption insurance claim (41) -- -- -- (41) ------------ --------------- --------------- ----------- -------- Income (loss) from operations 2,864 (94) -- (1,402) 1,368 Interest and other income/(expense) 10 -- -- 28 38 Other income 17 -- -- -- 17 ------------ --------------- --------------- ----------- -------- Income (loss) before income tax and discontinued operations 2,891 (94) -- (1,374) 1,423 Income tax expense (benefit) -- -- -- 567 567 Discontinued operations -- -- -- -- -- ------------ --------------- --------------- ----------- -------- Net Income (loss) $ 2,891 $ (94) $ -- $ (1,941) $ 856 ============ =============== =============== =========== ======== Depreciation and accretion $ 1,273 $ 95 $ -- $ 8 $ 1,376 Capital Expenditures $ 2,529 $ -- $ -- $ -- $ 2,529 Total Assets $ 38,732 $ 6,531 $ -- $ 32,289 $77,552 Three months ended March 31, 2004 - --------------------------------- Revenue $ 13,891 $ 14 $ -- $ -- $13,905 Direct operating cost 7,503 109 -- -- 7,612 ------------ --------------- --------------- ----------- -------- Gross profit (loss) 6,388 (95) -- -- 6,293 S,G&A 1,224 5 -- 1,643 2,872 ------------ --------------- --------------- ----------- -------- Income (loss) from operations 5,164 (100) -- (1,643) 3,421 Interest and other income/(expense) 25 17 -- (10) 32 ------------ --------------- --------------- ----------- -------- Income (loss) before income tax and discontinued operations 5,189 (83) -- (1,653) 3,453 Income tax expense (benefit) -- -- -- 1,164 1,164 Discontinued operations -- -- 149 -- 149 ------------ --------------- --------------- ----------- -------- Net Income (loss) $ 5,189 $ (83) $ 149 $ (2,817) $ 2,438 ============ =============== =============== =========== ======== Depreciation and accretion $ 1,386 $ 94 $ -- $ 8 $ 1,488 Capital Expenditures $ 481 $ -- $ -- $ 32 $ 513 Total Assets $ 36,307 $ 6,529 $ 2,292 $ 19,217 $64,345
NOTE 4. STOCK OPTION PLANS 8 The Company has two stock-based compensation plans, which are accounted for under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees and related Interpretations. No stock-based employee compensation cost is reflected in net income. In December 2004, the Financial Accounting Standards Board ("FASB") revised SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 will require the Company to recognize the fair value of options issued to employees or the Board of Directors over the period in which the option is earned. The Company previously accounted for stock-based compensation under APB Opinion No. 25, which is superseded by SFAS No. 123. On April 14, 2005, the effective date of SFAS 123 was extended and will now be effective for the Company as of January 1, 2006. Under the revised SFAS No. 123 at March 31, 2005, the Company has issued but unvested options that, if earned, will result in the following compensation expense being recognized:
Pro Forma ($in thousands) Compensation Expense --------------------- Fair value of options to be earned during the first quarter of 2006 $ 47
The following table illustrates the effect on net income and earnings per share if the Company applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based compensation for the quarters ended March 31, 2005 and 2004:
($in thousands, except per share amounts) 2005 2004 ------ ------- Net income (loss), as reported $ 856 $2,438 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (133) (94) ------ ------- Pro forma net income (loss) $ 723 $2,344 ====== ======= EARNINGS (LOSS) PER SHARE: Basic - as reported $ .05 $ .14 ====== ======= Basic - pro forma $ .04 $ .14 ====== ======= Diluted - as reported $ .05 $ .14 ====== ======= Diluted - pro forma $ .04 $ .13 ====== =======
The stock option plan summary and changes during quarters ended March 31 are as follows:
2005 2004 --------- ----------- Options outstanding, beginning of quarter 913,708 1,266,281 Granted 7,500 -- Exercised (42,800) (141,100) Canceled -- -- --------- ----------- Options outstanding, end of quarter 878,408 1,125,181 ========= =========== Weighted average exercise price of options, beginning of quarter $ 4.40 $ 3.90 Weighted average exercise price of options granted $ 11.53 $ -- Weighted average exercise price of options exercised $ 3.54 $ 2.49 Weighted average exercise price of options canceled $ -- $ -- Weighted average exercise price of options, end of quarter $ 4.50 $ 4.08 Options exercisable at end of quarter 725,496 819,841 ========= =========== Options available for future grant at end of quarter 492,176 509,676 ========= ===========
The following table summarizes information about the stock options outstanding under the Company's option plans as of March 31, 2005: 9
Weighted average Weighted Weighted remaining average average Range of exercise contractual life Number exercise price Number exercise price price per share (years) outstanding per share exercisable per share - ------------------ ----------------- ----------- --------------- ----------- --------------- $1.00 - $1.47 2.6 37,500 $ 1.32 37,500 $ 1.32 $1.60 - $2.25 3.6 38,500 $ 2.14 38,500 $ 2.14 $2.42 - $3.50 7.5 246,109 $ 2.90 191,471 $ 2.87 $3.75 - $4.50 6.8 344,546 $ 4.34 281,085 $ 4.30 $6.50 7.9 139,253 $ 6.50 104,440 $ 6.50 $9.20 - $12.15 9.3 72,500 $ 9.75 72,500 $ 9.75 ----------- ----------- 878,408 725,496 =========== ===========
As of March 31, 2005, the 1992 Stock Option Plan for Employees had options outstanding to purchase 575,208 common shares with 188,976 shares remaining available for issuance under option grants. The 1992 Stock Option Plan for Directors had options outstanding to purchase 303,200 common shares with 303,200 shares remaining available for issuance under option grants. The fair value of each option grant is estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants during the quarter ended March 31 2005, with no options being granted during the quarter ended March 31, 2004:
2005 2004 ---- ---- Expected volatility 50% -- Risk-free interest rates 4.1% -- Expected lives 10 years -- Dividend yield 2.7% -- Weighted-average fair value of options granted during the quarter (Black-Scholes) $ 5.28 --
NOTE 5. LITIGATION Significant developments have occurred on the following legal matters since December 31, 2004: US ECOLOGY, INC. V. THE STATE OF CALIFORNIA, ET AL., CASE NO.GIC747562, SUPERIOR - --------------------------------------------------- COURT OF THE STATE OF CALIFORNIA FOR THE COUNTY OF SAN DIEGO In 2000, subsidiary US Ecology, Inc., sued the State of California for monetary damages exceeding $162 million. The suit stems from California's alleged abandonment of the formerly proposed Ward Valley low-level radioactive waste ("LLRW") disposal project. State and federal law requires the State to build a disposal facility for LLRW produced in California, Arizona, North Dakota and South Dakota; member states of the Southwestern Compact. US Ecology was selected to site and license the facility using its own funds on a reimbursable basis and obtained a license in 1993. On March 26, 2003, the Superior Court ruled that the Company failed to establish causation and that its claim is further barred by the doctrine of unclean hands. The latter finding was based on actions the Court concluded had created obstacles to an agreement to convey the proposed site from the federal government to the State. The Court also ruled that key elements of the Company's promissory estoppel claim were proven at trial. Specifically, the Court 10 ruled that the State made a clear and unambiguous promise to US Ecology in 1988 to use its best efforts to acquire the site, that the State had abandoned this promise, and that the Company's reliance on the State's promise was foreseeable. However, the Court found that the State's breach of its promise was not a substantial factor in causing damages to US Ecology since the federal government had continued to resist the land transfer. Based on the uncertainty of recovery following the trial court's adverse decision, the Company wrote off the $20,951,000 deferred site development asset on March 31, 2003. In June 2003, the Company filed a notice of appeal with the California Fourth Appellate District Court. The law firm of Cooley Godward was engaged on a fixed price plus contingency basis to pursue the appeal. The fixed fee was expensed at the time of engagement in July 2003. The matter is now fully briefed and oral argument has been scheduled for May 9, 2005. A decision will be due 90 days following oral argument. The Company's financial interest in the matter was materially improved by a 2003 amendment to the 1998 Ward Valley Interest Agreement and Assignment entered into by the Company and its former primary lender. This amendment, entered into with the former lender's successor, provides that any monetary damages obtained shall first be allocated to the Company to recover past and future litigation fees and expenses relating to the case. Any remaining amount recovered shall be divided equally between the Company and the former lender. The 1998 agreement had provided that the first $29.6 million less up to $1.0 million in legal fees and expenses would be owed to the former lender, with any remaining recovery reserved to the Company. No assurance can be given that the Company will prevail on appeal or reach a settlement to recover any portion of its investment or legal expenses. ENTERGY ARKANSAS, INC. ET AL, CENTRAL INTERSTATE LOW-LEVEL RADIOACTIVE WASTE - -------------------------------------------------------------------------------- COMMISSION AND US ECOLOGY, INC. ("PLAINTIFFS") V. STATE OF NEBRASKA, ET AL., - ------------------------------------------------------------------------------ CASE NO. 4:98CV3411, U.S. DISTRICT COURT, DISTRICT OF NEBRASKA This action was brought in federal court in December of 1999 by electric utilities that generate low-level radioactive waste ("LLRW") within the Central Interstate Low-Level Radioactive Waste Compact ("CIC"). CIC member states are Nebraska, Kansas, Oklahoma, Arkansas, and Louisiana. The action sought declaratory relief and damages for bad faith in the State of Nebraska's processing and denial of US Ecology's application to develop and operate a LLRW disposal facility near Butte, Nebraska. US Ecology is the CIC's contractor and intervened as a plaintiff. In September 2002, the US District Court for the District of Nebraska entered judgment against Nebraska in favor of the CIC for $153 million, including approximately $50 million for prejudgment interest. Of this amount, US Ecology's share was $6.2 million plus $6.1 million for prejudgment interest. The Company carries $6.5 million on its balance sheet for capitalized facility development costs. The State appealed the judgment to the Eighth Circuit Court of Appeals where it was argued in June 2003. On February 18, 2004, the Eighth U.S. Circuit Court of Appeals affirmed the District Court ruling in its entirety. On August 9, 2004 Nebraska and the CIC entered into a settlement under which the State agreed to make four equal payments of $38.5 million to the CIC beginning August 1, 2005 and annually thereafter for three years. The $154 million settlement reflects a principal amount of $140.5 million, plus interest of 3.75% compounded annually and beginning August 1, 2004. The principal may be reduced to $130 million if Nebraska and the CIC negotiate suitable access to a proposed future Texas LLRW disposal site. Settlement payments are subject to appropriation. Should the Nebraska legislature fail to appropriate the required payments, the CIC retains rights to pursue enforcement by any and all legal remedies available. Under the settlement, Nebraska waived any claim to sovereign immunity in a suit brought to enforce payment and agreed to dismiss its petition for U.S. Supreme Court review. The Company is undertaking efforts to finalize payment arrangements with the CIC prior to the intended August 2005 disbursement. No assurance can be given that the Nebraska legislature will appropriate the funds required to comply with the settlement agreement or that the Company can timely finalize acceptable payment arrangements with the CIC. MANCHAK V. US ECOLOGY, INC., U.S. DISTRICT COURT FOR THE DISTRICT OF NEVADA, - -------------------------------- CASE NO. CV-S-97-0655. In April 1996, Frank Manchak, Jr. ("Manchak") filed suit against subsidiary US Ecology, Inc., alleging infringement 11 of a sludge treatment patent to stabilize hazardous waste at the Company's Beatty, Nevada hazardous waste facility. Manchak sought unspecified damages for infringement, treble damages, interest, costs and attorney fees. In October 2002, the United States District Court for the District of Nevada entered a summary judgment in favor of the Company. Manchak filed a motion for reconsideration that was denied. Manchak's subsequent appeal to the U.S. Court of Appeals for the Federal Circuit was dismissed, and his requests for reconsideration and en banc review were rejected in October 2003. On January 8, 2004, Manchak filed a Rule 60(b) motion in the Nevada District Court seeking relief from that Court's orders granting summary judgment of non-infringement and denying reconsideration. On March 8, 2004, the District Court rejected Manchak's Rule 60(b) motion, prohibited further filings with the Court and imposed sanctions on Manchak. Manchak appealed the March 8, 2004 order, which the Federal Circuit agreed to hear. On March 18, 2005 the United States Court of Appeals for the Federal Circuit affirmed the lower Court's ruling rejecting Manchak's claim. The Company now considers the matter closed. DAVID W. CROW V. AMERICAN ECOLOGY CORPORATION, U.S. DISTRICT COURT OF HARRIS - -------------------------------------------------- COUNTY, TEXAS; 280TH JUDICIAL DISTRICT. In the complaint, David. Crow alleges he was hired by the Company as its General Counsel in October 1995 and that his compensation package included 150,000 options to purchase Company common stock with an oral agreement by the prior CEO that the stock options would be exercisable for ten years. In May 2000, Crow first contacted the Company regarding the stock options. The Company informed Crow by letter that pursuant to the Company's 1992 Employee Stock Option Plan, his options had expired thirty days after his employment with the Company ended. Crow's lawsuit was initially filed in Harris County District Court on or about May 4, 2004. The Company removed the lawsuit to federal court based on diversity jurisdiction. The complaint alleges four counts: breach of written contract, breach of oral contract, fraudulent inducement, and declaratory judgment that Crow is entitled to purchase 150,000 shares of AEC stock at a strike price of $4 per share. Crow estimates his damages between $1,050,000 and $1,258,500; an amount calculated by taking the difference of the Company's current and 52 week high stock trading price and the $4/share alleged option strike price. The Company believes it has insurance against a portion of the claim and has notified its carrier of the claim. The Company further believes that the allegations are without merit and intends to vigorously defend itself in the matter. However, no assurance can be given that it will prevail or that insurance proceeds will be recognized. NOTE 6. COMMITMENTS AND CONTINGENCIES On January 21, 2005, the Company committed to a five year operating lease for 150 to 200 rail cars at $475 a month for each car leased. A formal lease agreement has not yet been prepared, and the specific number of rail cars subject to the lease has not yet been determined. NOTE 7. CLOSURE AND POST CLOSURE OBLIGATIONS Closure and post closure obligations are recorded when environmental assessments and/or remedial efforts are probable, and the costs can be reasonably estimated consistent with Statement of Financial Accounting Standards No. 5. The Company performs periodic reviews of both non-operating and operating facilities and revises accruals for estimated post-closure, remediation and other costs when necessary. The Company's recorded liabilities are based on best estimates of current costs and are updated periodically to reflect current technology, laws and regulations, inflation and other economic factors. Changes to reported closure and post closure obligations were as follows ($ in thousands):
Accrued Closure and Post Closure Obligation ------------------------- December 31, 2004 obligation $ 11,627 Accretion of obligation 270 Payment of obligation (260) Adjustment of obligation -- ------------------------- March 31, 2005 obligation $ 11,637 =========================
12 At March 31, 2005, none of the Company's assets were legally restricted for purposes of settling the closure and post closure obligation. NOTE 8. DISCONTINUED OPERATIONS During 2002, the Company offered for sale its Processing Facility and Field Services operations based in Oak Ridge, Tennessee. On December 27, 2002, the facility ceased revenue-producing operations and further waste acceptance. All Oak Ridge waste was subsequently shipped to off-site processors and disposers to help sell the facility assets. These assets were subsequently sold to Toxco, Inc. on June 30, 2004. As of March 31, 2005, there were no "Assets held for sale or closure" associated with the discontinued Oak Ridge operations. The revenue, costs and expenses and cash flows for the Oak Ridge operations have been excluded from continuing operations results and reported as "Gain (loss) from discontinued operations" and "Net cash provided by (used in) discontinued operations". Prior periods have been restated to reflect this. The assets and liabilities of discontinued operations included in the consolidated balance sheet as of March 31 are as follows ($ in thousands):
Processing and Field Services Facility ------------------------------------------ Three Months Ended March 31, ------------------- --------------------- 2005 2004 ------------------- --------------------- Current assets - -------------- Current assets $ -- $ 183 Property & equipment, net -- 552 ------------------- --------------------- -- 735 =================== ===================== Non-current assets - ------------------ Property, plant & equipment, net -- 1,509 Other -- 48 ------------------- --------------------- -- 1,557 =================== ===================== Current liabilities - ------------------- Accounts payable & accruals -- 890 Current portion long term debt -- 38 ------------------- --------------------- -- 928 =================== ===================== Non-current liabilities - ----------------------- Closure/post closure obligations -- 4,593 Long-term debt -- 10 Other -- 5 ------------------- --------------------- -- 4,608 =================== =====================
Operating results for the discontinued operations were as follows for three months ending March 31:
($in thousands) Processing and Field Services Operations 2005 - ---- Revenues, net $ -- Operating income (loss) -- Net income (loss) -- Basic earnings (loss) per share -- Diluted earnings (loss) per share -- 2004 - ---- Revenues, net $ -- Operating income (loss) 149 Net income (loss) 149 Basic earnings (loss) per share .01 Diluted earnings (loss) per share .01
13 Costs incurred at the Oak Ridge facility to prepare the facility for sale during the three months ended March 31 are summarized as follows: ($ in thousands)
2005 2004 ----- ------ Net operating costs in excess of previous accruals $ -- $ 34 Accounts receivable collected in excess of valuation allowance -- (207) Increase in estimated cost to dispose of removed waste -- 24 ----- ------ Net Income for the period ended March 31, $ -- $ 149 ===== ======
Cost changes for Oak Ridge facility on-site activities and disposal liabilities for removed wastes are as follows:
($in thousands) December 31, 2004 Cash Payments Adjustments March 31, 2005 ----------------- -------------- ----------- -------------- Waste disposal liability -- -- -- -- On-site discontinued operation cost liability -- -- -- -- ($in thousands) December 31, 2003 Cash Payments Adjustments March 31, 2004 ----------------- -------------- ----------- -------------- Waste disposal liability 623 (139) 24 508 On-site discontinued operation cost liability 442 (221) 34 255
The adjustments represent differences between the estimated costs accrued at December 31, actual costs incurred during the first quarter, and changes in estimated future costs for removed waste disposition. NOTE 9. PARTIAL SERVICE INTERRUPTION AT ROBSTOWN, TEXAS HAZARDOUS WASTE FACILITY Hazardous waste treatment operations at the Company's Robstown Texas facility were suspended following a July 1, 2004 fire in the facility's waste treatment building. Treatment revenue had previously represented approximately 50% of the Texas facility's revenue. Direct disposal operations, which continued without interruption after the fire, generate the balance of the facility's revenue. While the Company is insured for property and equipment damage and business interruption, insurance deductibles, operational upgrades, and loss of customer business have, and will continue to negatively impact financial performance. The facility resumed limited treatment services in December 2004, but will not resume all permitted service until the new treatment building is operational. This is projected to occur in the third quarter of 2005. The Company filed a property insurance claim and received $265,000 of the $954,000 recognized as of March 31, 2005. An additional $503,000 was received in April 2005. The balance of the claim is under review by the insurance carrier. The Company has also filed approximately $2,300,000 in claims under its business interruption insurance policy for July 2004 through March 2005, of which only $472,000 has been recognized as of March 31, 2005. This claim is also under review by the insurance company. The Company anticipates recognizing the value of the claims after the insurance carrier accepts or confirms the affected amounts. No assurance can be given, however, that the Company will be able to recognize the pending insurance claims. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 14 This document contains forward-looking statements that involve known and unknown risks and uncertainties which may cause actual results in future periods to differ materially from those indicated herein. These risks include, but are not limited to, dependence on key personnel, compliance with and changes to applicable laws, exposure to litigation, access to capital, access to cost-effective insurance and financial assurances, new technologies and patent rights, competitive environment, general economic conditions, potential loss or diminution of major contracts, ability to collect on insurance claims, and the availability of cost effective rail transportation service. The Form 10-K for the year ending December 31, 2004 contains additional risk factors and an expanded disclosure of these risks. When the Company uses words like "will", "may," "believes," "expects," "anticipates," "should," "estimates," "project," "plans," their opposites and similar expressions, the Company is making forward-looking statements. These terms are most often used in statements relating to business plans, strategies, anticipated benefits or projections about the anticipated revenues, earnings or other aspects of our operating results. The Company makes these statements in an effort to keep stockholders and the public informed about our business based on management's current expectations about future events. Such statements should be viewed with caution and are not guarantees of future performance or events. As noted elsewhere in this report, our business is subject to uncertainties, risks and other influences, many of which the Company has no control over. Additionally, these factors, either alone or taken together, could have a material adverse effect on the Company and could change whether any forward-looking statement ultimately turns out to be true. The Company undertakes no obligation to publicly release updates or revisions to these statements. The following discussion should be read in conjunction with the audited consolidated financial statements and the notes thereto filed on Form 10-K for the year ending December 31, 2004. Unless otherwise described, changes discussed relate to the increase or decrease from the three month period ended March 31, 2004 to the three month period ended March 31, 2005. INTRODUCTION - ------------ The Company is a hazardous, PCB, industrial and radioactive waste management company providing transportation, treatment and disposal services to commercial and government entities including, but not limited to nuclear power plants, refineries, chemical manufacturing plants, steel mills, the U.S. Department of Defense, biomedical facilities, universities and research institutions. The majority of its revenues are derived from fees charged at the Company's four fixed waste disposal facilities. The Company and its predecessors have been in business for 52 years. A significant portion of the Company's revenue is attributable to discrete waste clean-up projects ("Event Business") which vary substantially in size and duration. The one-time nature of Event Business necessarily creates variability in revenue and earnings. This can produce large quarter to quarter swings. Management's strategy is to continue expanding its recurring business ("Base Business") while simultaneously securing both large and small Event Business projects. When the Company's Base Business covers fixed costs, more of the Event Business revenue falls through to the bottom line. This strategy takes advantage of the largely fixed cost nature of the disposal business. OVERALL COMPANY PERFORMANCE - --------------------------- The Company's financial performance for the three months ended March 31, 2005 was substantially lower than the first three months of 2004. This quarter to quarter difference primarily reflects a less favorable waste service mix and higher treatment and transportation costs incurred during the three months ended March 31, as discussed below. CRITICAL ACCOUNTING POLICIES - ------------------------------ In preparing the financial statements, management makes many estimates and assumptions that affect the Company's financial position and results of operations. Accounting for the July 1, 2004 Texas Fire, Disposal Facility Accounting, and Litigation involve subjective judgments, estimates and assumptions that would likely produce a materially different financial position and result of operations if different judgments, estimates, or assumptions were used. These matters are discussed below. ACCOUNTING FOR THE JULY 1, 2004 TEXAS FIRE 15 A July 1, 2004 fire in the Robstown, Texas facility's waste treatment building resulted in an insurance claim for Property and Equipment damaged in the fire. As of December 31, 2004 the Company had fully impaired the $679,000 in book value of assets damaged in the fire and recognized $954,000. This amount represents the stated values submitted to the insurance carrier at the inception of coverage and the probable recovery expected by management. As of May 6, 2005, $768,000 in property insurance proceeds had been received by the Company. As of March 31, 2005, the Company has filed approximately $2,300,000 in business interruption insurance claims with its insurance carrier, of which $472,000 of incremental costs due to the fire have been recognized. The Company has not recognized significant lost revenue associated with suspension of treatment services following the fire pending determination of the actual amounts recovered from its insurance company. DISPOSAL FACILITY ACCOUNTING In general terms, a disposal cell development asset exists for the cost of building usable disposal space and a closure liability exists for closing, maintaining and monitoring the disposal unit once this space has been filled. Major assumptions and judgments used to calculate cell development assets and closure liabilities are as follows: - - Personnel and equipment costs incurred to construct disposal cells are capitalized as a cell development asset. - - The cell development asset is amortized as each available cubic yard of disposal space is filled. Periodic independent engineering survey and inspection reports are used to determine the remaining volume available. These reports take into account waste volume, compaction rates and space reserved for capping filled cells. Additionally, changes in the estimated useful lives of the cells or related expansion plans have a direct effect on the amortization expense related to those cells during future periods. - - The closure liability is the present value based on a current cost estimate prepared by an independent engineering firm of the costs to close, maintain and monitor filled disposal units. Management estimates the timing of payment, accretes the current cost estimate by an estimated cost of living (1.5%), and then discounts (9.3%) the accreted current cost estimate back to a present value. The final payments of the closure liability are estimated as being paid in 2056 based upon current permitted capacity and estimated annual usage. LITIGATION The Company is involved in litigation requiring estimates of timing and loss potential whose disposition is controlled by the judicial process. During 2003, the Company wrote off $20,951,000 due to an adverse trial court decision which cast substantial doubt on the Company's ability to recover its investment in the formerly proposed Ward Valley, California disposal project. The Company has appealed the trial court's ruling. The US District Court for the District of Nebraska entered judgment against the State of Nebraska in favor of the Central Interstate Compact and other plaintiffs including the Company. The Company's share of the judgment was $12.3 million. On August 9, 2004 Nebraska and the CIC entered into a settlement under which the State agreed to make four equal payments of $38.5 million to the CIC beginning August 1, 2005 and annually thereafter for three years. Payments are subject to appropriation by the Nebraska legislature. The Company carries $6.5 million on its balance sheet for capitalized facility development costs and expects to recognize the difference between the balance sheet amount and the full value of its claim when final payment arrangements are entered into with the CIC and funds are appropriated by the Nebraska legislature. No assurance can be given that the Company will prevail in the above litigation or otherwise recover its investment in the California project, or that funds will be appropriated and acceptable payment arrangements made under the Nebraska settlement. The decision to accrue costs or write off assets is based on specific facts and circumstances pertaining to each case and management's evaluation of present circumstances. RESULTS OF OPERATIONS - ----------------------- 16 The following table presents, for the periods indicated, the operating costs as a percentage of revenues in the consolidated income statement:
($in 000's) Three Months Ended ------------------ March 31, 2005 March 31, 2004 ------------------- ------------------ $ % $ % --------- -------- -------- -------- Revenue 12,554 13,905 Direct operating costs 8,713 69.4% 7,612 54.7% --------- -------- Gross profit 3,841 30.6% 6,293 45.3% SG & A 2,514 20.0% 2,872 20.7% Business interruption insurance claim (41) (0.3)% -- 0.0% --------- -------- Operating income 1,368 10.9% 3,421 24.6% Interest income 85 0.7% 36 0.3% Interest expense 47 0.4% 49 0.4% Other income (expense) 17 0.1% 45 0.3% --------- -------- Net income (loss) before income taxes 1,423 11.3% 3,453 24.8% Income tax expense (benefit) 567 4.5% 1,164 8.4% --------- -------- Net income (loss) before discontinued operations 856 6.8% 2,289 16.5% ========= ========
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2005 AND 2004 - -------------------------------------------------------- REVENUE - ------- For the three months ended March 31, 2005, the Company reported consolidated revenue of $12,554,000, a 10% decrease from the $13,905,000 reported for the same period in 2004. Three of four operating disposal sites generated lower revenue during the first quarter of 2005. The lower quarterly revenue resulted from a combination of slightly lower waste volumes and average selling prices ("ASP") for the Company's treatment and disposal services and decreased shipments to the Company's disposal facility in Richland, Washington. At the three hazardous waste disposal facilities, volumes decreased 1% and ASP decreased 1% over the same quarter last year. The decrease in waste volume resulted from reduced shipments to the Company's Idaho and Texas facilities during the quarter. The decrease in ASP reflected a change in the mix of treatment and direct disposal services. During the three months ending March 31, 2005 and 2004, revenue from a contract with the U.S. Army Corps of Engineers accounted for $2,650,000 and $3,991,000 or 21% and 29% of revenue, respectively. Also during the first quarter of 2004, one New York clean-up project represented $1,438,000 or 10% of revenue. This project was completed prior to 2005. Operating Disposal Facilities - ------------------------------- Richland, Washington LLRW disposal facility revenue decreased substantially for the three months ended March 31, 2005 versus the same period in 2004. This decrease was due to a 52% decrease in rate-regulated wastes and despite a 17% increase in non rate-regulated waste receipt. For 2005, the Washington Utilities and Transportation Commission has approved a revenue requirement of $5,346,000 for the Richland facility's rate-regulated low-level radioactive waste business, of which $684,000 was recorded in the three months ended March 31, 2005. Management currently expects the Richland facility to reach its approved 2005 revenue requirement. At the Grand View, Idaho disposal facility, 5% lower waste volumes and lower transportation revenue were partially offset by 5% higher ASP. Total revenue dropped 6%, however, from the same quarter last year. A private clean-up in New York contributed to first quarter 2004 revenue. Management expects the U.S. Army Corps of Engineers and other customers to increase their rate of shipment to the Grand View, Idaho disposal facility for the balance of 2005. At the Beatty, Nevada hazardous treatment and disposal facility, total revenue increased 5% for the three months ended March 31, 2005 from the same period in 2004. The increased revenue was due to a 28% waste volume 17 increase, however, ASP decreased by 23%. The increased volume was from both clean-up projects and increased shipments from recurring base business. The lower ASP resulted from a higher percentage of waste from lower priced clean-up projects. At the Robstown, Texas hazardous treatment and disposal facility, revenue decreased 21% for the three months ended March 31, 2005 from the same period in 2004. The decreased revenue reflected a less favorable mix of wastes received at the site which reduced ASP by 3%, and a 19% decrease in waste volume following the July 1, 2005 treatment building fire. The Texas facility resumed limited treatment operations on December 1, 2004. A new treatment building is being constructed and is expected to be operational during the third quarter of 2005. DIRECT OPERATING COSTS - ---------------------- For the three months ended March 31, 2005, consolidated direct operating costs increased 14% to $8,713,000 (69% of revenue) compared to $7,612,000 (55% of revenue) for the same period in 2004. This was primarily caused by increased labor, transportation and waste treatment additive costs at the Company's Beatty, Nevada and Grand View, Idaho hazardous waste facilities. Higher transportation costs reflected fuel surcharges, an expanded leased railcar fleet, increased railcar operating lease expenses, and mobilization costs incurred in anticipation of the several large remediation projects. Only a portion of these expenses could be passed on to customers. Also affecting the quarter was $175,000 spent to secure preferred access to two east coast rail transfer points. Relative to revenue, direct operating costs increased substantially. This reflects the largely fixed cost nature of the Company's business. The Company continues its efforts to minimize direct costs through operational improvements and efficiencies such as an improved design for the new treatment building at the Robstown, Texas facility and improved reagent usage at the Beatty, Nevada facility. Operating Disposal Facilities - ------------------------------- Direct costs at each of the four operating facilities increased from the same quarter last year. This increase in consolidated direct operating costs was driven by an increase in direct costs at the Grand View, Idaho facility of $495,000 primarily related to transportation, and an increase in direct costs at the Beatty, Nevada facility of $391,000 primarily related to higher treatment reagent usage. For Idaho, $175,000 was spent securing preferred long-term access to two east coast rail transfer facilities, and approximately $575,000 was spent on other transportation-related activities during the first quarter of 2005. This included fuel surcharges and the costs of a temporarily underutilized rail fleet secured for clean-up shipping in the second quarter of 2005 and beyond. While most of a facility's direct costs are fixed, transportation and treatment reagents are substantially variable. The extent to which these costs are recovered as revenue is based on individual contract conditions, the characteristics of wastes received for treatment, and other factors. Non Operating Disposal Facilities - ------------------------------------ Non Operating Disposal Facilities incur current period expenses for the accretion of engineering, laboratory and other contractor expenses and labor costs required to meet the Company's obligations subsequent to operational use. For the three months ended March 31, 2005 and 2004, the Company reported $14,000 and $10,000 of expenses on proposed development projects, and $92,000 and $109,000 of costs in 2005 and 2004 to remediate or close facilities subsequent to use. GROSS PROFIT - ------------- Lower revenue compounded by higher direct costs resulted in a 39% reduction in gross profit, pushing quarterly gross profit down to $3,841,000 compared with a gross profit of $6,293,000 for the same quarter last year. Decreased disposal revenue at three of four operating disposal facilities produced less fall through due to the largely fixed cost nature of the business. Higher variable costs also reduced gross profit. Gross margin decreased from 45% to 31% of revenue due to the lower revenue received in a period when spending increased to prepare for increased waste volumes in subsequent periods. SELLING, GENERAL AND ADMINISTRATIVE COSTS (SG&A) - ------------------------------------------------ 18 For the three months ended March 31, 2005, the Company reported SG&A of $2,514,000 (20% of revenue), a 12% decrease from the $2,872,000 (21% of revenue) for the same three months of 2004. The decrease in SG&A primarily resulted from a $292,000 accrual in 2004 for the Management Incentive Plan which was not accrued in 2005. The Company will accrue costs for the 2005 Management Incentive Plan if and when pro rata operating income of $12,000,000, including the costs of the plan, is achieved. Operating Disposal Facilities - ------------------------------- During the quarter ended March 31, 2005, Operating Disposal Facilities SG&A decreased $117,000 due to centralization of specific sales functions at the corporate office, offset by miscellaneous increases in SG&A. Corporate - --------- During the quarter ended March 31, 2005, Corporate SG&A decreased $241,000. $292,000 of the reduction is due to the lack of an accrual for the Management Incentive Plan discussed above. During the quarter ended March 31, 2005 the Company incurred costs of $105,000 for documentation and audit of the Company's internal controls as mandated by Section 404 of the Sarbanes-Oxley Act of 2002. Non Operating Disposal Facilities - ------------------------------------ Non Operating Disposal Facilities incur primarily legal costs to recover the Company's investment in formerly proposed disposal site development projects in Ward Valley, California and Butte, Nebraska. For each of the three months ended March 31, 2005 and 2004, the Company reported $5,000 of such SG&A expenses. INTEREST INCOME - --------------- For the three months ended March 31, 2005, the Company earned $85,000 of interest income, an increase from $36,000 in the same period of 2004 due to higher cash balances and higher interest rates available on short term investments. Interest income is earnings on cash balances, short-term investments, and notes receivable for which income is a function of prevailing market rates. Based on current interest rates, the Company does not anticipate significant interest income in 2005. INTEREST EXPENSE - ----------------- For the three months ended March 31, 2005, the Company reported interest expense of $47,000, a decrease of $2,000 from the corresponding period in 2004. The primary cause of this decrease was the reduction in average debt outstanding by $1,400,000 from March 31, 2004 to 2005. For the three months ending March 31, 2005, the interest rate paid on its single outstanding term loan was 4.56%, an increase of 1.18% from the 3.38% at March 31, 2004. Additional reductions may occur as debt balances continue to be paid down, however the Company will experience increased interest expense should interest rates increase. At March 31, 2005, the line of credit had a zero balance. OTHER INCOME (LOSS) - ------------------- Other Income is composed of the following ($ in thousands):
Three Months Ended March 31, 2005 2004 ------------- ---------------- Data processing services $ -- $ 20 Cash receipts for sale or rent of property rights 17 16 Other miscellaneous income, net -- 9 ------------- ---------------- Total other income (loss) $ 17 $ 45 ============= ================
INCOME TAXES - ------------ 19 The components of the income tax provision were as follows ($ in thousands):
Three Months Ended March 31, 2005 2004 ------------- ---------------- Federal tax expense $ 521 $ 1,164 State tax expense 46 -- ------------- ---------------- Income tax expense $ 567 $ 1,164 ============= ================
The tax effects of temporary differences between income for financial reporting and income taxes give rise to deferred tax assets and liabilities. The potential realization of a significant portion of net deferred tax assets is based in part on the Company's estimates of the timing of reversals of certain temporary differences and on the generation of taxable income before such reversals. The net operating loss carry forward at March 31, 2005 was approximately $36,000,000 and expires at various dates between 2011 and 2020. Due to the Company's net operating loss carry forwards, 2005 income tax expense of approximately 2% of pretax income tax expense is expected to be paid in cash, while the other approximately 35% of income tax expense will be offset against the net operating loss carry forwards. The Company will continue to assess the deferred tax asset for utilization as needed but at least annually. SEASONAL EFFECTS - ---------------- Operating revenues are generally lower in the winter months than the warmer summer months when more short duration, one-time remediation projects tend to occur. While both disposal and processing revenue are generally more affected by market conditions than seasonality, weather related clean-up project delays did have an adverse impact on the first quarter of 2005. CAPITAL RESOURCES AND LIQUIDITY - ------------------------------- At March 31, 2005, cash and short term investments totaled $13,243,000, an increase of $116,000 from December 31, 2004. The small increase in cash reflects the Company's continued profitability. During the first three months of 2005, the Company's days sales outstanding ("DSO") increased at March 31, 2005, to 64 days compared to December 31, 2004 at 60 days. As of March 31, 2005 the Company's liquidity, as measured by the current ratio, was 2.4 to 1.0. The debt to equity ratio decreased to 0.5:1.0 at March 31, 2005. There have not been any substantial changes to working capital or debt to equity ratio during the three months ended March 31, 2005. The debt to equity ratio is defined as total liabilities divided by stockholders equity. SOURCES OF CASH On March 31, 2005, the Company had an $8,000,000 revolving line of credit with Wells Fargo Bank in Boise, Idaho maturing June 15, 2005. Management is negotiating with the Bank to renew and extend the line of credit. The line of credit is secured by the Company's accounts receivable. At March 31, 2005, the outstanding balance on the revolving line of credit was $-0-. The Company borrows and repays according to business demands and availability of cash. It currently reserves $5,000,000 for a letter of credit used as collateral for an insurance policy. Company operations produced an average of almost $4,000,000 a quarter in cash flow over the past three years. Management expects 2005 quarterly cash flow from operations to, on average, be higher. The $13,243,000 in cash and short term investments at March 31, 2005 was comprised of short term investments which were not required for operations of $10,323,000, cash immediately available for operations of $3,469,000, and a net checks outstanding amount of ($549,000). 20 USES OF CASH Management currently expects its capital spending to be up to an additional $9,000,000 in 2005 with $3,100,000 projected to be spent completing a cell expansion at the Idaho hazardous waste facility. Cell expansion at each of the Company's other sites are also underway or projected in 2005. The Company paid a $0.25 annual dividend on October 15, 2004. The Company's Board of Directors is evaluating dividend policy and is considering changing from an annual to quarterly dividend. While management anticipates that an announcement will be made on dividend policy on or around its annual shareholders meeting on May 25, 2005, such announcement is contingent upon approval from its commercial bank, Wells Fargo. Management is working with its bank to modify its existing credit agreement to allow for a change in the Company's dividend policy, however no assurance can be given that the Company can have such approval prior to May 25, 2005. The Company believes that cash on hand and cash flow from operations, augmented as needed by periodic borrowings under the line of credit, will be sufficient to meet the Company's cash needs for the foreseeable future. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company does not maintain equities, commodities, derivatives, or any other instruments for trading or any other purposes, and does not enter into transactions denominated in currencies other than the U.S. Dollar. The Company has minimal interest rate risk on investments or other assets due to the Company's preservation of capital approach to investments. At March 31, 2005, approximately $13,200,000 was held in cash or short term investments at terms ranging from overnight to three months. Together, these items earned interest at approximately 2% and comprised 17% of assets. The Company has interest rate risk on debt instruments due to the $7,000,000 five year amortizing term loan due Wells Fargo Bank. At December 31, 2004, $3,733,000 of variable rate debt was owed under the term loan, accruing interest at the rate of 4.6%. A hypothetical change of 1% in interest rates would change annual interest expense paid by the Company by approximately $30,000. ITEM 4. CONTROLS AND PROCEDURES. (a) As of the end of the period covered by this quarterly report, Company management, under the direction of the Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934 (Exchange Act). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer believe that the Company's disclosure controls and procedures are effective in timely alerting them to material information required to be disclosed in the Company's Exchange Act filings. (b) The Company maintains a system of internal controls that are designed to provide reasonable assurance that its records and filings accurately reflect the transactions engaged in. For the quarter ending March 31, 2005, there were no changes to internal controls or in other factors that could materially affect these internal controls. On April 25, 2005 the Company filed an Amended Form 10-K with the Securities and Exchange Commission that contained the opinions of management and the Company's Independent Registered Public Accounting firm regarding the Company's internal controls over financial reporting. Both Management and the Independent Registered Public Accounting firm found that the Company's controls over financial reporting at December 31, 2004 were effective and that no material weaknesses existed. PART II OTHER INFORMATION. - -------------------------- ITEM 1. LEGAL PROCEEDINGS. 21 Significant developments have occurred on the following legal matters since December 31, 2004: US ECOLOGY, INC. V. THE STATE OF CALIFORNIA, ET AL., CASE NO.GIC747562, SUPERIOR - --------------------------------------------------- COURT OF THE STATE OF CALIFORNIA FOR THE COUNTY OF SAN DIEGO In 2000, subsidiary US Ecology, Inc., sued the State of California for monetary damages exceeding $162 million. The suit stems from California's alleged abandonment of the formerly proposed Ward Valley low-level radioactive waste ("LLRW") disposal project. State and federal law requires the State to build a disposal facility for LLRW produced in California, Arizona, North Dakota and South Dakota; member states of the Southwestern Compact. US Ecology was selected to site and license the facility using its own funds on a reimbursable basis and obtained a license in 1993. On March 26, 2003, the Superior Court ruled that the Company failed to establish causation and that its claim is further barred by the doctrine of unclean hands. The latter finding was based on actions the Court concluded had created obstacles to an agreement to convey the proposed site from the federal government to the State. The Court also ruled that key elements of the Company's promissory estoppel claim were proven at trial. Specifically, the Court ruled that the State made a clear and unambiguous promise to US Ecology in 1988 to use its best efforts to acquire the site, that the State had abandoned this promise, and that the Company's reliance on the State's promise was foreseeable. However, the Court found that the State's breach of its promise was not a substantial factor in causing damages to US Ecology since the federal government had continued to resist the land transfer. Based on the uncertainty of recovery following the trial court's adverse decision, the Company wrote off the $20,951,000 deferred site development asset on March 31, 2003. In June 2003, the Company filed a notice of appeal with the California Fourth Appellate District Court. The law firm of Cooley Godward was engaged on a fixed price plus contingency basis to pursue the appeal. The fixed fee was expensed at the time of engagement in July 2003. The matter is now fully briefed and oral argument has been scheduled for May 9, 2005. A decision will be due 90 days following oral argument. The Company's financial interest in the matter was materially improved by a 2003 amendment to the 1998 Ward Valley Interest Agreement and Assignment entered into by the Company and its former primary lender. This amendment, entered into with the former lender's successor, provides that any monetary damages obtained shall first be allocated to the Company to recover past and future litigation fees and expenses relating to the case. Any remaining amount recovered shall be divided equally between the Company and the former lender. The 1998 agreement had provided that the first $29.6 million less up to $1.0 million in legal fees and expenses would be owed to the former lender, with any remaining recovery reserved to the Company. No assurance can be given that the Company will prevail on appeal or reach a settlement to recover any portion of its investment or legal expenses. ENTERGY ARKANSAS, INC. ET AL, CENTRAL INTERSTATE LOW-LEVEL RADIOACTIVE WASTE - -------------------------------------------------------------------------------- COMMISSION AND US ECOLOGY, INC. ("PLAINTIFFS") V. STATE OF NEBRASKA, ET AL., - ------------------------------------------------------------------------------ CASE NO. 4:98CV3411, U.S. DISTRICT COURT, DISTRICT OF NEBRASKA This action was brought in federal court in December of 1999 by electric utilities that generate low-level radioactive waste ("LLRW") within the Central Interstate Low-Level Radioactive Waste Compact ("CIC"). CIC member states are Nebraska, Kansas, Oklahoma, Arkansas, and Louisiana. The action sought declaratory relief and damages for bad faith in the State of Nebraska's processing and denial of US Ecology's application to develop and operate a LLRW disposal facility near Butte, Nebraska. US Ecology is the CIC's contractor and intervened as a plaintiff. In September 2002, the US District Court for the District of Nebraska entered judgment against Nebraska in favor of the CIC for $153 million, including approximately $50 million for prejudgment interest. Of this amount, US Ecology's share was $6.2 million plus $6.1 million for prejudgment interest. The Company carries $6.5 million on its balance sheet for capitalized facility development costs. The State appealed the judgment to the Eighth Circuit Court of Appeals where it was argued in June 2003. 22 On February 18, 2004, the Eighth U.S. Circuit Court of Appeals affirmed the District Court ruling in its entirety. On August 9, 2004 Nebraska and the CIC entered into a settlement under which the State agreed to make four equal payments of $38.5 million to the CIC beginning August 1, 2005 and annually thereafter for three years. The $154 million settlement reflects a principal amount of $140.5 million, plus interest of 3.75% compounded annually and beginning August 1, 2004. The principal may be reduced to $130 million if Nebraska and the CIC negotiate suitable access to a proposed future Texas LLRW disposal site. Settlement payments are subject to appropriation. Should the Nebraska legislature fail to appropriate the required payments, the CIC retains rights to pursue enforcement by any and all legal remedies available. Under the settlement, Nebraska waived any claim to sovereign immunity in a suit brought to enforce payment and agreed to dismiss its petition for U.S. Supreme Court review. The Company is undertaking efforts to finalize payment arrangements with the CIC prior to the intended August 2005 disbursement. No assurance can be given that the Nebraska legislature will appropriate the funds required to comply with the settlement agreement or that the Company can timely finalize acceptable payment arrangements with the CIC. MANCHAK V. US ECOLOGY, INC., U.S. DISTRICT COURT FOR THE DISTRICT OF NEVADA, - -------------------------------- CASE NO. CV-S-97-0655. In April 1996, Frank Manchak, Jr. ("Manchak") filed suit against subsidiary US Ecology, Inc., alleging infringement of a sludge treatment patent to stabilize hazardous waste at the Company's Beatty, Nevada hazardous waste facility. Manchak sought unspecified damages for infringement, treble damages, interest, costs and attorney fees. In October 2002, the United States District Court for the District of Nevada entered a summary judgment in favor of the Company. Manchak filed a motion for reconsideration that was denied. Manchak's subsequent appeal to the U.S. Court of Appeals for the Federal Circuit was dismissed, and his requests for reconsideration and en banc review were finally rejected in October 2003. On January 8, 2004, Manchak filed a Rule 60(b) motion in the Nevada District Court seeking relief from that Court's orders granting summary judgment of non-infringement and denying reconsideration. On March 8, 2004, the District Court rejected Manchak's Rule 60(b) motion, prohibited further filings with the Court on the matter and imposed sanctions on Manchak. Manchak appealed the March 8, 2004 order and the Federal Circuit agreed to hear the appeal. On March 18, 2005 the United States Court of Appeals for the Federal Circuit affirmed the lower Court's ruling rejecting Manchak's claim. The Company considers the matter closed. DAVID W. CROW V. AMERICAN ECOLOGY CORPORATION, U.S. DISTRICT COURT OF HARRIS - -------------------------------------------------- COUNTY, TEXAS; 280TH JUDICIAL DISTRICT. In the complaint, David. Crow alleges he was hired by the Company as its General Counsel in October 1995 and that his compensation package included 150,000 options to purchase Company common stock with an oral agreement by the prior CEO that the stock options would be exercisable for ten years. In May 2000, Crow first contacted the Company regarding the stock options. The Company informed Crow by letter that pursuant to the Company's 1992 Employee Stock Option Plan, Crow's options had expired thirty days after his employment with the Company ended. Crow's lawsuit was initially filed in Harris County District Court on or about May 4, 2004. The Company removed the lawsuit to federal court based on diversity jurisdiction. The complaint alleges four counts: breach of written contract, breach of oral contract, fraudulent inducement, and declaratory judgment that Crow is entitled to purchase 150,000 shares of AEC stock at a strike price of $4 per share. Crow estimates his damages between $1,050,000 and $1,258,500; an amount calculated by taking the difference of the Company's current and 52 week high stock trading price and the $4/share alleged option strike price. The Company believes it has insurance against a portion of the claim and has notified its carrier of the claim. The Company further believes that the allegations are without merit and intends to vigorously defend itself in the matter. However, no assurance can be given that it will prevail or that insurance proceeds will be recognized. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. None 23 ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None ITEM 5. OTHER INFORMATION. None ITEM 6. EXHIBITS. The following exhibits are filed as part of this report:
- ---------------------------------------------------------------------------------------------------- Exhibit No. Description - ----------- --------------------------------------------------------------------------------------- 31.1 Certifications of March 31, 2005 Form 10-Q by Chief Executive Officer dated May 6, 2005 - ----------- --------------------------------------------------------------------------------------- 31.2 Certifications of March 31, 2005 Form 10-Q by Chief Financial Officer dated May 6, 2005 - ----------- --------------------------------------------------------------------------------------- 32.1 Certifications of March 31, 2005 Form 10-Q by Chief Executive Officer dated May 6, 2005 - ----------- --------------------------------------------------------------------------------------- 32.2 Certifications of March 31, 2005 Form 10-Q by Chief Financial Officer dated May 6, 2005 - ----------------------------------------------------------------------------------------------------
SIGNATURES - ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMERICAN ECOLOGY CORPORATION (Registrant) Date: May 6, 2005 By:/s/ Stephen A. Romano ------------------------ Stephen A. Romano President, Chief Executive Officer and Chief Operating Officer Date: May 6, 2005 By:/s/ James R. Baumgardner --------------------------- James R. Baumgardner Senior Vice President, Chief Financial Officer, Secretary and Treasurer 24
EXHIBIT INDEX Exhibit Description - ------- ----------- 31.1 Certifications of March 31, 2005 Form 10-Q by Chief Executive Officer dated May 6, 2005 31.2 Certifications of March 31, 2005 Form 10-Q by Chief Financial Officer dated May 6, 2005 32.1 Certifications of March 31, 2005 Form 10-Q by Chief Executive Officer dated May 6, 2005 32.2 Certifications of March 31, 2005 Form 10-Q by Chief Financial Officer dated May 6, 2005
25 EX-31.1 2 ex31_1.txt EXHIBIT 31.1 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 annual 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 report; 4. The registrant's other certifying officer 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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 report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) 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 report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) 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 officer 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 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. May 6, 2005 /S/ Stephen A. Romano _______________________ Chief Executive Officer EX-31.2 3 ex31_2.txt EXHIBIT 31.2 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 annual 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 report; 4. The registrant's other certifying officer 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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 report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) 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 report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) 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 officer 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 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. May 6, 2005 /S/ James R. Baumgardner _______________________ Chief Financial Officer EX-32.1 4 ex32_1.txt EXHIBIT 32.1 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, 2005 (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 May 6, 2005 EX-32.2 5 ex32_2.txt EXHIBIT 32.2 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, 2005 (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 May 6, 2005 -----END PRIVACY-ENHANCED MESSAGE-----