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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, 1999
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 (I.R.S. Employer
incorporation or organization) 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
--------------
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 files 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. X
---
As of March 16, 2000, 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 $119,124,000 based on the average closing price of the Common
Stock as reported by the NASDAQ National Market on March 16, 2000. 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 16, 2000
----- -----------------------------
Common stock, par value $0.01 per share 13,422,459 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 2000 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.................................................19
Item 3. Legal Proceedings..........................................19
Item 4. Submission of Matters to a Vote of Security Holders........20
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters.............................21
Item 6. Selected Financial Data....................................22
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations...........23
Item 7A. Quantitative and Qualitative Information About Market Risk....29
Item 8. Financial Statements and Supplementary Data................30
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure..................60
PART III
Item 10. Directors and Executive Officers of the Registrant*...........61
Item 11. Executive Compensation*.......................................62
Item 12. Security Ownership of Certain Beneficial Owners
and Management*.........................................62
Item 13. Certain Relationships and Related Transactions*...............62
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.............................................63
Signatures...................................................................64
* Incorporated by reference from registrant's definitive Proxy Statement for
the Annual Meeting of Stockholders to be held May 16, 2000 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, Inc. (the "Company") provides waste treatment solutions
for radioactive, hazardous, mixed (i.e. intermingled radioactive and hazardous)
and other wastes. The Company combines proprietary technologies for treating
various waste streams with a staff of highly skilled personnel with significant
environmental experience to offer its customers a comprehensive approach to
their waste treatment needs that includes commercial waste processing services,
government waste processing services and technical support services. The
Company's strategy is to (i) provide the low cost solution to process
contaminated waste streams, (ii) combine its proprietary technologies and
technical support services to provide full-service waste treatment, and (iii)
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 conducts its commercial waste processing operations
principally at its Bear Creek Operations Facility located in Oak Ridge,
Tennessee. This facility is the largest commercial waste processing facility for
low-level radioactive waste in the United States and has the capacity to process
30 million pounds of radioactive waste per year. Generators of low-level
radioactive waste send their waste to this facility where the Company, utilizing
a combination of treatment technologies, processes the waste, achieving
significant volume and mass reduction, before sending it to a landfill for
disposal. Accordingly, the Company believes its customers benefit from
significant cost savings as compared to other commercially available
alternatives. The Company's waste treatment technologies utilized at the Bear
Creek Operations Facility include incineration, compaction, and metal
decontamination and recycling. Other technologies used by the Company in its
commercial waste processing operations include vitrification, steam reforming
and ion exchange. The Company's technologies can be used independently or in
tandem to process its customers' waste for long-term storage and disposal. 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 also provides on-site waste processing services on large
government projects for the United States Department of Energy ("DOE"). The
on-site waste processing services provided by the Company on DOE projects
include program development, waste characterization, on-site waste treatment,
facility operation, packaging and shipping of residual waste, profiling and
manifesting the processed waste and selected technical support services. In
November 1995, the Company and BNFL, Inc. ("BNFL"), the U.S. subsidiary of
British Nuclear Fuels plc, formed a strategic alliance, agreeing to team on five
major DOE environmental remediation projects. To date, the Company and BNFL have
been jointly awarded contracts from the DOE on two of such projects.
The Company's technical support services encompass over 600 engineers,
consultants and technicians, some of whom are full-time employees and the
balance of whom are contract employees, who support and complement the Company's
commercial and government waste processing operations and also provide 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 operations. The technical support services provided by the Company for
its customers include site decontamination and decommissioning, radiological
engineering services, staff augmentation and outage support (principally to
assist nuclear power plants during regular maintenance shutdowns), environmental
and computer consulting and environmental safety and health training. Having
these technical resources available has enabled the Company to move its
technologies from bench-scale
1
laboratory testing to field operations and commercial application more rapidly
and to handle larger scope waste cleanup projects.
The Company also provides transportation services for radioactive
wastes. The Company maintains a fleet of tractors, trailers and shipping
containers for transporting radioactive wastes from customers' sites for
processing and disposal.
On June 30, 1999, the Company acquired 100% of the outstanding capital
stock of Frank W. Hake Associates, LLC ("Hake") from HakeTenn, Inc., a Delaware
corporation and an affiliate of the Hake Group of Philadelphia, Pennsylvania,
and two individuals for $12.9 million in cash, subject to a post closing
adjustment, and the assumption of certain liabilities. Hake is a specialist in
storage, transportation handling and processing of radioactive waste emanating
from nuclear power generation plants throughout the United States. Hake also
stores and services power generation equipment at its licensed facility in
Memphis, Tennessee.
The Company has developed the following joint venture and collaborative
arrangements, among others, 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 BNFL, Inc. ("BNFL"). In November 1995, the Company formed a
strategic alliance with BNFL to jointly pursue up to five major
DOE environmental remediation projects. BNFL is the U.S.
subsidiary of British Nuclear Fuels plc, one of the largest
processors of radioactive waste in the world. To date, the Company
and BNFL have agreed to jointly pursue three major DOE waste
treatment projects and have been jointly awarded contracts from
the DOE on two such projects, the Hanford Tank Waste Remediation
System and the Idaho Advanced Mixed Waste Treatment Facility
projects.
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 a
significant capital infusion and, on a continuing basis, provides
the Company with 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.
RECENT EVENTS
In February 2000, the Company completed the sale of its 80% interesest
in DuraTherm, Inc. to DuraTherm Group, Inc. for $8.0 million in cash and a
subordinated note for $355,000. Proceeds to the Company of $8.0 million were
used by the Company to pay down borrowings under its bank credit facility. The
note receivable bears interest at 14%, payable semi-annually during the first
year following the sale, and 18% during the second year following the sale with
the principal due in February 2002. The Company estimates that it will recognize
a pre-tax gain of approximately $1.5 million on the sale.
On March 29, 2000, the Company announced that it has entered into a
definitive agreement to acquire the nuclear services business of Waste
Management, Inc. for up to $65 million in cash, consisting of $55 million in
cash at closing and up to $10 million additional cash consideration upon the
satisfaction of certain post-closing conditions. Waste Management Nuclear
Services ("WMNS") is a leader in providing low-level radioactive waste
management services for the commercial industry and the federal government. WMNS
consists primarily of three operating segments: (i) the Federal Services
Division which provides radioactive waste handling, transportation, treatment
packaging, storage, disposal, site cleanup, and project management services
primarily for the DOE and other federal agencies; (ii) the Commercial Services
Division which provides radioactive waste handling, transportation, licensing,
packing, disposal, and decontamination and decommissioning services primarily to
nuclear utilities; and (iii) the Commercial Disposal Division which operates a
commercial low-level radioactive waste disposal facility at Barnwell, South
Carolina. The proposed acquisition is subject to certain regulatory approvals
and other customary conditions. Closing of the transaction is targeted for the
second quarter of 2000.
2
COMMERCIAL WASTE PROCESSING
The Company conducts its commercial waste processing operations
principally at its Bear Creek Operations Facility located in Oak Ridge,
Tennessee. This facility is the largest commercial waste processing facility for
low-level radioactive waste in the United States and has the capacity to process
30 million pounds of radioactive waste per year. Generators of low-level
radioactive waste send their waste to this facility where the Company, utilizing
a combination of treatment technologies, processes the waste, achieving
significant volume and mass reduction, before sending it to a landfill for
disposal. Accordingly, the Company believes its customers benefit from
significant cost savings as compared to other commercially available
alternatives. The Company's waste treatment technologies utilized at the Bear
Creek Operations Facility include incineration, compaction and metal
decontamination and recycling.
Other technologies used by the Company in its commercial waste
processing operations include vitrification, steam reforming and ion exchange.
The Company's technologies can be used independently or in tandem to process its
customers' waste for long-term storage and disposal. 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 developed or acquired several waste treatment
technologies for use on a variety of radioactive, hazardous, mixed and other
waste streams. The following is a brief summary of the waste treatment
technologies that are being utilized by the Company.
Vitrification. 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 Company's
vitrification technology involves combining radioactive, hazardous, mixed and
other waste with glass-forming additives in 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%. The glass produced by the DuraMelter(TM) passes the
United States Environmental ProtectiOn Agency's Toxicity Characteristic Leachate
Procedure (TCLP), one of the most commonly used criteria for waste acceptance,
particularly hazardous and mixed waste, at land disposal facilities.
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.
3
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.
INCINERATION. Incineration is the most cost-effective treatment for
most dry active waste and is the preferred waste treatment technology of many of
the Company's customers for nonhazardous waste oils and other waste liquids. The
Company's two incinerators at its Bear Creek Operations Facility are the only
two licensed commercial low-level radioactive waste incinerators in the United
States. Each of the Company's incinerators is capable of processing solid waste
at up to 1,600 pounds per hour and up to 30 gallons of radioactive, nonhazardous
waste oils simultaneously. The proprietary ash transport system of the Company's
incinerators mixes ash with air, resulting in complete burning of all
combustible material without excessive particulate carry-over common to most
incinerators. In addition, the secondary chamber utilizes two burners at up to
2200(degree)F to Ensure complete combustion of all volatile materials.
Incinerator ash and fly ash are compacted in the Company's UltraCompactor(TM) to
form a high-density, nondispersible solid which is packaged and shipped for
disposal. THe incinerators are also equipped with a combination of emission
control equipment and technology to maximize environmental and employee safety,
including a heat recovery boiler for off-gas temperature control, a baghouse
filter for particulate control, a dual HEPA bank for contamination control, a
wet scrubber for acid gas removal, an evaporator to concentrate and solidify
suspended and dissolved solids in the liquid from the scrubbers and a recycling
system so that water can be recycled for reuse or processed in the incinerator
which eliminates all liquid effluents.
COMPACTION. Achieving maximum density is critical to cost-effective
radioactive waste disposal at most burial sites. The Company's
UltraCompactor(TM) at its Bear Creek Operations Facility is the world's largeSt
compactor available for low-level radioactive waste, capable of compacting both
drums and boxes (up to 38 cubic feet) with the force of 10 million pounds. The
UltraCompactor(TM) has a capacity of 70,000 cubic feet per montH. Average volume
reduction using the Company's compaction technology is approximately six times
for dry active waste and eight times for asbestos. Typically, the waste
processed utilizing this technology is dry active waste and includes paper,
plastic, asbestos, metals, woods and filters. Other items that have been
successfully volume reduced using the UltraCompactor(TM) include soils, motors,
pumps, pipes, valves and conduits. The Company also hAs a mobile compactor which
can be operated at the customer's site. The mobile compactor utilizes 2,200 tons
of compaction force, achieves volume reduction rates of 60% to 80% and is suited
for smaller-scale jobs on concrete, rubble, steel structures, valve bodies and
other hard-to-compact material near theoretical density.
METAL DECONTAMINATION AND RECYCLING. The Company's metals processing
program at its Bear Creek Operations Facility provides a cost-effective solution
for radioactively contaminated metals utilizing its full-service capabilities of
surveying, decontaminating and melting. Upon arrival at the Company's Bear Creek
Operations Facility, the Company examines the metal and sorts it for processing
based on the contamination level of the metal to achieve the most cost-effective
process for recycling metal. If it is more cost-effective to dispose of it
rather than to recycle it, the Company will volume reduce the metal using its
UltraCompactor(TM) aNd send it to an appropriate burial site. If the metal can
be decontaminated and commercially recycled, the Company will employ its
decontamination technologies which incorporate chemical, abrasive grit/shot,
sponge and carbon dioxide processing. The Company's specialized decontamination
equipment allows
4
multiple shapes and metal types to be successfully treated for commercial
recycling. For those metals that cannot be economically decontaminated to levels
low enough for free release, the Company will utilize its metal melting
technology. The Company's 20 ton, 7,200 kw electric induction furnace, the
largest available in the United States, operates exclusively for melting and
recycling radioactively contaminated metal. This furnace is capable of
processing various types of ferrous metals over a broad alloy spectrum and
copper and lead. All of the metal processed through the metal melt furnace is
recycled into shield blocks and provided to various high-energy physics projects
throughout the United States and Canada. The decontamination and/or recycling of
radioactively contaminated metal has two principal benefits, it eliminates the
liability for the original waste generator and it eliminates the cost of burial.
STEAM REFORMING. The Company's steam reforming technology is designed
for processing the toughest wastes including mixed waste, waste requiring
segregation and waste exhibiting high activity levels. In particular, the
Company has successfully utilized this technology to process radiologically
contaminated medical and biological wastes. The system's compact size,
containment integrity, in-drum processing option and steam-based chemistry offer
significant safety and regulatory advantages over most incinerator or other
thermal destruction systems. The Company holds exclusive rights to this
proprietary technology, which first vaporizes organics in the waste, either in
liquid or solid forms, and then converts those gases to a dry, nonhazardous,
mineral-like solid residue with greater than 99.99% efficiency. Using its steam
reforming technology, the Company is able to achieve volume reductions of up to
100 times, depending on the type of waste.
The steam reforming process is conducted in a steam-laden,
oxygen-deficient environment that converts organic and biochemical compounds to
carbon monoxide, hydrogen, carbon dioxide and water. The two-step process first
employs an evaporation phase (between 700(degree)F and 900(degree)F) which
breaks down and vaporizes Most organic compounds and water from the waste. The
waste solids are not exposed to higher temperatures which would tend to volatize
metals and other radionuclides from the residue. The volatized gases exit the
evaporator and are passed through a filter which removes any fine entrained
particles from the gases. Particulate-free gases exiting the filter are then
co-mixed with additional superheated steam and passed through a high-temperature
reformer. The gases, some of which are organic fractions of the original waste
material, are fully decomposed in the reformer at high destruction efficiencies.
The resulting products are simple gases and inert mineral-like residue.
Because the Company's steam reforming technology does not use
combustion and because the secondary pollutants are not formed by the steam
reforming process, it is not classified as an incinerator by the United State
Environmental Protection Agency ("EPA") and is therefore easily permitted for
on-site operations. Accordingly, the Company can provide a compact mobile unit
for on-site processing at the customer's facility. For example, the Company
successfully processed high-level radioactive wastes at Portland General
Electric's Trojan Nuclear Plant. The project included sorting and packaging
spent fuel pool wastes submerged in 20 feet of water, removing wastes from the
fuel pool, destructing hydrogen bearing materials in the mobile steam reformer
and sealing the processed wastes in dry-storage capsules for long-term storage.
ION EXCHANGE. The Company has developed a family of selective ion
exchange media, called DURASIL(R), whicH selectively targets and removes
specific radioactive, toxic or hazardous ions from wastewater while passing
benign ions. 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 simplifies its disposal. DURASIL(R) also
has physical characteristics that enable it to endure extremE wastewater
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
5
of the waste stream. The Company has developed different DURASIL(R) ion exchange
media depending on thE characteristics of the liquid waste stream. The Company
manufactures and supplies highly specialized waste water purification systems
and the patented DURASIL(R) for commercial nuclear power plants, DOE facilities
and industriaL clients.
GOVERNMENT WASTE PROCESSING
The Company provides on-site waste processing services on large
government projects for the DOE. The on-site waste processing services provided
by the Company on DOE projects include program development, waste
characterization, on-site waste treatment, facility operation, packaging and
shipping of residual waste, profiling and manifesting the processed waste and
selected technical support services. In November 1995, the Company and BNFL
formed a strategic alliance, agreeing to team on five major DOE environmental
remediation projects. To date, the Company and BNFL have agreed to jointly
pursue three major DOE waste projects and have been jointly awarded contracts
from the DOE on two of such projects, the Hanford River Protection Project
("RPP") and the Idaho Advanced Mixed Waste Treatment Project ("AMWTP").
The Company is currently involved in several waste treatment projects
for the DOE. The following is a summary of the status of the Company's major
waste treatment projects with the DOE.
HANFORD RIVER PROTECTION PROJECT ("RPP"). 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 Hanford, Washington. 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 54
million gallons of high-level radioactive waste and low-level radioactive waste
which is contained in 177 underground storage tanks.
The Company will provide the technical and support services for
vitrifying both the high-level and low-level waste for the project. Part I of
the project is divided into two parts. Part IA, which was concluded in January
1998, consisted of completing the facility conceptual design, initiating the
environmental permitting process and submitting a proposal to the DOE for the
next phase. The Company completed its portion of Part IA by delivering the
conceptual design for high level waste (HLW) and low active waste (LAW) melters,
and by generating a cost estimate for the design and construction of these
systems. In addition during Part IA, glass formulation and validation testing on
a small scale was performed at the VSL.
In July 1998, the DOE and BNFL reached an agreement for Part 1B of the
Hanford RPP contract. The two part contract, worth approximately $6.9 billion
to the team, will result in the safe immobilization of approximately 10% mass,
or 20 to 25% of the radioactivity in Hanford's 54 million gallons of tank waste
by 2018. Under the negotiated contract, the project will proceed in two parts.
The first part consists of a 24-month advance facility design phase that will
result in securing private project financing, filing regulatory permit
applications, preparing to begin construction, and establishing final fixed-unit
prices and a schedule for cleanup of the waste. The second part of the project
will provide for the construction of the facilities, followed by treatment and
immobilization of the high and low-level waste contained in the tanks as
determined in the first part and established according to the fixed-price.
In preparation for beginning the detailed design of the demonstration
facility, BNFL funded $17 million to design, construct, own and operate a pilot
DuraMelter(TM) at the Company's headquarters. The pilot DuraMelteR(TM) commenced
startup in December 1998 and completed its initial phase of testing in September
1999. The melter processed non-hazardous, non-radioactive test materials using
the Company's proven vitrification technology for fusing contaminants in
durable, ecologically safe glass. The melter, a 3.3 ton-per-day vitrification
system, is a one-third scale version of one of the 10 ton-per-day LAW melters to
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be built at the RPP facility. During the testing, the pilot melter demonstrated
that the full-scale LAW melter configuration achieved and sustained a glass
production rate of one ton of glass per day per square meter of glass surface
area.
According to DOE estimates, the total Phase I contract is estimated to
be worth $6.9 billion over 18 years. 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 in excess of $40 billion. The Company's
portion of the total contract is undetermined at this point. See "Joint Venture
and Collaborative Arrangements - BNFL."
IDAHO ADVANCED MIXED WASTE TREATMENT PROJECT ("AMWTP"). In December
1996, the team led by BNFL, of which the Company is a key member, was awarded
the sole contract by the DOE for 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 originally planned to utilize vitrification and
incineration technologies developed by the Company in the INEEL project. In June
1998, the team changed the technical process and has proposed the ash from the
incineration process to be micro-encapsulated (in cement) in lieu of vitrified
(melted into glass). This change in process is being explored due to changes in
the waste acceptance criteria of the Waste Isolation Pilot Project ("WIPP"),
which is less restrictive. The acceptability of this change has not yet been
agreed to by the State of Idaho and the EPA. Even though the Company's
vitrification technology may not be utilized in this project, the Company will
retain a major role in the project with responsibility for all the thermal
processes. In addition, the Company's scope has been expanded to include other
ancillary processes.
The Company will be responsible for the design, development,
procurement, and construction supervision of the waste processing systems. 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. The Company
completed its Phase I activities with the submission of its conceptual design
for the waste processing systems to BNFL in January 1998. BNFL began the
environmental permitting process in January 1998 with the submission of the
permit applications to the State of Idaho. Phase II includes the design and
construction of the facility and operational testing for a duration of up to
three years. Phase III includes the retrieval of the waste and operation of the
facility with an approximate duration of 12 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.
The Company's portion of the total contract is undetermined at this point. See
"Joint Venture and Collaborative Arrangements - BNFL."
TECHNICAL SUPPORT SERVICES
The Company's technical support services encompass over 600 engineers,
consultants and technicians, some of whom are full-time employees and the
balance of whom are contract employees, who support and complement the Company's
commercial and government waste processing operations and also provide 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 operations. The technical support services provided by the Company for
its customers include site decontamination and decommissioning, radiological
engineering services, staff
7
augmentation and outage support (principally to assist nuclear power plants
during regular maintenance shutdowns), environmental and computer consulting and
environmental safety and health training. The Company provides these technical
support services either as a prime contractor or as a subcontractor to a diverse
group of electric utilities, industrial facilities, commercial businesses and
government agencies including Duke Power Company, Southern Nuclear Operating
Company, Vermont Yankee Nuclear Power Corporation and the DOE. 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.
SITE DECONTAMINATION AND DECOMMISSIONING. The Company has performed
decontamination and decommissioning services at over 60 facilities worldwide,
including major scopes of work at two nuclear power plants which have been
completely decommissioned to United States Nuclear Regulatory Commission ("NRC")
requirements. The Company has performed decontamination and decommissioning
services at the following commercial nuclear power plants: Fort St. Vrain
Nuclear Generating Station, Humboldt Bay Power Plant Unit 3, Shoreham Nuclear
Power Station, Rancho Seco Nuclear Station, Trojan Nuclear Power Plant and is
currently performing decontamination and decommissioning services under
contracts for Connecticut Yankee's Haddam Nuclear Power Station, Consumers
Energy Big Rock Point Nuclear Power Plant and Maine Yankee Atomic Power Company.
Decontamination and decommissioning services provided by the Company include
site radiological surveys, waste characterization, decommissioning planning,
remediation, health physics support, radwaste services and final surveys. The
Company has the technical personnel, who have developed project techniques
accepted by the NRC, programs, procedures, equipment and instrumentation to
handle projects involving small hot cells to large nuclear power stations. In
addition, through its transportation and commercial waste processing operations,
the Company offers its customers a comprehensive solution to their site
decontamination and decommissioning problems.
RADIOLOGICAL ENGINEERING SERVICES. The Company's technical personnel
provide commercial and government customers with a variety of radiological
engineering services including development of health physics and emergency
preparedness programs, MORT analysis, licensing procurement, instrumentation and
radiological training. Most of the Company's senior technical personnel
providing radiological engineering services are fully certified and have
extensive operating plant as well as NRC and DOE experience.
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 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.
8
The Company's largest customer for staff augmentation services is Duke
Power Company, which accounted for approximately 7% and 5% of the Company's
total revenues in 1998 and 1999, respectively. Duke Power currently has seven
nuclear power units at three sites. 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. Other nuclear power utilities to which
the Company provides augmentation and outage support services include Southern
Nuclear Operating Company and Vermont Yankee Nuclear Power Corporation.
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 and development, computer
software development and testing, networking, web site development, quality
assurance audits, non-destructive examination and computer training for a broad
base of clients.
ENVIRONMENTAL SAFETY AND HEALTH 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 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.
TRANSPORTATION SERVICES. As part of its technical support services, the
Company provides certain complementary services to its customers including
transportation services. Through a wholly owned subsidiary, Hittman Transport
Services, Inc. ("Hittman"), the Company maintains a fleet of tractors, trailers
and shipping containers for transporting radioactive waste and radioactively
contaminated equipment for processing and disposal. All of Hittman's vehicles
are constantly monitored via satellite to optimize waste pickup and delivery
scheduling. Hittman maintains terminal locations around the country that are
conveniently located to 90% of the commercial nuclear power plants in the United
States.
JOINT VENTURE AND COLLABORATIVE ARRANGEMENTS
In order to commercialize its technologies 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 treatment projects, particularly its
government waste processing operations. In this complementary relationship, the
VSL provides the necessary technology and research and development support while
the Company advances the technology to commercial application.
9
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
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, particularly its government waste processing
operations. 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 funding for research conducted
at the VSL on behalf of the Company. During 1998, the Company paid $530,000 in
research and development funding to the VSL. No funding was provided during
1999. 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. 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. 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 environmental
remediation project. To date, the Company and BNFL have agreed to jointly pursue
three major DOE environmental remediation projects and have been jointly awarded
contracts from the DOE on two of such projects.
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 through November 2000 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 mutually agree on
10
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.
BNFL has funded $17 million to design, construct, own and operate a
pilot DuraMelter(TM) at the Company's headquarters. The pilot DuraMelter(TM)
commenced startup in December 1998 and completed its initial phase of testiNg in
September 1999. The melter processed non-hazardous, non-radioactive test
materials using the Company's proven vitrification technology for fusing
contaminants in durable, ecologically safe glass. The melter, a 3.3 ton-per-day
vitrification system, is a one-third scale version of one of the 10 ton-per-day
LAW melters to be built at the RPP facility. During the testing, the pilot
melter demonstrated that the full-scale LAW melter configuration achieved and
sustained a glass production rate of one ton of glass per day per square meter
of glass surface area.
DURACHEM
In September 1994, the Company formed a joint venture with Chem-Nuclear
Systems, Inc. ("Chem-Nuclear"), a subsidiary of Waste Management, Inc., 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 pursue the disposal market for ion
exchange resins which are generated by nuclear power plants and contaminated
wastes from hospitals and laboratories. The vitrification facility of this joint
venture is located at Chem-Nuclear's waste processing center at Barnwell, South
Carolina. 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.
In 1995, the Company and Chem-Nuclear constructed a vitrification
facility at Chem-Nuclear's radioactive waste processing center at Barnwell,
South Carolina. The Company designed and constructed a new DuraMelter(TM) At the
facility and is 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. 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. The
DuraChem facility was expected to begin commercial operations in 1997; however,
as a result of the Company focusing its management and capital resources on (i)
restarting the M-Area melter, (ii) successfully and rapidly incorporating SEG's
business following the acquisition and (iii) meeting commitments to the DOE
privatization cleanups in Hanford, Washington and Idaho Falls, Idaho, the
Company announced in April 1997, that it would reduce the priority of, and
capital commitments to, other projects which have higher levels of marketplace
uncertainty or have longer-term financial prospects including the DuraChem joint
venture. The Company's management anticipates commencement of the facility
within the next two years, however, changes in market conditions or other
factors could result in additional delays.
11
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 Company expects the joint venture to have limited operations during
2000.
CUSTOMERS
In its commercial waste processing operations, the Company derives
revenues from the processing and treatment of customer waste streams and from
related waste transportation services. Customers of the Company's commercial
waste processing services include electric utilities, government agencies,
industrial facilities, laboratories, hospitals and others. Revenues derived from
commercial waste processing operations represented approximately 45.6% and 49.4%
of the Company's total revenues in 1998 and 1999, respectively.
In its government waste processing operations, the Company derives
revenues related to its proprietary vitrification technologies principally
through subcontracts with a combination of DOE contractors and subcontractors
including BNFL. Revenues derived from DOE-related subcontracts represented
approximately 19.7% and 21.0% of the Company's total revenues during 1998 and
1999, respectively.
The Company provides technical support services to a diverse group of
government agencies and utilities. Customers include the DOE, the United States
Department of Defense ("DOD"), the EPA, state environmental protection agencies,
Duke Power Company and Southern Nuclear Operating Company. Revenues derived from
technical support services represented approximately 34.7% and 29.6% of the
Company's total revenues during 1998 and 1999, respectively.
Revenues from Duke Power accounted for 7% and 5% of the Company's
revenues for 1998 and 1999, respectively. Revenues from BNFL accounted for
approximately 10.6% and 13.6% of the Company's revenues for 1998 and 1999,
respectively. No other customer accounted for more than 5% of the Company's
total revenues during 1998 or 1999.
SALES AND MARKETING STRATEGY
The Company's operations to date, including the commercial waste
processing operations acquired in April 1997, have provided it with extensive
knowledge of commercial and DOE 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 commercial and DOE
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, government regulation or its ability to provide a
comprehensive approach to its customers' waste treatment needs.
12
In its technical support services business, GTS Duratek will seek to
strengthen its relationships with its large utility customers, such as Duke
Power Company, Southern Nuclear Operating Company and Vermont Yankee Nuclear
Power Corporation. 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 decontamination and
decommissioning services, environmental and computer consulting, radiation
instrument services and environmental health and safety training, all of which
generate relatively higher profit margins than staff augmentation and outage
support. Decontamination and decommissioning services provided to nuclear
facilities encompasses services from initial site characterization to project
completion.
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, treatment and disposal of low-level
radioactive waste and that require the licensing of low-level radioactive waste
disposal sites by NRC or NRC Agreement States.
The processing, 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 the 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 Low-Level Radioactive Waste Policy Act of 1980 ("LLRWPA") and the
Low-Level Radioactive Waste Policy Amendments Act of 1985 ("LLRWPA Amendments")
address the siting of new low-level radioactive waste disposal facilities. Each
state is responsible for providing capacity for commercial low-level radioactive
waste generated within its borders. The LLRWPA also encourages groups of states
to enter into compacts providing for the development and operation of low-level
radioactive waste disposal facilities. 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.
13
The Resource Conservation and Recovery Act of 1976 ("RCRA"), as amended
by the Hazardous and Solid Waste Amendments of 1984 ("HSWA"), 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
Restrictions developed under the HSWA 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 the EPA with the
authority to regulate over 60,000 commercially produced chemical substances. The
EPA may impose requirements involving manufacturing, record keeping, reporting,
importing and exporting. The TSCA also established a comprehensive regulatory
program for PCBs which is analogous to the RCRA program for hazardous waste.
The Clean Water Act, as amended, establishes standards, permits and
procedures for controlling the discharge of pollutants from wastewater sources.
The Clean Air Act of 1970, as amended (the "Clean Air Act"), empowers
the EPA and the states 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 ("CERCLA" or "Superfund"), and subsequent amendments under the
Superfund Amendments and Reauthorization Act ("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 hazardous substances meet applicable and
relevant and/or appropriate regulatory requirements. Superfund also establishes
strict and retroactive liability for parties who generated, stored, handled,
managed or transported hazardous substances or owned and operated the sites
containing them. This creates a strong incentive for proper management and
disposal of hazardous waste.
The Emergency Planning and Community Right to Know Act ("EPCRA") of
1986 requires companies to submit emergency and hazardous inventory forms to
state and local agencies for all materials requiring a material safety data
sheet under OSHA. EPCRA requires full disclosure of 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, public pressure may be eliminated or significantly
reduced.
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.
14
ENVIRONMENTAL LAWS AND REGULATIONS AFFECTING THE USE OF THE COMPANY'S
WASTE TREATMENT TECHNOLOGIES
To the extent that the Company is engaged in the storage, 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. To the extent that these regulations
have been delegated to the states, the state may also regulate mixed waste.
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, financial assurance, closure, and site stabilization.
Under RCRA, wastes are classified as hazardous either because they are
specifically listed as such or because they display certain hazardous
characteristics. Under current regulations, waste residues derived from listed
hazardous wastes are considered 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 such as 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. In
some cases, there is no current technology to treat mixed wastes, although EPA
policy places these wastes on a low enforcement priority. The RCRA regulation
classifying such waste residue as hazardous has been overturned by the U.S.
Court of Appeals for the District of Columbia Circuit, but has been temporarily
reinstated until 2001 when the EPA is under court order to develop a revised
regulatory approach which would allow listed wastes to leave the hazardous waste
regulatory system if they met specified concentration limits. The Company's
ownership and operation of treatment facilities also exposes the Company to
potential liability for cleanup of releases of hazardous wastes under RCRA.
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 facility in Oak Ridge,
Tennessee, is a RCRA Part-B permitted facility. The Company has developed
procedures to ensure compliance with RCRA permit provisions at the Bear Creek
Operations facility, including procedures for ensuring appropriate waste
acceptance and scheduling, waste tracking, manifesting and reporting, and
employee training.
If the Company engages in the transportation of hazardous materials,
such as 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 statutes, the United States
Department of Transportation regulates the transportation of hazardous 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
15
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 retroactive
liability upon owners or operators of facilities where a release of hazardous
substances has occurred on parties who generated hazardous substances that were
released at such facilities and on parties who arranged for the transportation
of hazardous substances to such facilities. The Company's ownership and
operation of vitrification, storage and incineration 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 other residues from the Company's vitrification, incineration and
other treatment processes 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) and other processes 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.
Company facilities may have to obtain permits under the Clean Water
Act, the Clean Air Act, and corresponding state statutes. 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.
The Clean Air Act imposes strict requirements upon owners and operators
of facilities which emit pollutants into the air. Although the Company believes
that its treatment systems effectively trap particulates and prevents hazardous
emissions from being released into the air, which releases would violate the
Clean Air Act, the Clean Air Act may require permits prior to the construction
and operation of the Company's facilities, and may require additional emission
controls and restrictions on materials stored, used and incinerated at existing
or proposed facilities.
The Clean Water Act establishes standards, permits and procedures for
controlling the discharge of pollutants from 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 standard permits and procedures are potentially applicable to all other
water discharged from, or reused at, facilities owned or operated by the
Company.
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 worker protection and public exposure to
radioactive materials or wastes.
COMPETITION
The market for the Company's waste treatment services 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
16
thermal treatment methods. Competition is based primarily on cost, regulatory
and permit restrictions, technical 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 waste
treatment technologies, its comprehensive approach to waste treatment,
demonstrated commercial success of its technologies, reputation for providing
quality service to its customers 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 business, 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 1997 and 1998, research and development activities were
conducted at the VSL under contracts totaling $255,000 and $530,000,
respectively. No funding was provided in 1999. 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. 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. 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 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, Drs. Macedo and Litovitz exclusively license the
vitrification technology rights and process patents developed by them at the VSL
to the Company.
17
The Company has all patents and related trademarks and copyright
pertaining to the detection, storage, decontamination, processing and handling
of radioactive and hazardous waste materials that are necessary in its business.
Specifically, the issued and active patents held by the Company relate to the
steam reforming, incineration, ultracompaction and vitrification technologies
used in its commercial waste processing operations. As a result of the
acquisition of SEG, the Company acquired rights in 48 U.S. patents, 11 pending
U.S. patent applications, 118 foreign patents and 35 pending foreign patent
applications. Pursuant to the purchase agreement with Westinghouse, the Company
has granted Westinghouse a non-exclusive royalty-free license to practice the
technologies covered by certain of the patents acquired by the Company.
From time to time, the Company acquires or licenses technologies from
third parties that complement its existing waste processing technologies. In
November 1997, the Company acquired a joint interest in several patents
pertaining to the gasification and vitrification of organic materials from
Proler Environmental Services, Inc. ("Proler"). The Company now owns Proler's
interest in these patents jointly with Hylsa SA, a company located and doing
business in Mexico.
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, 1999, the Company employed 1,020 employees,
including 308 temporary field-assigned employees performing services for
clients, 471 full-time technical personnel and 241 in administration and support
personnel. 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 temporary field-assigned employees generally increases to
approximately 600 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.
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 owns real property assets, including approximately 50 acres
of land in Oak Ridge, Tennessee, upon which the primary waste processing
operations are located and an additional 50 acre parcel in Oak Ridge, Tennessee,
at which additional waste processing operations are conducted. The Company also
owns a 13,500 square foot building in Richland, Washington, which houses certain
technical services operations.
18
In June 1999, the Company acquired certain real property assets in
connection with its acquisition of Hake, including approximately 13.5 acres of
land in Memphis, Tennessee, upon which the operations are located.
ITEM 3. LEGAL PROCEEDINGS
On February 3, 1998, the Company's wholly owned subsidiary, Scientific
Ecology Group, Inc. (now named GTS Duratek Bear Creek , Inc. ("SEG"), was sued
in federal district court in Boston, Massachusetts. The suit alleges that
statements made in press releases by Molten Metals Technology, Inc. ("MMT") were
fraudulent and misleading under federal securities laws and state common law
fraud theories. These statements concerned a joint venture between SEG and MMT
and some of these statements were made in press releases which MMT issued
jointly with SEG. The complaint seeks to hold SEG liable for all of these
statements. The defendant moved to dismiss the complaint, the plaintiffs chose
to amend their pleading, and the defendant moved to dismiss the amended
complaint. At the present time the Company is unable to express a view on the
probable ultimate outcome of the litigation. In addition, the Company may have
rights of indemnity against CBS Corporation ("CBS"), the successor to
Westinghouse Electric Corporation ("Westinghouse") which was the parent of SEG
at the time the allegedly misleading statements were made, if, among other
things, certain representations and warranties made by CBS in the definitive
purchase agreement pursuant to which the Company purchased SEG were breached.
CBS has agreed to assume all litigation costs associated with the defense of the
case, but has reserved the right to challenge the Company's claim for
indemnification for any settlement or judgment that may arise from the case.
On or about February 25, 1999, Synthetica Technologies, Inc.
("Synthetica") served the Company with a complaint filed in the Superior Court
of California, County of San Francisco. In addition to the Company, the
complaint named SEG, Westinghouse, and two former SEG executives as defendants.
The complaint alleged that SEG was required by a license agreement and a
subsequent asset purchase agreement to make certain payments to Synthetica in
exchange for the right to develop and commercialize Synthetica's waste disposal
technology. Synthetica claimed that SEG did not make allegedly required payments
and did not comply with other alleged provisions of the contracts between SEG
and Synthetica. Both the alleged license agreement and alleged asset purchase
agreement predate the Company's acquisition of SEG. Synthetica advanced claims
of fraud in the inducement, constructive fraud, actual fraud, breach of written
contract, breach of implied covenant of good faith and fair dealing, intentional
interference with contractual relations, intentional interference with economic
relations, negligent interference, negligent misrepresentation and breach of
fiduciary duty and trade secret misappropriation. The complaint sought
compensatory and exemplary damages in an unspecified amount and an injunction
against further trade secret misappropriation by the former SEG executives. The
defendants removed the action to the United States District for the Northern
District of California and then moved to dismiss the case. The plaintiff chose
to amend its pleading, dropping the individual defendants and eliminating three
claims. The remaining defendants sought to dismiss the amended complaint. On
October 27, 1999, the court dismissed the amended complaint in its entirety, but
permitted the plaintiff to replead certain claims. On November 29, 1999, the
plaintiff filed an amended complaint alleging fraud and conspiracy to defraud,
breach of implied covenant of good faith and fair dealing and breach of
contract. The claims in the amended complaint relate only to the asset purchase
agreement and revolved around the claim that SEG failed to develop and
commercialize Synthetica's waste disposal technology as required by that
agreement. On January 3, 2000, the court dismissed the Company as a party to the
case, leaving SEG as one of the remaining defendants along with CBS and
dismissed certain claims against the remaining defendants. While the Company and
SEG believe that SEG has meritorious defenses to the claims alleged against it
by Synthetica, the Company cannot make a determination as to the likelihood or
the extent of any liability arising from this matter.
19
On December 2, 1999, the Company's wholly owned subsidiary, SEG, was
named as a defendant in an adversary proceeding in the United States Bankruptcy
court for the District of Massachusetts. The Chapter 11 Trustee, on behalf of
the debtor MMT and its creditors, filed an adversary "Complaint to Avoid
Fraudulent Transfer" naming as defendants CBS and SEG. The complaint alleges
that the sale of CBS's interest in a joint venture to MMT resulted in a
fraudulent conveyance. The primary allegations against SEG are that MMT's
release of SEG from obligations to pay $8 million to equalize capital
expenditures and additional amounts for MMT's share of profits, and MMT's
assumption of at least $1.5 million of SEG's liabilities, are avoidable because
MMT did not receive reasonably equivalent value for the transfers. The Company
intends to vigorously contest MMT's allegations on the basis that MMT did in
fact receive reasonably equivalent value for its transfers. In addition, the
Company may have a right of indemnification from CBS pursuant to the relevant
purchasing agreements. It is too early in the litigation to provide an accurate
assessment of the Company's liability. CBS has agreed to assume all litigation
costs associated with the defense of the case, but has reserved the right to
challenge the Company's claim for indemnification for any settlement or judgment
that may arise from the case.
In addition, from time to time the Company is a party to litigation or
administrative proceedings relating to 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 such litigation or administrative
proceedings 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.
20
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. The last reported
sale price of the Common Stock on the NASDAQ National Market on March 16, 2000
was $8.875.
PRICE RANGE
OF COMMON STOCK
----------------
HIGH LOW
---- ---
Year ended December 31, 1997:
1st quarter 14-5/8 4-7/8
2nd quarter 10-1/2 7-7/8
3rd quarter 15-3/8 9-1/2
4th quarter 15 9-3/4
Year ended December 31, 1998:
1st quarter 14 13-3/8
2nd quarter 12-3/4 10
3rd quarter 12-3/8 5-3/8
4th quarter 8-1/8 3-7/8
Year ended December 31, 1999:
1st quarter 7-1/2 5-1/8
2nd quarter 6-5/8 4-1/2
3rd quarter 7-3/4 6-1/8
4th quarter 8-7/16 7-7/8
As of March 16, 2000, there were 1,126 holders of record of the Common
Stock and the Company estimates that there were approximately 6,000 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."
21
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ------------- ------------ ------------ -------------
STATEMENT OF OPERATIONS DATA:
Revenues $ 40,418 $ 44,285 $ 136,553 $ 160,313 $ 177,196
Cost of revenues 32,220 35,198 120,814 123,839 128,719
----------- ------------- ------------ ------------ -------------
Gross profit 8,198 9,087 15,739 36,474 48,477
Selling, general and administrative expenses 5,876 7,455 15,725 26,613 27,723
Charge for asset impairment -- -- -- 9,224 --
----------- ------------- ------------ ------------ -------------
Income (loss) from operations 2,322 1,632 14 637 20,754
Interest income (expense), net 57 1,239 571 (545) (2,297)
----------- ------------- ------------ ------------ -------------
Income (loss) before income taxes
and proportionate share of losses
by joint ventures 2,379 2,871 585 92 18,457
Income taxes 101 649 716 627 6,855
----------- ------------- ------------ ------------ -------------
Income (loss) before proportionate
share of losses by joint ventures 2,278 2,222 (131) (535) 11,602
Proportionate share of losses by
joint ventures (824) (165) (150) (1,474) (122)
----------- ------------- ------------ ------------ -------------
Net income (loss) before cumulative
effect of change in accounting
principle 1,454 2,057 (281) (2,009) 11,480
Cumulative effect of change in accounting
principle -- -- -- (420) --
----------- ------------- ------------ ------------ -------------
Net income (loss) and comprehensive
income (loss) 1,454 2,057 (281) (2,429) 11,480
Preferred stock dividends and charges
for accretion (1,394) (1,500) (1,503) (1,507) (1,510)
----------- ------------- ------------ ------------ -------------
Net income (loss) attributable to
common stockholders $ 60 $ 557 $ (1,784)$ (3,936)$ 9,970
=========== ============= ============ ============ =============
Net income (loss) per share before
cumulative effect of change in accounting
principle:
Basic $ 0.01 $ 0.05 $ (0.14)$ (0.27)$ 0.75
=========== ============= ============ ============ =============
Diluted $ 0.01 $ 0.04 $ (0.14)$ (0.27)$ 0.58
=========== ============= ============ ============ =============
Net income (loss) per share:
Basic $ 0.01 $ 0.05 $ (0.14)$ (0.30)$ 0.75
=========== ============= ============ ============ =============
Diluted $ 0.01 $ 0.04 $ (0.14)$ (0.30)$ 0.58
=========== ============= ============ ============ =============
Basic weighted average common stock
outstanding 8,820 11,460 12,619 13,137 13,351
=========== ============= ============ ============ =============
Diluted weighted average common stock
and dilutive securities outstanding 11,213 13,404 12,619 13,137 20,316
=========== ============= ============ ============ =============
AS OF DECEMBER 31,
----------------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ------------- ------------ ------------ -------------
BALANCE SHEET DATA:
Working capital $ 24,114 $ 62,161 $ 8,363 $ 15,359 $ 20,983
Total assets 38,660 85,199 132,298 134,245 157,588
Long-term debt, convertible debenture
and capital lease obligation 10,123 10,939 11,557 13,102 30,492
Redeemable convertible preferred stock 14,609 14,829 15,052 15,279 15,509
Stockholders' equity 9,257 55,147 56,429 55,022 61,395
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
GTS Duratek, Inc. (the "Company") derives substantially all of its
revenues from commercial and government waste processing operations, and from
technical support services to electric utilities, industrial facilities,
commercial businesses and government agencies. Commercial waste processing
operations are provided primarily at the Company's Bear Creek low-level
radioactive waste processing facility located in Oak Ridge, Tennessee. The
Company also provides on-site waste processing services on large government
projects for the United States Department of Energy ("DOE"). 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.
On June 30, 1999, the Company acquired 100% of the outstanding capital
stock of Frank W. Hake Associates, LLC ("Hake") from HakeTenn, Inc., a Delaware
corporation and an affiliate of the Hake Group of Philadelphia, Pennsylvania,
and two individuals for $12.9 million in cash, subject to a post-closing
adjustment, and the assumption of certain liabilities. Hake is a specialist in
storage, transportation handling and processing of radioactive waste emanating
from nuclear power generation plants throughout the United States. Hake also
stores and services power generation equipment at its licensed facility in
Memphis, Tennessee. The acquisition was accounted for under the purchase method
of accounting and, accordingly, the Company's results of operations for the year
ended December 31, 1999 reflect the operating results of Hake from the date of
the acquisition. In addition, the Company's results of operations for the year
ended December 31, 1999 reflect the operating results of DuraTherm, Inc.
("DuraTherm"), which was sold by the Company on February 7, 2000.
The following sets forth certain consolidated statement of operations
information as a percentage of revenues for the years ended December 31:
1997 1998 1999
---------- --------- ---------
Revenues 100.0% 100.0% 100.0%
Loss on M-Area contract (5.3) (1.1) --
Other costs of revenues (83.2) (76.1) (72.6)
---------- --------- ---------
Gross profit 11.5 22.8 27.4
Selling, general and administrative
expenses (11.5) (16.6) (15.6)
Charge for asset impairment -- (5.8) --
---------- --------- ---------
Income from operations --% 0.4% 11.8%
========== ========= =========
23
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1999.
Revenues increased by $16.9 million, or 10.5%, from $160.3 million in
1998 to $177.2 million in 1999. The increase was primarily attributable to a
$9.5 million increase in commercial waste processing services at the Company's
waste processing facilities located in Tennessee (which includes the Bear Creek
Operations facility and Hake), a $5.1 million increase in waste processing
revenues at the Company's DuraTherm hazardous waste treatment facility located
in San Leon, Texas, and a $5.6 million increase in government waste processing
services, offset by a $3.3 million decrease in technical support service
revenues. The increase in revenues at the Tennessee waste processing facilities
was primarily the result of increased waste processing during 1999 as compared
to 1998, and to a lesser extent to the acquisition of Hake which generated
revenue of $3.4 million during the second half of 1999. Revenues from DuraTherm
increased as a result of increased waste processing during 1999 as compared to
the prior year. The increase in government waste processing services was
primarily the result of more work performed on the Hanford River Protection
Project and the Idaho Advanced Mixed Waste Treatment Project during 1999 as
compared to 1998. The decrease in technical support service revenues was
primarily attributable to a decrease in consulting services in 1999 as compared
to the prior year.
Gross profit increased by $12.0 million, or 32.9%, from $36.5 million
in 1998 to $48.5 million in 1999. As a percentage of revenues, gross profit
increased from 22.8% in 1998 to 27.4% in 1999. The Tennessee waste processing
facilities, government waste processing and DuraTherm accounted for increases in
gross profit of $5.4 million, $5.0 million and $1.8 million, respectively. The
increases were slightly offset by a $200,000 decrease in gross profit from
technical support services. The increase in gross profit at both the Tennessee
and DuraTherm waste processing facilities was primarily the result of increased
waste processing over the prior year as well as the continued efforts to reduce
fixed and variable operating costs. The increase in gross profit from government
waste processing was the result of the increase in revenues from the Hanford
River Protection Project and the Idaho Advanced Mixed Waste Treatment Project
contracts. In addition, the loss recorded on the M-Area project at the DOE's
Savannah River site of $1.8 million in 1998 also contributed to this increase.
The M-Area project was completed in 1999. The decrease in gross profit from
technical support services was the result of the decrease in consulting service
revenues described above.
Selling, general and administrative expenses increased by $1.1 million,
or 4.2%, from $26.6 million in 1998 to $27.7 million in 1999. As a percentage of
revenues, selling, general and administrative expenses decreased from 16.6% in
1998 to 15.6% in 1999. The increase in selling, general and administrative
expenses was primarily attributable to higher operating costs for the Bear Creek
facility and government waste processing services as a result of business growth
in these areas.
Interest expense, net increased by $1.8 million from 1998 to 1999. The
increase was the result of increased borrowings to fund working capital needs
and the acquisition of Hake.
Income taxes increased by $6.2 million from 1998 to 1999 as a result of
the significant increase in income before income taxes. The Company's effective
tax rate for 1999 was 37.1%. During 1999, the Company reversed $256,000 of
valuation allowances previously established for certain state net operating
losses and other deductible temporary differences.
24
Proportionate share of losses by joint ventures decreased from
$1,474,000 in 1998 to $122,000 in 1999. The decrease in the loss relates
principally to the 1998 charge, net of tax benefits, taken by the Company for
the proportionate share of its 45% owned joint venture, DuraChem, which adopted
Statement of Position 98-5 "Reporting on Costs of Start-up Activities" (SOP
98-5), which requires start-up costs to be expensed as incurred. The Company's
proportionate share in the loss of its 50% owned joint venture, Vitritek,
decreased from $200,000 in 1998 to $122,000 in 1999. The Company expects
Vitritek to have limited operations in 2000.
In the fourth quarter of 1998, the Company also adopted the provisions
of SOP 98-5. The cumulative, after tax effect of adoption was $420,000. The
adoption of SOP 98-5 by DuraChem and the Company reduced the Company's loss
before proportionate share of losses by joint ventures by approximately $78,000,
increased the net loss before cumulative effect of a change in accounting
principle by approximately $1.2 million, increased the net loss by approximately
$1.6 million, increased the per share net loss attributable to common
stockholders before cumulative effect of a change in accounting principle by
$0.09 per share and increased the per share net loss attributable to common
stockholders by $0.12 per share.
The Company's net income increased by $13.9 million from a loss of $2.4
million in 1998 to income of $11.5 million in 1999. Results for 1998 were
adversely impacted by the after-tax losses on the M-Area contract and related
asset impairment charge of approximately $6.6 million and the adoption of SOP
98-5 of approximately $1.6 million. Excluding the impact of the M-Area charges
and the adoption of SOP 98-5 on the Company's 1998 results, the Company's 1999
net income increased by approximately $5.7 million, or 98%, over the prior year.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1998.
Revenues increased by $23.7 million, or 17.4%, from $136.6 million in
1997 to $160.3 million in 1998. The increase was primarily attributable to a
$15.6 million increase in government waste processing services, a $4.4 million
increase in commercial waste processing services at the Company's Bear Creek
low-level radioactive waste processing facility located in Oak Ridge, Tennessee,
a $2.8 million increase in technical support service revenues, and a $900,000
increase in waste processing revenues at the Company's DuraTherm hazardous waste
treatment facility located in San Leon, Texas. The increase in revenues in
government waste processing services was primarily the result of work performed
on the Hanford Tank Waste Remediation System contract awarded by BNFL to build
and operate a pilot melter at the Company's Columbia, Maryland headquarters and
performance on a project at Idaho Falls, Idaho. The increase in revenues at the
Bear Creek facility was primarily the result of increased waste processing
during 1998 as compared to 1997. The increase in revenues from technical support
services was primarily the result of more work performed on site decontamination
and decommissioning contracts and an increase in revenues from radiological
engineering services. Revenues from DuraTherm increased as a result of increased
waste processing during 1998 as compared to 1997.
In March 1997, the Company decided to temporarily suspend processing of
radioactive waste and initiate an unscheduled controlled cool down of its glass
melter at its M-Area processing plant located at the DOE's Savannah River site.
After an extensive inspection of the condition of the melter at the Savannah
River site, the Company's management made the decision to undertake more
extensive repairs and modification of the facility, including melter box
replacement, before resumption of radioactive waste processing. The
modifications were made so that the Company could more efficiently meet its
obligations under the existing contract as well as prepare the facility for
additional waste streams. The M-Area facility resumed radioactive waste
processing operations during the fourth quarter of 1997. As a result of the
necessary repairs and the delay in completing the waste processing required by
the contract, the Company recorded losses of $7.2 million on the M-Area contract
in 1997 which included the estimated costs of repairs to the melter and
estimated losses to complete the fixed price contract. During 1998, the Company
recorded a
25
$1.8 million charge for additional costs to be incurred to complete and close
out the contract. As of February 1999, the Company successfully completed the
contract to vitrify 660,000 gallons of mixed waste sludge at the DOE's Savannah
River Site.
As part of the M-Area contract, the Company constructed a $9.2 million
fixed facility at the DOE's Savannah River Site. This facility is capable of
processing additional waste streams present at this site and the melter
potentially has years of additional life. As a result of a change in the site's
waste treatment priorities at the site, no additional waste processing contracts
were awarded to the Company. Therefore, the Company recorded a one-time asset
impairment charge of $9.2 million in 1998 to write off the Company's remaining
investment in this facility.
Gross profit increased by $20.7 million, or 131.7%, from $15.7 million
in 1997 to $36.4 million in 1998. Government waste processing services and the
Bear Creek facility accounted for increases in gross profit of $8.7 and $6.7
million, respectively. Additionally, technical support services and the
DuraTherm facility accounted for increases in gross profit of $4.5 million and
$800,000 respectively. The increase in gross profit from government waste
processing principally relates to the loss recorded on the M-Area project in
1997 and the increase in gross profit in 1998 from government waste processing
attributable to the increase in revenues from the Hanford Tank Waste Remediation
System contract and performance on the project at Idaho Falls, Idaho previously
mentioned. The increase in gross profit at the Bear Creek facility was the
result of increased waste processing over the prior year in addition to measures
taken in the third quarter to reduce fixed and variable operating costs. The
increase in gross profit from technical support services was the result of a
shift in mix toward performance on higher margin site decontamination and
decommissioning contracts and radiological engineering services. The increase in
gross profit at the DuraTherm facility was the result of increased waste
processing over the prior year in addition to the Company's continued efforts to
reduce fixed and variable operating costs. As a percentage of revenues, gross
profit increased from 11.5% in 1997 to 22.8% in 1998 for the reasons previously
mentioned.
Selling, general and administrative expenses increased by $10.9
million, or 69.2%, from $15.7 million in 1997 to $26.6 million in 1998. As a
percentage of revenues, selling, general and administrative expenses increased
from 11.5% in 1997 to 16.6% in 1998. The increase in selling, general and
administrative expenses was primarily attributable to the operations of SEG,
which was acquired by the Company effective April 1, 1997, higher than expected
costs incurred on proposals for two major commercial nuclear power plant
decommissioning projects, severance charges associated with the re-engineering
of the processing methods at the Bear Creek facility, and higher operating costs
for government waste processing services as a result of business growth in this
area.
Interest income (expense), net changed from income of $571,000 in 1997
to an expense of $545,000 in 1998. The change was the result of the decrease in
cash due to the purchase of SEG in April of 1997 and interest on short-term
borrowings required to fund working capital needs.
Income tax expense was $716,000 in 1997 and $627,000 in 1998. The
effective tax rate for 1997 and 1998 was adversely impacted by state income
taxes on income in certain states which could not be offset by losses in others
and a valuation allowance established with respect to a portion of the Company's
decontamination and decommissioning accruals.
Proportionate share of losses by joint ventures increased from $150,000
in 1997 to $1,474,000 in 1998. The increase in the loss relates principally to
the charge, net of tax benefits, taken by the Company for the proportionate
share of its 45% owned joint venture, DuraChem, which adopted SOP 98-5. The
Company's proportionate share in the loss of its 50% owned joint venture,
Vitritek, increased from $150,000 in 1997 to $200,000 in 1998.
26
The Company's net loss increased by $2.1 million from a loss of
$281,000 in 1997 to a loss of $2.4 million in 1998. Results for 1998 were
adversely impacted by the after-tax losses on the M-Area contract and related
assets impairment charge of approximately $6.6 million and the adoption of SOP
98-5 of approximately $1.6 million.
LIQUIDITY AND CAPITAL RESOURCES
During 1999, the Company generated $10.0 million in cash flows from
operating activities. The Company's cash flow from operating activities was
generated by income from operations before depreciation and amortization of
$26.4 million less cash interest expenses of $1.7 million, cash payments for
income taxes of $4.1 million and the increased investment in working capital of
$10.6 million.
During 1999, the Company used approximately $24.2 million in cash flows
for investing activities of including approximately $13.1 million used for the
acquisition of Hake and $8.8 million used for purchases of plant and equipment.
Cash flows used in investing activities were funded by the $10.0
million provided by operating activities, $8.3 million in cash from financing
activities and $5.9 million of cash. Cash flows from financing activities
included $17.2 million of long-term borrowings, net of repayments, and $1.8
million from the exercise of common stock options. During 1999, the Company also
purchased 1,036,700 shares of its common stock for $6.3 million.
The Company has a backlog of orders of approximately $217.1 million at
December 31, 1999, of which approximately $121.5 million is expected to be
completed in 2000.
The Company has a $60 million bank credit facility which includes (i) a
$35 million revolving line of credit, based on eligible accounts receivable (as
defined in the credit agreement), to fund working capital requirements, (ii) a
$20 million line of credit to finance acquisitions or stock repurchases, and
(iii) a $5 million line of credit to finance up to 75% of new equipment
purchases. Substantially all of the Company's assets, excluding real property
and inventory, have been pledged as collateral. Borrowings outstanding under the
revolving line of credit bear interest at either the bank's base rate, as
defined, plus .5% (9.00% at December 31, 1999), or the London Interbank Offered
Rate (LIBOR) plus 1.75% (7.94% at December 31, 1999). The credit facility has a
five-year term. At December 31, 1999, total borrowings of $26.2 million were
outstanding under the facility and the Company had available borrowings of $26.0
million to fund working capital needs.
In February 2000, the Company completed the sale of its 80% interest in
DuraTherm, Inc. to DuraTherm Group, Inc. for $8.0 million in cash and a
subordinated note for $355,000. Proceeds to the Company of $8.0 million were
used by the Company to pay down borrowings under its bank credit facility. The
note receivables bears interest at 14%, payable semi-annually during the first
year following the sale, and 18% during the second year following the sale, with
the principal due in February 2002. The Company estimates that it will recognize
a pre-tax gain of approximately $1.5 million on the sale.
The Company believes cash flows from operations, proceeds from the sale
of DuraTherm and, if necessary, borrowings available under the credit facility
will be sufficient to meet its operating needs, including the quarterly
preferred dividend requirement of $320,000 for at least the next twelve months.
27
NEW ACCOUNTING PRONOUNCEMENTS
During 2001, the Company will adopt the provisions of Statements of
Financial Accounting Standards No. 133 Accounting for Derivative Instruments and
Hedging Activities. The Company does not expect that the new pronouncement will
have a material effect on the Company's financial condition or results of
operations.
INFORMATION SYSTEMS AND THE IMPACT OF THE YEAR 2000 ISSUE
During 1999, the Company executed a program to address the Year 2000
issue with respect to (i) the Company's information systems, (ii) the Company's
non-information systems, and (iii) certain systems for the Company's major
customers and suppliers. The Company has not experienced any disruptions in
operations as a result of the Year 2000 issue. Management will continue to
monitor its information systems and those of its significant customers and
vendors throughout 2000.
FORWARD LOOKING INFORMATION
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