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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-K
[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended December 31, 1996
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ______________ to
____________
Commission File Number 0-14292
GTS DURATEK, INC.
(Exact name of Registrant as specified in its charter)
Delaware 22-2476180
--------------- --------------
(State or other jurisdiction of
incorporation ororganization) (I.R.S. Employer Identification No.)
10100 Old Columbia Road,
Columbia, Maryland 21046
- --------------------------- -------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (410) 312-5100
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par
Value 0.01 Per Share
Indicate by check mark X 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 the 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. ______
As of March 14, 1997, the aggregate market value of the outstanding shares of
the Registrant's Common Stock, par value $0.01 per share, held by non-affiliates
was approximately $85,813,000 based on the average closing price of the Common
Stock as reported by Nasdaq National Market on March 14, 1997. Determination of
affiliate status for this purpose is not a determination of affiliate status for
any other purpose.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the most recent practicable date.
Class Outstanding at March 14, 1997
----- -----------------------------
Common stock, par value $0.01 per share 12,439,151 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 1997 Annual
Meeting of Stockholders are incorporated by reference into Part III hereof.
Form 10-K Cross-Reference Sheet
Page
PART I
Item 1. Business.............................................................1
Item 2. Properties...................................................17
Item 3. Legal Proceedings............................................17
Item 4. Submission of Matters to a Vote of Security Holders..........17
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters............................18
Item 6. Selected Financial Data......................................19
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations..........20
Item 8. Financial Statements and Supplementary Data..................26
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.................47
PART III
Item 10. Directors and Executive Officers of the Registrant*..........48
Item 11. Executive Compensation*......................................49
Item 12. Security Ownership of Certain Beneficial Owners
and Management*........................................49
Item 13. Certain Relationships and Related Transactions*..............49
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K............................................50
Signatures..................................................................52
* Incorporated by reference from registrant's definitive Proxy Statement for
the Annual Meeting of Stockholders to be held May 14, 1997 which Proxy
Statement will be filed not later than 120 days after the end of the fiscal
year covered by this Annual Report on Form 10-K.
Part I
ITEM 1. BUSINESS
OVERVIEW
GTS Duratek provides waste treatment solutions for radioactive,
hazardous, mixed and other wastes. The Company's strategy is (i) to provide the
low cost solution to process contaminated waste streams, (ii) to combine its
proprietary technologies and technical support services to provide full-service
waste treatment, and (iii) to team, where appropriate, with other companies with
complementary expertise to advance GTS Duratek's treatment solutions within its
target markets and into new markets. The Company's vitrification, thermal
desorption and ion exchange technologies convert waste to stable forms for
storage or disposal while achieving significant volume reduction. Accordingly,
the Company believes its customers benefit from significant cost savings as
compared to other commercially-available alternatives. To implement its waste
treatment technologies and provide related technical support services, the
Company has a staff of highly skilled personnel with significant environmental
services experience.
The Company's waste treatment technologies include vitrification, thermal
desorption and ion exchange and can be used independently or in tandem to solve
the waste disposal or storage problems of its customers. The Company's
vitrification technology converts waste to environmentally stable,
leach-resistant glass through a patented high-temperature melter system known as
a DuraMelter(TM). The thermal desorption and ion exchange technologies are used
by the Company to treat petrochemical and liquid radioactive waste streams,
respectively, and can be used to separate the waste streams into components that
can either be safely stored, recycled or used as additives in the vitrification
of other waste streams. The Company's ability to integrate its waste treatment
technologies enables it to handle a diversity of waste streams in a
cost-effective manner.
The Company has over 480 engineers, consultants and technicians who
support and complement its waste treatment and stabilization services and also
provides highly specialized technical support services for the Company's
customers. The technical support services provide a consistent source of revenue
and the complementary expertise for the company to expand and diversify its
waste treatment technologies. The services provided by the Company include staff
augmentation and outage support, principally to assist nuclear power plants
during regular maintenance shutdowns, environmental and computer consulting and
environmental safety training. Having these technical resources available has
enabled the Company to move its technologies from bench-scale laboratory testing
to field operations and commercial application more rapidly and to handle larger
scope waste cleanup projects.
In January 1997, the Company entered into a letter of intent to acquire
100% of the stock of Scientific Ecology Group, Inc. (`SEG') from Westinghouse
Electric Corp. (`Westinghouse') for $28 million in cash and 156,986 shares of
the Company's stock. SEG, a wholly-owned subsidiary of Westinghouse based in Oak
Ridge Tennessee, is the largest commercial radioactive waste processing company
in the United States, offering an extensive range of waste processing services
and technologies. The proposed acquisition is subject to the parties entering
into a mutually acceptable definitive purchase agreement, certain regulatory
approvals and other customary conditions. The Company anticipates closing the
transaction in April 1997.
On March 27, 1997, the Company decided to temporarily suspend processing of
radioactive waste and initiate an unscheduled controlled cool down of its glass
melter at the United States Department of Energy's ('DOE') Savannah River Site.
This decision was the result of recent observations by the operations personnel
that indicated that excessive wear could be occurring on certain internal
components of the melter. As a result of this finding, the Company is
performing a detailed inspection and assessment of the equipment. If this
assessment results in a delay in completing the processing, the Company could
incur contract losses on the M-Area contract in 1997. Until such time as this
assessment is complete the loss, if any, cannot be reasonably determined.
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The Company has developed the following important joint venture and
collaborative arrangements in order to advance the commercialization of its
waste treatment technologies and increase the number of markets that it serves:
o The Vitreous State Laboratory of The Catholic University of America in
Washington, D.C. (`VSL'). The Company has an established research and
development relationship with the VSL, one of the leading research centers
in the world for glass technology, including vitrification of waste.
o Chem-Nuclear Systems, Inc. (`Chem-Nuclear'). In September 1994, the Company
established a joint venture with Chem-Nuclear, a subsidiary of WMX
Technologies, Inc., to jointly pursue the treatment and disposal of
commercial low-level radioactive waste generated by nuclear power plants,
hospitals, research laboratories and industrial facilities. The joint
venture combines the Company's DOE vitrification experience with
Chem-Nuclear's 23 years of experience in providing radioactive waste
services. The joint venture expects to begin commercial operations in 1997.
o BNFL, Inc. (`BNFL'). In November 1995, the Company formed a strategic
alliance with BNFL to jointly pursue up to five major DOE waste treatment
projects. BNFL is the U.S. subsidiary of British Nuclear Fuels plc, one of
the largest processors of radioactive waste in the world. During 1996, the
Company and BNFL were awarded Phase I contracts for two DOE projects. To
date the Company has agreed to jointly pursue three major DOE waste
treatment projects with BNFL.
o The Carlyle Group (`Carlyle'). In January 1995, Carlyle, a Washington,
D.C.-based private merchant bank, made a significant investment in the
Company. Carlyle provided the Company with strong financial support and
experience with companies that contract with the federal government.
The Company seeks to utilize the complementary technical expertise or
commercial experience of the other parties in these collaborative arrangements
and, where possible, to develop additional collaborative arrangements, to pursue
its primary markets and expand into new markets.
PROPRIETARY WASTE TREATMENT TECHNOLOGIES
The Company has developed several waste treatment technologies for use
on a variety of radioactive, hazardous, mixed and other waste streams. The
Company's existing waste treatment technologies include vitrification, thermal
desorption and ion exchange and can be used independently or in tandem to solve
the waste disposal or storage problems of its customers. The following is a
brief summary of the Company's waste treatment technologies.
Vitrification
GTS Duratek's vitrification technology involves combining radioactive,
hazardous, mixed and other waste with glass-forming additives in a high
temperature melter, known as a DuraMelter(TM), that reaches temperatures of
1150(degree)C to 1450(degree)C (or 2100(degree)F to 2640(degree)F). The high
temperatures of the DuraMelter(TM) cause the waste and any additives, to form a
molten liquid that becomes solid glass as it cools. As the molten liquid cools,
the radioactive or hazardous atoms become chemically bonded in the molecular
structure of the glass for long-term storage or disposal, thereby virtually
eliminating contamination of the environment. For certain waste streams, the
Company's vitrification technology can achieve volume reductions of up to 97%.
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The DuraMelter(TM) is a proprietary melter system within a
refractory-lined cavity incorporating submerged electrodes which heat up the
materials within the cavity. Contaminated waste materials are deposited onto a
melt surface in either a liquid (slurry) or a solid form. Glass forming
additives are also introduced into the system and the amount of such additives
is dependent upon the characteristics of the waste stream. As the electrodes in
the DuraMelter(TM) raise the temperature above 600(degree)C, the waste and
additive mixture becomes electrically conductive. Resistance to the passage of
electricity through the mixture causes further heating and maintains the waste
and additive mixture in a molten state. This process is known as `joule heating'
and typically requires temperatures of about 1150(degree)C. Within the
DuraMelter(TM), water evaporates and organic substances are oxidized forming
simple gases which are channeled into the patented off-gas treatment system. The
inorganic radioactive or hazardous substances in the waste are dissolved into
the molten glass mixture. The molten glass exits through a side opening near the
floor of the melting cavity and, depending upon the characteristics of the waste
stream, is either discharged in bulk or directed into the proprietary GTS
Duratek gem machine where it forms into beads, 1 to 2 centimeters in diameter,
for long-term storage. As the beads of molten mixture cool, the inorganic
radioactive or hazardous substances become chemically bonded or `locked' into
the molecular structure of the glass.
DuraMelters(TM) range in size from small bench-scale units used for
testing and characterization of waste streams to commercial sized melters
designed for large waste treatment and remediation projects. Currently, the
Company's largest commercial operating DuraMelters(TM) can process up to
approximately 400 cubic feet of waste per day. The design of the DuraMelter(TM)
can be modified depending upon the characteristics of the waste stream to be
processed. To process waste streams that have a higher content of soil or sand,
the Company has designed a DuraMelter(TM) with higher temperature capability (up
to 1450(degree)C or 2640(degree)F). To process waste streams that include a high
content of corrosive elements such as sulfates, phosphates, lead and nitrates,
the Company has designed a DuraMelter(TM) with multiple waste chambers to
protect the electrodes from the corrosiveness of the waste stream.
Thermal Desorption Technology
The Company's thermal desorption technology separates hazardous wastes
into more stable waste components that can either be safely stored, recycled or
used as additives in the processing of other waste streams. The overall result
is a reduction in the costs of treating and disposing of such wastes. In this
process, hydrocarbon sludges and cakes are placed in a thermal desorber which
utilizes temperatures in excess of 635(degree)C (or 1175(degree)F) to separate
the waste into four components. The components include solids which meet
universal treatment standards land disposal restrictions, water amenable to
low-cost conventional waste water treatment or deep well disposal, reusable oil
and noncondensable gases. The Company's thermal desorption technology will
initially be used at its DuraTherm facility in San Leon, Texas for the
processing of high solid content petroleum refinery and petrochemical
manufacturing wastes. The high temperature thermal desorption process is
protected by three patents exclusively licensed by the Company. See `Business -
Status of Current and Potential Waste Treatment Projects - DuraTherm Facility in
San Leon, Texas.'
Ion Exchange
The Company manufactures and supplies highly specialized waste water
purification systems and patented ion exchange media, known as DURASIL(R), for
commercial nuclear power plants, DOE facilities and industrial clients.
DURASIL(R) is formulated to separate specific contaminants from liquid waste
streams thereby allowing radioactive and hazardous ions to be removed and
separated into their respective species. Since radioactive and hazardous
materials are regulated by two different government agencies, this ability to
separate mixed waste greatly
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simplifies its disposal. DURASIL(R) also has physical characteristics that
enable it to endure extreme waste water processing conditions. It is
mechanically stable and nonflammable, does not shrink or swell, is virtually
immune to radiation damage and has no effect on the pH of the waste stream. The
Company has developed different DURASIL(R) ion exchange media depending on the
characteristics of the liquid waste stream. To complement its line of DURASIL(R)
ion exchange media, the Company also developed the DURA C(TM) line of activated
carbons which are high capacity, specialty filtration media designed for
treatment of water containing mixed waste.
STATUS OF CURRENT AND POTENTIAL WASTE TREATMENT PROJECTS
The Company has completed, is currently involved in or is bidding on
several vitrification projects for the DOE through subcontracts with DOE site
managers and in the application of its waste treatment technologies to the
commercially-generated low-level radioactive waste and hazardous waste markets.
The following is a summary of the status of several of the Company's major waste
treatment projects.
Savannah River M-Area Project
The DOE's Savannah River site near Aiken, South Carolina has
approximately 18.7 million cubic feet in total currently stored inventory and
twenty years' projected volume of low-level radioactive and mixed wastes. This
represents about 31% of all of such wastes throughout the DOE weapons
facilities. The Savannah River site is the largest single repository of
low-level radioactive and mixed wastes among all DOE sites.
In November 1993, the Company was awarded a subcontract by the site
management and operations contractor, Westinghouse Savannah River Company
(`WSRC') to vitrify 90,000 cubic feet of low-level mixed waste sludge stored in
the M-Area tanks at Savannah River. GTS Duratek's subcontract represents only
0.5% of the total mixed waste inventoried at Savannah River. The Company's
obligations under this subcontract entail vitrifying the waste and performing
ancillary services related to the handling of the waste, including removal of
the radioactive sludges from the storage tanks, cleanup and decontamination of
the storage tanks and placement of the containers of the glass waste in a secure
storage area. The project is expected to be complete by October 1997.
Construction of the melter began in July 1995 and was completed during
1996. The Company designed and constructed the DuraMelter(TM) and serves as the
operator. The M-Area contract represents the first `privatization' type contract
entered into by the DOE for waste cleanup at its facilities. Pursuant to this
contract, the Company will own and operate the DuraMelter(TM) under its
subcontract with WSRC. The Company believes that the DOE will enter into more of
these privatization arrangements with commercial vendors and that the Company's
contract at Savannah River has been extensively used as a model for contemplated
future privatized DOE waste cleanup projects. See `Management's Discussion and
Analysis of Financial Condition and Results of Operations.'
On March 27, 1997, the Company decided to temporarily suspend processing of
radioactive waste and initiate an unscheduled controlled cool down of its glass
melter at the DOE's Savannah River Site. This decision was the result of recent
observations by the operations personnel that indicated that excessive wear
could be occurring on certain internal components of the melter. As a result of
this finding, the Company is performing a detailed inspection and assessment of
the equipment. If this assessment results in a delay in completing the
processing, the Company could incur contract losses on the M-Area contract in
1997. Until such time as this assessment is complete the loss, if any, cannot be
reasonably determined.
Hanford Tank Waste Remediation System Project
In September 1996, the team led by BNFL, of which the Company is a key
member, was awarded a contract for the Hanford Tank Water cleanup at the DOE's
site in Washington state. The Hanford site is the single largest DOE facility
and contains the largest amount of high-level radioactive waste in the United
States with approximately 61 million gallons of high-level radioactive waste and
low-level radioactive waste which is contained in 177 underground storage tanks.
4
The Company will provide the technical and support services for
vitrifying both high-level and low-level mixed waste for the project. Phase I-A,
which combines proof-of-concept and commercial demonstration-scale efforts, is
divided into two parts and consists of the facility design and initiation of the
environmental permitting process. Based on its evaluation of the work completed
in Phase I-A, the DOE will grant permission to begin Phase I-B, which involves
parallel vitrification test demonstrations that will treat about 6% to 13% of
the Hanford tank waste by the year 2012. The DOE awarded two contractor teams to
perform the Phase I tests. Each team will be responsible for stabilizing between
one and two million gallons of the Hanford waste. The Phase I portion of the
project will conclude with a decontamination and decommissioning of the cleaned
tanks, followed by RCRA closure and site decontamination, all of which is
expected to last an additional two years. Phase II of the cleanup of the Hanford
tank waste is not expected to start until 2003.
According to DOE estimates, the total Phase I contract is estimated to
be worth $2 to $4 billion over 16 years. The initial Phase I-A awarded to the
BNFL-led team is worth $27 million and will take sixteen months to complete.
Phase II of the cleanup to convert all the tank waste to glass is expected to
take 20 to 30 years to complete. The total project is estimated by the DOE to
cost $20 to $40 billion. See `Joint Venture and Collaborative Arrangements -
BNFL.'
Idaho Advanced Mixed Waste Treatment Project
In December 1996, the team led by BNFL, of which the Company is a key
member, was awarded a contract by the DOE for the Advanced Mixed Waste Treatment
Project (AMWTP) in Idaho Falls, Idaho. Under the contract, the team will
finance, construct and operate a treatment facility for mixed radioactive and
toxic wastes at the DOE's Idaho National Engineering and Environmental
Laboratory (INEEL). The facility will treat and package for disposal
approximately 65,000 cubic meters of mixed and transuranic waste now stored or
buried at INEEL. The contract also provides an option for the team to treat an
additional 120,000 cubic meters of mixed waste generated by future cleanup
operations at INEEL or other DOE sites.
The BNFL-led team plans to utilize vitrification and thermal desorption
technologies developed by the Company in the INEEL project. The Company will be
responsible for the design, development, procurement, and construction
supervision of the thermal desorber and waste vitrification melter systems as
well as related services. The AMWTP is split into three phases with the
intention of meeting important and aggressive milestones agreed to by the DOE
and the State of Idaho. Phase One includes permitting applications with a
duration of two to three years. Phase Two includes the design and construction
of the facility and operational testing for a duration of up to three years.
Phase Three includes the retrieval of the waste and operation of the facility
with an approximate duration of twelve years. After the completion of these
phases, there will be a decommissioning of the facility anticipated to take six
months. The total contract is estimated to be worth approximately $1 billion.
See `Joint Venture and Collaborative Arrangements - BNFL.'
Durachem Facility in Barnwell, South Carolina
As part of the DuraChem joint venture, the Company and Chem-Nuclear
constructed a vitrification facility at Chem-Nuclear's radioactive waste
processing center at Barnwell, South Carolina. During 1995, the Company designed
and constructed a new DuraMelter(TM) at the facility and will be responsible for
the vitrification operations. Chem-Nuclear manages the overall facility and is
responsible for procuring all required operating permits, obtaining the
low-level radioactive waste from its customers, transporting the waste to the
facility and removing the waste for ultimate disposal once it has been
vitrified. Through the DuraChem joint venture, GTS Duratek has become the first
company in the United States to convert commercially generated low-level
radioactive waste to glass. See `Joint Venture and Collaborative Arrangements -
DuraChem.'
5
DuraChem's Barnwell facility will process contaminated filtration and
ion exchange resins from nuclear power plants and contaminated wastes from
hospitals and laboratories. In initial test runs on contaminated nuclear power
plant resins, the DuraMelter(TM) achieved significant waste volume reductions of
up to 97%. On other types of wastes the Company believes that it will be able to
achieve volume reductions of 93% or better. The DuraChem facility is located
adjacent to the Barnwell landfill, one of the few facilities in the United
States permitted to accept commercially-generated low-level radioactive waste.
The Company believes that DuraChem's location is advantageous because of its
proximity to the nation's primary facility for handling low-level radioactive
waste. The DuraChem facility is expected to begin commercial operations in 1997.
Duratherm Facility in San Leon, Texas
The Company owns an 80% interest in DuraTherm, Inc. DuraTherm is a RCRA
Part B-permitted hazardous waste recycling center located in San Leon, Texas
which uses a patented thermal desorption technology to treat and produce
recyclable materials from hazardous oil refinery and petrochemical plant
sludges. The 20% minority interest is owned by the operators of the DuraTherm
facility, each of which has entered into an employment agreement providing for
incentive compensation tied directly to the financial performance of the
facility.
DuraTherm has a patented thermal desorption process that removes
volatile gases and recovers oil from contaminated sludges generated by oil
refineries and processing operations. The oil recovered can be recycled. The
thermal desorption process is effective on sludges with a Btu content of between
2,000 and 5,000 per ton. Most incinerators and cement kilns, alternative
processing methods, typically cannot cost-effectively handle sludges with Btu
levels within the effective range for the thermal desorption process.
JOINT VENTURE AND COLLABORATIVE ARRANGEMENTS
In order to commercialize its vitrification technology more rapidly and
cost-effectively, the Company has developed several important joint venture and
collaborative arrangements. The following is a summary of certain of these
relationships.
VSL
The Company has established a research and development relationship
with the VSL of The Catholic University in Washington, D.C. pursuant to which
the VSL provides ongoing research and development capabilities and technical
services in support of the Company's waste cleanup projects. In this
complementary relationship, the VSL provides the necessary technology and
research and development support while the Company advances the technology to
commercial application.
The VSL, a research facility with a staff of 90 researchers, is one of
the leading research centers in the world for glass technology, including
vitrification. The laboratories at the VSL are equipped with highly
sophisticated analytical tools which enable the researchers to perform a
comprehensive array of analyses. The VSL's research and development capabilities
include waste characterization, testing of radioactive waste-loaded glasses to
evaluate glass durability, processability and leachability, glass dissolution
computer modeling, batch melting and the study of ion exchange media for
removing specific contaminants from liquid waste streams. Various DuraMelter(TM)
models have been designed and constructed at the VSL for use by the staff of the
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VSL in its research and analytical work. In addition, the facility is fully
licensed for radioactive and hazardous materials research. The VSL is led by
Pedro B. Macedo, Ph.D. and Theodore A. Litovitz, Ph.D. who are the inventors and
owners of the technology licensed exclusively to the Company for ion exchange
and the vitrification of radioactive, hazardous, mixed and other wastes. See
`Business - Patents and Other Intellectual Property Rights.'
In addition to being the source of the vitrification technologies used
by the Company, the VSL provides ongoing services to the Company in support of
its waste treatment projects. The VSL conducts expert waste composition and
glass treatability studies before any project is commenced, assists in the
initial test melt phase of each project and works with the Company's engineers
in the design adaptation of the DuraMelter(TM) technology to fit the waste
characteristics of each new cleanup project. In addition, the VSL conducts
ongoing research and development into improvements in the existing vitrification
technologies and into entirely new vitrification techniques, serving in effect
as the research and development arm of the Company. The primary advantage to the
Company from its relationship with the VSL is the access to leading
vitrification technologies and ongoing vitrification research without having to
incur the ongoing overhead and administrative expenses if such capabilities were
in house.
In return, the Company provides ongoing project funding for research
conducted at the VSL on behalf of the Company. During 1995 and 1996, the Company
paid $789,000 and $1,343,000, respectively, in research and development funding
to the VSL. For Company waste cleanup projects in which the VSL's technical
services are utilized by the Company, the Company pays the VSL on a time and
expense basis and includes the estimated cost for such services in its formal
bid proposal. The VSL is a not-for-profit institution so it does not include
extra fees or percentage profits in its cost estimates.
BNFL
In November 1995, the Company and BNFL entered into a strategic
alliance agreement. BNFL is the U.S. subsidiary of British Nuclear Fuels plc, a
United Kingdom-based company with annual revenues of approximately $2 billion
worldwide. British Nuclear Fuels plc is one of the largest processors of
radioactive waste in the world and is one of only two companies worldwide with
commercial experience in processing and stabilizing high-level radioactive
wastes. The strategic alliance with BNFL enhances the Company's prospects of
obtaining major DOE waste treatment projects such as Hanford and Idaho and opens
opportunities for international expansion. BNFL has been active in the U.S.
radioactive waste market for the past five years, including being selected as a
member of the team to manage the DOE's nuclear waste facility in Rocky Flats,
Colorado.
As part of the strategic alliance, BNFL invested $10.0 million in the
Company in the form of a convertible debenture. The debenture accrues non-cash
interest during the first five years at the one-year London Interbank Offered
Rate (LIBOR) and is convertible at the option of BNFL into 1,381,575 shares of
the Common Stock prior to November 7, 2000. BNFL also agreed to provide the
Company with research and development funding of at least $500,000 per year over
five years. The two parties will mutually agree on how the research and
development funding will be spent, but the Company will retain the rights to the
vitrification processes that it develops through this funding. The Company has
agreed as part of the strategic alliance to sublicense its radioactive waste
vitrification technologies to BNFL for use only in the United Kingdom.
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DuraChem
In September 1994, the Company formed a joint venture with Chem-Nuclear
to design, construct and operate vitrification facilities to process commercial
radioactive waste for disposal, including low-level radioactive wastes from
nuclear power plants, hospitals, research laboratories and industrial
facilities. The joint venture entity, called DuraChem, is 55% owned by
Chem-Nuclear and 45% by the Company. The joint venture represents the
combination of the Company's proprietary vitrification technology and
Chem-Nuclear's 23 years of experience in providing radioactive waste handling
and processing services. DuraChem will first pursue the disposal market for ion
exchange resins which are generated by nuclear power plants. The first
vitrification facility of this joint venture is located at Chem-Nuclear's waste
processing center at Barnwell, South Carolina. The need for the services
provided by DuraChem was created by the closure of nationally accessible
low-level radioactive waste disposal sites and the delay by state compacts in
opening new regional sites. The high cost of disposal of certain low-level
radioactive waste materials has caused commercial generators of low-level
radioactive waste, in some instances, to store their waste at their facilities
until regional sites are opened or other low-cost disposal alternatives become
available. See `Business - Status of Current and Potential Waste Treatment
Projects - DuraChem Facility in Barnwell, South Carolina.'
VITRITEK
Through a joint venture with Vitritek Holdings Company, L.L.C.,
(`Vitritek Holdings') a privately-held entity, the Company has extended its
vitrification technology to non-radioactive wastes. The joint venture entity,
called Vitritek, is 50% owned by each of the Company and Vitritek Holdings. The
joint venture, formed in December 1993, represents the consolidation of
co-licensing rights to non-radioactive vitrification technologies previously
acquired by the Company and Vitritek Holdings. Under the terms of the joint
venture arrangement, all funding requirements and all profits are shared
equally. The joint venture intends to pursue potential international
opportunities during 1997. The Company expects the joint venture to have limited
operations during 1997.
TECHNICAL SUPPORT SERVICES
The Company has over 480 engineers, consultants and technicians, some
of whom are full-time employees and the balance of whom are contract employees.
These employees support and complement the Company's waste treatment services
and also provide highly specialized technical support services for the Company's
customers. This business provides a consistent source of revenue and the
necessary complementary expertise for the Company to expand and diversify its
waste treatment technologies business in the future. The primary services
provided by the Company include staff augmentation and outage support,
principally to assist nuclear power plants during regular maintenance shutdowns,
environmental and computer consulting, and environmental safety training. The
Company provides these technical services either as a prime contractor or as a
subcontractor to a diverse group of government agencies, electric utilities,
industrial facilities and commercial businesses including the DOE, Duke Power
Company, Vermont Yankee Nuclear Power Corporation and Loral Federal Systems.
Staff Augmentation and Outage Support Services
The Company provides trained personnel to assist nuclear power plants
undergoing periodic refueling, maintenance outages, construction or
decommissioning. There are 119 nuclear power generating units in the United
States, of which 108 are operational. To control costs, utilities maintain their
permanent staffs at the level needed for steady-state power operations. They
supplement their full-time staffs during refueling and maintenance outages with
skilled contract
8
personnel. Every 12 to 24 months, nuclear power plants are shut down for
scheduled maintenance that typically takes 30 to 90 days. This shutdown and
maintenance operation costs the nuclear power facility on average $1 million for
every day it is closed. Accordingly, there is a strong economic incentive for
the nuclear power facilities to hire trained and experienced personnel for these
maintenance operations in order to complete the servicing as quickly and
efficiently as possible. The Company's trained technicians and personnel are
experienced in outage support procedures and are effective at helping to
minimize the cost of the power facilities' down time.
The offering of services for operating nuclear power plants provides a
considerable market for the Company, despite the fact that no new plants have
been ordered in over 10 years. The demand for the Company's services results
from the extensive overhaul required to extend the life of aging plants,
replacement of major components of existing plants, startup of plants recovering
from long-term shutdown, modifications to the plants resulting from changing
legislation and the decommissioning of plants that have reached the end of their
useful lives.
The Company's largest customer for staff augmentation services is Duke
Power Company, which accounted for approximately 23% and 28% of the Company's
total revenues in 1995 and 1996. Duke Power currently has seven nuclear power
units at three sites. Under a series of contracts between the Company and Duke
Power which expire between 1997 and 1998, the Company provides a group of
technicians to the Duke Power system year-round and provides additional
personnel to Duke Power during planned maintenance outages. The Company is
currently pursuing renewal of its contract relationship with Duke Power, however
there can be no assurance that such efforts will be successful. Other nuclear
power utilities to which the Company provides augmentation and outage support
services include PECO Energy, Vermont Yankee Nuclear Power Corporation and
Southern Nuclear Operating Company.
Environmental and Computer Consulting Services
The Company provides extensive environmental consulting services to
clients in the areas of environmental remediation, facility decommissioning,
Occupational Safety and Health Act (`OSHA') and EPA compliance audits, site
characterization, licensing and permitting and air quality and emission studies.
The Company either supplies professionals and technical personnel to supplement
client staffs or assumes responsibility for entire projects. Included among the
Company's available personnel for such environmental consulting projects are
chemical, civil and environmental engineers, certified health physicists,
chemists, toxicologists, safety and health experts, regulatory compliance
specialists, remediation experts, radiological control technicians, hazardous
material technicians, decontamination experts and others. The Company also
supplies professionals and technical specialists in a wide range of scientific,
engineering, data processing and communications disciplines. These individuals
perform computer consulting services such as program assessment/ development,
computer software development, quality assurance audits, non-destructive
examination and computer training for a broad base of clients. In January 1996,
GTS Duratek acquired Analytical Resources, Inc., a small environmental
consulting firm that has been involved in many DOE consulting projects. The
Company's management believes that this acquisition adds senior environmental
management and consulting resources to the Company.
Environmental Safety Training
The Company provides radiation protection and hazardous waste training
services nationwide. The Company's training specialists prepare candidates,
consisting of health physics technicians and professionals from nuclear power
plants, universities and laboratories nationwide, for the National Registry of
Radiation Protection Technologists and American Board of Health
9
Physics certification examinations. The Company's training programs enable
customers to realize cost savings through increased worker competence and
productivity, enhanced workplace safety and improved compliance with regulatory
requirements.
CUSTOMERS
The Company derives revenues related to its proprietary vitrification
technologies principally through subcontracts with a combination of DOE
contractors and subcontractors including WSRC and Fernald Environmental
Restoration Management Company (`FERMCO'). Revenues derived from DOE-related
subcontracts represented approximately 35.0% and 21.4% of the Company's total
revenues during 1995 and 1996, respectively. The Company provides technical
support services to a diverse group of government agencies, including the DOE,
the United States Department of Defense (`DOD'), the United States Environmental
Protection Agency (`EPA') and state environmental protection agencies, electric
utilities, including Duke Power Company, Vermont Yankee Nuclear Power
Corporation, PECO Energy and Southern Nuclear Operating Company, and industrial
facilities and commercial businesses, including Loral Federal Systems. Revenues
from Duke Power and FERMCO accounted for approximately 28% and 12%,
respectively, of the Company's revenues for 1996. No other customer accounted
for more than 10% of the Company's total revenues during 1996. The Company has
multiple contracts with Duke Power which expire between 1997 and 1998 and
pursuant to which it provides technical support services and personnel.
SALES AND MARKETING STRATEGY
The Company's operations to date have provided it with extensive
knowledge of DOE and other waste stream composition and the factors that
influence the remediation of those waste streams. The Company's internal sales
force uses and will continue to use that knowledge and operating experience to
strengthen the Company's competitive position when pursuing DOE and other waste
remediation projects. In addition, through its collaborative arrangements, the
Company will seek to utilize complementary technical expertise, marketing
resources and commercial experience of the other parties to develop additional
business in its primary markets, expand its capabilities in handling a greater
diversity of waste streams and replicate its operating model to pursue
international markets. The Company pursues markets where it can be the most
cost-effective processor of the waste due to its technologies, geographical
proximity to a waste stream or government regulation.
In its technical support services business, GTS Duratek will seek to
strengthen its relationships with its large utility customers, such as Duke
Power Company, Vermont Yankee Nuclear Power Corporation, PECO Energy and
Southern Nuclear Operating Company, which are significant contributors to the
Company's total revenues. The Company is also pursuing opportunities with
utilities that are downsizing and outsourcing service work as well as DOE sites
that are privatizing departments such as training and radiological controls. To
enhance the overall profitability of the technical support services business,
the Company is focusing on increasing market share in environmental and computer
consulting, radiation instrument services and environmental safety training, all
of which generate relatively higher profit margins than staff augmentation and
outage support.
10
ENVIRONMENTAL MATTERS
Environmental Laws and Regulations Creating a Demand for the Company's
Waste Treatment Technologies
Various environmental protection laws have been enacted and amended
during recent decades in response to public concern over the environment. The
operations of the Company's customers are subject to these evolving laws and the
implementing regulations. The Company believes that the obligations to comply
with the requirements of the following laws contribute to the demand for its
services:
The Atomic Energy Act of 1954 (`AEA') and the Energy Reorganization Act
of 1974 (the `ERA') authorize the Nuclear Regulatory Commission (`NRC') to
regulate the receipt, possession, use and transfer of radioactive materials,
including `source material,' `special nuclear material,' and `byproduct
material.' Pursuant to its authority under the AEA, the NRC has adopted
regulations that address the management and disposal of low-level radioactive
waste and that require the licensing of commercial low-level radioactive waste
disposal sites.
The storage and disposal of high-level nuclear waste are subject to the
requirements of the Nuclear Waste Policy Act, as amended by the Nuclear Waste
Policy Act Amendments. These statutes regulate the disposal of high-level
nuclear waste by establishing procedures and schedules for siting geologic
repositories for such waste. The statutes also direct EPA to promulgate
environmental standards for the disposal of high-level nuclear waste, and
require the NRC to promulgate standards covering the licensing of waste
repositories. The NRC has issued regulations that address the storage and
disposal of high-level nuclear waste.
The Uranium Mill Tailings Radiation Control Act (`UMTRCA') and the
Uranium Mill Tailings Remedial Action Amendments Act are intended to protect
public health and the environment from hazards associated with uranium ore
milling wastes at active and inactive uranium mills. UMTRCA designates specific
inactive mill sites for remedial action, and gives the DOE the responsibility
for carrying out remedial actions at these sites.
The locations for future low-level radioactive waste disposal
facilities also may be affected by the Low-Level Radioactive Waste Policy Act of
1980 (`LLRWPA') and the Low-Level Radioactive Waste Policy Amendments Act
(`LLRWPA Amendments'). The LLRWPA addresses the siting of new low-level
radioactive waste disposal facilities and establishes that each state is
responsible for providing disposal capacity for most low-level commercial
radioactive waste generated within its borders. The statute also encourages
groups of states to enter into compacts providing for the development and
operation of low-level radioactive waste disposal facilities. Incentives for the
formation of interstate compacts, and the deadlines and procedures which states
must meet in designating disposal facilities were modified by the LLRWPA
Amendments. At the present time, no new radioactive waste disposal facilities
have been opened by state compacts and none are expected to open in the near
future.
The Resource Conservation and Recovery Act of 1976, as amended (`RCRA')
provides a comprehensive framework for the regulation of the generation,
transportation, treatment, storage and disposal of hazardous waste. The intent
of RCRA is to control hazardous wastes from the time they are generated until
they are properly recycled or treated and disposed. RCRA prohibits improper
hazardous waste disposal and imposes criminal and civil liability for failure to
comply with its requirements. RCRA requires that hazardous waste generators,
transporters and operators of hazardous waste treatment, storage and disposal
facilities meet strict standards set by government agencies. In certain
circumstances, RCRA also requires operators of treatment, storage and disposal
facilities to obtain and comply with RCRA permits. The Land Disposal
11
Restrictions developed under the Hazardous and Solid Waste Amendments of 1984
prohibit land disposal of specified wastes unless these wastes meet or are
treated to meet Best Demonstrated Available Technology (`BDAT') treatment
standards, unless certain exemptions apply.
The Toxic Substances Control Act (`TSCA') provides EPA with the
authority to regulate over 60,000 commercially produced chemical substances. EPA
may impose requirements involving manufacturing, record keeping, reporting,
importing and exporting. TSCA also established a comprehensive regulatory
program for PCBs which is analogous to the RCRA program for hazardous waste.
The Clean Water Act establishes standards, permits and procedures for
controlling the discharge of pollutants from industrial and municipal wastewater
sources.
The Clean Air Act of 1970, as amended (the `Clean Air Act'), empowers
the EPA to establish and enforce ambient air quality standards and limits of
emissions of pollutants from facilities. This has resulted in tight control over
emissions from technologies like incineration.
The Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended (`CERCLA' or `Superfund'), and subsequent amendments
under the Superfund Amendments and Reauthorization Act (`SARA') impose
continuing liability upon generators of hazardous substances (among other
parties) and such potential liability may significantly affect a generator's
decision on how to dispose of the wastes. The Community Right-to-Know mandate
established by SARA requires full disclosure of all environmental releases to
the public and contributes to public awareness and activism regarding corporate
environmental management issues. To the extent a generator's waste can be
reported as being recycled, potential liability and public pressure can be
eliminated or significantly reduced.
CERCLA and SARA, as implemented by the National Contingency Plan,
provide for the investigation and remediation of sites containing hazardous
substances. The Superfund program's regulations require that any remediation of
the hazardous substances meet applicable and relevant and/or appropriate
regulatory requirements. Superfund's remedy selection process includes a
preference for innovative technology. Superfund also establishes strict
liability for parties who generated or transported hazardous substances or owned
and operated the sites containing them. This may create a strong incentive to
avoid on-site waste treatment in favor of utilizing technologies like the
Company's waste treatment technologies, which can, in certain instances,
effectively recycle wastes.
The Pollution Prevention Act of 1990 establishes pollution prevention
as a national objective, naming it a primary goal wherever feasible. The act
states that if pollution cannot be prevented, materials should be recycled in an
environmentally safe manner.
Under the mandate of the Federal Facility Compliance Act (`FFCA'), the
DOE is currently engaged in a program to treat and dispose of the mixed waste
currently stored at its facilities. The FFCA required DOE to develop and comply
with treatment and disposal plans for each of its facilities and charges DOE
with developing treatment and disposal capacity for these wastes where it does
not currently exist. The plans must also address the need to treat and dispose
of mixed wastes generated from the remediation of contaminated DOE sites.
12
Environmental Laws and Regulations Affecting the Use of the Company's
Waste Treatment Technologies
Pursuant to the mandate of the AEA and the ERA, NRC regulations and
guidance address the classification and management of low-level radioactive
waste. The NRC regulations also govern the technical, monitoring and
safety-related aspects of developing and operating low-level radioactive waste
disposal facilities. Pursuant to its authority under the AEA, the NRC also has
established licensing requirements and operating procedures for such facilities.
The NRC requirements address siting criteria, site stability, the development
and implementation of institutional controls for the facility (e.g., access
restrictions, environmental monitoring and site maintenance), facility
operation, closure, and site stabilization.
Under RCRA, wastes are classified as hazardous either by specific
listings or because they display certain hazardous characteristics. Under
current regulations, waste residues derived from listed hazardous wastes are
generally considered to be hazardous wastes unless they are delisted through a
formal rulemaking process that may last a few months to several years. For this
reason, waste residue that is generated by the treatment of listed hazardous
wastes but which has no beneficial use, including waste treated with the
Company's vitrification technologies, may be considered a hazardous waste
without regard to the fact that this waste residue may be environmentally
benign. Subsequent management of such waste residue would be subject to full
RCRA regulation, including the prohibition against land disposal without
treatment in compliance with BDAT. The RCRA regulation classifying such waste
residue as hazardous has been overturned by the District of Columbia Court of
Appeals, but has been temporarily reinstated until the EPA develops a revised
regulatory approach. Under EPA's proposed Hazardous Waste Identification Rule,
listed wastes would leave the hazardous waste regulatory system if they met
specified concentration limits for hazardous constituents. The Company's
ownership and operation of vitrification facilities also exposes the Company to
potential liability for cleanup of releases of hazardous wastes under RCRA.
If the Company engages in the transportation of radioactive materials
it will be subject to the requirements of the Hazardous Materials Transportation
Act, as amended by the Hazardous Materials Transportation Uniform Safety Act.
Pursuant to these statues, the United States Department of Transportation
regulates the transportation of hazardous materials, including radioactive
materials, in commerce. Shippers and carriers of radioactive materials must
comply with both the general requirements for hazardous materials transportation
and with specific requirements for the transportation of radioactive materials.
If the Company engages in the storage and disposal of high-level nuclear waste
it may be subject to the Nuclear Waste Policy Act, as amended by the Nuclear
Waste Policy Act Amendments.
CERCLA effectively imposes strict, joint and several liability upon
owners or operators of facilities where a release of hazardous substances has
occurred, upon parties who generated hazardous substances that were released at
such facilities and upon parties who arranged for the transportation of
hazardous substances to such facilities. The Company's ownership and operation
of vitrification facilities on-site expose the Company to potential liability
under CERCLA for releases of hazardous substances into the environment at those
sites. In the event that off-site storage or disposal facilities utilized by the
Company for final disposition of the glass and resulting residues from the
Company's vitrification process are targeted for investigation and cleanup under
CERCLA, the Company could incur liability as a generator of such materials or by
virtue of having arranged for their transportation and disposal. The Company
designs its DuraMelters(TM) to minimize the potential for release of hazardous
substances into the environment. In addition, the Company has developed plans to
manage and minimize the risk of CERCLA or RCRA liability, including the training
of operators, use of operational controls and structuring of its relationships
with the entities responsible for the handling of waste materials and
by-products.
13
The Clean Air Act imposes strict requirements upon owners and operators
of facilities which discharge pollutants into the environment. Although the
Company believes that its proprietary off-gas treatment system effectively traps
particulates and prevents hazardous emissions from being released into the
environment, which releases would violate the Clean Air Act, the Clean Air Act
may require a permit prior to the construction and operation of the Company's
facilities and may require additional controls.
The Clean Water Act establishes standards, permits and procedures for
controlling the discharge of pollutants from industrial and municipal wastewater
sources. The Company believes that DuraMelters(TM) generally will not be subject
to the water pollution control requirements of the Clean Water Act because
DuraMelters(TM) are designed to have no residual wastewater discharge. However,
the Clean Water Act's standards permits and procedures are potentially
applicable to wastewater treatment systems designed by the Company, using its
ion exchange technology.
OSHA provides for the establishment of standards governing workplace
safety and health requirements, including setting permissible exposure levels
for hazardous chemicals which may be present in mixed wastes. The Company is
required to follow OSHA standards, including the preparation of material safety
data sheets, hazardous response training and process safety management. The NRC
has set regulatory standards for exposure to radioactive materials.
To the extent that the Company is engaged in the processing or disposal
of mixed waste, the radioactive components are subject to the NRC regulations
promulgated under the AEA, while the hazardous components of the waste are
regulated by the EPA under RCRA.
Company facilities may have to obtain permits under state laws that
correspond to the Clean Water Act and the Clean Air Act. The necessity to obtain
such permits depends upon the facility's location and the expected emissions
from the facility.
Additional state licenses or approvals may also be required.
Operators of hazardous waste treatment, storage and disposal facilities
are required to obtain RCRA Part-B permits from the EPA or from states
authorized to implement the RCRA program. Obtaining such permits is a lengthy
and costly process that requires regulatory inspection and approval of, among
other things, the facility design, equipment and operating plans and procedures.
In addition, applicants for a RCRA permit for a treatment, storage or disposal
facility must submit detailed information regarding all past waste management
practices at that facility and may be required to undertake corrective action
for past contamination of the site. The Company's DuraTherm facility in San
Leon, Texas is a RCRA Part-B permitted facility. The Company has developed
procedures to ensure compliance with RCRA permit provisions at the DuraTherm
facility, including procedures for ensuring appropriate waste acceptance and
scheduling, waste tracking, manifesting and reporting, and employee training.
COMPETITION
The market for the Company's waste treatment technologies is
characterized as the treatment and stabilization of certain radioactive,
hazardous, mixed and other wastes. The Company is aware of some competition from
several large companies and numerous small companies. Any of such companies may
possess or develop technologies superior to those of the Company. While the
Company is aware of competition from companies with similar waste treatment
technologies, the primary competition comes from companies which provide waste
treatment and disposal services. The predominant waste treatment and disposal
methods include landfilling, deep-well injection, on-site containment and
incineration or other thermal treatment methods. Competition is based primarily
on cost, regulatory and permit restrictions, technical
14
performance, dependability and environmental integrity. The Company believes
that it will be able to compete favorably on the basis of these factors. The
Company also believes that it has several competitive advantages over its
competitors including its proprietary vitrification technologies, integrated
approach to waste treatment, demonstrated commercial success of technologies and
strategic alliances. Many of the Company's competitors have substantially
greater financial and technical resources than the Company and there can be no
assurance that one or more of the Company's competitors do not possess or will
not develop waste treatment technologies that are superior to those of the
Company.
In its technical support services, the Company's competitors range from
major national and regional environmental service and consulting firms which
have large environmental remediation staffs to small local firms. Many of the
major national and regional environmental service and consulting firms have
greater financial, management and marketing resources than the Company. The
availability of skilled technical personnel, quality of performance, safety,
diversity of services and price are the key competitive factors.
RESEARCH AND DEVELOPMENT ACTIVITIES
The Company's research and development activities are conducted
primarily by the VSL for the enhancement of the Company's existing vitrification
and ion exchange technologies or the introduction of new vitrification
technologies. During 1994, 1995, and 1996, research and development activities
were conducted at the VSL under contracts totaling $1.9 million, $789,000 and
$1,343,000, respectively. The Company did not incur any additional research and
development costs during those years. In connection with various Company
contracts or subcontracts, the VSL conducts research and development under
fixed-price and cost-plus-fixed fee contracts. Under these contracts, the
research is supervised by Drs. Macedo and Litovitz and all inventions and
discoveries are owned by them and licensed to the Company under the exclusive
license agreement. The Company expects to spend a significant portion of the
research and development funding provided by BNFL with the VSL. See `Business -
Joint Venture and Collaborative Arrangements - VSL' and `-BNFL.'
PATENTS AND OTHER INTELLECTUAL PROPERTY RIGHTS
The Company licenses all of the patent and other intellectual property
rights to its proprietary vitrification and other waste treatment technologies
from the inventors of such technologies. Drs. Macedo and Litovitz, the inventors
of the Company's vitrification and ion exchange technologies, license the
patents and proprietary rights to such technologies to the Company under an
exclusive license agreement. Under this agreement, which was renewed in August
1992, Drs. Macedo and Litovitz collectively receive annual royalties equal to
the greater of (i) $100,000 or (ii) 1% to 3% of net revenues, depending on the
level of net revenues, which are generated by the Company from the application
of the licensed technology to encapsulate liquids and solids in porous glass
matrices, remove radioactive and hazardous materials from liquids and stabilize
low-level radioactive or mixed waste. During 1994, 1995 and 1996, the Company
paid Drs. Macedo and Litovitz $100,000 per year in royalties. The exclusive
license agreement with Drs. Macedo and Litovitz expires upon the expiration of
the last patent covered by the license agreement which is currently in the year
2012. Drs. Macedo and Litovitz also received options to purchase 250,000 shares
of the Common Stock at the time the exclusive license was renewed. The exclusive
license agreement, which currently encompasses 22 patents and one patent
application, also includes any process patents or technology rights related to
the licensed field which is subsequently developed by the VSL or Drs. Macedo and
Litovitz.
Dr. Macedo and Litovitz own all of the vitrification and ion exchange
patents relating to the research and development work conducted by them at the
VSL. The Catholic University of
15
America has agreed that all patents and technologies developed at the VSL belong
to Drs. Macedo and Litovitz and not to the University. In turn, Dr. Macedo and
Litovitz exclusively license the vitrification technology rights and process
patents developed by them at the VSL to the Company.
The rights to the proprietary vitrification technology for the
treatment of non-radioactive hazardous wastes and the treatment of radioactive
waste in Germany are held by Vitritek and are licensed to Vitritek by Drs.
Macedo and Litovitz. Under the terms of this license agreement, the Company's
allocable share of revenues from the joint venture are included within the
royalty payment obligations under the Company's exclusive license agreement with
Drs. Macedo and Litovitz for the vitrification of radioactive and mixed wastes.
The Company also licenses the rights to the thermal desorption
technology used in the processing of petrochemical waste by DuraTherm from the
inventor of such technology. The Company and DuraTherm are co-licensees under
the license agreement and, upon the satisfaction of certain conditions, are
collectively obligated to pay to the inventor of the technology an annual
royalty payment equal to the greater of (i) $50,000 or (ii) 1.0% of the net
revenues generated from the operation of the desorber equipment (excluding net
revenues generated from equipment acquired in the DuraTherm acquisition)
incorporating the technology and 5.0% of the sales of any such equipment. No
royalty expense was earned for the year ended December 31, 1996. Once certain
aggregate royalty obligations have been satisfied, the royalty payment structure
will be modified. The license agreement grants to the Company and DuraTherm the
exclusive rights to such technology and any subsequently developed related
technology and provides that any subsequently developed unrelated technology
which results from research and development funded or sponsored by the Company
or DuraTherm shall be assigned to such entities. The license agreement currently
covers three patents relating to thermal desorption, one pending patent and a
European patent application.
The Company requires each of its employees to enter into standard
agreements pursuant to which the employee agrees to keep confidential all
proprietary information of the Company and to assign to the Company all rights
in any proprietary information or technology developed by the employee during
his or her employment or made thereafter as a result of any inventions conceived
or work done during such employment. Despite these precautions, it may be
possible for a third party to copy or otherwise obtain and use the company's
technology without authorization or to develop similar technology independently.
In addition, effective patent and trade secret protection may be unavailable or
limited in certain foreign countries.
DURASIL(R) is a registered trademark held by the Company and
DuraMelter(TM) and DuraGem(TM) are common law trademarks.
EMPLOYEES
As of December 31, 1996, the Company employed 533 employees, including
388 field-assigned employees performing services for clients, 91 full-time
technical personnel and 54 in finance and administration. The Company contracts
with most of the field-assigned personnel on an as-needed basis and such
personnel are not full-time employees of the Company. Due to the seasonality of
the technical support services business of the Company, the number of
field-assigned employees generally increases to approximately 500 during the
fall peak outage season at the nation's nuclear power plants. To date, the
Company has been successful in attracting and retaining qualified technical
personnel, although there can be no assurance that this success will continue.
None of the Company's employees are subject to a collective bargaining
agreement. The Company has never experienced a work stoppage and believes that
its relations with its employees are good.
16
ITEM 2. PROPERTIES
The company leases approximately 35,000 square feet of office space in
Columbia Maryland which it uses as its administration and general corporate
offices. The initial lease term expires December 31, 2006. The Company also
leases 2,400 square feet of space in Laurel, Maryland, which the Company uses as
a warehouse for DURASIL(R) ion exchange media and related equipment, and 4,800
square feet in Pittsburgh, Pennsylvania which houses the Company's instrument
repair and rental facility.
The Company's 80%-owned subsidiary, DuraTherm, owns a RCRA-permitted
hazardous waste recycling center located in San Leon, Texas. The facility is
located on 14.5 acres of land and consists of a recycling center on 8.5 acres
and 4,500 square feet of office and laboratory space. The facility and the land
are owned by DuraTherm.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is a party to litigation or
administrative proceedings relating the claims arising from its operations in
the normal course of business. Management of the Company, on the advice of
counsel, believes that the ultimate resolution of litigation currently pending
against the Company is unlikely, either individually or in the aggregate, to
have a material adverse effect on the Company's results of operations or
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is quoted on the Nasdaq National Market
under the symbol `DRTK'. The following table sets forth, for the periods
indicated, the high and low sale prices of the Common Stock (bid prices prior to
September 19, 1994 when the Common Stock commenced trading on the Nasdaq
National Market). The reported last sale price of the Common Stock on the Nasdaq
National Market on March 14, 1997 was $11 7/8.
Price Range
of Common Stock
---------------------------
High Low
------------------------------------------------------------------------------
Year ended December 31, 1994:
1st quarter 5 $ 4 1/4
2nd quarter 4 1/2 3 5/8
3rd quarter 4 1/2 2 3/4
4th quarter 4 3/8 3
Year ended December 31, 1995:
1st quarter 5 $ 3 5/8
2nd quarter 6 1/8 4 1/4
3rd quarter 6 1/4 5 3/8
4th quarter 17 7/8 5 1/2
Year ended December 31, 1996:
1st quarter 17 7/8 $ 11 1/4
3rd quarter 19 1/2 11 1/8
4th quarter 16 5/8 10 7/8
As of March 14, 1997, there were 714 holders of record of the Common
Stock and the Company estimates that there were approximately 7,200 beneficial
holders.
The Company has never declared or paid a cash dividend on its Common
Stock and is currently prohibited from paying dividends under its revolving line
of credit with its principal lender. The Company will pay dividends on the 8%
Cumulative Convertible Redeemable Preferred Stock (the `Convertible Preferred
Stock') out of funds legally available therefore in accordance with the terms of
the Convertible Preferred Stock which require the payment of quarterly dividends
of $320,000 or $2.00 per share. The Company may not pay dividends on any of the
Common Stock unless the Company has paid all accumulated dividends on all of the
outstanding shares of Convertible Preferred Stock. To date, the Company has paid
all dividends on all of the outstanding shares of the Convertible Preferred
Stock. Except with respect to the dividends on the Convertible Preferred Stock,
the Company currently intends to retain earnings primarily for working capital
and development of waste treatment technologies and therefore does not
anticipate paying any cash dividends in the foreseeable future. See
`Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources.'
18
ITEM 6. SELECTED FINANCIAL DATA
Years Ended December 31,
------------------------------------------------------
1992 1993 1994 1995 1996
(In thousands, except per
share data)
Statement of Operations Data:
Revenues $ 38,772 33,505 35,968 40,418 44,285
Cost of revenues 32,674 28,609 28,857 32,220 35,198
- ----------------------------------------------------------------------------------------------------------
Gross profit 6,098 4,896 7,111 8,198 9,087
Selling, general and administrative expenses 5,616 5,738 5,926 5,876 7,455
- ----------------------------------------------------------------------------------------------------------
Income (loss) from operations 482 (842) 1,185 2,322 1,632
Interest income (expense), net (406) (372) (595) 57 1,239
- ----------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and
proportionate share of loss of
joint venture 76 (1,214) 590 2,379 2,871
Income taxes 50 73 12 101 649
- ----------------------------------------------------------------------------------------------------------
Income (loss) before proportionate share
of loss of joint venture 26 (1,287) 578 2,278 2,222
Proportionate share of loss of
joint venture - - (321) (824) (165)
- ----------------------------------------------------------------------------------------------------------
Net income (loss) 26 (1,287) 257 1,454 2,057
Preferred stock dividends and charges
for accretion - - - (1,394) (1,500)
- ----------------------------------------------------------------------------------------------------------
Net income (loss) attributable
to common stockholders $ 26 (1,287) 257 60 557
- ----------------------------------------------------------------------------------------------------------
Net income (loss) per share $ 0.00 (0.l6) 0.03 0.01 0.04
- ----------------------------------------------------------------------------------------------------------
Weighted average common stock and
common stock equivalents outstanding 7,388 7,936 8,656 8,820 13,922
- ----------------------------------------------------------------------------------------------------------
As of December 31,
------------------------------------------------------
1992 1993 1994 1995 1996
Balance Sheet Data:
Working capital (deficit) $ 1,265 (127) (78) 24,114 62,161
Total assets 13,127 12,754 19,200 38,660 85,199
Long-term debt, convertible debenture
and capital lease obligation 123 288 502 10,123 10,939
Redeemable convertible preferred stock - - - 14,609 14,829
Stockholders' equity 4,529 6,159 6,933 9,257 55,147
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
GTS Duratek has historically derived substantially all of its revenues
from technical support services to government agencies, electric utilities,
industrial facilities and commercial businesses. Technical support services are
generally provided pursuant to multi-year time-and-materials contracts. Revenues
are recognized as costs are incurred according to predetermined rates. The
contract costs primarily include direct labor, materials and the indirect costs
related to contract performance.
Historically, the Company's waste treatment revenues have been
generated from projects in which the Company acts as a subcontractor for the DOE
pursuant to fixed-price and cost-plus-fixed-fee contracts. Substantially all of
the Company's waste treatment revenues during 1994 were derived from the DOE's
Fernald Environmental Management Project and during 1995 and 1996 were derived
from the DOE's Savannah River M-Area project. Revenues from these projects are
recognized on the percentage-of-completion method as costs are incurred as
measured by the cost-to-cost method.
The Company has historically generated minimal revenues from waste
treatment projects for commercial customers. Revenues from the operations of
commercial waste treatment facilities are recognized as waste is processed. The
Company's current commercial waste treatment projects are the DuraChem joint
venture with Chem-Nuclear, Inc. and DuraTherm, which owns the San Leon, Texas
thermal desorption facility. Income or loss from the Company's 45% share in
DuraChem will be recorded by the Company on the equity method. DuraTherm
commenced commercial operations in the second quarter of 1996. The Company
consolidates the results of DuraTherm adjusting for the 20% minority interest in
consolidation.
In November 1995, the Company formed a strategic alliance with BNFL to
jointly pursue up to five major DOE waste treatment projects. Pursuant to the
terms of the strategic alliance, the Company will receive a $1.0 million teaming
fee for each time that BNFL and the Company agree to jointly pursue a major DOE
waste treatment project. The Company reached agreements to pursue the first
three projects in November 1995, February 1996 and September 1996 and recognized
as revenue the $1.0 million fees in the fourth quarter of 1995 and the first and
third quarters of 1996, respectively. The Company is unable to predict the
timing of recognition of future teaming fees, if any. In addition, BNFL will
provide the Company with research and development funding of $500,000 annually
for five years which will be used to offset certain of the Company's research
and development expenses.
The timing of new waste treatment projects, including those pursued
jointly with BNFL, the duration of these projects, and the form in which these
projects are owned and operated will affect period-to-period comparisons of the
Company's operating results.
On March 27, 1997, the Company decided to temporarily suspend processing of
radioactive waste and initiate an unscheduled controlled cool down of its glass
melter at the DOE's Savannah River Site. This decision was the result of recent
observations by the operations personnel that indicated that excessive wear
could be occurring on certain internal components of the melter. As a result of
this finding, the Company is performing a detailed inspection and assessment of
the equipment. If this assessment results in a delay in completing the
processing, the Company could incur contract losses on the M-Area contract in
1997. Until such time as this assessment is complete the loss, if any, cannot be
reasonably determined.
RESULTS OF OPERATIONS
Year ended December 31, 1995 Compared to Year Ended December 31, 1996
Revenues increased by $3.9 million or 9.6%, from $40.4 million in 1995
to $44.3 million in 1996. The increase was primarily attributable to an increase
in revenues from technical support services of $4.0 million and $3.9 million in
revenues from the DuraTherm commercial waste treatment facility which commenced
operations May 1, 1996. Revenues in 1996 also included $2.0 million in teaming
fees received from BNFL, as compared to $1.0 million in 1995, in
20
exchange for the Company's agreement to exclusively team with BNFL on two DOE
waste treatment projects. Such increases were partially offset by a decline in
revenues from DOE waste treatment projects of $5.0 million, from $10.1 million
in 1995 to $5.1 million in 1996. Revenues from technical support services were
$29.3 million in 1995 and $33.3 in 1996.
The increase in revenues in technical support services was the result
of more work performed on power plant outage and support services contracts with
Duke Power Company and Southern Nuclear Operating Company, partially offset by
reduced demand for training and consulting services to commercial nuclear power
plants. The decrease in revenues from DOE waste treatment projects was
attributable to lower revenues achieved on the Savannah River M-Area contract
resulting from the delay in starting up this facility and the completion of
several other projects in 1995. Revenues from the Savannah River M-Area contract
were $6.1 million in 1995 and $3.4 million in 1996.
Gross profit increased by $900,000 or 10.8% from $8.2 million in 1995 to
$9.1 million in 1996. The increase in gross profit was primarily the result of
the additional teaming fee from BNFL in 1996 as compared to 1995 and additional
higher margin technical consulting service contracts obtained in 1996. As a
percentage of revenues, gross profit was comparable at 20.3% in 1995 and 20.5%
in 1996. Gross profits from DOE waste treatment projects were lower in 1996 as
compared to 1995 principally as a result of project mix and modifications to the
estimated costs to complete the Savannah River M-Area project. The estimated
cost to complete the Savannah River M-Area project was increased in 1996 due to
the Company's decision to make additional investments in the on-site facility to
better position the Company to handle additional waste streams at that site. The
Company expects to complete processing of the waste under this contract by
October 1997. Based on estimates to complete at December 31, 1996, no provisions
for contract losses were deemed necessary. Significant delays in processing
could result in the Company needing to record contract losses during 1997. See
Note 19 to Notes to Consolidated Financial Statements. Gross profits from
technical support services were $4.1 million in 1995 and $4.7 million in 1996,
as a result of additional higher margin technical consulting service contracts
obtained in 1996 as compared to 1995.
Selling, general and administrative expenses increased by $1.6 million
or 26.9% from 1995 to 1996. As a percentage of revenues, selling, general and
administrative expenses increased from 14.5% in 1995 to 16.8% in 1996. The
increase was principally the result of higher administrative costs incurred by
the Company to support waste treatment projects for the DOE and commercial
projects, costs incurred to develop and expand the Company's business as well as
pre-operating costs for the DuraTherm commercial waste treatment facility.
Interest income, net increased by approximately $1.2 million from 1995
to 1996. The increase was principally the result of interest income from the net
proceeds of the Company's public stock offering in April 1996 partially offset
by interest expense on the convertible debenture held by BNFL.
Income tax expense was $101,000 in 1995 compared to $649,000 in 1996.
Utilization of net operating loss carryforwards in 1995 resulted in no federal
income taxes other than alternative minimum tax. The Company's 1996 tax
provision includes an approximately $400,000 benefit from utilization of a net
operating loss carryforward. As of December 31, 1996, the Company had utilized
all net operating losses which could benefit future earnings. As of December 31,
1996, the Company had a net operating loss of approximately $1.3 million as the
result of compensation deductions related to the exercise of non-qualified stock
options. The Company has recorded the income tax benefit of such net operating
loss as a deferred tax asset and as a credit to stockholder's equity.
21
The Company's proportionate share in the loss of its 50% owned joint
venture, Viritek, decreased from $824,000 in 1995 to $165,000 in 1996. The joint
venture intends to pursue some potential international opportunities during
1997, however the Company expects the joint venture to have limited operations
during 1997.
As a result of factors discussed above, net income increased by
$600,000 or 41.4% from $1.5 million in 1995 to $2.1 million in 1996.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1995
Revenues increased by $4.4 million or 12.4%, from $36.0 million in 1994
to $40.4 million in 1995. The increase was primarily the result of an increase
in revenues from waste treatment projects, which were $6.7 million in 1994 and
$10.1 million in 1995. The most significant of the waste treatment projects is
the Savannah River M-Area project with WSRC. Revenues from this contract were
$2.3 million in 1994 and $6.1 million in 1995. Revenues in 1995 also include a
$1.0 million teaming fee received from BNFL in exchange for the Company's
agreement to exclusively team with BNFL on a DOE waste treatment project in
Hanford, Washington. Revenues from technical support services were $29.3 million
in 1994 and $29.3 million in 1995.
Gross profit increased by $1.1 million or 15.3%, from $7.1 million in
1994 to $8.2 million in 1995. The teaming fee from BNFL represented
approximately $1.0 million of the increase. As a percentage of revenues, gross
profit increased from 19.8% in 1994 to 20.3% in 1995. Gross profits from waste
treatment projects were lower in 1995 as compared to 1994 principally as a
result of project mix and modifications to the estimated costs to complete the
Savannah River M-Area project. The estimated cost to complete the Savannah River
M-Area project was increased in 1995 due to the Company's decision to make
additional investments in the on-site facility to better position the Company to
handle additional waste streams at that site. Gross profits from technical
support services were $4.0 million in 1994 and $4.1 million in 1995.
Selling, general and administrative expenses declined by $50,000 or
0.8%, from 1994 to 1995. As a percentage of revenues, selling, general and
administrative expenses declined from 16.5% in 1994 to 14.5% in 1995. The
percentage decline was principally the result of higher utilization of the
Company's engineering staff on waste treatment projects and joint ventures, as
well as increased revenues without a corresponding increase in administrative
overhead.
In 1994, the Company had net interest expense of $595,000 compared to
net interest income of $57,000 in 1995. In January 1995, the Company issued
$16.0 million of convertible preferred stock, the net proceeds of which were
utilized to repay outstanding short-term borrowings with the balance being
invested in short-term investment grade securities.
Income tax expense was $12,000 in 1994 compared to $101,000 in 1995.
Utilization of net operating loss carryforwards in 1994 and 1995 resulted in no
federal income taxes other than alternative minimum tax. The 1994 and 1995 state
income tax amounts relate to income taxes payable to states which do not
recognize net operating loss carryforwards. At December 31, 1995, the Company
has a net operating loss carryforward of approximately $2.2 million of which
approximately $1.1 million resulted from the exercise by employees of the
Company of non-qualified stock options in 1995. Accordingly, utilization of this
$1.1 million of the net operating loss carryforward will result in a credit to
capital in excess of par.
22
The Company's proportionate share in the loss of its 50% owned joint
venture, Vitritek, increased from $321,000 in 1994 to $824,000 in 1995.
Vitritek's 1995 loss was the result of limited business activity, as well as a
$1.2 million write-off of Vitritek's intangible assets related to asbestos
vitrification technology rights. In 1995, management of Vitritek concluded that
the market for asbestos vitrification would not develop quickly enough to
generate the cash flows necessary to recover the intangible assets acquired by
Vitritek in 1993.
Net income increased by $1.2 million or approximately 465% from
$257,000 in 1994 to $1.5 million in 1995. The increase resulted from higher
revenues from waste treatment projects, the receipt of the BNFL $1.0 million
teaming fee and lower interest expense offset by the higher loss resulting from
the write-off of intangible assets realized from the Vitritek joint venture.
LIQUIDITY AND CAPITAL RESOURCES
In April 1996, the Company completed a public offering of 2,500,000
shares of Common Stock sold by the Company and 1,100,000 shares of Common Stock
sold by certain shareholders. The shares were sold to the public at a price of
$18.50 per share. Net proceeds to the Company after underwriting discounts,
commissions and expenses were approximately $43.3 million. The Company intends
to use the net proceeds to expand its waste treatment technology operations,
including for working capital, funding of waste treatment technology projects,
and research and development. The Company may use a portion of the net proceeds
for the acquisition of businesses or technologies complementary to the Company's
business, particularly in connection with the proposed acquisition of SEG.
During 1996, the Company invested approximately $9.5 million in
property, plant and equipment, and the DuraChem joint venture. The investments
in property, plant and equipment consist of $2.4 million representing costs of
the Company's waste treatment facility constructed on DOE property in South
Carolina, and $3.6 million in the DuraTherm facility. The investments in the
DuraChem joint venture related principally to the construction of
DuraMelters(TM) and related components. The Company presently expects to invest
in the aggregate approximately $7.2 million in property, plant and equipment,
including for the DuraTherm facility, and the DuraChem joint venture during
1997.
As of December 31, 1996, the Company has capitalized approximately $4.2
million of equipment and installation costs related to the Savannah River M-Area
facility. It is the Company's intention to recover these costs through
additional waste treatment contracts at the Savannah River facility or by
dismantling the equipment and using it in other waste treatment facilities the
Company expects to construct throughout the United States. The recoverability of
such cost will be impacted if future operating cash flow from the additional
waste treatment projects are not achieved or the equipment cannot be fully
deployed on future waste treatment projects. At December 31, 1996, the Company
has not contracted with the DOE for any new waste treatment projects at the
South Carolina site.
Of the $18.0 million in accounts receivable and costs and estimated
earnings in excess of billings on uncompleted contracts at December 31, 1996,
$9.1 million relates to a contract with one DOE contractor which is expected to
be collected in 1997. The Company has a backlog of orders of approximately $43.0
million at December 31, 1996, of which approximately $36.0 million is expected
to be completed in 1997.
The Company has a revolving line of credit agreement with a bank
providing for borrowings up to $7.0 million based upon eligible amounts of
accounts receivable, as defined in the agreement. Borrowings outstanding under
the agreement are due on demand and bear interest
23
at the bank's LIBOR rate plus 2% (7.5% as of December 31, 1996). At December 31,
1996, no borrowings were outstanding and the Company had available borrowings of
$5.2 million.
In January 1997, the Company entered into a letter of intent to acquire
100% of the stock of SEG from Westinghouse for $28 million in cash and 156,986
shares of the Company's stock. SEG, a wholly-owned subsidiary of Westinghouse,
based in Oak Ridge Tennessee, is the largest commercial radioactive waste
processing company in the United States, offering an extensive range of waste
processing services and technologies. The proposed acquisition is subject to the
parties entering into a mutually acceptable definitive purchase agreement,
certain regulatory approvals and other customary conditions. The Company
anticipates closing the transaction in April 1997.
The Company believes cash flows from operations, cash resources
available at December 31, 1996 and, if necessary, borrowings available or
expected to be available under the bank line of credit will be sufficient to
fund currently planned capital improvements, acquire SEG and meet its operating
needs, including the quarterly preferred dividend requirement of $320,000, for
at least the next twelve months.
SEASONALITY
Seasonality generally does not affect the Company's waste treatment
technology operations; however, it does have an effect on the Company's
technical support services business. A large component of the Company's staff
augmentation business is devoted to nuclear power plant outage support. The
seasonal nature of this work is caused by utilities' desire to schedule their
nuclear unit refueling and maintenance outages during spring and fall when, due
to moderate temperatures, electrical load demand is lowest. In addition, a
significant portion of the Company's computer and communications consulting
services client base is in the federal, state and local government sectors.
Funding appropriations for many of these clients' projects are coordinated with
the government's fiscal years which causes some season impact on this business.
In contrast to the outage support business, demand for computer and
communications consulting services typically peaks in winter and summer months.
CAUTIONARY INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
In response to the `safe harbor' provisions contained in the Private
Securities Litigation Reform Act of 1995, the Company is including in this
Annual Report on Form 10-K the following cautionary statements which are
intended to identify certain important factors that could cause the Company's
actual results to differ materially from those projected in forward-looking
statements of the Company made by or on behalf of the Company. Many of these
factors have been discussed in prior filings with the Securities and Exchange
Commission, including the discussion of `Risk Factors' contained in the
Company's Registration Statement on Form S-2 (File No. 333-01805) which became
effective on April 22, 1996, to which reference is hereby made.
The Company experienced growth in total revenues during 1996 as
compared to 1995. In addition, net income in 1996 was significantly greater than
in 1995. However, there can be no assurance that the Company will be able to
sustain these favorable operating trends in future periods. The Company's future
operating results may fluctuate due to factors such as: the acceptance and
implementation of its waste treatment technologies, particularly vitrification
and thermal desorption, in the governmental and commercial sectors; the
evaluation by DOE and other customers of the Company's technologies versus other
competing technologies as well as conventional storage and disposal
alternatives; the timing of new waste treatment projects, including those
pursued jointly with BNFL; and the Company's ability to maintain existing
collaborative relationships or enter into new collaborative arrangements in
order to commercialize its waste treatment technologies. In addition, the
Company's future operating results are largely
24
dependent upon the timing and awarding of future contracts by the DOE for the
cleanup of the waste sites administered by it. The timing and award of such
contracts by the DOE is directly related to the response of governmental
authorities to public concern over the treatment and disposal of radioactive,
hazardous, mixed and other waste. The lessening of public concern in this area
or other changes in the political environment could adversely affect the
availability and timing of government funding for the cleanup of DOE and other
sites containing radioactive and mixed wastes. Additionally, revenues from
technical support services have in the past and continue to account for a
substantial portion of the Company's revenues, and the loss of one or more
technical support service contracts could adversely affect the Company's future
operating results.
25
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
GTS DURATEK, INC. AND SUBSIDIARIES
Page
Independent Auditors' Report.................................................27
Consolidated Balance Sheets at December 31, 1995 and 1996....................28
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996.......................................29
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1994, 1995 and 1996.................................30
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996.......................................31
Notes to Consolidated Financial Statements...................................32
26
Independent Auditors' Report
The Board of Directors and Stockholders
GTS Duratek, Inc.:
We have audited the accompanying consolidated financial statements of GTS
Duratek, Inc. and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we have
also audited the consolidated financial statement schedule listed under Item
14(a)(2). These consolidated financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of GTS Duratek,
Inc. and subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles. Also in our opinion, the related consolidated financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG Peat Marwick LLP
Baltimore, Maryland
March 4, 1997 except as
to the second paragraph
of Note 19, which is
as of March 28, 1997.
27
GTS DURATEK, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1995 and 1996
- ----------------------------------------------------------------------------------------------------------------------
1995 1996
- ----------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 11,396,008 $ 46,336,126
Receivables, less allowance for doubtful accounts of $68,964 in 1995
and $107,964 in 1996 8,724,420 7,462,688
Other accounts receivable 597,093 1,547,755
Costs and estimated earnings in excess of billings on uncompleted contracts 7,707,434 8,956,200
Inventories 274,859 467,775
Prepaid expenses and other current assets 79,686 432,317
Deferred tax asset - 993,159
- ----------------------------------------------------------------------------------------------------------------------
Total current assets 28,779,500 66,196,020
Property, plant and equipment, net 3,541,462 10,780,748
Investments in and advances to joint ventures, net 4,059,078 5,960,984
Intangibles, net of accumulated amortization of $628,047 in 1995
and $752,913 in 1996 553,517 464,344
Deferred charges and other assets 1,726,270 1,797,290
- ----------------------------------------------------------------------------------------------------------------------
$ 38,659,827 $ 85,199,386
- ----------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current
liabilities:
Accounts payable and accrued expenses $ 4,194,713 $ 3,985,157
Current maturities of long-term debt and capital lease obligation 470,709 49,403
- ----------------------------------------------------------------------------------------------------------------------
Total current liabilities 4,665,422 4,034,560
Long-term debt and capital lease obligation 36,000 206,794
Convertible debenture 10,086,931 10,682,897
Deferred tax liability - 299,302
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities 14,788,353 15,223,553
- ----------------------------------------------------------------------------------------------------------------------
Minority interest of subsidiary 5,610 -
- ----------------------------------------------------------------------------------------------------------------------
8% Cumulative Convertible Redeemable Preferred Stock, $.01 par value;
160,000 shares authorized, issued and outstanding
(liquidation value $16,320,000) 14,608,890 14,828,965
- ----------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock - $.01 par value; authorized 4,840,000 shares; none issued
- Common stock - $.01 par value; authorized 35,000,000 shares; issued
9,475,878 in 1995 and 12,419,231 in 1996 94,758 124,191
Capital in excess of par value 18,912,751 64,216,440
Deficit (9,578,758) (9,021,986)
Treasury stock at cost, 70,458 shares (171,777) (171,777)
- ----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 9,256,974 55,146,868
- ----------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
- ----------------------------------------------------------------------------------------------------------------------
$ 38,659,827 $ 85,199,386
- ----------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
28
GTS DURATEK, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1994, 1995 and 1996
- ----------------------------------------------------------------------------------------------------------------------
1994 1995 1996
- ----------------------------------------------------------------------------------------------------------------------
Revenues $ 35,967,563 $ 40,418,066 $ 44,284,618
Cost of revenues 28,856,910 32,220,569 35,197,830
- ----------------------------------------------------------------------------------------------------------------------
Gross profit 7,110,653 8,197,497 9,086,788
Selling, general and administrative expenses 5,925,618 5,875,688 7,455,069
- ----------------------------------------------------------------------------------------------------------------------
Income from operations 1,185,035 2,321,809 1,631,719
Interest income (expense), net (595,475) 57,453 1,239,667
- ----------------------------------------------------------------------------------------------------------------------
Income before income taxes and proportionate share of
loss of joint venture 589,560 2,379,262 2,871,386
Income taxes 11,487 100,926 649,375
- ----------------------------------------------------------------------------------------------------------------------
Income before proportionate share of loss of joint venture 578,073 2,278,336 2,222,011
Proportionate share of loss of joint venture (321,548) (824,025) (165,164)
- ----------------------------------------------------------------------------------------------------------------------
Net income 256,525 1,454,311 2,056,847
Preferred stock dividends and charges for accretion - (1,394,064) (1,500,075)
- ----------------------------------------------------------------------------------------------------------------------
Net income attributable to common stockholders $ 256,525 $ 60,247 $ 556,772
- ----------------------------------------------------------------------------------------------------------------------
Net income per share $ 0.03 $ 0.01 $ 0.04
- ----------------------------------------------------------------------------------------------------------------------
Weighted average common stock and common stock
equivalents outstanding 8,655,811 8,820,131 13,922,375
- ----------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
29
GTS DURATEK, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1994, 1995 and 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Capital in
Common Stock Excess of
------------------------- Par Treasury Stockholders'
Shares Amount Value Deficit Stock Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 8,627,775 $ 86,278 $ 16,140,430 $ (9,895,530) $ (171,777) $ 6,159,401
Net income - - - 256,525 - 256,525
Exercise of options 7,000 70 16,829 - - 16,899
Issuance of common stock
in exchange for cash 125,000 1,250 498,750 - - 500,000
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 8,759,775 87,598 16,656,009 (9,639,005) (171,777) 6,932,825
Net income - - - 1,454,311 - 1,454,311
Exercise of options and
warrants 716,103 7,160 1,946,742 - - 1,953,902
Income tax benefit from
exercise of non-qualified
stock options - - 30,000 - - 30,000
Issuance of common stock
option for cash