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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED DECEMBER 31, 2003 COMMISSION FILE NUMBER 0-11688
AMERICAN ECOLOGY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-3889638
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
300 E. MALLARD, SUITE 300, BOISE, IDAHO 83706
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (208) 331-8400
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.01 par value per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
The aggregate market value of the Registrant's voting stock held by
non-affiliates on June 30, 2003 was approximately $24,200,000 based on the
closing price of $2.75 per share as reported on the NASDAQ Stock Market, Inc.'s
National Market System. For purposes of the foregoing calculation, all directors
and executive officers of the Registrant have been deemed to be affiliates.
At March 12, 2004, Registrant had outstanding 17,161,418 shares of its Common
Stock.
Documents Incorporated by Reference
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be
held May 20, 2004. Part III
1
TABLE OF CONTENTS
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
PART I
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . 14
PART II
Item 5. Market for Registrants Common Equity and Related Stockholder Matters. . . 15
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. . . . . . . . 32
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . 34
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . 61
PART III
Items 10 through 15 are incorporated by reference from the definitive proxy
statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
PART IV
Item 16. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. . . . . 63
2
DEFINITIONS
TERM MEANING
---- -------
AEC or the Company. . American Ecology Corporation and its subsidiaries
CERCLA or "Superfund" Comprehensive Environmental Response,
Compensation and Liability Act of 1980
FUSRAP. . . . . . . . U.S. Army Corps of Engineers Formerly Utilized Site
Remedial Action Program
LLRW. . . . . . . . . Low-level radioactive waste
NORM/NARM . . . . . . Naturally occurring and accelerator produced
radioactive material
NRC . . . . . . . . . U.S. Nuclear Regulatory Commission
PCBs. . . . . . . . . Polychlorinated biphenyls
RCRA. . . . . . . . . Resource Conservation and Recovery Act of 1976
SEC . . . . . . . . . U. S. Securities and Exchange Commission
TCEQ. . . . . . . . . Texas Commission on Environmental Quality
TSCA. . . . . . . . . Toxic Substance Control Act of 1976
USACE . . . . . . . . U.S. Army Corps of Engineers
US EPA. . . . . . . . U.S. Environmental Protection Agency
WUTC. . . . . . . . . Washington Utilities and Transportation Commission
3
PART I
ITEM 1. BUSINESS
The Company provides radioactive, hazardous and industrial waste management
services to commercial and government entities, such as nuclear power plants,
medical and academic institutions, steel mills and petro-chemical facilities.
Headquartered in Boise, Idaho, the Company is one of the nation's oldest
providers of radioactive and hazardous waste services. AEC and its predecessor
companies have been in business for more than 50 years. AEC operates nationally
and currently employs 182 people.
The Company's official website can be found at www.americanecology.com. Company
filings with the SEC are posted on the website subsequent to the official
filing.
AEC was most recently incorporated as a Delaware corporation in May 1987. The
Company's wholly owned operating subsidiaries are US Ecology, Inc., a California
corporation ("US Ecology"); US Ecology Texas, L.P., a Texas Limited Partnership
("USET"); American Ecology Recycle Center, Inc., a Delaware corporation
("AERC"); American Ecology Environmental Services Corporation, a Texas
corporation ("AEESC"); and US Ecology Idaho, Inc., a Delaware corporation
("USEI").
The Company operates within two business segments: Operating Disposal
Facilities and Non-Operating Disposal Facilities. These segments reflect AEC's
internal reporting structure and current operational status. The Operating
Disposal Facilities currently accept hazardous and low-level radioactive waste
and include the Company's RCRA hazardous waste treatment and disposal facilities
in Beatty, Nevada; Grand View, Idaho; and Robstown, Texas; and its LLRW and
NORM/NARM disposal facility in Richland, Washington. The Non-Operating Disposal
Facilities segment includes non-operating disposal facilities in Sheffield,
Illinois; Beatty, Nevada; and Bruneau, Idaho; a closed hazardous waste
processing and deep-well injection facility in Winona, Texas; and two proposed
new disposal facilities in Butte, Nebraska and Ward Valley, California which are
involved in litigation. 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.
On December 27, 2002, the Company announced its LLRW Processing and Field
Services business was eliminated as an operating segment, at which time
employees were notified that processing operations had been discontinued. The
Company is marketing the Oak Ridge, Tennessee LLRW processing facility for sale
to qualified buyers. The Processing and Field Services operations are reported
as discontinued operations.
On February 13, 2003, the Company announced the sale of the El Centro municipal
and industrial waste landfill to a wholly-owned subsidiary of Allied Waste
Industries, Inc. ("Allied") for $10 million cash at closing and future
volume-based royalty payments. The El Centro landfill is located adjacent to
subsidiary US Ecology Texas' hazardous and industrial waste treatment and
disposal facility. Under the Agreement, Allied will pay American Ecology minimum
royalties of at least $215,000 annually. Once Allied has paid the Company
$14,000,000 it will no longer have an obligation to pay annual minimum royalties
but will still be required to pay royalties based on waste volumes received at
El Centro. Opened in July 2000, the El Centro solid waste landfill was carried
on the Company's books at approximately $7 million prior to sale. When combined
with reductions in liabilities and the recognition of certain future minimum
royalties, the sale resulted in a gain of approximately $4.9 million. This gain
was recognized during the first quarter of 2003.
The following table summarizes each segment:
SUBSIDIARY LOCATION SERVICES
- ---------------- -------- --------
OPERATING DISPOSAL FACILITIES
-----------------------------
USEI Grand View, Idaho Hazardous, PCB and NRC-exempt radioactive and mixed
waste treatment and disposal, rail transfer station
USET Robstown, Texas Hazardous, non-hazardous industrial and NRC-exempt
radioactive and mixed waste treatment and disposal
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US Ecology Beatty, Nevada Hazardous, Thermal, and PCB waste treatment and disposal
US Ecology Richland, Washington Low-Level Radioactive and NORM/NARM waste disposal
NON-OPERATING DISPOSAL FACILITIES
---------------------------------
US Ecology Beatty, Nevada Closed LLRW disposal facility: State of Nevada is licensee
US Ecology Sheffield, Illinois Closed LLRW disposal facility: State of Illinois is licensee
US Ecology Sheffield, Illinois Non-operating hazardous waste disposal facility: US
Ecology is permittee
AEESC Winona, Texas Non-operating hazardous waste treatment and deep well
facility: AEESC is permittee
USEI Bruneau, Idaho Closed hazardous waste disposal facility: US Ecology Idaho
is permittee
US Ecology Ward Valley, California Proposed LLRW disposal facility: in litigation
US Ecology Butte, Nebraska Proposed LLRW disposal facility: in litigation
DISCONTINUED OPERATIONS
-----------------------
AERC Oak Ridge, Tennessee Idle LLRW volume reduction and processing facility and
related Field Services
Texas Ecologists Robstown, Texas Municipal and industrial solid waste, sold February 13, 2003
OPERATING DISPOSAL FACILITIES
A significant portion of the Company's revenue from operating disposal
facilities is attributable to discrete, one-time clean-up projects ("Event
Business"). The project-specific nature of the Event Business necessarily
creates variability in revenue and earnings. This can produce large quarter to
quarter and year to year changes in earnings, depending on the relative
contribution from single Event Business projects. Management's strategy is to
expand its recurring business ("Base Business"), while opportunistically and
simultaneously pursuing both large and small Event Business opportunities.
Management believes that by controlling and structuring its operating costs so
that the Company's Base Business covers fixed costs, an increased amount of the
Event Business revenue will fall through to the bottom line. This strategy takes
advantage of the predominantly fixed cost nature of waste disposal operations.
Grand View, Idaho Facility. USEI is located on 1,760 acres of Company-owned
land about 60 miles southeast of Boise, Idaho in the Owyhee Desert. This
operation, acquired in February 2001, includes a rail transfer station located
approximately 30 miles northeast of the disposal site. As part of the
acquisition, the Company also obtained rights to a patented, U.S. Environmental
Protection Agency ("US EPA") approved technology to stabilize and "delist"
certain steel mill hazardous wastes. Delisted waste is subject to the lower
State fees applicable to non-hazardous waste. The facility is also permitted to
accept certain naturally occurring and accelerator produced radioactive
material, low activity radioactive material, and mixed wastes from commercial
and government customers, including materials received under a contract with the
U.S. Army Corps of Engineers. The facility is regulated under a joint permit
issued by the Idaho Department of Environmental Quality and the US EPA, and is
subject to applicable State law and regulations governing radioactive materials
exempt from regulation under the federal Atomic Energy Act as amended.
Robstown, Texas Facility. USET operates on 240 acres of land near Robstown,
Texas about 10 miles west of Corpus Christi. The facility, opened to accept
waste in 1973, is regulated under a permit issued by the Texas Commission on
Environmental Quality ("TCEQ"). The site is also subject to US EPA regulations
and is permitted to accept certain low activity radioactive materials and mixed
wastes under its TCEQ permit.
5
Beatty, Nevada Facility. US Ecology leases approximately 80 acres from the
State of Nevada on which treatment and disposal operations are conducted. The
Company's lease was renewed for ten years in 1997. Opened to receive hazardous
waste in 1970, the site is located in the Amargosa Desert approximately 100
miles northwest of Las Vegas, Nevada and 30 miles east of Death Valley,
California. The facility is regulated under permits issued by the Nevada
Department of Conservation and Natural Resources and the US EPA.
Richland, Washington Facility. In operation since 1965, this US Ecology facility
is located on 100 acres of State leased land on the U.S. Department of Energy
Hanford Reservation approximately 35 miles west of Richland, Washington. The
lease between the State of Washington and the Federal government expires in
2061. The Company expects to renew its sublease with the State, which expires in
2005, based on a February 2004 decision by the State of Washington not to
compete this sublease. The facility is licensed by the Washington Department of
Health for health and safety purposes, and is also regulated by the Washington
Utilities and Transportation Commission ("WUTC"), which sets disposal rates for
low-level radioactive wastes. Rates are set at an amount sufficient to cover
operating costs and provide the Company with a reasonable profit. A new rate
agreement was entered in 2001 and expires January 1, 2008. The State also
assesses user fees for local economic development, State regulatory agency
expenses, and a dedicated trust account to pay for long-term care and
maintenance after the facility closes.
Also managed out of the Richland Facility, the US Ecology NORM/NARM Services
group offers site characterization, decontamination, waste removal and off-site
shipment in addition to disposal services.
NON-OPERATING DISPOSAL FACILITIES
Beatty, Nevada LLRW Facility. Operated by the Company from 1962 to 1993, the
Beatty LLRW disposal site was the nation's first commercial facility licensed to
dispose of LLRW. In 1997, it became the first such LLRW disposal facility to
successfully complete closure and post-closure stabilization and to transfer its
license to the government for long-term institutional control. Since that time,
the Company has performed maintenance and surveillance under a contract with the
State of Nevada, and is paid from a State-controlled fund contributed during
facility operations.
Bruneau, Idaho Facility. This remote 88 acre desert site, acquired along with
the Grand View, Idaho disposal operation in February 2001, was closed under an
approved RCRA plan. Post closure monitoring will continue for approximately 25
more years in accordance with permit and regulatory requirements.
Sheffield Illinois LLRW Facility. The Company previously operated this LLRW
disposal facility on a 5-acre, State-owned site from 1968 to 1978. After
performing closure work under a 1988 Settlement Agreement with the State of
Illinois, the Company monitored and maintained the site until mid-2001, when the
LLRW license was transferred to the State. In 2003, the Company received $39,000
of the $59,000 remaining in a site construction escrow account established with
the Illinois Department of Nuclear Security. As at Beatty, the Company has a
contract with the State to perform long-term inspection and maintenance with
funds from a State-controlled account.
Sheffield Illinois Facility. The Company previously operated two hazardous
waste disposal facilities adjacent to the Sheffield LLRW disposal area. One
hazardous waste site was opened in 1968 and ceased accepting waste in 1974. The
second accepted hazardous waste from 1974 through 1983. In November 2003 the
Company renegotiated its closure/post-closure obligations allowing the Company
to reduce its financial assurance requirement from $3,181,000 to $1,497,000.
The Company also reduced its corrective action financial assurance requirements
from $1,500,000 to $800,000. In addition, the Company received all of the
$74,000 remaining in a site investigation escrow account established with U.S.
EPA. The company continues to perform corrective measures at the facility under
regulation by the US EPA.
Winona, Texas Facility. From 1980 to 1994, Gibraltar Chemical Resources
operated the Winona hazardous waste processing and deep well facility, at which
time AEC purchased the facility. Solvent recovery, deep well injection and
waste brokerage operations were conducted on an eight acre site until March
1997, when the Company ceased operations. The Company is proceeding under an
Agreed Order entered with the State of Texas for closure, and maintains a
$1,300,000 financial assurance. State action is pending on a Closure
Certification Report submitted in 1999 and resubmitted with additional
information in 2003. The Company owns an additional 540 acres contiguous to the
permitted site. Efforts are underway to sell certain excess property while
retaining an adequate buffer zone.
6
Ward Valley, California Proposed Disposal Facility. In 1993, the Company
received a State of California license to construct and operate a LLRW disposal
facility in the Mojave Desert to serve the Southwestern LLRW Compact. The
Company has alleged that the State of California abandoned its duty to acquire
the project property from the U.S. Department of the Interior in a suit filed in
State court seeking recovery of monetary damages in excess of $162 million. The
trial court ruled against the Company on March 26, 2003. The Company has
appealed this ruling. Briefing on the appeal is expected to be complete in
mid-2004, after which oral arguments will be scheduled.
Butte, Nebraska, Proposed Disposal Facility. The Company submitted an
application to the State of Nebraska to construct and operate this facility,
developed under contract to the Central Interstate LLRW Compact Commission
("CIC"). Following proposed license denial by the State of Nebraska, the CIC,
the Company and a number of nuclear power utilities funding the project sued the
State of Nebraska alleging bad faith in the license review process. A federal
court order was issued enjoining the State license review process. On September
30, 2002, the federal district court awarded plaintiffs $153 million in damages,
including approximately $12 million to the Company based on its contributions to
the project and pre-judgment interest. On February 18, 2004, the Eighth U.S.
Circuit Court of Appeals affirmed the district court ruling in its entirety. On
March 3, 2004, the State of Nebraska filed a petition for rehearing en banc by
the full Eighth U.S. Circuit Court of Appeals.
DISCONTINUED OPERATIONS
Oak Ridge, Tennessee Facility. AERC, acquired in 1994, processed LLRW to reduce
the volume of waste requiring disposal at licensed radioactive waste facilities.
AERC's processing services were never successfully integrated with the Company's
core disposal business, and management was unable to identify a viable business
strategy to reverse the recurring losses that occurred at the facility since its
acquisition in 1994. On December 27, 2002, the Company announced cessation of
commercial operations. The plant, situated on 16 acres of Company property in
Oak Ridge, Tennessee, primarily served the commercial nuclear power industry,
but also accepted brokered waste from biomedical, academic and non-utility
industry customers. In October 2002, the Company announced its intent to
actively market the business for sale, however, no acceptable offers were
received to acquire the operation as a going concern. The Company focused its
efforts in 2003 on removal of customer waste from the facility and post-waste
removal radiation surveys. Two employees presently maintain the facility's
radioactive materials licenses and assist with efforts to market the facility
for sale. The Company has paid the required fees and intends to maintain the
facility's existing radioactive materials operating license through the existing
term pending a possible sale.
Robstown, Texas Municipal Solid Waste Landfill. In July 2000, the Company began
operation of a municipal and industrial waste landfill on 160 acres of land
immediately adjacent to subsidiary US Ecology Texas' hazardous and industrial
waste treatment and disposal facility. On February 13, 2003, the Company
announced the sale of the El Centro municipal and industrial waste landfill to a
subsidiary of Allied Waste Industries, Inc. ("Allied") for $10 million cash at
closing and future volume-based royalty payments. Under the Agreement, Allied
will pay American Ecology minimum royalties of at least $215,000 annually. Once
Allied has paid the Company $14,000,000, it no longer has an obligation to pay
annual minimum royalties, but will still be required to pay royalties based on
waste volumes received at El Centro. Opened in July 2000, the El Centro solid
waste landfill was carried on the Company's books at approximately $7 million
prior to sale. When combined with reductions in liabilities and the recognition
of certain future minimum royalties, the sale resulted in a gain on sale of
approximately $4.9 million which was recognized in the first quarter of 2003.
INDUSTRY
During 2003, the hazardous waste industry trends of reduced disposal waste
volumes and restructuring continued. This industry maturation period followed
rapid expansion in the 1970s and 1980s driven by new environmental laws and
actions by federal and state agencies to regulate existing hazardous waste
management facilities and to direct the clean up of contaminated sites under the
federal Superfund law.
By the early 1990s, excess hazardous waste management capacity had been
constructed and permitted by the waste services industry. At the same time, to
better manage risk and reduce expenses, many waste generators instituted
industrial process changes and other methods to minimize waste production. The
volume of waste shipped for disposal from Superfund and other properties also
diminished as many contaminated sites were cleaned up.
7
Improved waste management by generators coupled with excess commercial disposal
capacity and a maturing federal Superfund program created highly competitive
market conditions that still apply today.
Management believes that the hazardous waste business will continue to
restructure and possibly consolidate, but that a baseline demand for services
will remain. Management further believes that the ability to deliver specialized
services, while aggressively competing for non-specialized commodity business,
will differentiate successful from unsuccessful companies going forward. The
Company's 2001 acquisition of Envirosafe Services of Idaho and access to its
patented steel mill waste delisting technology, expanded approvals to manage
certain radioactive and mixed waste volumes materials at its Idaho and Texas
hazardous waste facilities, installation of patented thermal treatment units at
its Beatty, Nevada hazardous waste facility, and development of more
cost-effective treatment processes for specific customer wastes reflect
successful initiatives by the Company to increase market share and profitability
under present market conditions.
The commercial LLRW business has also experienced significant change. This is
primarily due to failure of the LLRW Policy Act of 1980 ("Policy Act") and
interstate Compacts encouraged to be formed under the Policy Act to provide any
new disposal sites and market responses to that failure. Company efforts to site
new disposal facilities in Ward Valley, California and Butte, Nebraska have been
frustrated and delayed by litigation. Management believes that both of these
proposed facilities would be safe and environmentally sound if constructed. The
Company has alleged, in separate litigation, that both California and Nebraska
have abandoned their duties under existing law. Management believes the Company
is entitled to compensation for its past investments in these
statutorily-required site development projects. This litigation is now well
advanced. See Item 3. Legal Proceedings of this Form 10-K.
The Company's Richland, Washington disposal facility, serving the Northwest and
Rocky Mountain Compacts, is one of only two operating Compact disposal
facilities in the nation. Both were in full operation for many years before
passage of the LLRW Policy Act. While the Richland site has substantial unused
capacity, it can only accept LLRW from the eleven western states comprising the
two Compacts served. The Barnwell, South Carolina site, owned by a competitor,
is located in the Atlantic Compact. The Barnwell site is open to the entire
nation but has limited remaining service capacity (in terms of space and years
of availability) and imposes much higher state fees.
Restricted access to the Company's Richland, Washington facility, Barnwell's
limited capacity and state fee status, and the failure of the Compacts to
establish new disposal facilities created a market opportunity for a privately
held Utah disposal company. The Utah facility is licensed to accept a
substantial subset of the LLRW which Congress made a state responsibility under
the Policy Act. Increased disposal prices have also induced a number of
businesses to offer LLRW processing and volume reduction services. The Company
purchased its Oak Ridge facility in 1994 to participate in this market, along
with other new market entrants. The LLRW volume reduction business has
experienced heavy price competition and a number of companies have ceased
operations and/or declared bankruptcy. This heavy competition and the Oak Ridge
facility's reliance on disposal facilities operated by competitors to ship
processed waste produced substantial losses leading to the Company's decision to
discontinue Oak Ridge commercial LLRW processing operations in December 2002.
The significant rise in radioactive waste disposal prices at traditional LLRW
facilities has also created a demand for more cost-effective disposal services
for soil, debris, consumer products, industrial wastes and other materials
containing low activity radioactive material, as well as mixed wastes exhibiting
both hazardous and radioactive properties. In addition to commercial demand, a
substantial amount of low activity radioactive materials is generated by U.S.
Department of Defense remediation activities. Management believes the expanded
use of permitted hazardous waste disposal facilities to dispose of such
materials is a safe, environmentally sound market response. The Company's Grand
View, Idaho RCRA hazardous waste facility has significantly increased waste
volume throughput since 2001 based largely on permit modifications and contracts
secured to serve this growing demand. The Company's US Ecology Texas disposal
facility is also positioned to accept, on a more limited basis, this type of
waste.
On November 18, 2003, the USEPA published an Advance Notice of Proposed
Rulemaking titled "Approaches to an Integrated Framework for Management and
Disposal of Low-Activity Radioactive Waste: Request for Comment" focusing on use
of RCRA Subtitle C hazardous waste disposal technology for disposal of such
waste. Management believes the Company is well positioned to grow its low
activity radioactive material business based on its reputation in the industry,
its existing Idaho and Texas facility permits, its substantial experience
handling
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radioactive materials at its Subtitle C facilities, its high volume waste
throughput capabilities, and its competitive cost structure.
PERMITS, LICENSES AND REGULATORY REQUIREMENTS
The Company's hazardous, industrial, non-hazardous, and radioactive materials
business is subject to extensive environmental, health, safety, and
transportation laws, regulations, permits and licenses administered by federal,
state and local agencies. The responsible agencies regularly inspect the
Company's operations to monitor compliance. They have authority to enforce
compliance through the suspension of operating licenses and permits and the
imposition of civil or criminal penalties in case of violations. This body of
law and regulations contribute to the demand for Company services and represent
a significant obstacle to new market entrants.
The Resource Conservation and Recovery Act of 1976 ("RCRA") provides a
comprehensive framework for regulating hazardous waste handling, transportation,
treatment, storage, and disposal. Certain radioactive materials may also be
managed under RCRA permits, as specifically authorized for the Company's
facilities in Grand View, Idaho and Robstown, Texas. RCRA regulation and
permitting is the responsibility of the US EPA and state agencies delegated such
authority. Listed chemical compounds and residues derived from listed industrial
processes are subject to RCRA standards unless they are delisted through a
formal rulemaking process such as the patented steel mill treatment employed at
the Company's Grand View, Idaho facility. RCRA liability may be imposed for
improper waste management or for failure to take corrective action to address
releases of hazardous substances. To the extent wastes are recycled or
beneficially reused, regulatory controls under RCRA diminish.
CERCLA and its amendments ("Superfund") impose strict, joint and several
liability on owners or operators of facilities where a release of hazardous
substances has occurred, on parties who generated hazardous substances released
at such facilities, and on parties who arranged for the transportation of
hazardous substances. Liability under Superfund may be imposed if releases of
hazardous substances occur at treatment, storage, or disposal sites. Since
customers of the Company face the same liabilities, waste producers are
motivated to minimize the number of commercial disposal sites utilized and to
manage their own wastes when feasible. Commercial disposal facilities require
authorization from the US EPA to receive Superfund clean-up wastes. The
Company's three hazardous waste disposal facilities each maintain this
authorization.
The Toxic Substances Control Act ("TSCA") establishes a comprehensive regulatory
program for treatment, storage and disposal of PCBs. Regulation and licensing of
PCB wastes is the responsibility of the US EPA. The Company's Grand View, Idaho
and Beatty, Nevada disposal facilities have TSCA permits.
The Atomic Energy Act of 1954 ("AEA") and the Energy Reorganization Act of 1974
assign the NRC regulatory authority over the receipt, possession, use and
transfer of specified radioactive materials, including disposal. The NRC has
adopted regulations for licensing commercial LLRW processing and disposal sites,
and may delegate regulatory and licensing authority to individual states. The
NRC and U.S. Department of Transportation regulate the transport of radioactive
materials. Shippers and carriers of radioactive materials must comply with both
the general requirements for hazardous materials transportation and with
specific requirements for radioactive materials.
The AEA does not authorize the NRC to regulate NORM/NARM, however, individual
states may assert regulatory jurisdiction. Many states, including Idaho and
Texas, where the Company operates facilities, have chosen to do so.
The process of applying for and obtaining licenses and permits to construct and
operate facilities accepting radioactive, hazardous and industrial waste is
lengthy and complex. Management believes it has significant knowledge and
expertise regarding environmental laws, regulations, and permit processes. The
Company also believes it possesses all permits, licenses and regulatory
approvals currently required to maintain regulatory compliance and safely
operate its facilities, and has the specialized expertise required to secure
additional approvals to grow its business in the future.
INSURANCE, FINANCIAL ASSURANCE AND RISK MANAGEMENT
The Company carries a broad range of insurance coverage, including general
liability, automobile liability, real and personal property, workers'
compensation, directors' and officers' liability, environmental impairment
liability, and
9
other coverage customary to the industry. The Company does not expect the impact
of any known casualty, property, environmental or other contingency to be
material to its financial condition, results of operations or cash flows.
Existing regulations require financial assurance to cover the cost of final
closure and/or post-closure obligations at the Company's processing and disposal
facilities. Acceptable forms of financial assurance include escrow-type accounts
funded by revenue during the operational life of a facility, letters of credit
from third parties, surety bonds, and traditional insurance. Alternatively,
facilities may be required to fund State-controlled escrow type or trust
accounts during the operating life of the facility.
Through December 31, 2003, the Company has been able to maintain all required
insurance and financial assurance coverage. The Company's insurer for its
closure and post-closure financial assurance obligations had previously notified
the Company to expect increased premiums and collateral requirements at renewal
of its current financial assurance policies. The Company's current closure and
post-closure policies became effective December 19, 2003 and have a term of one
year. The Company expects to continue renewing these insurance policies. If the
Company were unable to obtain adequate closure, post-closure or environmental
insurance in the future, any partially or completely uninsured claim against the
Company, if successful and of sufficient magnitude, could have a material
adverse effect on the Company's financial condition, results of operations and
cash flows. Additionally, continued access to casualty and pollution legal
liability insurance with sufficient limits, at acceptable terms, is important to
obtaining new business. Failure to maintain adequate financial assurance could
also result in regulatory action being taken against the Company that could
include the early closure of affected facilities.
As of December 31, 2003, the Company provided letters of credit of $3,258,000 as
collateral for financial assurance insurance policies of approximately
$32,000,000 ensuring performance of facility final closure and post-closure
requirements. Management believes the Company will be able to maintain the
requisite financial assurance policies throughout 2004. While the Company has
been able to obtain financial assurance for its current operations, the cost of
maintaining surety bonds, letters of credit and insurance policies in sufficient
amounts may continue to increase.
Primary casualty insurance programs do not generally cover accidental
environmental contamination losses. To provide insurance protection for such
environmental claims, the Company maintains environmental impairment liability
insurance and professional environmental consultants liability insurance for
non-nuclear occurrences. For nuclear liability coverage, the Company maintains
so-called Facility Form nuclear liability insurance provided under the federal
Price Anderson Act. This insurance covers the operations of its facilities,
suppliers and transporters. The Company purchases primary property, casualty and
excess liability policies through traditional third party insurance.
CUSTOMERS
The Company disposes of CERCLA, low activity radioactive material and hazardous
environmental remediation waste under a contract with the U.S. Army Corps of
Engineers Formerly Utilized Site Remedial Action Program ("FUSRAP"), and steel
mill air pollution control dust (KO61 waste) under individual steel mill
contracts. The Company also periodically manages the transportation of wastes to
its disposal facilities. These projects may periodically contribute significant
revenue. The following customers accounted for more than 10% of the Company's
revenue in 2003, 2002 and 2001:
% OF REVENUE FOR YEAR ENDING
CUSTOMER 2003 2002 2001
-------- --------- --------
U.S. Army Corps of Engineers 27 27 15
Nucor Steel Company 7 13 11
Shaw Environmental & Infrastructure, Inc. 18 - -
MARKETS
Disposal Services. The hazardous waste treatment and disposal business is
generally highly competitive and sensitive to transportation costs. NRC-exempt
radioactive material and other specialized niche services offerings are
10
less sensitive to these factors. Waste transported by rail is less expensive, on
a per mile basis, than waste transported by truck.
The Company's Robstown, Texas hazardous waste facility is geographically well
positioned to serve refineries, chemical manufacturing plants and other
industries concentrated along the Texas Gulf coast. The facility is also
permitted to accept certain NRC-exempt radioactive materials and mixed wastes,
and competes over a larger area for these wastes.
The Company's Beatty, Nevada facility primarily competes for business in the
California, Arizona, Utah and Nevada markets. Due to the site's superior
geologic and climate conditions in the Amargosa Desert, the Nevada facility can
compete for wastes shipped from more distant locations. The Nevada facility also
competes over a broader geographic area for PCB waste due to the more limited
number of TSCA disposal facilities nationwide. The Beatty facility also offers
thermal treatment services, primarily to customers in its western service
region.
The Company's Grand View, Idaho facility accepts wastes from across the United
States and operates a Company-owned rail transfer station located adjacent to a
main east-west rail line, generally allowing much lower cost transportation than
by truck. The Idaho facility's two primary markets are steel mill air pollution
control dust, and NRC-exempt radioactive materials and mixed wastes in
concentrations specified by permit. Substantial waste volumes are received under
a five-year, renewable contract with the U.S. Army Corps of Engineers that is
also utilized by the Air Force and other federal agencies. Management expects to
renew this contract, which expires in the second quarter of 2004. Permit
modifications have expanded disposal capabilities at the Idaho facility. Waste
throughput in 2003 was significantly enhanced by the addition of 3,000 feet of
track and another rail switch at the Company's Idaho rail transfer station in
late 2002.
Waste stabilization, encapsulation, chemical oxidation and other treatment
technologies are available at the Company's Idaho, Nevada and Texas facilities
to meet US EPA land disposal restrictions. This capability allows all three
sites to manage a significantly broader spectrum of wastes than if pre-disposal
treatment was not offered.
The Richland, Washington disposal facility serves LLRW producers in the eight
member States of the Northwest Compact. The three Rocky Mountain Compact States
are also eligible to use the facility subject to annual volume limits. Since US
Ecology is a monopoly LLRW service provider under the Northwest Compact, the
State of Washington approves the facility's LLRW disposal rates. The site
competes for NORM/NARM from customers across the country. These NORM/NARM rates
are not regulated, since a monopoly does not exist.
COMPETITION
The Company competes with large and small companies in each of the markets in
which it operates. The radioactive, hazardous and non-hazardous industrial waste
management industry is highly competitive. Management believes that its primary
disposal competitors are Waste Management, The EQ Company, Clean Harbors,
Envirocare of Utah, and Waste Control Specialists. Management believes that the
principal competitive factors applicable to its radioactive and hazardous waste
management business are:
- - Price
- - Specialized permits and "niche" service offerings
- - Customer service
- - Operational efficiency and technical expertise
- - Environmental compliance and credibility with regulatory agencies
- - Industry reputation and brand name recognition
Management believes the Company is competitive based on each of these factors.
Management further believes that it offers a nationally unique mix of services,
including specialized patent rights, permits and "niche" services which
favorably distinguish it from competitors. Management further believes that its
understanding of the industry, strong "brand" name recognition from more than 50
years of experience in the business, excellent compliance record and customer
service reputation, and positive relationships with customers, regulators, and
the local communities enhance these advantages.
11
While the Company is competitive, advantages exist for certain competitors that
have technology, permits, and equipment enabling them to accept additional
wastes streams, that have greater resources, that operate in jurisdictions that
impose lower disposal taxes, and/or are located closer to where various wastes
are generated.
PERSONNEL
Since October 2001, the executive management team has implemented major business
system and fundamental organizational changes to the Company's organizational
structure and management. This included a large reduction in force following a
December 2002 decision to exit the LLRW processing business.
On February 10, 2004, the Company had 182 full time employees, of which 11 were
members of the PACE union at its Richland, Washington facility.
ITEM 2. PROPERTIES
The Company believes that its property and equipment are well maintained, in
good operating condition, and suitable for the Company's current and projected
needs. Company headquarters are located in Boise, Idaho in leased office space.
AEC also leases sales and administrative offices in Washington and Kentucky. The
following table describes the principal properties and facilities owned or
leased by the Company.
CORPORATE FUNCTION ACREAGE OWN/LEASE
- --------- -------- ------- ---------
Boise, Idaho Corporate office 8,572 sq. ft. Lease
OPERATING DISPOSAL FACILITIES
- -----------------------------
Beatty, Nevada Treatment and disposal facility 80 acres Lease
Grand View, Idaho Treatment and disposal facility 1,760 acres Own
Elmore County, Idaho Rail transfer station 140 acres Own
Robstown, Texas Treatment and disposal facility 240 acres Own
Richland, Washington Disposal facility 100 acres Sublease
NON-OPERATING DISPOSAL FACILITIES
- ---------------------------------
Bruneau, Idaho Closed disposal facility 88 acres Own
Sheffield, Illinois Closed disposal facility 204 acres Own
Sheffield, Illinois Closed disposal facility 170 acres Own
Winona, Texas Non-operating treatment and deep 540 acres Own
well facility
DISCONTINUED OPERATIONS
- -----------------------
Oak Ridge, Tennessee Processing facility 16 acres Own
Robstown, Texas Municipal landfill 200 acres Sold
The principal properties of the Company make up less than 10% of the total
assets. The properties utilized are sufficient and suitable for the Company's
needs.
12
ITEM 3. LEGAL PROCEEDINGS
- ----------------------------
ONGOING LITIGATION
- -------------------
US ECOLOGY, INC. V. THE STATE OF CALIFORNIA, ET AL., CASE NO.GIC747562, SUPERIOR
- ---------------------------------------------------
COURT OF THE STATE OF CALIFORNIA FOR THE COUNTY OF SAN DIEGO
In May 2000, subsidiary US Ecology, Inc., sued the State of California, et. al.
("the State") for monetary damages exceeding $162 million. The suit stems from
the State's alleged abandonment of the Ward Valley low-level radioactive waste
("LLRW") disposal project. State and federal law requires the State to build a
disposal site for LLRW produced in California, Arizona, North Dakota and South
Dakota; member states of the Southwestern Compact. US Ecology was selected in
1985 to locate and license the site using its own funds on a reimbursable basis.
The case was tried in Superior Court for the County of San Diego during February
and March 2003.
On March 26, 2003, the Superior Court issued a decision finding that the Company
failed to establish causation and that its claim is further barred by the
doctrine of unclean hands. The latter finding was based on actions the Court
concluded had created obstacles to an agreement between the federal government
and the State to convey the site. However, the Court did find that key elements
of the Company's promissory estoppel claim had been proven at trial.
Specifically, the Court ruled that the State made a clear and unambiguous
promise to US Ecology in 1988 to use its best efforts to acquire the site, that
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.
On June 26, 2003, the Company filed a notice of appeal with the California
Fourth Appellate District Court.
The Company's financial interest in the pending claim against the State was
improved by an amendment to the November 13, 1998 Ward Valley Interest Agreement
and Assignment entered into by American Ecology and its former primary lender.
This June 27, 2003 amendment, entered into 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 related legal 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.
In early July of 2003, the Company engaged the law firm of Cooley Godward on a
fixed price plus contingency basis to pursue the appeal, paying and expensing
the fixed fee at the time of engagement. Briefing is underway. 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 seeks
declaratory relief and damages for bad faith in the State of Nebraska's
processing and denial of US Ecology's application to site, construct 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 Court also dismissed the utilities' and US Ecology's
13
cross claims for breach of contract and imposition of a constructive trust,
finding that it was premature to decide the merits of these claims and leaving
the question open for future resolution if necessary. The State appealed the
judgment to the Eighth Circuit Court of Appeals 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 March 3, 2004, the State of Nebraska
filed a petition for rehearing en banc by the full Eighth U.S. Circuit Court of
Appeals. 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.
RESOLVED LITIGATION
- --------------------
MANCHAK V. US ECOLOGY, INC., U.S. DISTRICT COURT FOR THE DISTRICT OF NEVADA,
- --------------------------------
CASE NO. CV-S-97-0655.
In March 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 disposal
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 on January
8, 2003. Manchak appealed, but failed to timely file his opening brief and the
Company moved to dismiss the appeal. On July 2, 2003, the United States Court of
Appeals for the Federal Circuit granted the Company's motion to dismiss
Manchak's appeal. Manchak's requests for reconsideration and en banc review were
rejected by the Federal Circuit on October 6, 2003 and again on October 20,
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 9, 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. The matter is now closed.
MATTIE CUBA, ET AL. V. AMERICAN ECOLOGY ENVIRONMENTAL SERVICES CORPORATION, ET
- --------------------------------------------------------------------------------
AL.,CAUSE NO. 2000-092, 4TH JUDICIAL DISTRICT COURT, RUSK COUNTY, TEXAS
- --
This suit was brought in November 2000 by 28 named plaintiffs against the
Company and named subsidiaries, the former owners and former customers of its
Winona, Texas facility. Plaintiffs sought recovery for personal injuries,
property damages and exemplary damages based on negligence, gross negligence,
nuisance and trespass. The Company sought a motion for summary judgment in July
2002 based on lack of evidence. In November 2002, the trial court dismissed
certain causes of action and reduced the number of plaintiffs, but preserved
other causes of action. The Company subsequently sought a motion for summary
judgment seeking dismissal against all of the adult plaintiffs on statute of
limitations grounds. On March 26, 2003, the court granted this motion and
dismissed the adult plaintiffs, leaving seven minors and one intervenor party to
the lawsuit. The Company and its insurance provider subsequently settled the
matter for $37,000 of which $27,000 will be paid by the Company. Because the
deductible had been fully reserved, there was no impact to the income statement.
The matter is now closed.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's security holders during the fourth
quarter of 2003.
14
PART II
ITEM 5. MARKET FOR AMERICAN ECOLOGY CORPORATION COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
American Ecology Corporation common stock is listed on the NASDAQ National
Market System under the symbol ECOL. As of March 12, 2004, there were
approximately 3,200 common stockholders. High and low sales prices for the
common stock for each quarter in the last two years are shown below:
2003 2002
---- ----
PERIOD High Low High Low
-------- -------- -------- --------
1st Quarter $ 3.42 $ 2.69 $ 1.98 $ 1.25
2nd Quarter 3.15 2.60 4.85 1.66
3rd Quarter 3.80 2.80 4.50 2.10
4th Quarter 8.26 3.59 3.23 2.31
The Company has not paid dividends on common stock during the last two years.
In August 2000, the Company established a credit facility with Wells Fargo Bank
that prohibits cash dividends on any of the Company's outstanding capital stock
without Bank approval. This credit facility, which has been amended several
times, currently provides the Company with $8.0 million of borrowing capacity
and matures on June 15, 2005.
In January 2003, the Company offered to repurchase all outstanding Series D
Preferred Stock for the original sales price plus accrued but unpaid dividends.
The offer was accepted by all Series D holders and approved, as required, by the
Board of Directors and Wells Fargo Bank. On February 28, 2003, the Company
repurchased the remaining 100,001 shares of Series D Preferred Stock for $47.50
a share plus accrued but unpaid dividends of $16.56 a share, for a total payment
of $6,406,000.
On February 18, 2004, the Company redeemed a warrant to purchase 1,349,843
shares of common stock for $5,500,000. The warrant was issued in 1998 as part
of the settlement with the Company's prior bank, and enabled the bank to acquire
1,349,843 common shares for $1.50 each. After paying the $5,500,000 for
redemption of the warrant, the Company had in excess of $7,000,000 in cash on
hand without borrowing any funds on the line of credit.
15
ITEM 6 SELECTED FINANCIAL DATA
This summary should be read in conjunction with the consolidated financial
statements and related notes.
(Dollars in thousands, except per share amounts)
YEARS ENDED DECEMBER 31, 2003 2002 2001 2000 1999
- ------------------------ --------- --------- -------- -------- --------
Revenue $ 57,047 $ 46,789 $40,175 $27,054 $20,830
Loss on write off of Ward Valley development costs $(20,951) $ -- $ -- $ -- $ --
Income tax benefit from reversal of valuation allowance $ -- $ 8,284 $ -- $ -- $ --
Income (loss) from continuing operations $(11,069) $ 16,094 $ 2,991 $ 5,510 $ 4,301
Cumulative effect of change in accounting principle $ -- $ 13,141 $ -- $ -- $ --
Income (loss) from discontinued operations $ 2,477 $(10,464) $(2,189) $ (813) $ 108
Net Income $ (8,592) $ 18,771 $ 802 $ 4,697 $ 4,409
Preferred stock dividends accrued $ 64 $ 398 $ 398 $ 398 $ 398
Shares used to compute income (loss) per share (000's) 16,604 14,311 13,738 13,711 13,585
Total assets $ 66,626 $ 87,125 $86,824 $65,750 $58,459
Long-term debt, net of current portion $ 4,200 $ 8,344 $ 4,436 $10,775 $ 3,569
Shareholders' equity $ 36,351 $ 45,948 $26,416 $25,984 $21,582
Current ratio (current assets divided by current liabilities)
2.10:1 1.47:1 0.65:1 1.17:1 0.9:1
Return on average equity (net income divided by
average equity) (20.9)% 51.9% 3.1% 19.7% 22.6%
Dividends declared per common share $ -- $ -- $ -- $ -- $ --
Capital expenditures $ 6,270 $ 2,737 $ 4,009 $ 3,267 $ 3,740
Depreciation, amortization and accretion expense $ 6,973 $ 6,604 $ 4,076 $ 1,899 $ 1,498
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
- ---------------------------
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:
- - compliance with and changes in applicable laws and regulations,
- - exposure to litigation,
- - access to capital,
- - access to insurance and financial assurances,
- - new technologies and patent rights,
- - competitive environment,
- - general economic conditions,
- - potential loss of major contracts, and
- - costs to maintain or close the Oak Ridge facility.
16
When the Company uses words like "may," "believes," "expects," "anticipates,"
"should," "estimates," "projects," "plan," their opposites and similar
expressions, it is making forward-looking statements. These expressions are most
often used in statements relating to business plans, strategies, anticipated
benefits or projections about anticipated revenues, earnings or other aspects of
Company operating results. The Company makes these statements in an effort to
keep stockholders and the public informed about its business based on its
current expectations about future events. Such statements should be viewed with
caution and are not guarantees of future performance or events.
As noted elsewhere in this report, the Company's business is subject to
uncertainties, risks and other influences, many of which are not within its
control. 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 proves to be accurate. The Company
undertakes no obligation to publicly release updates or revisions to these
statements. The following discussion should be read in conjunction with audited
consolidated financial statements and the notes thereto for the year ending
December 31, 2003, included elsewhere in this Form 10-K.
General
- -------
The Company is a hazardous, non-hazardous, industrial, and radioactive waste
management company providing treatment and disposal service to commercial and
government entities, including but not limited to, nuclear power plants,
refineries, chemical manufacturing plants, steel mills, the U.S. Department of
Defense, biomedical facilities, universities and research institutions. The
majority of revenues are derived from fees charged for waste treated and
disposed at Company-owned facilities. The Company periodically manages the
transportation of wastes to its disposal facilities. These projects may
periodically contribute significant revenue. Fees are also charged for waste
packaging, brokering, waste removal, and transportation to facilities operated
by other service providers. The Company and its predecessors have been in
business for more than 50 years.
In late 2001, the Board of Directors appointed a new executive team that
reorganized the Company with the objectives of optimizing performance of its
core waste treatment and disposal assets and exiting non-core businesses.
Management believes that this restructuring has yielded benefits, including
improved market penetration, clearer organizational accountability, cost
savings, increased waste handling efficiencies, and improved utilization of
operating assets. Management further believes that actions to resolve a number
of long-standing lawsuits, sell its El Centro municipal solid waste landfill,
and discontinue its unprofitable Oak Ridge, Tennessee LLRW processing operations
have allowed the Company to improve the performance of its profitable hazardous
and radioactive waste treatment and disposal business.
Overall Company Performance
- -----------------------------
On a consolidated basis, the Company's financial performance for the
twelve-months ended December 31, 2003, showed material improvement over 2002 and
2001 as measured by income from operations. Management believes this improvement
is due to strong performance of its Grand View, Idaho operation acquired in
early 2001, execution of new management's turn around plan and related
restructuring actions implemented beginning later that year, and increased
attention to efficient waste handling operations and business systems. These
actions focused on improving waste treatment and disposal throughput at the
Company's operating facilities, securing permit modifications required to expand
higher margin "niche" services, reducing head count and other costs,
streamlining reporting, implementing centralized information and accounting
systems, reducing use of external consultants, and restructuring the sales
function to increase revenue and earnings.
Management believes 2002 and 2003 operating performance, as well as future
operating performance, is driven by the Company's core disposal business. A
significant portion of the Company's revenue is derived from government
remediation projects, which are driven by availability of state and federal
appropriations, and the requirement to remove contamination from contaminated
sites. During 2003 and 2002, the Army Corps of Engineers (USACE) and federal
contractors, such as Shaw E&I, represented significant amounts of the Company's
revenue.
Funding for the USACE FUSRAP program, which presently contracts with the Company
for disposal, has remained generally constant and management expects this to
continue. US EPA and other federal agencies have also used the Company's USACE
contract to dispose of CERCLA and other federal remediation project waste.
17
Remediation projects under "Superfund" depend on site-specific fund
availability. Funding levels have generally decreased since the early 1990s,
however, major projects continue. The Company is currently accepting waste from
several large multi-year federal Superfund projects. States also fund
remediation projects. The majority of the 2003 Shaw E&I revenue derived from a
remediation project funded by the State of New Jersey.
Non-government remediation project opportunities are driven by regulatory agency
enforcement actions and settlements, litigation, local community controversy,
availability of private funds and other factors. To the extent privately funded
remediation projects are discretionary, management believes a healthy national
economy generally favors increased project availability. Management further
believes that bid activity for such projects increased in the second half of
2003 and that this higher level of bid activity will continue during 2004.
The Company's largest base business customer is Nucor Corporation, which
operates electric arc furnace steel mills. The Company disposes of air pollution
control dust (KO61) from Nucor steel mills in several states and other steel
mills at its Grand View, Idaho facility, however, aggressive price competition
from KO61 recyclers resulted in a loss of market share and revenue during 2003.
In February 2004, the Company entered into an agreement with Envirosafe Services
of Ohio, Inc. ("ESOI") to provide ESOI's USEPA-approved KO61 "delisting"
technology at the Company's Robstown, Texas and Beatty, Nevada facilities to
extend the regulatory fee advantages enjoyed by its Idaho operation to these
other two facilities. No assurance can be given, however, that this strategy
will result in new KO61 business.
Other than Nucor, no other base business customer contributed more than 5% of
the Company's revenue in 2003. The Company was successful in securing new base
business contracts from other hazardous waste customers in 2003 and employs a
sales incentive plan that is weighted to rewarding new base business revenue.
The hazardous waste business is highly competitive. No assurance can be given
that the Company will retain its present base business customers or increase its
market share for steel mill air pollution control dust or other hazardous waste.
The Company has not historically performed well outside its core treatment and
disposal business and will continue to attempt to limit the negative impact of
previous growth initiatives outside of its core business. Year to year
comparisons are made difficult by a series of material, independent events in
both 2002 and 2003. These included:
- - a large single event clean-up project undertaken in early 2002 by the
Company's Richland, Washington facility,
- - a large single event project undertaken in the second half of 2003 at the
Company's Grand View, Idaho facility,
- - unusually high litigation expenses in early 2003 and write off of the Ward
Valley, California litigation,
- - costs to discontinue the Company's Oak Ridge, Tennessee low-level
radioactive waste processing businesses and remove customer and Company
waste from the premises,
- - a gain on sale of the El Centro landfill assets in early 2003, and
- - the adoption of a new accounting standard ("FAS 143") which resulted in a
large gain.
These events are discussed in detail below.
2003 EVENTS
- ------------
Oak Ridge Disposal Plan: During 2003, the Company accrued an additional
- ---------------------------
$2,517,000 in costs to remove waste from the facility and prepare the facility
for sale. This primarily reflects actual expenses, above estimates, incurred to
dispose of specific wastes which were identified when the wastes were shipped to
off-site service providers. $442,000 of these additional costs were accrued for
expenses expected to be paid during 2004 in accordance with the provisions of
EITF 94-3.
In June 2003, the Company entered into a non-binding letter of intent with a
potential buyer of the Company's Oak Ridge facility assets, including certain
licenses, buildings and equipment, for a nominal sales price along with buyer
assumption of specified liabilities. This potential buyer later notified the
Company that its board of directors was not prepared to proceed with the
purchase transaction as contemplated and the letter of intent expired without
18
being exercised on December 5, 2003. The Company is in continuing discussions
with other potentially qualified buyers; however, no assurance can be given that
an asset sale will be consummated.
Ward Valley Litigation and Expenses: Due to the adverse California state trial
- --------------------------------------
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 $1,786,000 were incurred and
included in SG&A during 2003. The Company has appealed the Ward Valley ruling.
Briefing in that appeal is underway. Minimal out-of-pocket costs for this appeal
are expected in 2004 based on a fixed price legal representation agreement
entered into and paid for in July 2003.
Sale of El Centro: On February 13, 2003, the Company sold the El Centro
- ---------------------
municipal waste landfill to Allied Waste and recognized a $4,909,000 gain on
sale. This gain was included in discontinued operations during the quarter ended
March 31, 2003.
New Jersey PCB Clean-up Project: The Company's Grand View, Idaho facility
- ------------------------------------
performed a $10,053,000 transportation and disposal project in the third and
fourth quarters of 2003. This project represented 18% of 2003 revenues.
2002 EVENTS
- ------------
Financial Accounting Standard No. 143 ("FAS 143"): The Company implemented FAS
- ----------------------------------------------------
143 on January 1, 2002. FAS 143 requires a liability to be recognized as part of
the fair value of future asset retirement obligations. It also requires an
associated asset to be recognized as part of the carrying amount of the
underlying asset. The implementation of FAS 143 resulted in a $13,141,000
cumulative effect of change in accounting principle gain during the quarter
ended March 31, 2002.
Army Corps of Engineers Fort Greely, Alaska Project: The Company performed a
- -------------------------------------------------------
$3,850,000 waste packaging and disposal project at its Richland, Washington
facility during the first quarter of 2002. This project represented 8% of 2002
revenues and produced significantly higher margin and earnings than other
projects typically handled by the Richland facility.
Oak Ridge Disposal Plan: On December 27, 2002, the Company discontinued
- ---------------------------
operations at the Oak Ridge facility and recognized $7,018,000 of additional
estimated costs to implement its asset and liability disposal plan.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Compliance and Changes with Applicable Laws and Regulations
- ------------------------------------------------------------------
The changing regulatory framework governing the Company's business creates
significant risks, including potential liabilities from violations of
environmental statutes and regulations. Failure to timely obtain or comply with
applicable federal, state and local governmental licenses, permits or approvals
for its waste treatment and disposal facilities could prevent or inhibit the
Company from operating its facilities and providing services, resulting in a
potentially significant loss of revenue and earnings. Changes in laws or
regulations or changes in the enforcement or interpretation of existing laws and
regulations may require the Company to modify existing operating licenses or
permits, or obtain additional approvals if new environmental legislation or
regulations are enacted or existing legislation or regulations are amended,
reinterpreted or enforced differently than in the past. Any new governmental
requirements that raise compliance standards or require changes in operating
practices or technology requirements may impose significant costs upon the
Company. The Company's failure to comply with applicable statutes, and
regulations, licenses and permits may result in the imposition of substantial
fines and penalties and could adversely affect the Company's ability to carry on
its business as presently constituted.
The Company's revenues are primarily generated as a result of requirements
arising under federal and state laws, regulations, and programs to protect the
environment. Management believes the nation's basic framework of environmental
laws and regulations is broadly accepted as sound public policy. If requirements
to comply with these environmental laws and regulations, particularly those
relating to the treatment, storage or disposal of PCB, hazardous, NORM/NARM and
low-level radioactive waste were substantially relaxed in the future or were
19
less vigorously enforced, the demand for the Company's services could materially
decrease and revenues could be significantly reduced.
Exposure to Litigation
- ------------------------
Since Company personnel routinely handle radioactive, PCB and hazardous
materials, the Company may be subject to liability claims by employees,
customers and third parties. There can be no assurance that the Company's
existing liability insurance is adequate to cover claims asserted against the
Company or that the Company will be able to maintain such insurance in the
future. Management believes the Company has adopted prudent risk management
programs to reduce these risks and potential liabilities; however, there can be
no assurance that such programs will fully protect the Company. Adverse rulings
in ongoing legal matters, including but not limited to litigation brought to
protect the Company's investment in the proposed Butte, Nebraska disposal
project and other matters could have a material adverse effect on the Company.
See Item 3. Legal Proceedings of this Form 10-K.
Access to Capital
- -------------------
The Company requires cost effective access to capital to implement its strategic
and financial plan. If the Company cannot maintain access to capital or raise
additional capital, the Company may need to delay or scale back planned
infrastructure improvements or future disposal capacity expansions. This could
negatively impact the Company's ability to generate earnings. The Company
currently has cash on hand to fund its budgeted 2004 capital projects, and
expects to maintain access to cost-effective capital in the event borrowings are
required. Additionally, the Company has constructed sufficient disposal capacity
to meet foreseeable near-term needs. No assurance can be given, however, that
the Company will continue to have cash on hand for these purposes or maintain
cost-effective access to the capital markets.
Access to Insurance and Financial Assurances
- -------------------------------------------------
The Company is required by license, permit, and prudence to maintain a variety
of insurance instruments and financial assurances. Since early 2001, a
tightening in the insurance markets has decreased access to cost-effective
insurance. This was exacerbated by the terrorist attacks against the United
States on September 11, 2001 and claims resulting from those attacks. Without
cost-effective access to insurance and/or financial assurance markets, the
Company's ability to operate its facilities would be materially and adversely
affected. On December 19, 2003, insurance for the Company's primary financial
assurance for its hazardous waste disposal facilities was renewed for one year.
Although the Company expects to renew these policies, no guarantee can be given
that the Company will be able to renew or procure new financial assurance
insurance on terms favorable to the Company. Inability to obtain cost-effective
insurance and/or financial assurance could have a material adverse effect on the
Company.
New Technologies
- -----------------
The Company expects to introduce new technologies at its facilities from time to
time. The Company has experienced difficulties implementing new technologies in
the past. The Company's future growth at its Beatty, Nevada facility is
partially tied to its ability to cost effectively provide thermal treatment
services using patented equipment. If the Company cannot cost-effectively deploy
this and other commercially viable treatment technologies in response to market
conditions and customer requirements, the Company's business could be adversely
affected.
Competitive Environment
- ------------------------
The Company faces competition from companies with much greater resources and
potentially more cost-effective waste treatment and disposal services. An
increase in the number of commercial treatment or disposal facilities for
hazardous or radioactive waste in the United States, or a decrease in the
treatment or disposal fees charged by competitors could reduce or eliminate the
competitive advantage of the Company's facilities and services. The Company's
business is heavily affected by waste tipping fees assessed by state regulatory
entities. These fees, which vary from State to State, are periodically adjusted.
Such adjustments may significantly affect the competitive environment in which
the Company conducts business either positively or negatively.
20
General Economic Conditions
- -----------------------------
The Company's hazardous waste facilities serve steel mills, refineries, chemical
manufacturing plants and other basic industries that are, or may be affected by,
general economic conditions. During periods of economic weakness, these
industries may curtail production activities producing waste and/or delay
spending on plant maintenance, waste clean-up work and other discretionary
projects. Management believes the Company's business has been adversely affected
by generally weaker economic conditions since 2002. While management believes
that bid activity for the services it offers has recently increased, the Company
makes no predictions that general economic conditions will positively impact its
business in 2004.
Potential Loss of Major Contracts
- -------------------------------------
A loss on one or more of the Company's largest contracts could significantly
reduce Company revenues and negatively impact earnings. Its contract with the US
Army Corps of Engineers (USACE) expires during the second quarter of 2004 unless
renewed for an additional 5 years at the option of the USACE. While the Company
believes that the USACE will exercise its option and renew the contract on
substantially the same terms, there is no assurance that the contract will be
renewed or the terms of the contract will be materially changed. Discontinuation
of this contract could have a material adverse impact on the Company.
Cost of Discontinuing Operations at Oak Ridge
- ---------------------------------------------------
On December 27, 2002, the Company announced the discontinuance of LLRW
processing services and operations at its wholly-owned subsidiary, AERC. When
making these decisions, the Company has made assumptions about future costs. If
the facility cannot be sold, the Company may be required to initiate closure
activities during 2004, for which the Company has accrued costs totaling
$4,621,000. Developing these estimates required numerous subjective and complex
judgments, estimates, and assumptions that may or may not ultimately prove
accurate. While management believes this amount is sufficient to meet the
Company's closure obligations, no assurance can be given that additional closure
reserves will not be required.
RESULTS OF OPERATIONS
Operating Disposal Facilities, Non-operating Disposal Facilities, the
discontinued Processing and Field Services operations and Corporate are combined
to arrive at consolidated income. Continuing Operations is comprised of
Operating Disposal Facilities, Non-operating Disposal Facilities, and Corporate.
Only the Operating Disposal Facility segment reports revenue and profits.
Revenue, costs and profits or losses in the discontinued Processing and Field
Services segment are reflected in the consolidated financial statements in a
single line item. The Non-operating Disposal Facility segment generates minimal
revenues and does not generate profits. The Corporate segment generates no
revenue and provides administrative, managerial and support services for the
other segments. Summarized financial information concerning the Company's
reportable segments is shown in the following table.
Operating Non-Operating Discontinued
Disposal Disposal Processing and
Facilities Facilities Field Services Corporate Total
- ------------------------------------------------------------------------------------------------------------------
2003
- ------------------------------------------------------------------------------------------------------------------
Revenue $ 56,973 $ 74 $ -- $ -- $ 57,047
Direct operating cost 32,571 908 -- -- 33,479
------------ --------------- ---------------- ----------- ---------
Gross profit (loss) 24,402 (834) -- -- 23,568
S,G&A 6,982 1,794 -- 5,043 13,819
------------ --------------- ---------------- ----------- ---------
Income (loss) from operations 17,420 (2.628) -- (5,043) 9,749
Investment income -- -- -- 347 347
Interest expense 36 -- -- 230 266
Loss on writeoff of Ward Valley -- 20,951 -- -- 20,951
Other income 35 89 -- -- 124
------------ --------------- ---------------- ----------- ---------
Income (loss) before income tax,
discontinued operations and cumulative 17,419 (23,490) -- (4,926) (10,997)
21
effect
Income tax expense -- -- -- 72 72
------------ --------------- ---------------- ----------- ---------
Income (loss) before discontinued 17,419 (23,490) -- (4,998) (11,069)
operations and cumulative effect
Gain (loss) from discontinued operations 4,994 -- (2,517) -- 2,477
------------ --------------- ---------------- ----------- ---------
Net income (loss) $ 22,413 $ (23,490) $ (2,517) $ (4,998) $ (8,592)
============ =============== ================ =========== =========
Depreciation and accretion $ 6,515 $ 400 $ -- $ 81 $ 6,996
Capital Expenditures $ 6,582 $ 35 $ 451 $ -- $ 7,068
Total Assets $ 40,377 $ 6,550 $ 2,495 $ 17,204 $ 66,626
- ------------------------------------------------------------------------------------------------------------------
2002
- ------------------------------------------------------------------------------------------------------------------
Revenue $ 46,494 $ 295 $ -- $ -- $ 46,789
Direct operating cost 23,436 1,787 -- -- 25,223
------------ --------------- ---------------- ----------- ---------
Gross profit (loss) 23,058 (1,492) -- -- 21,566
S,G&A 8,000 103 -- 4,528 12,631
------------ --------------- ---------------- ----------- ---------
Income (loss) from operations 15,058 (1,595) -- (4,528) 8,935
Investment income 13 -- -- 18 31
Gain (loss) on sale of assets (20) 4 -- 1 (15)
Interest expense 711 -- -- 109 820
Other income (expense) 78 (389) -- (231) (542)
------------ --------------- ---------------- ----------- ---------
Income (loss) before income tax, 14,418 (1,980) -- (4,849) 7,589
discontinued operations and cumulative
effect
Income tax benefit -- -- -- 8,505 8,505
------------ --------------- ---------------- ----------- ---------
Income (loss) before discontinued
operations and cumulative effect 14,418 (1,980) -- 3,656 16,094
Gain (loss) from discontinued operations 466 -- (10,930) -- (10,464)
------------ --------------- ---------------- ----------- ---------
Income (loss) before cumulative effect 14,884 (1,980) (10,930) 3,656 5,630
Cumulative effect of change in
accounting principle 14,983 1,548 (3,390) -- 13,141
------------ --------------- ---------------- ----------- ---------
Net income (loss) $ 29,867 $ (432) $ (14,320) $ 3,656 $ 18,771
============ =============== ================ =========== =========
Depreciation and accretion $ 6,443 $ 458 $ 518 $ 361 $ 7,780
Capital Expenditures $ 3,010 $ 6 $ 300 $ 30 $ 3,346
Total Assets $ 44,832 $ 27,467 $ 4,649 $ 10,177 $ 87,125
- ------------------------------------------------------------------------------------------------------------------
2001
- ------------------------------------------------------------------------------------------------------------------
Revenue $ $40,088 $ 87 $ -- $ -- $ 40,175
Direct operating cost 21,637 1,141 -- -- 22,778
------------ --------------- ---------------- ----------- ---------
Gross profit (loss) 18,451 (1,054) -- -- 17,397
S,G&A 8,287 556 -- 5,431 14,274
------------ --------------- ---------------- ----------- ---------
Income from operations 10,164 (1,610) -- (5,431) 3,123
Investment income 188 -- -- 58 246
Gain (loss) on sale of assets (8) -- -- -- (8)
Interest expense 746 -- -- 265 1,011
Other income (expense) 450 (286) -- 663 827
------------ --------------- ---------------- ----------- ---------
Income (loss) before income tax and
discontinued operations effect 10,048 (1,896) -- (4,975) 3,177
Income tax benefit (expense) -- -- -- (186) (186)
------------ --------------- ---------------- ----------- ---------
Income (loss) before discontinued
operations 10,048 (1,896) -- (5,161) 2,991
Gain (loss) from discontinued operations 378 -- (2,567) -- (2,189)
------------ --------------- ---------------- ----------- ---------
Net Income (loss) $ 10,426 $ (1,896) $ (2,567) $ (5,161) $ 802
============ =============== ================ =========== =========
Depreciation Expense $ 4,285 $ 2 $ 684 $ 59 $ 5,030
22
Capital Expenditures $ 2,865 $ 3 $ 557 $ 31 $ 3,456
Total Assets $ 43,371 $ 27,482 $ 9,892 $ 6,079 $ 86,824
The following table sets forth items in the Statements of Operations for
Continuing Operations the three years ended December 31, 2003, as a percentage
of revenue:
Percentage of Revenues for the
Year Ended December 31,
-----------------------
2003 2002 2001
--------- --------- ---------
Revenue 100.0% 100.0% 100.0%
Operating costs 58.7 53.9 56.7
--------- --------- ---------
Gross profit 41.3 46.1 43.3
--------- --------- ---------
Selling, general and administrative expenses 24.2 27.0 35.5
--------- --------- ---------
Income from operations 17.1 19.1 7.8
Other income (expense), net (36.4) (2.9) 0.1
--------- --------- ---------
Income from continuing operations before income taxes (19.3) 16.2 7.9
Income tax expense (benefit) 0.1 (18.2) 0.5
--------- --------- ---------
Income from continuing operations (19.4) 34.4 7.4
========= ========= =========
RESULTS OF OPERATING DISPOSAL FACILITY SEGMENT OPERATIONS
The following discussion and analysis reflects the Company's Operating Disposal
facility operations and does not include the results of Discontinued Operations,
Non-Operating Facilities or Corporate for the 12 months ended December 31, 2003,
2002 and 2001.
Revenue
- -------
During the 12 months ended December 31, 2003, revenue from Operating Disposal
facilities totaled $56,973,000. This was 22% higher than the $46,494,000 posted
in 2002, and 42% higher than the $40,088,000 reported in 2001. Of the
$10,455,000 increase in Operating Disposal facility revenue from 2002 to 2003,
$10,053,000 reflects a single transportation and disposal project performed in
the second half of 2003 by the Idaho operation. In addition, the Company secured
several other significant projects and base business customers in 2003 and 2002,
allowing it to grow its market share despite the loss of certain steel mill
customers. Increases in volume and revenue at the Idaho facility offset
decreases in volume and revenue at the Company's three other disposal
facilities.
Direct Operating Costs
- ------------------------
Direct operating costs represent costs at Company disposal facilities that are
directly related to waste treatment and disposal. They include transportation,
labor, equipment depreciation, fuel, treatment, waste treatment additives,
testing, analysis, and amortization of disposal cell "airspace" costs. Except
for transportation, airspace and treatment additives, most of the Company's
direct costs are fixed and do not materially vary with changes in waste volume.
In 2003, direct operating costs from continuing operations increased 39%,
reaching $32,571,000, up from $23,436,000 in 2002. The $9,135,000 increase in
direct operating costs partially reflects a strategic decision to 'bundle'
transportation and disposal costs for certain projects shipped to the Idaho
site. Management believes that the bundling of transportation services with
disposal allows the Company to offer potential customers both lower overall
pricing and value-added service. It is recognized that this bundling increases
the Company's direct operating costs and reduces gross margin relative to
revenue. Bundling of services for certain customers will continue to be pursued
in 2004 as a key element of the Company's business development strategy to grow
revenue and earnings. In 2003, direct operating costs were $10,934,000 higher
than the $21,637,000 of direct costs incurred in 2001.
Selling, General and Administrative Expenses ("SG&A")
- ----------------------------------------------------------
23
In late 2001, management began a concerted effort to control and reduce SG&A. As
a result of management's cost control initiatives, SG&A associated with
Operating Disposal facility operations declined by 4% in 2002 and 13% in 2003.
All facilities decreased their respective SG&A costs. Decreases in overhead
spending were accomplished through improved procurement of goods and services,
decreased reliance on external consultants and other cost control measures.
During 2003, the Company installed new centralized information and accounting
systems that have increased the availability and timeliness of business
information.
Operating Income
- -----------------
For the 12 months ended December 31, 2003, operating income from continuing
operations totaled $9,749,000 or 17.1% of revenue, compared to $8,935,000 (19.1%
of revenue) posted in 2002 and $3,123,000 (7.8% of revenue) recorded in 2001.
Operating income from the Operating Disposal facility segment totaled
$17,420,000, or a 16% increase from the $15,059,000 posted for 2002, and 49%
higher than the $10,099,000 recorded in 2001. Higher revenues combined with the
relatively lower direct costs and SG&A were partially offset by low
transportation margins in 2003. The Company generated an operating margin from
the Operating Disposal segment of 31% in 2003, compared to the 32% operating
margin posted in 2002 and the 25% recorded in 2001.
RESULTS FROM NON-OPERATING DISPOSAL FACILITIES
Revenue
- -------
Revenue generated by Non-Operating Disposal facilities represents amounts
billable to third parties for services performed by the Company's non-operating
segment. In Nebraska, the Company is reimbursed by the Central Interstate
Compact ("Compact") for specified costs the Company incurs to provide technical
support to the Compact and maintain the proposed Butte, Nebraska disposal site
for future use. In Illinois and Nevada, the Company is paid by those States to
maintain and monitor closed low-level radioactive waste sites that were returned
to the states for perpetual care and maintenance. Generally speaking, this
revenue is immaterial. For the 12 months ended December 31, 2003, revenue
generated from closed sites was $74,000, which was a $221,000 and $13,000
decrease over revenue generated in 2002 and 2001, respectively. In 2002, the
Company was reimbursed for litigation support expenses incurred on the Butte,
Nebraska project, resulting in the greater 2002 revenue compared to 2003 and
2001.
Operating Costs and SG&A
- ---------------------------
Non-Operating Disposal Facilities incur primarily legal and consulting costs
required to maintain or license the facilities for initial use, and labor costs
required to properly maintain and close facilities subsequent to use. For the
years ended 2003, 2002 and 2001, the Company reported $2,628,000, $1,595,000 and
$1,610,000, respectively, in operating losses for the two proposed disposal site
development projects and to close and maintain facilities subsequent to
operational use. Legal expenses of $1,919,000, $1,383,000 and $570,000 were
incurred in 2003, 2002, and 2001, respectively, related to the proposed Ward
Valley, California and Butte, Nebraska disposal sites. The Ward Valley,
California litigation experienced an adverse trial court ruling in 2003 which is
being appealed. Significant legal expenses are not expected in 2004 unless the
appeals courts remand the case for further trial proceedings. The Company's
expenses in the Nebraska lawsuit are not significant based on the support role
assumed by the Company in this litigation relative to the other plaintiffs.
RESULTS FOR CORPORATE
- -----------------------
SG&A
- ----
Beginning in late 2001, new management undertook concerted efforts to control
and reduce SG&A across the Company, particularly at its corporate office in
Boise, Idaho, where spending has declined by $323,000 or 6% since 2001. The
Company also consolidated accounting, information, and certain operational
functions in the Boise office. Centralized information systems implemented in
2002 have increased the availability and timeliness of operating information and
reduced invoicing time for customers. The Company has also resolved multiple
longstanding lawsuits, thereby reducing legal fees and freeing up management
time and resources to focus on the business.
24
RESULTS OF DISCONTINUED OPERATIONS
During 2002, the Company entered into discussions with various parties
potentially interested in purchasing its municipal solid waste landfill in Texas
and with other parties regarding potential sale of its discontinued LLRW
processing business in Tennessee. Accordingly, the Company reclassified these
business operations as discontinued operations consistent with Generally
Accepted Accounting Principles ("GAAP") and specifically, in accordance with FAS
No. 144 "Accounting for the Impairment or Disposal of Long Lived Assets" and
Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity."
El Centro Solid Waste Landfill, Robstown, Texas
- -----------------------------------------------------
On February 13, 2003, the Company announced the sale of its El Centro municipal
and industrial waste landfill to a wholly-owned subsidiary of Allied Waste
Industries, Inc. ("Allied"). The Company sold Prepaid Assets of $117,000 and
Property, Plant, and Equipment of $6,930,000 which was subject to Closure/Post
Closure Obligations of $1,098,000 for $10,000,000 cash and future royalty
payments valued at $858,000. A $4,909,000 gain on sale was recognized in
discontinued operations during the first quarter of 2003.
Under the Agreement, Allied will pay American Ecology minimum royalties of at
least $215,000 annually. Once Allied has paid the Company $14,000,000, it will
no longer have an obligation to pay annual minimum royalties but will still be
required to pay royalties based on waste volumes received at El Centro. The
Royalty Asset, valued at $858,000 as of February 13, 2003, represents the
present value of 5 years of minimum royalty payments. Royalties of $237,000 were
paid by Allied in 2003, resulting in Other Income included in Discontinued
Operations of $22,000. As of December 31, 2003, the Royalty Asset was
reclassified from Discontinued Operations to the Operating Disposal Facility
Segment due to the ongoing nature of the expected payments. Effective January 1,
2004, annual payments in excess of $215,000, or payments subsequent to 2007,
would be included in Other Income at the time of receipt.
The table below provides financial information on the operations of the El
Centro landfill included in Discontinued Operations as of December 31, 2003:
$ in Thousands Year Ended December 31,
2003 2002 2001
------ ------- -------
Revenue $ 462 $2,563 $2,450
Direct Operating costs 244 1,351 1,480
------ ------- -------
Gross profit 218 1,212 970
Selling, general and administrative expenses 155 705 538
------ ------- -------
Income (loss) from operations 63 507 432
Other income (expenses) 4,931 (41) (54)
------ ------- -------
Gain (loss) from discontinued operations $4,994 $ 466 $ 378
====== ======= =======
Despite the Company's disposal expertise, the proven business model for solid
waste services based on integrated local transportation assets is significantly
different from the Company's core hazardous and radioactive waste business. By
exiting this business and monetizing its investment in the solid waste landfill,
the Company obtained resources to support growth of its core business, improve
its capital structure, and meet its obligations in Oak Ridge, Tennessee.
Low-level Radioactive Waste Processing and Field Services, Oak Ridge Tennessee
- --------------------------------------------------------------------------------
Oak Ridge, Tennessee Facility. AERC, acquired from Quadrex Corp. in 1994,
processed LLRW to reduce the volume of waste requiring disposal at licensed
radioactive waste facilities. In December 2002, the Company announced the
cessation of commercial LLRW services and operations. The plant, situated on 16
acres of Company property in Oak Ridge, Tennessee, primarily served the
commercial nuclear power industry, but also accepted brokered waste from
biomedical, academic and non-utility industry customers. In October 2002, the
Company announced its intent to actively market the facility and exit the LLRW
processing business. While a number of potential buyers were identified, no
acceptable offers were received to acquire the facility. After concluding it
25
would not be possible to sell the business as an operating business, management
discontinued AERC's commercial services. This resulted in the dismissal of
approximately 85 employees in 2003. The Company continues to employ two workers
to maintain the facility's radioactive materials licenses and help market the
facility. The Company has paid the required fees and intends to maintain the
facility's existing radioactive materials operating license through its current
term, pending a possible sale.
Since purchasing AERC in 1994, the subsidiary has lost $58 million, including
substantial operating and net losses in 2001 and 2002. Management concluded that
a lack of core business integration with the Company's disposal facilities and
the highly competitive nature of the LLRW processing business would continue to
prevent AERC from achieving profitability in the foreseeable future.
Accordingly, action was taken to discontinue commercial operations and prepare
the facility for sale.
The table below provides financial information on the combined operations of the
LLRW processing facility and Field Services included in Discontinued Operations
as of December 31, 2003:
$ in thousands Year Ended December 31,
2003 2002 2001
-------- --------- --------
Revenue $ 1,941 $ 17,018 $13,391
Direct Operating costs 2,038 16,687 12,086
-------- --------- --------
Gross profit (loss) (97) 331 1,305
Selling, general and administrative expenses 1,939 3,627 4,465
-------- --------- --------
(Loss) from operations (2,036) (3,296) (3,160)
Other expenses (gains) 39 616 (593)
Accrued charges 442 7,018 --
-------- --------- --------
(Loss) from discontinued operations $(2,517) $(10,930) $(2,567)
======== ========= ========
Management considers the timely and orderly disposition of the Oak Ridge
facility a high priority.
RESULTS OF CONSOLIDATED OPERATIONS
Selling, General & Administrative Expenses
- ----------------------------------------------
In 2003, overall SG&A increased $1,118,000 to $13,819,000 due to legal expenses
for the Ward Valley, California lawsuit and trial. In 2003, the Company spent
$1,794,000 on Ward Valley legal expenses. Despite this increase in legal
expense, SG&A relative to revenue continued dropping, decreasing to 24.2% of
revenue in 2003, compared to 27% of revenue and 35.5% of revenue in 2002 and
2001, respectively.
Interest Income
- ----------------
Interest income represents earnings on cash balances, restricted investments,
and notes receivable, of which the Company has traditionally maintained minimal
amounts. While 2003 Interest income was $347,000, $302,000 of this amount was
earned on the 1996 Federal Income Tax refund received during the third quarter
of 2003. Interest income in 2002 was $31,000. The $246,000 of interest income in
2001 was primarily earnings on investments acquired in February 2001 with the
Envirosafe Services of Idaho acquisition. These investments were subsequently
converted to cash and used in operations. The Company does not anticipate
significant interest income in the future, as available cash balances are not
held for investment purposes, and accordingly earn interest at low, short term
rates.
Interest Expense
- -----------------
Interest expense was $266,000, $820,000, and $1,011,000 in 2003, 2002 and 2001,
respectively. On October 28, 2002, the Company refinanced an 8.25%, $8,500,000
industrial revenue bond with a variable rate $7,000,000, 5-year fully amortizing
term loan. As of December 31, 2003, the interest rate on the term loan was 3.5%.
Also contributing to the lower interest expense in 2003 and 2002 was the
retirement of additional debt of $1,062,000 in 2003 and $6,628,000 in 2002 as
part of management initiatives to more efficiently utilize cash, improve the
Company's
26
balance sheet and reduce higher cost debt obligations. Interest expense is
expected to decrease in 2004 due to the scheduled repayment of the term loan and
other debt.
Other Income (Expense)
- ------------------------
Other income (expense) was $124,000, ($557,000), and $819,000 for 2003, 2002 and
2001, respectively. Other income is the account used to record various business
activities that are not a part of the Company's current year ordinary and usual
revenues and expenses. The following table summarizes the business transactions
from outside the Company's current year normal business scope.
($ in thousands)
As of December 31,
OTHER INCOME 2003 2002 2001
- ------------ ----------- ------------- -------------
State tax adjustments $ -- $ -- $ 106
Correction of expensed debt payments -- -- 177
Insurance claim refunds -- 31 172
Adjustment of prior years accrued burial fee -- -- 500
Settlement related to GM litigation -- (740) (300)
Payment received on National Union litigation -- 250 --
Impairment of equity investment -- (358) --
Reversal of previous professional fee accrual -- -- 160
Other litigation related settlements -- 100 --
Other miscellaneous income (expense), net 8 (12) (1)
Cash receipts for sale and rent of property rights 108 117 5
Data services sold 8 55 --
----------- ------------- -------------
Total Other Income (Expense) $ 124 $ (557) $ 819
=========== ============= =============
During 2002 and 2003 the Company sought to resolve pending litigation to better
focus resources and energies on its core treatment and disposal business. The
large increase in Other Expense during 2002 reflects the resolution of 7 of 11
pending lawsuits in 2002, and resolution two others in 2003.
The Company sold certain water rights in Idaho for approximately $100,000 during
2004, and is marketing excess property in Winona, Texas during 2004 for
approximately $300,000. Sale of property rights results in a lump sum payment
at the time of sale, and a small decrease in future other income for the
previously leased water rights.
Income Taxes
- -------------
Effective income tax rates were (1)%, (112)%, and 17% for the fiscal years 2003,
2002 and 2001 respectively.
The Company has approximately $24,000,000 in net deferred tax assets for federal
income tax purposes, of which a $8,284,000 reduction in the valuation allowance
was recorded at December 31, 2002. This reflected management's belief that it
was more likely than not that approximately $8,284,000 of the deferred tax asset
would be utilized in the foreseeable future. The certainty with which management
can project taxable income decreases over time. Consequently, management
believes three years is the longest period that the Company can project with
confidence. Moreover, uncertainties about future disposition of AERC assets in
Oak Ridge limit the reliability of estimates of potential future use of net
operating loss carry forwards applicable to that subsidiary. The Company will
continue to periodically assess the adequacy of the valuation allowance. Due to
the amount of federal deferred tax assets available to the Company, regular
federal income tax is not expected to be due for the foreseeable future.
However, federal alternative minimum tax of approximately 2% of income i