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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20552
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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, 1995
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For transition period from to
Commission File Number 0-14292
_______GTS DURATEK, INC._______
(Exact name of registrant as specified in its charter)
DELAWARE 22-2476180
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number
8944 GUILFORD ROAD, SUITE 200, COLUMBIA, 21046
MARYLAND
(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
(Title of class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
/ / Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
/ / As of March 18, 1996, 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 $70,282,498 based on the average closing price
of the Common Stock as reported on Nasdaq Stock Market's National Market on
March 18, 1996. 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 18, 1996
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Common Stock, par value $0.01 per share 9,585,653 shares
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Documents Incorporated by Reference:
Part III - Proxy Statement for 1996 Annual Meeting of Stockholders
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FORM 10-K CROSS-REFERENCE SHEET
PAGE
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PART I
Item 1. Business......................................................................................... 1
Item 2. Properties....................................................................................... 16
Item 3. Legal Proceedings................................................................................ 16
Item 4. Submission of Matters to a Vote of Security Holders.............................................. 16
Executive Officers of Registrant......................................................................... 17
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............................ 18
Item 6. Selected Financial Data.......................................................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 20
Item 8. Financial Statements and Supplementary Data...................................................... 24
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............. 39
PART III
Item 10. Directors and Executive Officers of the Registrant*............................................. 39
Item 11. Executive Compensation*......................................................................... 39
Item 12. Security Ownership of Certain Beneficial Owners and Management*................................. 39
Item 13. Certain Relationships and Related Transactions*................................................. 39
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................. 39
Signatures................................................................................................. 42
* Incorporated by reference from registrant's definitive Proxy Statement for the
Annual Meeting of Stockholders to be held May 15, 1996 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.
i
PART I
ITEM 1. BUSINESS
OVERVIEW
GTS Duratek provides waste treatment solutions for radioactive, hazardous,
mixed and other wastes. The Company's strategy is (i) to provide the low cost
solution to process contaminated waste streams, (ii) to combine its proprietary
technologies and technical support services to provide full-service waste
treatment, and (iii) to team, where appropriate, with other companies with
complementary expertise to advance GTS Duratek's treatment solutions within its
target markets and into new markets. The Company's vitrification, thermal
desorption and ion exchange technologies convert waste to stable forms for
storage or disposal while achieving significant volume reduction. Accordingly,
the Company believes its customers benefit from significant cost savings as
compared to other commercially-available alternatives. To implement its waste
treatment technologies and provide related technical support services, the
Company has a staff of highly skilled personnel with significant environmental
services experience.
The Company's waste treatment technologies include vitrification, thermal
desorption and ion exchange and can be used independently or in tandem to solve
the waste disposal or storage problems of its customers. The Company's
vitrification technology converts waste to environmentally stable,
leach-resistant glass through a patented high-temperature melter system, known
as a DuraMelter-TM-. The thermal desorption and ion exchange technologies are
used by the Company to treat petrochemical and liquid radioactive waste streams,
respectively, and can be used to separate the waste streams into components that
can either be safely stored, recycled or used as additives in the vitrification
of other waste streams. The Company's ability to integrate its waste treatment
technologies enables it to handle a diversity of waste streams in a
cost-effective manner.
The Company has over 450 engineers, consultants and technicians who support
and complement its waste treatment and stabilization services and also provides
highly specialized technical support services for the Company's customers. The
technical support services provide a consistent source of revenue and the
complementary expertise for the Company to expand and diversify its waste
treatment technologies. The services provided by the Company include staff
augmentation and outage support, principally to assist nuclear power plants
during regular maintenance shutdowns, environmental and computer consulting and
environmental safety training. Having these technical resources available has
enabled the Company to move its technologies from bench-scale laboratory testing
to field operations and commercial application more rapidly and to handle larger
scope waste cleanup projects.
The Company has developed the following important joint venture and
collaborative arrangements in order to advance the commercialization of its
waste treatment technologies and increase the number of markets that it serves:
- 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.
- CHEM-NUCLEAR SYSTEMS, INC. ("Chem-Nuclear"). In September 1994, the
Company established a joint venture with Chem-Nuclear, a subsidiary of WMX
Technologies, Inc., to jointly pursue the treatment and disposal of
commercial low-level radioactive waste generated by nuclear power plants,
hospitals, research laboratories and industrial facilities. The joint
venture combines the Company's DOE vitrification experience with
Chem-Nuclear's 22 years of experience in providing radioactive waste
services.
- BNFL, INC. ("BNFL"). In November 1995, the Company formed a strategic
alliance with BNFL to jointly pursue up to five major DOE waste treatment
projects. BNFL is the U.S. subsidiary of British Nuclear Fuels plc, one of
the largest processors of radioactive waste in the world.
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- THE CARLYLE GROUP ("Carlyle"). In January 1995, Carlyle, a Washington,
D.C.-based private merchant bank, made a significant investment in the
Company. Carlyle provided the Company with strong financial support and
experience with companies that contract with the federal government.
The Company seeks to utilize the complementary technical expertise or commercial
experience of the other parties in these collaborative arrangements and, where
possible, to develop additional collaborative arrangements, to pursue its
primary markets and expand into new markets.
PROPRIETARY WASTE TREATMENT TECHNOLOGIES
The Company has developed several waste treatment technologies for use on a
variety of radioactive, hazardous, mixed and other waste streams. The Company's
existing waste treatment technologies include vitrification, thermal desorption
and ion exchange and can be used independently or in tandem to solve the waste
disposal or storage problems of its customers. The following is a brief summary
of the Company's waste treatment technologies.
VITRIFICATION
GTS Duratek's vitrification technology involves combining radioactive,
hazardous, mixed and other waste with glass-forming additives in a high
temperature melter, known as a DuraMelter-TM-, that reaches temperatures of
1150 DEG.C to 1450 DEG.C (or 2100 DEG.F to 2640 DEG.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 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 DEG.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 DEG.C. Within the DuraMelter-TM-, water evaporates
and organic substances are oxidized forming simple gases which are channeled
into the patented off-gas treatment system. The inorganic radioactive or
hazardous substances in the waste are dissolved into the molten glass mixture.
The molten glass exits through a side opening near the floor of the melting
cavity and, depending upon the characteristics of the waste stream, is either
discharged in bulk or directed into the proprietary GTS Duratek gem machine
where it forms into beads, 1 to 2 centimeters in diameter, for long-term
storage. As the beads of molten mixture cool, the inorganic radioactive or
hazardous substances become chemically bonded or "locked" into the molecular
structure of the glass.
DuraMelters-TM- range in size from small bench-scale units used for testing
and characterization of waste streams to commercial sized melters designed for
large waste treatment and remediation projects. Currently, the Company's largest
commercial operating DuraMelters-TM- can process up to approximately 400 cubic
feet of waste per day. The design of the DuraMelter-TM- can be modified
depending upon the characteristics of the waste stream to be processed. To
process waste streams that have a higher content of soil or sand, the Company
has designed a DuraMelter-TM- with higher temperature capability (up to
1450 DEG.C or 2640 DEG.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.
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THERMAL DESORPTION TECHNOLOGY
The Company's thermal desorption technology separates hazardous wastes into
more stable waste components that can either be safely stored, recycled or used
as additives in the processing of other waste streams. The overall result is a
reduction in the costs of treating and disposing of such wastes. In this
process, hydrocarbon sludges and cakes are placed in a thermal desorber which
utilizes temperatures in excess of 635 DEG.C (or 1175 DEG.F) to separate the
waste into four components. The components include solids which meet universal
treatment standards land disposal restrictions, water amenable to low-cost
conventional waste water treatment or deep well disposal, reusable oil and
noncondensable gases. The Company's thermal desorption technology will initially
be used at its DuraTherm facility in San Leon, Texas for the processing of high
solid content petroleum refinery and petrochemical manufacturing wastes. The
high temperature thermal desorption process is protected by three patents
exclusively licensed by the Company. See "Business -- Status of Current and
Potential Waste Treatment Projects -- DuraTherm Facility in San Leon, Texas."
ION EXCHANGE
The Company manufactures and supplies highly specialized waste water
purification systems and patented ion exchange media, known as
DURASIL-Registered Trademark-, for commercial nuclear power plants, DOE
facilities and industrial clients. DURASIL-Registered Trademark- 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-Registered Trademark- also has physical
characteristics that enable it to endure extreme waste water processing
conditions. It is mechanically stable and nonflammable, does not shrink or
swell, is virtually immune to radiation damage and has no effect on the pH of
the waste stream. The Company has developed different
DURASIL-Registered Trademark- ion exchange media depending on the
characteristics of the liquid waste stream. To complement its line of
DURASIL-Registered Trademark- ion exchange media, the Company also developed the
DURA C-TM- line of activated carbons which are high capacity, specialty
filtration media designed for treatment of water containing mixed waste.
The Company utilizes its proprietary ion exchange technology and its
abilities in designing and implementing waste water treatment systems to solve
the liquid waste treatment and disposal problems of its customers. At the DOE
site in Fernald, Ohio, the Company studied liquid samples from waste streams and
conducted bench-scale evaluations of its DURASIL-Registered Trademark- and other
nonproprietary ion exchange media in conjunction with various other treatment
methods. After successful completion of the first phase of the project, the
Company was awarded the second phase in which it designed, constructed and
operated a demonstration unit on site at Fernald. In addition, the Company
designed, constructed and operated a waste water treatment system for mixed
waste for Martin Marrieta Energy Systems, Inc. at its Oak Ridge Facility and
designed and built three waste water cleanup systems for the Taiwan Power
Company's Kuosheng Nuclear Power Plant. In February 1995, the Company was
awarded an $800,000 subcontract by WSRC to provide ion exchange water treatment
services at the DOE's Savannah River site.
STATUS OF CURRENT AND POTENTIAL WASTE TREATMENT PROJECTS
The Company has completed, is currently involved in or is bidding on several
vitrification projects for the DOE through subcontracts with DOE site managers
and in the application of its waste treatment technologies to the
commercially-generated low-level radioactive waste and hazardous waste markets.
The following is a summary of the status of several of the Company's major waste
treatment projects.
SAVANNAH RIVER M-AREA PROJECT
The DOE's Savannah River site near Aiken, South Carolina has approximately
18.7 million cubic feet in total currently stored inventory and twenty years'
projected volume of low-level radioactive
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and mixed wastes. This represents about 31% of all of such wastes throughout the
DOE weapons facilities. The Savannah River site is the largest single repository
of low-level radioactive and mixed wastes among all DOE sites.
In November 1993, the Company was awarded a subcontract by the site
management and operations contractor, WSRC, to vitrify 90,000 cubic feet of
low-level mixed waste sludge stored in the M-Area tanks at Savannah River. GTS
Duratek's subcontract represents only 0.5% of the total mixed waste inventoried
at Savannah River. The Company's obligations under this subcontract entail
vitrifying the waste and performing ancillary services related to the handling
of the waste, including removal of the radioactive sludges from the storage
tanks, cleanup and decontamination of the storage tanks and placement of the
containers of the glass waste in a secure storage area. The project is expected
to take approximately three years to complete.
Construction of the melter began in July 1995 and was completed on January
10, 1996. The Company designed and constructed the DuraMelter-TM- and will serve
as the operator. WSRC began an operational readiness assessment of the facility
in January 1996 which will allow the Company to begin operation of the
DuraMelter-TM- upon completion of a short testing period using non-radioactive,
simulated waste material. The M-Area contract represents the first
"privatization" type contract entered into by the DOE for waste cleanup at its
facilities. Pursuant to this contract, the Company will own and operate the
DuraMelter-TM- under its subcontract with WSRC. The Company believes that the
DOE will enter into more of these privatization arrangements with commercial
vendors and that the Company's contract at Savannah River has been extensively
used as a model for contemplated future privatized DOE waste cleanup projects.
FERNALD MAWS PROJECT
The Company's first vitrification project, which began in 1991, was the
Minimum Additive Waste Stabilization ("MAWS") project at the DOE's Fernald
Environmental Management Project near Cincinnati, Ohio under a subcontract with
Argonne National Laboratories. The MAWS project involved the Company's
demonstration of minimum additive waste vitrification, or blending waste streams
of varying chemical and physical characteristics in a melter and exploiting the
natural glass-forming properties of each component waste. The Company believes
that the application of the MAWS concept to future waste treatment projects will
result in much lower operating costs and achieve significant volume reduction by
producing glass that is almost entirely composed of waste materials. GTS Duratek
designed, constructed and operated a DuraMelter-TM- vitrification facility at
Fernald and began processing simulated wastes in September 1993 and actual
Fernald mixed radioactive wastes in July 1994 in accordance with its subcontract
with Argonne National Laboratories. Through the MAWS project, the Company became
the first in the country to process mixed waste at a DOE facility. Through MAWS
and an additional related project, the Company gained extensive knowledge of
waste streams at the DOE's facilities, which the Company believes provides it
with a competitive advantage in procuring future subcontracts for DOE projects.
FERNALD K-65 PROJECT
In September 1994, FERMCO awarded the Company a subcontract to design a
DuraMelter-TM- to vitrify the sludge in the K-65 silos at Fernald. The sludge in
the K-65 silos contains substantial amounts of radon, lead, nickel, phosphates,
nitrates and sulfates.
The initial K-65 subcontract called for the Company to provide a pilot-scale
melter and associated gem machine capable of processing up to three tons per day
of the K-65 silo waste. With GTS Duratek's assistance, FERMCO began assembly of
the DuraMelter-TM- at Fernald in July 1995 and completed construction at the end
of 1995. The Company is advising FERMCO during construction tests and will
provide consulting support for the startup of the melter. FERMCO, the site
environmental restoration management contractor, will own and operate the
DuraMelter-TM-. Although the Company has substantially completed its obligations
under the initial subcontract for the pilot-scale melter, the unit will process
only a small fraction of the radioactive waste contained in the K-65 silos at
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Fernald. FERMCO recently awarded the Company a new subcontract to develop the
process chemistry for the operation of a pilot-scale vitrification system.
FERMCO plans to build a vitrification system five times the size of the
pilot-scale vitrification system for the cleanup of the K-65 waste and has
issued an expression of interest to identify companies, like GTS Duratek,
capable of designing and constructing such a vitrification system.
HANFORD TANK WASTE REMEDIATION SYSTEM PROJECT
The Hanford, Washington site is the single largest DOE facility and contains
the largest amount of high-level radioactive waste in the United States. Hanford
contains approximately 61 million gallons of high-level radioactive waste and
spent nuclear fuel which is contained in 177 underground storage tanks. The DOE
has recently released a request for proposals ("RFP") for the cleanup of this
waste. According to estimates prepared by the DOE, the cleanup project at
Hanford could take at least 20 years and cost over $40 billion. Under a
tri-party agreement among the DOE, the EPA and the Washington State Department
of Ecology, vitrification has been selected as the preferred method to stabilize
the contaminated wastes at Hanford.
The final RFP for Phase I of the project was released in February 1996 with
the DOE expected to award contracts for Phase I around August 1996. According to
the RFP, the first part of Phase I involves a 16 month developmental period to
establish technical and operational elements of the privatized facilities. The
second part of Phase I involves parallel vitrification test demonstrations that
will treat about 6% to 13% of the Hanford tank waste by the year 2004. The RFP
indicates that the DOE will select at least two contractor teams to perform the
Phase I vitrification tests. Each team will be responsible for vitrifying
between one and two million gallons of the Hanford waste with one team
vitrifying both high-level and low-level radioactive wastes and the other team
storing high-level radioactive wastes and vitrifying low-level radioactive
wastes. The Phase I portion of the project will conclude with a decontamination
and decommissioning of the cleaned tanks, followed by RCRA closure and site
decontamination, all of which is expected to last an additional two years. Phase
II of the cleanup of the Hanford tank waste is not expected to start until 2004.
The Company has agreed to jointly pursue the Hanford project with BNFL. See
"Joint Venture and Collaborative Arrangements -- BNFL."
IDAHO ADVANCED MIXED WASTE TREATMENT PROJECT
The Company and BNFL have also recently agreed to exclusively team on the
DOE's advanced mixed waste treatment project in Idaho. The DOE has recently
issued an RFP for this project and is expected to award contracts by October
1996. The DOE is required, under an agreement with the State of Idaho, to begin
processing the mixed waste on site by 2003 and to have the waste removed from
the State of Idaho by no later than 2018. There is an estimated 2.3 million
cubic feet of inventoried and non-inventoried waste and an additional 1.4
million cubic feet of contaminated soil that may require processing. This waste
is currently being stored in drums and crates in buildings and in earthen berms.
See "Joint Venture and Collaborative Arrangements -- BNFL."
DURACHEM FACILITY IN BARNWELL, SOUTH CAROLINA
As part of the DuraChem joint venture, the Company and Chem-Nuclear
constructed a vitrification facility at Chem-Nuclear's radioactive waste
processing center at Barnwell, South Carolina. During 1995, the Company designed
and constructed a new DuraMelter-TM- at the facility and will be responsible for
the vitrification operations. The facility was granted its initial operating
permit in November 1995. Chem-Nuclear manages the overall facility and is
responsible for procuring all required operating permits, obtaining the
low-level radioactive waste from its customers, transporting the waste to the
facility and removing the waste for ultimate disposal once it has been
vitrified. Through the DuraChem joint venture, GTS Duratek has become the first
company in the United States to convert commercially generated low-level
radioactive waste to glass. See "Joint Venture and Collaborative Arrangements --
DuraChem."
DuraChem's Barnwell facility will process contaminated filtration and ion
exchange resins from nuclear power plants and contaminated wastes from hospitals
and laboratories. In initial test runs on
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contaminated nuclear power plant resins, the DuraMelter-TM- achieved significant
waste volume reductions of up to 97%. On other types of wastes, the Company
believes that it will be able to achieve volume reductions of 93% or better. The
DuraChem facility is located adjacent to the Barnwell landfill, one of the few
facilities in the United States permitted to accept commercially-generated
low-level radioactive waste. Over the last 15 years, no new radioactive waste
storage sites have been built or licensed in the United States. 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.
DURATHERM FACILITY IN SAN LEON, TEXAS
The Company acquired an 80% interest in BEGCI, since renamed DuraTherm, on
November 30, 1995. DuraTherm is a RCRA Part B-permitted hazardous waste
recycling center located in San Leon, Texas which uses a patented thermal
desorption technology to treat and produce recyclable materials from hazardous
oil refinery and petrochemical plant sludges. The Company purchased the 80%
interest for one dollar from a subsidiary of Bird Corporation and agreed with
the remaining stockholders to invest up to $5.1 million for capital improvements
and working capital for the facility. The 20% minority interest is owned by the
operators of the DuraTherm facility, each of which has entered into an
employment agreement providing for incentive compensation tied directly to the
financial performance of the facility. Operations at the facility have been
suspended until completion of the capital improvements. The Company expects to
complete the capital improvements and resume operations in the second quarter of
1996.
DuraTherm has a patented thermal desorption process that removes volatile
gases and recovers oil from contaminated sludges generated by oil refineries and
processing operations. The oil recovered can be recycled. The thermal desorption
process is effective on sludges with a Btu content of between 2,000 and 5,000
per ton. Most incinerators and cement kilns, alternative processing methods,
typically cannot cost-effectively handle sludges with Btu levels within the
effective range for the thermal desorption process. The DuraTherm facility
provides the Company a permitted site to demonstrate and use other technologies
including vitrification and ion exchange.
JOINT VENTURE AND COLLABORATIVE ARRANGEMENTS
In order to commercialize its vitrification technology more rapidly and
cost-effectively, the Company has developed several important joint venture and
collaborative arrangements. The following is a summary of certain of these
relationships.
VSL
The Company has established a research and development relationship with the
VSL of The Catholic University in Washington, D.C. pursuant to which the VSL
provides ongoing research and development capabilities and technical services in
support of the Company's waste cleanup projects. In this complementary
relationship, the VSL provides the necessary technology and research and
development support while the Company advances the technology to commercial
application.
The VSL, a research facility with a staff of 90 researchers, is one of the
leading research centers in the world for glass technology, including
vitrification. The laboratories at the VSL are equipped with highly
sophisticated analytical tools which enable the researchers to perform a
comprehensive array of analyses. The VSL's research and development capabilities
include waste characterization, testing of radioactive waste-loaded glasses to
evaluate glass durability, processability and leachability, glass dissolution
computer modeling, batch melting and the study of ion exchange media for
removing specific contaminants from liquid waste streams. Various DuraMelter-TM-
models have been designed and constructed at the VSL for use by the staff of the
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."
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In addition to being the source of the vitrification technologies used by
the Company, the VSL provides ongoing services to the Company in support of its
waste treatment projects. The VSL conducts expert waste composition and glass
treatability studies before any project is commenced, assists in the initial
test melt phase of each project and works with the Company's engineers in the
design adaptation of the DuraMelter-TM- technology to fit the waste
characteristics of each new cleanup project. In addition, the VSL conducts
ongoing research and development into improvements on the existing vitrification
technologies and into entirely new vitrification techniques, serving in effect
as the research and development arm of the Company. The primary advantage to the
Company from its relationship with the VSL is the access to leading
vitrification technologies and ongoing vitrification research without having to
incur the ongoing overhead and administrative expenses if such capabilities were
in house.
In return, the Company provides ongoing project funding for research
conducted at the VSL on behalf of the Company. During 1994 and 1995, the Company
paid $1.9 million and $789,000, respectively, in research and development
funding to the VSL. For Company waste cleanup projects in which the VSL's
technical services are utilized by the Company, the Company pays the VSL on a
time and expense basis and includes the estimated cost for such services in its
formal bid proposal. The VSL is a not-for-profit institution so it does not
include extra fees or percentage profits in its cost estimates.
BNFL
On November 7, 1995, the Company and BNFL entered into a strategic alliance
agreement. BNFL is the U.S. subsidiary of British Nuclear Fuels plc, a United
Kingdom-based company with annual revenues of approximately $2 billion
worldwide. British Nuclear Fuels plc is one of the largest processors of
radioactive waste in the world and is one of only two companies worldwide with
commercial experience in processing and stabilizing high-level radioactive
wastes. The strategic alliance with BNFL enhances the Company's prospects of
obtaining major DOE waste treatment projects such as Hanford and Idaho and opens
opportunities for international expansion. BNFL has been active in the U.S.
radioactive waste market for the past five years, including being selected as a
member of the team to manage the DOE's nuclear waste facility in Rocky Flats,
Colorado.
Under the terms of the strategic alliance, the Company and BNFL have agreed
to jointly pursue up to five major DOE waste treatment projects, with the first
project being the separation and vitrification of high-level radioactive waste
at the DOE's Hanford, Washington facility. The terms of the strategic alliance
provide that BNFL pays to the Company a fee of $1.0 million each time the two
companies agree to exclusively pursue a waste treatment project. Upon the
execution of the strategic alliance agreement, the Company received the $1.0
million fee for its agreement to pursue the Hanford project exclusively with
BNFL. See "Business -- Status of Current and Potential Waste Treatment Projects
- -- Hanford Tank Waste Remediation System Project," and "-- Idaho Advanced Mixed
Waste Treatment Project."
As part of the strategic alliance, BNFL invested $10.0 million in the
Company in the form of a convertible debenture. The debenture accrues non-cash
interest during the first five years at the one-year London Interbank Offered
Rate (LIBOR) and is convertible at the option of BNFL into 1,381,575 shares of
the Common Stock prior to November 7, 2000. If the debenture is not converted or
extended, the Company must repay principal and interest in installments over the
five year period beginning on November 8, 2000. BNFL also agreed to provide the
Company with research and development funding of at least $500,000 per year over
the next five years. The two parties will mutually agree on how the research and
development funding will be spent, but the Company will retain the rights to the
vitrification processes that it develops through this funding. The Company has
agreed as part of the strategic alliance to sublicense its radioactive waste
vitrification technologies to BNFL for use only in the United Kingdom.
DURACHEM
In September 1994, the Company formed a joint venture with Chem-Nuclear to
design, construct and operate vitrification facilities to process commercial
radioactive waste for disposal, including low-
7
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 22 years of experience in providing radioactive waste
handling and processing services. DuraChem will first pursue the disposal market
for ion exchange resins which are generated by nuclear power plants. The first
vitrification facility of this joint venture is located at Chem-Nuclear's waste
processing center at Barnwell, South Carolina. The need for the services
provided by DuraChem was created by the closure of nationally accessible
low-level radioactive waste disposal sites and the delay by state compacts in
opening new regional sites. The scarcity of disposal capacity has forced
commercial generators of low-level radioactive waste to store their waste at
their facilities until regional sites are opened. See "Business -- Status of
Current and Potential Waste Treatment Projects -- DuraChem Facility in Barnwell,
South Carolina."
VITRITEK
Through a joint venture with Vitritek Holdings Company, L.L.C., ("Vitritek
Holdings") a privately-held entity, the Company has extended its vitrification
technology to non-radioactive wastes. The joint venture entity, called Vitritek,
is 50% owned by each of the Company and Vitritek Holdings. The joint venture,
formed in December 1993, represents the consolidation of co-licensing rights to
non-radioactive vitrification technologies previously acquired by the Company
and Vitritek Holdings. Under the terms of the joint venture arrangement, all
funding requirements and all profits are shared equally.
In November 1994, Vitritek, along with the VSL, completed a demonstration
project for the White House in Washington, D.C. converting approximately one ton
of asbestos-laden construction debris from the White House renovation project
into recyclable glass. Vitritek was awarded its first, and only to date,
commercial subcontract in September 1994 by WSRC to conduct a comparative
vitrification study on asbestos materials at the Savannah River site in order to
determine which of two melting technologies is better suited for converting the
Savannah River asbestos to glass. In the study, the Company conducted parallel
tests using joule-heated and plasma-arc furnaces to vitrify about 25 tons of
asbestos-laden waste material.
TECHNICAL SUPPORT SERVICES
The Company has over 450 engineers, consultants and technicians, some of
whom are full-time employees and the balance of whom are contract employees.
These employees support and complement the Company's waste treatment services
and also provide highly specialized technical support services for the Company's
customers. This business provides a consistent source of revenue and the
necessary complementary expertise for the Company to expand and diversify its
waste treatment technologies business in the future. The primary services
provided by the Company include staff augmentation and outage support,
principally to assist nuclear power plants during regular maintenance shutdowns,
environmental and computer consulting, and environmental safety training. The
Company provides these technical services either as a prime contractor or as a
subcontractor to a diverse group of government agencies, electric utilities,
industrial facilities and commercial businesses including the DOE, Duke Power
Company, New York Power Authority, UNISYS Corporation and WSRC.
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
8
to complete the servicing as quickly and efficiently as possible. The Company's
trained technicians and personnel are experienced in outage support procedures
and are effective at helping to minimize the cost of the power facilities' down
time.
The offering of services for operating nuclear power plants provides a
considerable market for the Company, despite the fact that no new plants have
been ordered in over 10 years. The demand for the Company's services results
from the extensive overhaul required to extend the life of aging plants,
replacement of major components of existing plants, startup of plants recovering
from long-term shutdown, modifications to the plants resulting from changing
legislation and the decommissioning of plants that have reached the end of their
useful lives.
The Company's largest customer for staff augmentation services is Duke Power
Company, which accounted for approximately 23% of the Company's total revenues
in 1994 and 1995. Duke Power currently has seven nuclear power units at three
sites. Under a series of contracts between the Company and Duke Power which
expire between 1997 and 1998, the Company provides a group of technicians to the
Duke Power system year-round and provides additional personnel to Duke Power
during planned maintenance outages. Other nuclear power utilities to which the
Company provides augmentation and outage support services include New York Power
Authority, Tennessee Valley Authority, PECO Energy, Vermont Yankee Power Company
and Southern Nuclear Operating Company.
ENVIRONMENTAL AND COMPUTER CONSULTING SERVICES
The Company provides extensive environmental consulting services to clients
in the areas of environmental remediation, facility decommissioning,
Occupational Safety and Health Act ("OSHA") and EPA compliance audits, site
characterization, licensing and permitting and air quality and emission studies.
The Company either supplies professionals and technical personnel to supplement
client staffs or assumes responsibility for entire projects. Included among the
Company's available personnel for such environmental consulting projects are
chemical, civil and environmental engineers, certified health physicists,
chemists, toxicologists, safety and health experts, regulatory compliance
specialists, remediation experts, radiological control technicians, hazardous
material technicians, decontamination experts and others. The Company also
supplies professionals and technical specialists in a wide range of scientific,
engineering, data processing and communications disciplines. These individuals
perform computer consulting services such as program assessment/ development,
computer software development, quality assurance audits, non-destructive
examination and computer training for a broad base of clients. In January 1996,
GTS Duratek acquired Analytical Resources, Inc., a small environmental
consulting firm that has been involved in many DOE consulting projects. The
Company's management believes that this acquisition adds senior environmental
management and consulting resources to the Company.
ENVIRONMENTAL SAFETY TRAINING
The Company provides radiation protection and hazardous waste training
services nationwide. During 1995, the Company's training specialists prepared
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.
CUSTOMERS
The Company derives revenues related to its proprietary vitrification
technologies principally through subcontracts with a combination of DOE
contractors and subcontractors including WSRC and FERMCO. Revenues derived from
DOE-related subcontracts represented 22.7% and 35.0% of the Company's total
revenues during 1994 and 1995, respectively. The Company provides technical
support services to a diverse group of government agencies, including the DOE,
the DOD, the EPA and state environmental protection agencies, electric
utilities, including Duke Power Company, New York
9
Power Authority, Tennessee Valley Authority, Vermont Yankee Nuclear Power
Corporation, PECO Energy and Southern Nuclear Operating Company, and industrial
facilities and commercial businesses, including UNISYS Corporation. Revenues
from Duke Power, WSRC and FERMCO accounted for approximately, 22.6%, 17.4% and
16.1%, respectively, of the Company's revenues for 1995. The Company has
multiple contracts with Duke Power which expire between 1997 and 1998 and
pursuant to which it provides technical support services and personnel.
SALES AND MARKETING STRATEGY
The Company's operations to date have provided it with extensive knowledge
of DOE and other waste stream composition and the factors that influence the
remediation of those waste streams. The Company's internal sales force uses and
will continue to use that knowledge and operating experience to strengthen the
Company's competitive position when pursuing DOE and other waste remediation
projects. In addition, through its collaborative arrangements, the Company will
seek to utilize complementary technical expertise, marketing resources and
commercial experience of the other parties to develop additional business in its
primary markets, expand its capabilities in handling a greater diversity of
waste streams and replicate its operating model to pursue international markets.
The Company pursues markets where it can be the most cost-effective processor of
the waste due to its technologies, geographical proximity to a waste stream or
government regulation.
In its technical support services business, GTS Duratek will seek to
strengthen its relationships with its large utility customers, such as Duke
Power Company, Tennessee Valley Authority, PECO Energy Services and Southern
Nuclear Operating Company, which are significant contributors to the Company's
total revenues. For its consulting and staff business, the Company is also
pursuing arrangements in which single-nuclear-unit utilities can form users'
alliances with the Company as the sole staff support contractor. These
arrangements would emulate the Company's contracts with large,
multiple-nuclear-plant utilities. The Company is also pursuing opportunities
with utilities that are downsizing and outsourcing service work as well as DOE
sites that are privatizing departments such as training and radiological
controls. To enhance the overall profitability of the technical support services
business, the Company is focusing on increasing market share in environmental
and computer consulting, radiation instrument services and environmental safety
training, all of which generate relatively higher profit margins than staff
augmentation and outage support.
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 AEA and the Energy Reorganization Act of 1974 (the "ERA") authorize the
NRC to regulate the receipt, possession, use and transfer of radioactive
materials, including "source material," "special nuclear material," and
"byproduct material." Pursuant to its authority under the AEA, the NRC has
adopted regulations that address the management and disposal of low-level
radioactive waste and that require the licensing of commercial low-level
radioactive waste disposal sites.
The storage and disposal of high-level nuclear waste are subject to the
requirements of the Nuclear Waste Policy Act, as amended by the Nuclear Waste
Policy Act Amendments. These statutes regulate the disposal of high-level
nuclear waste by establishing procedures and schedules for siting geologic
repositories for such waste. The statutes also direct EPA to promulgate
environmental standards for the disposal of high-level nuclear waste, and
require the NRC to promulgate standards covering the licensing of waste
repositories. The NRC has issued regulations that address the storage and
disposal of high-level nuclear waste.
10
The Uranium Mill Tailings Radiation Control Act ("UMTRCA") and the Uranium
Mill Tailings Remedial Action Amendments Act are intended to protect public
health and the environment from hazards associated with uranium ore milling
wastes at active and inactive uranium mills. UMTRCA designates specific inactive
mill sites for remedial action, and gives the DOE the responsibility for
carrying out remedial actions at these sites.
The locations for future low-level radioactive waste disposal facilities
also may be affected by the Low-Level Radioactive Waste Policy Act of 1980
("LLRWPA") and the Low-Level Radioactive Waste Policy Amendments Act ("LLRWPA
Amendments"). The LLRWPA addresses the siting of new low-level radioactive waste
disposal facilities and establishes that each state is responsible for providing
disposal capacity for most low-level commercial radioactive waste generated
within its borders. The statute also encourages groups of states to enter into
compacts providing for the development and operation of low-level radioactive
waste disposal facilities. Incentives for the formation of interstate compacts,
and the deadlines and procedures which states must meet in designating disposal
facilities were modified by the LLRWPA Amendments. At the present time, no new
radioactive waste disposal facilities have been opened by state compacts and
none are expected to open in the near future.
RCRA provides a comprehensive framework for the regulation of the
generation, transportation, treatment, storage and disposal of hazardous waste.
The intent of RCRA is to control hazardous wastes from the time they are
generated until they are properly recycled or treated and disposed. RCRA
prohibits improper hazardous waste disposal and imposes criminal and civil
liability for failure to comply with its requirements. RCRA requires that
hazardous waste generators, transporters and operators of hazardous waste
treatment, storage and disposal facilities meet strict standards set by
government agencies. In certain circumstances, RCRA also requires operators of
treatment, storage and disposal facilities to obtain and comply with RCRA
permits. The Land Disposal Restrictions developed under the Hazardous and Solid
Waste Amendments of 1984 prohibit land disposal of specified wastes unless these
wastes meet or are treated to meet Best Demonstrated Available Technology
("BDAT") treatment standards, unless certain exemptions apply.
TSCA provides EPA with the authority to regulate over 60,000 commercially
produced chemical substances. EPA may impose requirements involving
manufacturing, record keeping, reporting, importing and exporting. TSCA also
established a comprehensive regulatory program for PCBs which is analogous to
the RCRA program for hazardous waste.
The Clean Water Act establishes standards, permits and procedures for
controlling the discharge of pollutants from industrial and municipal wastewater
sources.
The Clean Air Act of 1970, as amended (the "Clean Air Act"), empowers the
EPA to establish and enforce ambient air quality standards and limits of
emissions of pollutants from facilities. This has resulted in tight control over
emissions from technologies like incineration.
The Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA" or "Superfund"), and subsequent amendments under the
Superfund Amendments and Reauthorization Act ("SARA") impose continuing
liability upon generators of hazardous substances (among other parties) and such
potential liability may significantly affect a generator's decision on how to
dispose of the wastes. The Community Right-to-Know mandate established by SARA
requires full disclosure of all environmental releases to the public and
contributes to public awareness and activism regarding corporate environmental
management issues. To the extent a generator's waste can be reported as being
recycled, potential liability and public pressure can be eliminated or
significantly reduced.
CERCLA and SARA, as implemented by the National Contingency Plan, provide
for the investigation and remediation of sites containing hazardous substances.
The Superfund program's regulations require that any remediation of the
hazardous substances meet applicable and relevant and/or appropriate regulatory
requirements. Superfund's remedy selection process includes a preference for
11
innovative technology. Superfund also establishes strict liability for parties
who generated or transported hazardous substances or owned and operated the
sites containing them. This may create a strong incentive to avoid on-site waste
treatment in favor of utilizing technologies like the Company's waste treatment
technologies, which can, in certain instances, effectively recycle wastes.
The Pollution Prevention Act of 1990 establishes pollution prevention as a
national objective, naming it a primary goal wherever feasible. The Act states
that if pollution cannot be prevented, materials should be recycled in an
environmentally safe manner.
Under the mandate of the Federal Facility Compliance Act ("FFCA"), the DOE
is currently engaged in a program to treat and dispose of the mixed waste
currently stored at its facilities. The FFCA required DOE to develop and comply
with treatment and disposal plans for each of its facilities and charges DOE
with developing treatment and disposal capacity for these wastes where it does
not currently exist. The plans must also address the need to treat and dispose
of mixed wastes generated from the remediation of contaminated DOE sites.
ENVIRONMENTAL LAWS AND REGULATIONS AFFECTING THE USE OF THE COMPANY'S WASTE
TREATMENT TECHNOLOGIES
Pursuant to the mandate of the AEA and the ERA, NRC regulations and guidance
address the classification and management of low-level radioactive waste. The
NRC regulations also govern the technical, monitoring and safety-related aspects
of developing and operating low-level radioactive waste disposal facilities.
Pursuant to its authority under the AEA, the NRC also has established licensing
requirements and operating procedures for such facilities. The NRC requirements
address siting criteria, site stability, the development and implementation of
institutional controls for the facility (e.g., access restrictions,
environmental monitoring and site maintenance), facility operation, closure, and
site stabilization.
Under RCRA, wastes are classified as hazardous either by specific listings
or because they display certain hazardous characteristics. Under current
regulations, waste residues derived from listed hazardous wastes are generally
considered to be hazardous wastes unless they are delisted through a formal
rulemaking process that may last a few months to several years. For this reason,
waste residue that is generated by the treatment of listed hazardous wastes but
which has no beneficial use, including waste treated with the Company's
vitrification technologies, may be considered a hazardous waste without regard
to the fact that this waste residue may be environmentally benign. Subsequent
management of such waste residue would be subject to full RCRA regulation,
including the prohibition against land disposal without treatment in compliance
with BDAT. The RCRA regulation classifying such waste residue as hazardous has
been overturned by the District of Columbia Court of Appeals, but has been
temporarily reinstated until the EPA develops a revised regulatory approach.
Under EPA's proposed Hazardous Waste Identification Rule, listed wastes would
leave the hazardous waste regulatory system if they met specified concentration
limits for hazardous constituents. The Company's ownership and operation of
vitrification facilities also exposes the Company to potential liability for
cleanup of releases of hazardous wastes under RCRA.
If the Company engages in the transportation of radioactive materials it
will be subject to the requirements of the Hazardous Materials Transportation
Act, as amended by the Hazardous Materials Transportation Uniform Safety Act.
Pursuant to these statutes, the United States Department of Transportation
regulates the transportation of hazardous materials, including radioactive
materials, in commerce. Shippers and carriers of radioactive materials must
comply with both the general requirements for hazardous materials transportation
and with specific requirements for the transportation of radioactive materials.
If the Company engages in the storage and disposal of high-level nuclear waste
it may be subject to the Nuclear Waste Policy Act, as amended by the Nuclear
Waste Policy Act Amendments.
CERCLA effectively imposes strict, joint and several liability upon owners
or operators of facilities where a release of hazardous substances has occurred,
upon parties who generated hazardous substances that were released at such
facilities and upon parties who arranged for the transportation
12
of hazardous substances to such facilities. The Company's ownership and
operation of vitrification facilities on-site expose the Company to potential
liability under CERCLA for releases of hazardous substances into the environment
at those sites. In the event that off-site storage or disposal facilities
utilized by the Company for final disposition of the glass and resulting
residues from the Company's vitrification process are targeted for investigation
and cleanup under CERCLA, the Company could incur liability as a generator of
such materials or by virtue of having arranged for their transportation and
disposal. The Company designs its DuraMelters-TM- to minimize the potential for
release of hazardous substances into the environment. In addition, the Company
has developed plans to manage and minimize the risk of CERCLA or RCRA liability,
including the training of operators, use of operational controls and structuring
of its relationships with the entities responsible for the handling of waste
materials and by-products.
The Clean Air Act imposes strict requirements upon owners and operators of
facilities which discharge pollutants into the environment. Although the Company
believes that its proprietary off-gas treatment system effectively traps
particulates and prevents hazardous emissions from being released into the
environment, which releases would violate the Clean Air Act, the Clean Air Act
may require a permit prior to the construction and operation of the Company's
facilities and may require additional controls.
The Clean Water Act establishes standards, permits and procedures for
controlling the discharge of pollutants from industrial and municipal wastewater
sources. The Company believes that DuraMelters-TM- generally will not be subject
to the water pollution control requirements of the Clean Water Act because
DuraMelters-TM- are designed to have no residual wastewater discharge. However,
the Clean Water Act's standards permits and procedures are potentially
applicable to wastewater treatment systems designed by the Company, using its
ion exchange technology.
OSHA provides for the establishment of standards governing workplace safety
and health requirements, including setting permissible exposure levels for
hazardous chemicals which may be present in mixed wastes. The Company is
required to follow OSHA standards, including the preparation of material safety
data sheets, hazardous response training and process safety management. The NRC
has set regulatory standards for exposure to radioactive materials.
To the extent that the Company is engaged in the processing or disposal of
mixed waste, the radioactive components are subject to the NRC regulations
promulgated under the AEA, while the hazardous components of the waste are
regulated by the EPA under RCRA.
Company facilities may have to obtain permits under state laws that
correspond to the Clean Water Act and the Clean Air Act. The necessity to obtain
such permits depends upon the facility's location and the expected emissions
from the facility. Additional state licenses or approvals may also be required.
Operators of hazardous waste treatment, storage and disposal facilities are
required to obtain RCRA Part-B permits from the EPA or from states authorized to
implement the RCRA program. Obtaining such permits is a lengthy and costly
process that requires regulatory inspection and approval of, among other things,
the facility design, equipment and operating plans and procedures. In
addition, applicants for a RCRA permit for a treatment, storage or disposal
facility must submit detailed information regarding all past waste management
practices at that facility and may be required to undertake corrective action
for past contamination of the site. The Company's DuraTherm facility in San
Leon, Texas is a RCRA Part-B permitted facility. The Company has developed
procedures to ensure compliance with RCRA permit provisions at the DuraTherm
facility, including procedures for ensuring appropriate waste acceptance and
scheduling, waste tracking, manifesting and reporting, and employee training.
COMPETITION
The market for the Company's waste treatment technologies is characterized
as the treatment and stabilization of certain radioactive, hazardous, mixed and
other wastes. The Company is aware of
13
some competition from several large companies and numerous small companies. Any
of such companies may possess or develop technologies superior to those of the
Company. While the Company is aware of competition from companies with similar
waste treatment technologies, the primary competition comes from companies which
provide waste treatment and disposal services. The predominant waste treatment
and disposal methods include landfilling, deep-well injection, on-site
containment and incineration or other thermal treatment methods. Competition is
based primarily on cost, regulatory and permit restrictions, technical
performance, dependability and environmental integrity. The Company believes
that it will be able to compete favorably on the basis of these factors. The
Company also believes that it has several competitive advantages over its
competitors including its proprietary vitrification technologies, integrated
approach to waste treatment, demonstrated commercial success of its technologies
and strategic alliances. Many of the Company's competitors have substantially
greater financial and technical resources than the Company and there can be no
assurance that one or more of the Company's competitors do not possess or will
not develop waste treatment technologies that are superior to those of the
Company.
In its technical support services, the Company's competitors range from
major national and regional environmental service and consulting firms which
have large environmental remediation staffs to small local firms. Many of the
major national and regional environmental service and consulting firms have
greater financial, management and marketing resources than the Company. The
availability of skilled technical personnel, quality of performance, safety,
diversity of services and price are the key competitive factors.
RESEARCH AND DEVELOPMENT ACTIVITIES
The Company's research and development activities are conducted primarily by
the VSL for the enhancement of the Company's existing vitrification and ion
exchange technologies or the introduction of new vitrification technologies.
During 1995, 1994 and 1993, research and development activities were conducted
at the VSL under contracts totaling $789,000, $1.9 million and $1.3 million,
respectively. The Company did not incur any additional research and development
costs during those years. In connection with various Company contracts or
subcontracts, the VSL conducts research and development under fixed-price and
cost-plus-fixed fee contracts. Under these contracts, the research is supervised
by Drs. Macedo and Litovitz and all inventions and discoveries are owned by them
and licensed to the Company under the exclusive license agreement. The Company
expects to spend a significant portion of the research and development funding
provided by BNFL with the VSL. See "Business -- Joint Venture and Collaborative
Arrangements -- VSL" and "-- BNFL."
PATENTS AND OTHER INTELLECTUAL PROPERTY RIGHTS
The Company licenses all of the patent and other intellectual property
rights to its proprietary vitrification and other waste treatment technologies
from the inventors of such technologies. Drs. Macedo and Litovitz, the inventors
of the Company's vitrification and ion exchange technologies, license the
patents and proprietary rights to such technologies to the Company under an
exclusive license agreement. Under this agreement, which was renewed in August
1992, Drs. Macedo and Litovitz collectively receive annual royalties equal to
the greater of (i) $100,000 or (ii) 1% to 3% of net revenues, depending on the
level of net revenues, which are generated by the Company from the application
of the licensed technology to encapsulate liquids and solids in porous glass
matrices, remove radioactive and hazardous materials from liquids and stabilize
low-level radioactive or mixed waste. During the three years ended December 31,
1995, the Company paid Drs. Macedo and Litovitz the $100,000 minimum annual
royalty each year. The exclusive license agreement with Drs. Macedo and Litovitz
expires upon the expiration of the last patent covered by the license agreement
which is currently in the year 2012. Drs. Macedo and Litovitz also received
options to purchase 250,000 shares of the Common Stock at the time the exclusive
license was renewed. The exclusive license agreement, which currently
encompasses 22 patents and one patent application, also includes any process
patents or technology rights related to the licensed field which is subsequently
developed by the VSL or Drs. Macedo and Litovitz.
14
Drs. 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.
The rights to the proprietary vitrification technology for the treatment of
non-radioactive hazardous wastes and the treatment of radioactive waste in
Germany are held by Vitritek and are licensed to Vitritek by Drs. Macedo and
Litovitz. Under the terms of this license agreement, the Company's allocable
share of revenues from the joint venture are included within the royalty payment
obligations under the Company's exclusive license agreement with Drs. Macedo and
Litovitz for the vitrification of radioactive and mixed wastes.
The Company also licenses the rights to the thermal desorption technology
used in the processing of petrochemical waste by DuraTherm from the inventor of
such technology. The Company and DuraTherm are co-licensees under the license
agreement and are collectively obligated to pay to the inventor of the
technology an annual royalty payment equal to the greater of (i) $50,000 or (ii)
1.0% of the net revenues generated from the operation of the desorber equipment
(excluding net revenues generated from equipment acquired in the DuraTherm
acquisition) incorporating the technology and 5.0% of the sales of any such
equipment. Once certain aggregate royalty obligations have been satisfied, the
royalty payment structure will be modified. The license agreement grants to the
Company and DuraTherm the exclusive rights to such technology and any
subsequently developed related technology and provides that any subsequently
developed unrelated technology which results from research and development
funded or sponsored by the Company or DuraTherm shall be assigned to such
entities. The license agreement currently covers three patents relating to
thermal desorption, one pending patent and a European patent application.
DuraTherm recently received an attorneys' letter on behalf of a company that
owns certain thermal desorption patent rights. The letter offers to license
these rights to DuraTherm. These attorneys have brought several patent
infringement cases relating to these patents which are currently pending before
federal courts or have been settled upon the execution of license agreements.
Although the letter does not assert patent infringement claims, no assurance can
be given that such claims will not be asserted in the future. Management of the
Company and special patent counsel for the Company have reviewed the matter and
have determined that most of the patents cited in the letter relate to waste
streams containing contaminants that DuraTherm does not process or intend to
process and that no infringement of these patent claims exists. Two patent
claims cited in the letter are so broad as to cover many waste treatment
processes. With respect to these patent claims, GTS Duratek has been advised by
its special patent counsel that it is doubtful whether the scope of these patent
claims can be expanded to cover DuraTherm's process in view, among other things,
of a significant body of prior art. Accordingly, management of the Company
believes that the ultimate outcome of this matter is unlikely to have a material
adverse effect on DuraTherm or on the Company taken as a whole.
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-Registered Trademark- is a registered trademark held by the Company
and DuraMelter-TM- and DuraGem-TM- are common law trademarks.
15
EMPLOYEES
As of December 31, 1995, the Company employed 512 employees, including 403
field-assigned employees performing services for clients, 68 full-time technical
personnel and 41 in finance and administration. The Company contracts with most
of the field-assigned personnel on an as-needed basis and such personnel are not
full-time employees of the Company. Due to the seasonality of the technical
support services business of the Company, the number of field-assigned employees
generally increases to approximately 500 during the fall peak outage season at
the nation's nuclear power plants. To date, the Company has been successful in
attracting and retaining qualified technical personnel, although there can be no
assurance that this success will continue. None of the Company's employees are
subject to a collective bargaining agreement. The Company has never experienced
a work stoppage and believes that its relations with its employees are good.
ITEM 2. PROPERTIES
The Company leases approximately 14,200 square feet of office space in
Columbia, Maryland which it uses as its administration and general corporate
offices. The initial lease term expired in 1995 but has been extended through
November 1996. The Company also leases 2,400 square feet of space in Laurel,
Maryland, which the Company uses as a warehouse for
DURASIL-Registered Trademark- ion exchange media and related equipment, and
4,800 square feet in Pittsburgh, Pennsylvania which houses the Company's
instrument repair and rental facility.
The Company's 80%-owned subsidiary, DuraTherm, owns a RCRA-permitted
hazardous waste recycling center located in San Leon, Texas that was previously
operated by BEGCI. The facility is located on 14.5 acres of land and consists of
a recycling center on 8.5 acres and 4,500 square feet of office and laboratory
space. The facility and the land are owned by DuraTherm.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is a party to litigation or administrative
proceedings relating 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 litigation currently pending against the Company is
unlikely, either individually or in the aggregate, to have a material adverse
effect on the Company's results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
16
EXECUTIVE OFFICERS OF GTS DURATEK AS OF MARCH 15, 1996
The following table sets forth the names of the executive officers of GTS
Duratek, their positions with the Company, and their principal business
experience for the last five years:
NAME AGE POSITION PRINCIPAL BUSINESS EXPERIENCE
- ----------------------- --- --------------------------- -----------------------------------------------------
Daniel A. D'Aniello 49 Chairman of the Board Managing Director, The Carlyle Group since 1987.
of Directors Chairman of the Board of GTS Duratek since January
1995.
Robert E. Prince 48 President, Chief Executive President and Chief Executive Officer of GTS Duratek
Officer and Director since November 1990 and director since 1991; Founder
of General Technical Services, Inc. (GTS) in October
1984; President and Chief Executive Officer of GTS
from 1987 to 1992.
Robert F. Shawver 39 Executive Vice President Executive Vice President of GTS Duratek since May
and Chief Financial Officer 1993; Chief Financial Officer and Chief
Administrative Officer of GTS Duratek since 1987;
Vice President of GTS Duratek from 1987 to 1993.
Craig T. Bartlett 33 Controller and Treasurer Treasurer of GTS Duratek since February 1996;
Controller of GTS Duratek since February 1993;
Director, Financial Operations of GTS Duratek from
1991 to 1993; Assistant Controller of GTS Duratek
from 1988 to 1991.
Diane L. Leviski 35 Vice President, Human Vice President of Human Resources of GTS Duratek
Resources since February 1996; Director of Human Resources from
1988 to 1996; Manager of Accounting of GTS Duratek
from 1985 to 1988;
C. Paul Deltete 47 Senior Vice President, Senior Vice President of Environmental Operations and
Environmental Operations Support of GTS Duratek since January 1996; President
and Support of Analytical Resources, Inc. (an environmental
consulting firm recently acquired by GTS Duratek)
from 1984 to January 1996.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the Nasdaq Stock Market's National
Market (the "Nasdaq National Market") under the symbol "DRTK". The following
table sets forth, for the periods indicated, the high and low sale prices of the
Common Stock (bid prices prior to September 19, 1994 when the Common Stock
commenced trading on the Nasdaq National Market). The reported last sale price
of the Common Stock on the Nasdaq National Market on March 18, 1996 was $15 7/8.
PRICE RANGE
OF COMMON STOCK
--------------------
HIGH LOW
Year Ended December
31, 1994:
1st Quarter......... $ 5 $ 4 1/4
2nd Quarter......... 4 1/2 3 5/8
3rd Quarter......... 4 1/2 2 3/4
4th Quarter......... 4 3/8 3
Year Ended December
31, 1995:
1st Quarter......... $ 5 $ 3 5/8
2nd Quarter......... 6 1/8 4 1/4
3rd Quarter......... 6 1/4 5 3/8
4th Quarter......... 17 7/8 5 1/2
Year Ended December
31, 1996:
1st Quarter through
March 18, 1996..... $ 17 7/8 $11 1/4
As of February 22, 1996, there were 678 holders of record of the Common
Stock and the Company estimates that there were approximately 1,700 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 therefor 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 Results of Operations and Financial
Condition -- Liquidity and Capital Resources."
18
ITEM 6. SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1991 1992 1993 1994 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues................................................. $ 32,820 $ 38,772 $ 33,505 $ 35,968 $ 40,418
Cost of revenues......................................... 27,583 32,674 28,609 28,857 32,220
--------- --------- --------- --------- ---------
Gross profit............................................. 5,237 6,098 4,896 7,111 8,198
Selling, general and administrative expenses............. 6,280 5,616 5,738 5,926 5,876
--------- --------- --------- --------- ---------
Income (loss) from operations............................ (1,043) 482 (842) 1,185 2,322
Interest income (expense), net........................... (517) (406) (372) (595) 57
--------- --------- --------- --------- ---------
Income (loss) before income taxes and proportionate share
of loss of joint venture................................ (1,560) 76 (1,214) 590 2,379
Income taxes............................................. -- (50) (73) (12) (101)
--------- --------- --------- --------- ---------
Income (loss) before proportionate share of loss of joint
venture................................................. (1,560) 26 (1,287) 578 2,278
Proportionate share of loss of joint venture............. -- -- -- (321) (824)
--------- --------- --------- --------- ---------
Net income (loss)........................................ (1,560) 26 (1,287) 257 1,454
Preferred stock dividends and charges for accretion...... -- -- -- -- (1,394)
--------- --------- --------- --------- ---------
Net income (loss) attributable to common stockholders.... $ (1,560) $ 26 $ (1,287) $ 257 $ 60
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income (loss) per share.............................. $ (0.21) $ 0.00 $ (0.16) $ 0.03 $ 0.01
Weighted average common shares outstanding............... 7,360 7,388 7,936 8,656 8,820
AS OF DECEMBER 31,
-----------------------------------------------------
1991 1992 1993 1994 1995
BALANCE SHEET DATA:
Working capital (deficit)................................ $ 916 $ 1,265 $ (127) $ (78) $ 24,114
Total assets............................................. 9,350 13,127 12,754 19,200 38,660
Long-term debt and convertible debenture................. 1,418 123 288 502 10,123
Redeemable convertible preferred stock................... -- -- -- -- 14,609
Stockholders' equity..................................... 2,796 4,529 6,159 6,933 9,257
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
GTS Duratek has historically derived substantially all of its revenues from
technical support services to government agencies, electric utilities,
industrial facilities and commercial businesses. Technical support services are
generally provided pursuant to multi-year time-and-materials contracts. Revenues
are recognized as costs are incurred according to predetermined rates. The
contract costs primarily include direct labor, materials and the indirect costs
related to contract performance.
Historically, the Company's waste treatment revenues have been generated
from projects in which the Company acts as a subcontractor for the United States
Department of Energy ("DOE") pursuant to fixed-price and cost-plus-fixed-fee
contracts. The Company began to offer vitrification services for wastes from the
DOE's Fernald Environmental Management Project in 1991 and began to operate its
first field-based DuraMelter-TM- at Fernald in 1993. Substantially all of the
Company's waste treatment revenues during 1993 and 1994 were derived from the
Fernald project and during 1995 were derived from the DOE's Savannah River
M-Area project. Revenues from these projects are recognized on the
percentage-of-completion method as costs are incurred as measured by the
cost-to-cost method.
The Company to date has generated minimal revenues from waste treatment
projects for commercial customers. Revenues from the operations of commercial
waste treatment facilities will be recognized as waste is processed. The
Company's current commercial waste treatment projects are the DuraChem joint
venture ("DuraChem") with Chem-Nuclear, Inc. and DuraTherm, Inc. ("DuraTherm"),
which owns the San Leon, Texas thermal desorption facility. Income or loss from
the Company's 45% share in DuraChem will be recorded by the Company on the
equity method. DuraTherm is expected to commence commercial operations in the
second quarter of 1996. The Company consolidates the results of DuraTherm
adjusting for the 20% minority interest in consolidation.
In November 1995, the Company formed a strategic alliance with BNFL, Inc.
("BNFL") to jointly pursue up to five major DOE waste treatment projects. BNFL
is the U.S. subsidiary of British Nuclear Fuels plc, one of the largest
processors of radioactive waste in the world. Pursuant to the terms of the
strategic alliance, the Company will receive a $1.0 million teaming fee each
time that BNFL and the Company agree to jointly pursue a major DOE waste
treatment project. The Company reached agreements to pursue the first two
projects in November 1995 and February 1996 and recognized as revenue the $1.0
million fees in the fourth quarter of 1995 and the first quarter of 1996,
respectively. The Company is unable to predict the timing of recognition of
future teaming fees, if any. In addition, BNFL will provide the Company with
research and development funding of $500,000 annually for five years, which will
be used to offset certain of the Company's research and development expenses.
The timing of new waste treatment projects, including those pursued jointly
with BNFL, the duration of these projects, and the form in which these projects
are owned and operated will affect period-to-period comparisons of the Company's
operating results.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues increased by $4.4 million or 12.4%, from $36.0 million in 1994 to
$40.4 million in 1995. The increase was primarily the result of an increase in
revenues from waste treatment projects, which were $6.7 million in 1994 and
$11.1 million in 1995. The most significant of the waste treatment projects is
the Savannah River M-Area project with Westinghouse Savannah River Company.
Under this three-year, $14.1 million contract, the Company has constructed a
vitrification facility at the Savannah River site in South Carolina to convert
approximately 90,000 cubic feet of mixed waste to stable glass. Revenues from
this contract were $2.3 million in 1994 and $6.1 million in 1995. Revenues
20
in 1995 also include a $1.0 million teaming fee received from BNFL in exchange
for the Company's agreement to exclusively team with BNFL on a DOE waste
treatment project in Hanford, Washington. Revenues from technical support
services were $29.3 million in 1994 and $29.3 million in 1995.
Gross profit increased by $1.1 million or 15.3%, from $7.1 million in 1994
to $8.2 million in 1995. The teaming fee from BNFL represented approximately
$1.0 million of the increase. As a percentage of revenues, gross profit
increased from 19.8% in 1994 to 20.3% in 1995. Gross profits from waste
treatment projects were lower in 1995 as compared to 1994 principally as a
result of project mix and modifications to the estimated costs to complete the
Savannah River M-Area project. The estimated cost to complete the Savannah River
M-Area project was increased due to the Company's decision to make additional
investments in the on-site facility to better position the Company to handle
additional waste streams at that site. Gross profits from technical support
services were $4.0 million in 1994 and $4.1 million in 1995.
Selling, general and administrative expenses declined by $50,000 or 0.8%,
from 1994 to 1995. As a percentage of revenues, selling, general and
administrative expenses declined from 16.5% in 1994 to 14.5% in 1995. The
decline was principally the result of higher utilization of the Company's
engineering staff on waste treatment projects and joint ventures, as well as
increased revenues without a corresponding increase in administrative overhead.
In 1994, the Company had net interest expense of $595,000 compared to net
interest income of $57,000 in 1995. In January 1995, the Company issued $16.0
million of convertible preferred stock, the net proceeds of which were utilized
to repay outstanding short-term borrowings with the balance being invested in
short-term investment grade securities.
Income tax expense was $12,000 in 1994 compared to $101,000 in 1995.
Utilization of net operating loss carryforwards in 1994 and 1995 resulted in no
federal income taxes other than alternative minimum tax. The 1994 and 1995 state
income tax amounts relate to income taxes payable to states which do not
recognize net operating loss carryforwards. At December 31, 1995, the Company
has a net operating loss carryforward of approximately $2.2 million of which
approximately $1.1 million resulted from the exercise by employees of the
Company of non-qualified stock options in 1995. Accordingly, utilization of this
$1.1 million of the net operating loss carryforward will result in a credit to
capital in excess of par.
The Company's proportionate share in the loss of its 50% owned joint
venture, Vitritek Environmental, Inc. ("Vitritek"), increased from $321,000 in
1994 to $824,000 in 1995. Vitritek's 1995 loss was the result of limited
business activity, as well as a $1.2 million write-off of Vitritek's intangible
assets related to asbestos vitrification technology rights. In 1995, management
of Vitritek concluded that the market for asbestos vitrification would not
develop quickly enough to generate the cash flows necessary to recover the
intangible assets acquired by Vitritek in 1993.
Net income increased by $1.2 million or approximately 465% from $257,000 in
1994 to $1.5 million in 1995. The increase resulted from higher revenues from
waste treatment projects, the receipt of the BNFL $1.0 million teaming fee and
lower interest expense offset by the higher loss resulting from the write-off of
intangible assets realized from the Vitritek joint venture.
YEAR ENDED DECEMBER 31, 1993 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenues increased by $2.5 million or 7.4%, from $33.5 million in 1993 to
$36.0 million in 1994. The increase was primarily a result of revenues
recognized on the Company's waste treatment projects, which were $3.7 million in
1993 and $6.7 million in 1994, particularly the Savannah River M-Area project
which commenced in 1994. Revenues from technical support services declined from
$29.8 million in 1993 to $29.3 million in 1994.
Gross profit increased by $2.2 million or 45.2%, from $4.9 million in 1993
to $7.1 million in 1994. As a percentage of revenues, gross profit increased
from 14.6% in 1993 to 19.8% in 1994. The increase
21
primarily resulted from gross profits achieved on waste treatment projects which
generally have a higher gross profit margin than technical support services.
Gross profits from technical support services were $3.7 million in 1993 and $4.0
million in 1994.
Selling, general and administrative expenses increased by $188,000 or 3.3%,
from $5.7 million in 1993 to $5.9 million in 1994. As a percentage of revenues,
selling, general and administrative expenses declined from 17.1% in 1993 to
16.5% in 1994. This decline was principally the result of higher utilization of
the Company's engineering staff on waste treatment projects and joint ventures.
Net interest expense increased from $372,000 in 1993 to $595,000 in 1994.
The $223,000 increase was primarily the result of higher short-term borrowings
on the Company's line of credit and higher interest rates.
Income tax expense was $73,000 in 1993 compared to $12,000 in 1994. The 1993
and 1994 income tax amounts relate to state income taxes payable.
The Company's 50% owned joint venture, Vitritek, began operations in 1994.
The Company's proportionate share in the loss of Vitritek was $321,000.
Vitritek's 1994 loss was the result of the entity's startup costs and limited
business activity.
In 1993, the Company had a net loss of $1.3 million compared to net income
of $257,000 in 1994. The improvement in earnings resulted primarily from higher
revenues from waste treatment projects.
LIQUIDITY AND CAPITAL RESOURCES
During 1995, the Company completed two significant capital transactions,
which provided net proceeds of approximately $24.5 million. In January 1995, the
Company issued to investment partnerships sponsored and controlled by the
Carlyle Group for $16.0 million, 160,000 shares of 8% convertible preferred
stock and an option to purchase an additional 1,250,000 shares of the Company's
common stock, at any time prior to January 24, 1999 for $3.75 per share.
Proceeds to the Company, net of offering expenses, were $14.7 million. In
November 1995, the Company issued to BNFL a $10.0 million convertible debenture,
which accrues interest at the one-year London Interbank Offered Rate (LIBOR) for
a period of five years, for $9.8 million, net of debt issue cost. In addition,
the Company generated $2.0 million upon the exercise of stock options and
warrants held by employees and others. The Company used certain of the proceeds
from these transactions to retire short-term borrowings of $7.6 million with the
balance being used for working capital needs and to further the Company's waste
treatment technologies through acquisitions, joint ventures and strategic
alliances.
During 1995, the Company invested approximately $4.5 million in property,
plant and equipment, the DuraChem joint venture and an acquisition. The
investments in property, plant and equipment and DuraChem related principally to
the construction of DuraMelters-TM- and related components. In November 1995,
the Company acquired 80% of the outstanding capital stock of DuraTherm, formerly
Bird Environmental Gulf Coast, Inc., a company which operates a RCRA Part
B-permitted waste facility using thermal desorption technology in San Leon,
Texas. The Company purchased its interest in DuraTherm for one dollar and
incurred approximately $260,000 of transaction costs. In connection with the
acquisition, the Company agreed to invest up to $5.1 million in DuraTherm (of
which up to $2.7 million is for capital improvements and up to $2.4 million is
for working capital) in exchange for preferred stock of DuraTherm. The Company
presently expects to invest in the aggregate approximately $6.4 million in
property, plant and equipment, DuraTherm and the DuraChem joint venture during
1996.
During 1995, the Company used $847,000 of cash flows for operating
activities. Cash flows from operations were primarily impacted by the $4.0
million increase in accounts receivable and costs and estimated earnings in
excess of billings on uncompleted contracts. Of the $17.0 million in accounts
22
receivable and costs and estimated earnings in excess of billings on uncompleted
contracts at December 31, 1995, $10.5 million relates to contracts with two DOE
contractors which are expected to be collected in 1996. The Company has a
backlog of orders of approximately $48.0 million at December 31, 1995, of which
approximately $23.0 million is expected to be completed in 1996.
The Company has a revolving line of credit agreement with a bank providing
for borrowings up to $7.0 million based upon eligible amounts of accounts
receivable, as defined in the agreement. Borrowings outstanding under the
agreement are due on demand and bear interest at the bank's prime interest rate
plus 1% (9.25% as of March 14, 1996). At December 31, 1995, no borrowings were
outstanding and the Company had available borrowings of $5.9 million.
The Company believes cash flows from operations, cash resources available at
December 31, 1995 and, if necessary, borrowings available under the bank line of
credit will be sufficient to fund currently planned capital improvements and
meet its operating needs, including the quarterly preferred dividend requirement
of $320,000, for at least the next twelve months.
SEASONALITY
Seasonality generally does not affect the Company's waste treatment
technology operations; however, it does have an effect on the Company's
technical support services business. A large component of the Company's staff
augmentation business is devoted to nuclear power plant outage support. The
seasonal nature of this work is caused by utilities' desire to schedule their
nuclear unit refueling and maintenance outages during spring and fall when, due
to moderate temperatures, electrical load demand is lowest. In addition, a
significant portion of the Company's computer and communications consulting
services client base is in the federal, state and local government sectors.
Funding appropriations for many of these clients' projects are coordinated with
the government's fiscal years which causes some seasonal impact on this
business. In contrast to the outage support business, demand for computer and
communications consulting services typically peaks in winter and summer months.
ACCOUNTING MATTERS
The Company will adopt the provisions of the Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of" and SFAS No. 123,
"Accounting for Stock-Based Compensation" in 1996. Adoption of SFAS No. 121 is
not expected to have a material impact on the Company's financial position or
results of operations for 1996. Beginning in 1996, the Company expects to
present information required by SFAS No. 123 with respect to stock compensation
on a pro forma basis and will continue to measure stock compensation based upon
the guidance provided in Accounting Principles Board Opinion No. 25.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
GTS DURATEK, INC. AND SUBSIDIARIES
PAGE
---------
Independent Auditors' Report............................................................................... 25
Consolidated Balance Sheets at December 31, 1994 and 1995.................................................. 26
Consolidated Statements of Operations for the years ended December 31, 1993, 1994 and 1995................. 27
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1993, 1994 and 1995....... 28
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995................. 29
Notes to Consolidated Financial Statements................................................................. 30
24
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
GTS Duratek, Inc.:
We have audited the accompanying consolidated balance sheets of GTS Duratek,
Inc. and subsidiaries as of December 31, 1994 and 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We have conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of GTS Duratek,
Inc. and subsidiaries as of December 31, 1994 and 1995 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Baltimore, Maryland
March 1, 1996
25
GTS DURATEK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
ASSETS 1994 1995
----------- -----------
Current Assets:
Cash and cash equivalents...................................... $ -- $11,396,008
Receivables, less allowance for doubtful accounts of $97,732
and $68,964................................................... 8,090,614 9,321,513
Cost and estimated earnings in excess of billings on
uncompleted contracts......................................... 3,119,443 7,707,434
Inventories.................................................... 334,998 274,859
Prepaid expenses and other current assets...................... 141,510 79,686
----------- -----------
Total current assets......................................... 11,686,565 28,779,500
Costs and estimated earnings in excess of billings on uncompleted
contracts, noncurrent........................................... 1,307,728 --
Property, plant and equipment, net............................... 2,137,247 3,541,462
Investments in and advances to joint ventures, net............... 2,417,771 4,059,078
Intangibles, net of accumulated amortization of $874,589 and
$999,454........................................................ 637,553 553,517
Deferred charges and other assets................................ 1,013,220 1,726,270
----------- -----------
$19,200,084 $38,659,827
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings.......................................... $ 7,630,512 $ --
Current maturities of long-term debt........................... 707,094 470,709
Accounts payable and accrued expenses.......................... 3,427,236 4,194,713
----------- -----------
Total current liabilities.................................... 11,764,842 4,665,422
Long-term debt................................................... 502,417 36,000
Convertible debenture............................................ -- 10,086,931
----------- -----------
Total liabilities............................................ 12,267,259 14,788,353
----------- -----------
Minority interest of subsidiary.................................. -- 5,610
----------- -----------
8% Cumulative Convertible Redeemable Preferred Stock - $.01 par
value; 160,000 shares authorized, issued and outstanding
(liquidation value $16,320,000)................................. -- 14,608,890
----------- -----------
Stockholders' equity:
Preferred stock - $.01 par value; authorized 4,840,000 shares;
none issued................................................... -- --
Common stock - $.01 par value; authorized 20,000,000 shares;
issued 8,759,775 shares in 1994 and 9,475,878 shares in
1995.......................................................... 87,598 94,758
Capital in excess of par value................................. 16,656,009 18,912,751
Deficit........................................................ (9,639,005) (9,578,758)
Treasury stock, 70,458 shares, at cost......................... (171,777) (171,777)
----------- -----------
Total stockholders' equity................................... 6,932,825 9,256,974
Commitments and contingencies....................................
----------- -----------
$19,200,084 $38,659,827
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements
26
GTS DURATEK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
1993 1994 1995
----------- ----------- -----------
Revenues......................................................... $33,504,540 $35,967,563 $40,418,066
Cost of revenues................................................. 28,608,831 28,856,910 32,220,569
----------- ----------- -----------
Gross profit..................................................... 4,895,709 7,110,653 8,197,497
Selling, general and administrative expenses..................... 5,737,350 5,925,618 5,875,688
----------- ----------- -----------
Income (loss) from operations.................................... (841,641) 1,185,035 2,321,809
Interest income (expense), net................................... (372,129) (595,475) 57,453
----------- ----------- -----------
Income (loss) before income taxes and proportionate share of loss
of joint venture................................................ (1,213,770) 589,560 2,379,262
Income taxes..................................................... (73,331) (11,487) (100,926)
----------- ----------- -----------
Income (loss) before proportionate share of loss of joint
venture......................................................... (1,287,101) 578,073 2,278,336
Proportionate share of loss of joint venture..................... -- (321,548) (824,025)
----------- ----------- -----------
Net income (loss)................................................ (1,287,101) 256,525 1,454,311
Preferred stock dividends and charges for accretion.............. -- -- (1,394,064)
----------- ----------- -----------
Net income (loss) attributable to common stockholders............ $(1,287,101) $ 256,525 $ 60,247
----------- ----------- -----------
----------- ----------- -----------
Net income (loss) per share...................................... $ (0.16) $ 0.03 $ 0.01
Weighted average common shares outstanding....................... 7,936,384 8,655,811 8,820,131
See accompanying notes to consolidated financial statements
27
GTS DURATEK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
COMMON STOCK CAPITAL IN TOTAL
------------------ EXCESS OF TREASURY STOCKHOLDERS'
SHARES AMOUNT PAR VALUE DEFICIT STOCK EQUITY
--------- ------- ----------- ----------- --------- ------------
Balance, December 31, 1992.......... 8,009,875 $80,099 $13,373,383 $(8,608,429) $(315,910) $ 4,529,143
Net loss.......................... -- -- -- (1,287,101) -- (1,287,101)
Exercise of options............... 40,400 404 63,196 -- -- 63,600
Issuance of common stock for
compensation expense and
litigation settlement............ 15,000 150 49,850 -- -- 50,000
Issuance of treasury stock for
litigation settlement............ -- -- -- -- 144,133 144,133
Issuance of common stock warrants
in exchange for certain
technology rights................ -- -- 500,000 -- -- 500,000
Issuance of common stock in
exchange for cash and certain
technology rights................ 562,500 5,625 2,154,001 -- -- 2,159,626
--------- ------- ----------- ----------- --------- ------------
Balance, December 31, 1993.......... 8,627,775 86,278 16,140,430 (9,895,530) (171,777) 6,159,401
Net income........................ -- -- -- 256,525 -- 256,525
Exercise of options............... 7,000 70 16,829 -- -- 16,899
Issuance of common stock in
exchange for cash................ 125,000 1,250 498,750 -- -- 500,000
--------- ------- ----------- ----------- --------- ------------
Balance, December 31, 1994.......... 8,759,775 87,598 16,656,009 (9,639,005) (171,777) 6,932,825
Net income........................ -- -- -- 1,454,311 -- 1,454,311
Exercise of options and
warrants......................... 716,103 7,160 1,946,742 -- -- 1,953,902
Income tax benefit from exercise
of non-qualified stock options... -- -- 30,000 -- -- 30,000
Issuance of a common stock option
for cash......................... -- -- 280,000 -- -- 280,000
Preferred stock dividend and
charges for accretion............ -- -- -- (1,394,064) -- (1,394,064)
--------- ------- ----------- ----------- --------- ------------
Balance, December 31, 1995.......... 9,475,878 $94,758 $18,912,751 $(9,578,758) $(171,777) $ 9,256,974
--------- ------- ----------- ----------- --------- ------------
--------- ------- ----------- ----------- --------- ------------
See accompanying notes to consolidated financial statements.
28
GTS DURATEK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMER 31, 1993, 1994 AND 1995
1993 1994 1995
----------- ----------- -----------
Cash flows from operating activities:
Net income (loss).............................................. $(1,287,101) $ 256,525 $ 1,454,311
Adjustments to reconcile to net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization................................ 533,215 508,900 608,165
Proportionate share of loss of joint venture................. -- 321,548 824,025
Income tax benefit from exercise of non-qualified stock
options..................................................... -- -- 30,000
Changes in operating items:
Receivables................................................ 1,796,847 (2,697,259) (759,195)
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... (576,274) (2,843,655) (3,280,263)
Inventories................................................ 114,616 (8,180) 61,180
Prepaid expenses and other current assets.................. 37,286 (6,227) 63,624
Accounts payable and accrued expenses...................... 861,304 441,747 145,995
Other...................................................... 194,133 -- 5,202
----------- ----------- -----------
Net cash provided by (used in) operating activities.............. 1,674,026 (4,026,601) (846,956)
----------- ----------- -----------
Cash flows from investing activities:
Additions to property, plant and equipment..................... (993,902) (269,383) (1,586,062)
Acquisition of DuraTherm, Inc.................................. -- -- (260,619)
Additions to intangibles....................................... (26,816) (5,179) (40,828)
Advances to joint ventures..................................... -- (1,489,319) (2,465,332)
Other.......................................................... (190,871) 42,853 (669,889)
----------- ----------- -----------
Net cash used in investing activities............................ (1,211,589) (1,721,028) (5,022,730)
----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from (repayments of) short-term borrowings........ (3,129,276) 4,520,946 (7,630,512)
Proceeds from issuance of long-term debt....................... 264,573 1,110,000 --
Reduction of long-term debt.................................... -- (400,216) (702,802)
Proceeds from issuance of convertible debenture, net of debt
issue costs................................................... -- -- 9,830,280
Proceeds from issuance of preferred stock and common stock
options, net of offering expenses............................. -- -- 14,690,026
Preferred stock dividends paid................................. -- -- (875,200)
Proceeds from issuance of common stock......................... 1,473,226 516,899 1,953,902
Other.......................................................... 929,040 -- --
----------- ----------- -----------
Net cash provided by (used in) financing activities.............. (462,437) 5,747,629 17,265,694
----------- ----------- -----------
Net increase in cash and cash equivalents........................ -- -- 11,396,008
Cash and cash equivalents, beginning of year..................... -- -- --
----------- ----------- -----------
Cash and cash equivalents, end of year........................... $ -- $ -- $11,396,008
----------- ----------- -----------
----------- ----------- -----------
Cash paid during the period for:
Interest....................................................... $ 432,018 $ 544,933 $ 189,347
Income taxes................................................... $ 41,314 $ 11,487 $ 60,091
See accompanying notes to consolidated financial statements.
29
GTS DURATEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
1. DESCRIPTION OF BUSINESS
GTS Duratek, Inc. (the "Company") provides waste treatment solutions for
radioactive, hazardous, mixed and other wastes. The Company's vitrificaton,
thermal desorption and ion exchange technologies convert waste to stable forms
for storage or disposal while achieving significant volume reduction. To
implement its waste treatment technologies and provide related technical support
services, the Company has a staff of highly skilled personnel with significant
environmental services experience. The services provided by the Company include
staff augmentation and outage support, principally to assist nuclear power
plants during regular maintenance shutdowns, environmental and computer
consulting and environmental safety training.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly-owned except for DuraTherm, Inc.
which is 80% owned. All significant intercompany balances and transactions have
been eliminated in consolidation. Investments in subsidiaries and joint ventures
in which the Company does not have control or majority ownership are accounted
for under the equity method.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statement of cash flows, the Company
considers all highly liquid investments with initial maturities, at the date of
purchase, of three months or less to be cash equivalents. Cash equivalents at
December 31, 1995 were $11,121,008.
INVENTORIES
Inventories are valued at the lower of cost or market, principally using the
first in, first out (FIFO) method of costing.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment are carried at cost. Replacements, maintenance
and repairs which do not extend the lives of the assets are expensed as
incurred. The Company provides for depreciation of property, plant, and
equipment when such assets become operational, primarily on a straight-line
basis over useful lives of three to ten years. Leasehold improvements are
amortized over the shorter of the asset life or the term of the lease.
INTANGIBLES
Intangible assets consist principally of amounts assigned to covenants
not-to-compete and costs incurred to obtain and maintain patents. Covenant and
patent amounts are being amortized over ten and seventeen years, respectively,
on a straight-line basis. The Company assesses the recoverability of intangible
assets by determining whether the amortization over the remaining life of the
asset can be recovered through undiscounted future cash flows. The amount of
impairment, if any, is measured based on projected discounted operating cash
flows.
DEFERRED CHARGES
Deferred charges consist principally of costs related to the maintenance of
the Company's temporary personnel work force data base, including
certifications, security clearances and related information. Such costs are
amortized over the term of the expected benefit which is generally two years.
REVENUE RECOGNITION
The Company generates substantially all of its revenue under fixed-price and
time-and-materials contracts. Revenue from contracts is recognized on the
percentage-of-completion method as costs are
30
GTS DURATEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
incurred and includes estimated fees at predetermined rates as measured by the
cost-to-cost method. Contract costs include all direct labor, material costs and
the indirect costs related to contract performance. Differences between recorded
costs, estimated earnings and final billings are recognized in the period in
which they become determinable. Costs and estimated earnings in excess of
billings on uncompleted contracts are recorded as assets. Billings in excess of
costs and estimated earnings on uncompleted contracts are recorded as
liabilities. Retainages, amounts subject to future negotiation and amounts
related to claims are not material.
In addition, the Company generates revenue from product sales which is
recognized upon product shipment.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the estimated future
tax consequences of temporary differences between the financial reporting and
tax bases of assets and liabilities based on enacted tax rates in effect when
such amounts are expected to be realized based on consideration of available
evidence, including tax planning strategies and other factors. The effects of
changes in tax laws or rates on deferred tax assets and liabilities are
recognized in the period that includes the enactment date.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments, including accounts
receivable, accounts payable and long-term debt, approximate carrying value.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and their respective
disclosures to prepare these consolidated financial statements in conformity
with generally accepted accounting principles. Actual results could differ
significantly from those estimates.
NET INCOME (LOSS) PER SHARE
The net income (loss) per share for 1993, 1994 and 1995 was computed by
dividing the net income (loss) attributable to common stockholders, which
reflects the preferred stock dividend requirement and accretion, by the weighted
average number of shares of common stock outstanding and common stock
equivalents to the extent they result in additional dilution. The Company has
issued options and warrants which exceed 20% of the common stock outstanding and
accordingly, the Company determines the dilutive effect of such common stock
equivalents using the modified treasury stock method. For the years ended
December 31, 1993, 1994 and 1995, the common stock equivalents were deemed to be
anti-dilutive and, accordingly, are not included in the weighted average number
of shares used in determining net income (loss) per share.
RECLASSIFICATIONS
Certain amounts for 1993 and 1994 have been reclassified to conform to the
presentation for 1995.
3. INVENTORIES
Inventories at December 31 consist of the following:
1994 1995
-------- --------
Raw materials........................................... $ 55,452 $ 36,256
Finished goods.......................................... 279,546 238,603
-------- --------
$334,998 $274,859
-------- --------
-------- --------
31
GTS DURATEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31 consists of the following:
1994 1995
---------- ----------
Machinery and equipment............................. $4,608,488 $4,942,753
Leasehold improvements, furniture and fixtures...... 911,333 1,105,851
Construction in progress............................ 354,894 1,650,353
---------- ----------
5,874,715 7,698,957
Less accumulated depreciation and amortization...... 3,737,468 4,157,495
---------- ----------
$2,137,247 $3,541,462
---------- ----------
---------- ----------
5. JOINT VENTURES AND OTHER AGREEMENTS
In order to commercialize its vitrification technology more rapidly and
cost-effectively, the Company has developed several joint venture and other
arrangements. The following is a summary of those relationships:
BNFL, INC.
On November 7, 1995, the Company and BNFL, Inc. (BNFL) entered into a
strategic alliance agreement. BNFL is the U.S. subsidiary of British Nuclear
Fuels plc, a United Kingdom-based company experienced in processing and treating
high level radioactive waste. Under the terms of the strategic alliance, the
Company and BNFL have agreed to jointly pursue up to five major United States
Department of Energy (DOE) waste treatment projects. The terms of the strategic
alliance provide that BNFL pay the Company a teaming fee of $1 million each time
the two companies agree to exclusively pursue together a waste treatment
project. Upon the execution of the strategic alliance agreement, the Company
received and recognized as revenue a $1 million fee for its agreement to pursue
a project exclusively with BNFL at the DOE's Hanford, Washington facility.
As part of the strategic alliance, BNFL invested $10 million in the Company
in the form of a convertible debenture (see note 10) and agreed to provide the
Company with research and development funding of at least $500,000 per year over
the next five years.
VITRITEK ENVIRONMENTAL, INC.
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 hazardous waste. The joint venture entity, called
Vitritek Environmental, Inc. ("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's investment in, and advances to, Vitritek at December 31, 1994
and 1995 were $1,837,323 and $1,121,027, respectively. As of December 31, 1995,
Vitritek had assets of $2,697,136 and liabilities of $3,500,000 (including
$1,750,000 due to the Company). For the years ended December 31, 1994 and 1995,
Vitritek had net sales of $105,173 and $678,989, respectively, and net losses of
$891,152 and $1,997,655, respectively. For the years ended December 31, 1994 and
1995, the Company recognized its proportionate share of loss in the consolidated
statement of operations after intercompany eliminations.
DURACHEM, INC.
In September 1994, the Company and Chem-Nuclear Systems, Inc.
(Chem-Nuclear), a subsidiary of WMX Technologies, Inc., formed a joint venture
to design, build and operate vitrification facilities
32
GTS DURATEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. JOINT VENTURES AND OTHER AGREEMENTS (CONTINUED)
to process commercial radioactive waste for disposal, including low-level
radioactive wastes from nuclear power plants, hospitals, research laboratories
and industrial facilities. The Company will contribute 45% of facility
construction costs and share proportionately in the venture's profits or losses.
The new venture is operating, as a limited partnership, under the name
"DuraChem." The Company's investment in, and advances to, DuraChem at December
31, 1994 and 1995 of $580,448 and $2,938,051, respectively, related to
construction of a facility in Barnwell, South Carolina.
6. ACQUISITION OF DURATHERM, INC.
In November 1995, the Company acquired 80% of the outstanding capital stock
of Bird Environmental Gulf Coast, Inc., since named DuraTherm, Inc.
("DuraTherm"), from Bird Environmental Technologies, Inc., a wholly-owned
subsidiary of Bird Corporation ("Bird") for one dollar and incurred
approximately $260,000 of transaction costs. DuraTherm owns and operates a
hazardous waste facility using thermal desorption technology in San Leon, Texas.
In connection with the acquisition, Bird contributed approximately $1.3 million
of cash to DuraTherm immediately prior to the acquisition to fund DuraTherm's
working capital deficit.
The remaining 20% of the outstanding capital stock of the Company is held by
certain individuals (the "Minority Shareholders") who developed the technology
and have operated and will continue to operate the facility. The Minority
Shareholders have entered into employment agreements providing for incentive
compensation tied directly to the financial performance of the facility. The
Company has entered into a stockholders' agreement pursuant to which, among
other terms and conditions, the Company has agreed to invest up to $5.1 million
(of which up to $2.7 million is for capital improvements and up to $2.4 million
is for working capital) in DuraTherm in exchange for preferred stock of
DuraTherm. The Company provided approximately $645,000 of the capital needed by
DuraTherm during the fourth quarter of 1995 and will make the balance available
during the first quarter of 1996. The Company expects the plant to reopen during
the second quarter of 1996. As part of the purchase transaction the Company also
acquired, through a licensing arrangement, the exclusive rights to the thermal
desorption technology used by the facility.
The Minority Shareholders have the right to "put" their stock to the Company
at fair market value beginning in December 1999 or earlier upon the occurrence
of certain events. The Company has the right to "call" the stock of the Minority
Shareholders at fair market value beginning in December 2001 or earlier upon the
occurrence of certain events.
The acquisition of DuraTherm was accounted for using the purchase method of
accounting. The estimated fair value of the net tangible assets acquired
exceeded the purchase price at November 29, 1995. Accordingly, the net purchase
price in excess of the net carrying value of DuraTherm of approximately $238,000
was allocated to property, plant and equipment. The Company determined the
amount of the minority interest of the subsidiary based upon 20% of the net
assets of DuraTherm at the date of acquisition.
Pro forma results of operations of the Company for the years ended December
31, 1994 and 1995, assuming the acquisition of DuraTherm had occurred on January
1, 1994, are as follows:
1994 1995
----------- -----------
Revenues.......................................... $39,682,000 $43,276,000
Net loss.......................................... (2,508,000) (1,379,000)
Loss per share.................................... (0.29) (0.27)
The plant was placed into operation in February 1994 and ceased operations
in August 1995. As such, the plant was not fully operational for either of the
pro forma periods presented. The pro forma
33
GTS DURATEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. ACQUISITION OF DURATHERM, INC. (CONTINUED)
results of operations are not indicative of the results that would have occurred
had the capital improvements actually been made by January 1994 or had the plant
operated during the entire pro forma periods presented or of future results of
operation of the Company with DuraTherm under management and control of the
Company's personnel.
7. SHORT-TERM BORROWINGS
The Company has a revolving line of credit agreement with a bank providing
for borrowings of up to $7,000,000 based upon eligible amounts of accounts
receivable, as defined in the agreement. Borrowings outstanding under the
agreement are due on demand and bear interest at the bank's prime interest rate
plus 1% (9.5% at December 31, 1995). Borrowings outstanding under the line of
credit are secured by the Company's accounts receivable, inventory and property,
plant and equipment. The line of credit agreement requires the Company to meet
certain financial covenants and restricts the payment of dividends on the
Company's common stock. At December 31, 1994, the Company had outstanding
borrowings of $7,630,512 under the agreement. At December 31, 1995, no amounts
were outstanding and approximately $5.9 million of borrowings were available
under the line of credit agreement.
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31 consist of the
following:
1994 1995
---------- ----------
Accounts payable.................................... $2,129,761 $2,165,720
Accrued expenses.................................... 508,934 846,999
Salaries and related costs.......................... 788,541 861,994
Preferred stock dividend payable.................... -- 320,000
---------- ----------
$3,427,236 $4,194,713
---------- ----------
---------- ----------
9. LONG-TERM DEBT
Long-term debt consists of notes payable to a bank requiring monthly
payments of principal plus interest at the bank's prime rate plus 1 1/4% (9.75%
at December 31, 1995). The notes payable are secured by the Company's accounts
receivable, inventory and property, plant and equipment. The notes payable have
aggregate annual maturities of $470,709 in 1996 and $36,000 in 1997.
10. CONVERTIBLE DEBENTURE
In November 1995, in connection with the formation of a strategic alliance,
the Company received proceeds of $9,830,280, net of debt issue costs from
issuance of a $10 million convertible debenture to BNFL. The debenture accrues
interest during the first five years at the one-year London Interbank Offered
Rate (LIBOR). The debenture and the accrued interest are convertible into
1,381,575 shares of the Company's common stock on or before November 7, 2000.
The debenture is to be repaid in annual installments over a five-year period
commencing on November 8, 2000. The conversion and repayment dates can be
extended under certain circumstances. At December 31, 1995, the balance due BNFL
of $10,086,931 included accrued interest of $86,931.
The estimated fair value of the convertible debenture at December 31, 1995
was approximately $14 million.
11. 8% CUMULATIVE CONVERTIBLE REDEEMABLE PREFERRED STOCK
In January 1995, the Company issued for $16 million, 160,000 shares of 8%
Cumulative Convertible Redeemable Preferred Stock, par value $.01 per share (the
"Convertible Preferred Stock") and an option (the "Carlyle Option") to purchase
up to an additional 1.25 million shares of the Company's
34
GTS DURATEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. 8% CUMULATIVE CONVERTIBLE REDEEMABLE PREFERRED STOCK (CONTINUED)
common stock, at any time prior to January 24, 1999 for $3.75 per share to
investment partnerships sponsored and controlled by The Carlyle Group
("Carlyle"). The Convertible Preferred Stock is initially convertible into the
Company's common stock at a conversion price of $3 per share and, if not
previously converted, the Company is required to redeem the outstanding
Convertible Preferred Stock on January 24, 2002 for $100 per share plus accrued
and unpaid dividends. The Company is required to pay quarterly dividends on the
Convertible Preferred Stock of $320,000.
The proceeds, net of offering expenses of $1,309,974, from the issuance of
the Convertible Preferred Stock and Carlyle Option were $14,690,026 of which
$14,410,026 was allocated to the Convertible Preferred Stock and $280,000 was
allocated to the fair value of the Carlyle Option. The difference between the
carrying value of the Convertible Preferred Stock and the redemption value is
being accreted through charges to stockholders' equity over a six-year period to
January 24, 2002.
The estimated fair value of the Convertible Preferred Stock at December 31,
1995 was approximately $53 million.
12. STOCK OPTION PLANS AND WARRANTS
The Company has a non-qualified Stock Option Plan (the "Plan") which
authorizes a committee of the Board of Directors to grant options to purchase
shares of the Company's common stock to directors, officers and employees of the
Company. The exercise price of such options may not be less than 85% of the fair
market value of the common stock on the date of grant and the exercise period
may not be more than ten years after such date. Changes in options and warrants
outstanding, options and warrants exercisable and shares reserved for issuance
are as follows:
PRICE RANGE NUMBER OF
PER SHARE SHARES
------------ ---------
Balance, December 31, 1992.......................... $1.00 - 3.50 1,060,900
Granted........................................... 3.50 - 4.00 555,000
Exercised......................................... 1.00 - 3.50 (40,400)
---------
Balance, December 31, 1993.......................... 1.00 - 4.00 1,575,500
Granted........................................... 3.50 - 3.88 949,000
Exercised......................................... 1.50 - 3.50 (7,000)
Terminated........................................ 1.50 - 3.75 (27,500)
---------
Balance, December 31, 1994.......................... 1.00 - 4.00 2,490,000
Granted........................................... 2.97 173,401
Carlyle Option.................................... 3.75 1,250,000
Exercised......................................... 1.00 - 4.00 (716,103)
Terminated........................................ 1.50 - 3.75 (2,500)
---------
Balance, December 31, 1995.......................... 1.00 - 4.00 3,194,798
---------
---------
As of December 31, 1995, 2,534,698 of the options and warrants are
exercisable. At December 31, 1995, the Company has reserved 9,909,706 shares for
issuance of options, warrants and securities convertible into the Company's
common stock.
35
GTS DURATEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. INCOME TAXES
The provision for income taxes for the years ended December 31, 1993, 1994
and 1995 consists of the following:
1993 1994 1995
------- ------- --------
Current:
State........................................... $73,331 $11,487 $ 50,230
Federal......................................... -- -- 50,696
------- ------- --------
$73,331 $11,487 $100,926
------- ------- --------
------- ------- --------
The provision for income taxes for the years ended December 31, 1993, 1994,
and 1995 is reconciled to the amount computed by applying the statutory Federal
income tax rate to income (loss) before income taxes and proportionate share of
loss of joint venture as follows:
1993 1994 1995
--------- --------- ---------
Federal income tax at statutory rate.............. $(413,000) $ 200,000 $ 809,000
State income taxes, net of Federal tax benefit.... 73,331 11,487 33,152
Increase in (use of) net operating loss
carryforwards.................................... 413,000 (200,000) (741,226)
--------- --------- ---------
$ 73,331 $ 11,487 $ 100,926
--------- --------- ---------
--------- --------- ---------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31 consist of
the following:
1994 1995
---------- ---------
Allowance for doubtful accounts................... $ 38,000 $ 27,000
Capitalized inventory costs....................... 50,000 52,000
Proportionate share of loss in investee company... 125,000 446,000
Accelerated depreciation.......................... (513,000) (611,000)
Net operating loss carryforward................... 1,521,000 863,000
Alternative minimum tax........................... -- 20,000
Other............................................. -- 3,000
---------- ---------
1,221,000 800,000
Less valuation allowance.......................... 1,221,000 800,000
---------- ---------
$ -- $ --
---------- ---------
---------- ---------
In assessing the realizability of deferred tax assets, management considered
whether it was more likely than not that some portion or all of the deferred tax
assets will be realized. The ultimate realization of the deferred tax assets is
dependent upon the generation of future taxable income during periods in which
temporary differences become deductible. Management considered income taxes paid
during the previous three years and projected future taxable income in making
this assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods in which the temporary
differences are deductible, management has established a valuation allowance at
December 31, 1995 of $800,000.
At December 31, 1995, the Company has net operating loss carryforwards of
approximately $2.2 million which are available to offset future taxable earnings
of the Company through 2008. Approximately $1.1 million of the $2.2 million net
operating loss carryfoward is available as the result of the exercise of
non-qualified stock options by employees of the Company. Income tax benefits
resulting from utilization of this portion of the net operating loss will result
in a credit to capital in excess of par.
36
GTS DURATEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. INCOME TAXES (CONTINUED)
Utilization of approximately $1.6 million of the $2.2 million net operating loss
carryforward is subject to a separate return limitation, whereby it is only
available to offset earnings from one of the Company's subsidiaries.
14. PROFIT SHARING PLAN
The Company maintains a Profit Investment Plan (the "Plan") for employees
who have completed one year of service with the Company. The Plan permits
pre-tax contributions to the Plan by participants pursuant to Section 401(k) of
the Internal Revenue Code of 1% to 14% of base compensation. The Company matches
25% of the participants' eligible contributions based on a formula set forth in
the Plan and may make additional matching contributions. Employer contributions
vest at a rate of 20% per year of service. The Company's matching contributions
were $73,000, $74,000 and $162,000 for the years ended December 31, 1993, 1994
and 1995, respectively.
15. BUSINESS AND CREDIT CONCENTRATIONS
The Company's revenues are derived primarily from utilities and through
subcontracts from a combination of DOE contractors and subcontractors. At
December 31, 1995, approximately 87% of the Company's accounts receivable were
due from these entities. Accounts receivable and costs and estimated earnings in
excess of billings on uncompleted contracts relating to DOE contractors and
subcontractors amounted to $2,226,023 and $2,857,336 at December 31, 1994 and
$5,115,785 and $7,591,628 at December 31, 1995, respectively. In 1993, two
customers comprised 20% and 15% of the Company's annual revenues. In 1994, one
customer comprised 23% of the Company's annual revenues. In 1995, three
customers comprised 23%, 17% and 16% of the Company's annual revenues,
respectively. Revenues from DOE contracts and subcontracts were 13%, 23% and 35%
of annual revenues for the years ended December 31, 1993, 1994 and 1995,
respectively.
The Company estimates an allowance for doubtful accounts based on the
creditworthiness of its customers, as well as general economic conditions.
Consequently, an adverse change in those factors could affect the Company's
estimate of its bad debts.
16. COMMITMENTS AND CONTINGENCIES
ROYALTY AGREEMENTS
The Company has entered into an exclusive licensing agreement with the
owners of the vitrification technology, pursuant to which the owners have
granted to the Company the exclusive license and rights to all vitrification
technology and process patents which they developed. The exclusive license
agreement expires 17 years after the last licensed patent is granted, which at
this time will be in 2012. The agreement provides for a guaranteed minimum
royalty of $100,000 per year throughout the term of the agreement. Pursuant to
the agreement, royalty expense was limited to $100,000 in each of the years
ended December 31, 1993, 1994 and 1995. Beginning in 1996, the Company is
obligated to make payments of 1% to 3% of net sales values, as defined. Assuming
the Company achieves a net sales value in 1996 equal to that achieved in 1995,
royalty expense will be approximately $260,000.
The Company also licenses the rights to the thermal desorption technology
used in the processing of petrochemical waste by DuraTherm from the inventor of
such technology. The Company and DuraTherm are co-licensees under the license
agreement and are collectively obligated to pay to the inventor of the
technology an annual royalty payment equal to the greater of (i) $50,000 or (ii)
1% of the net revenues generated from the operation of the desorber equipment
(excluding net revenues generated from equipment acquired in the DuraTherm
acquisition) incorporating the technology and 5% of the sales of any such
equipment.
37
GTS DURATEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
16. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEASES
The Company has several noncancellable facility leases which expire at
various dates and, in some cases, have options to extend their terms. Rent
expense approximated $316,000, $303,000 and $315,000 for the years ended
December 31, 1993, 1994 and 1995, respectively.
The following is a schedule of future minimum annual lease payments for all
long-term operating leases as of December 31, 1995:
1996............................................................. $229,000
1997............................................................. 14,000
--------
$243,000
--------
--------
CLOSURE BOND
Under the State of Texas Civil Statue, the Company is required to fund, in
the form of a closure bond, approximately $1,936,000 over a ten-year period
which will be available to cover closure expenses of the DuraTherm thermal
desorption facility in San Leon, Texas, when and if required. The funding is
maintained in an interest bearing trust account and as of December 31, 1995, the
trust balance was approximately $525,000. Such amount is included as other
assets in the Company's consolidated balance sheet.
LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
17. SUPPLEMENTAL CASH FLOW INFORMATION
In 1993, the Company acquired certain rights to medical and hazardous waste
technologies from an unrelated third party for a warrant valued at $500,000 to
purchase 500,000 shares of the Company's common stock through September 30, 1997
at $4.00 per share.
In 1993, the Company acquired certain rights to asbestos waste technologies
in exchange for 187,500 shares of the Company's common stock. The Company
contributed its interest in the technology rights to Vitritek Environmental,
Inc. (see note 5) in exchange for a $750,000 note bearing interest at the prime
rate plus 1%. The technology rights were previously owned by certain
shareholders of Vitritek Environmental, Inc.
38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The text and tables under "Election of Board of Directors" in GTS Duratek's
1996 Proxy Statement are incorporated herein by reference. Information
concerning executive officers is contained in Part I of this Registration
Statement on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The text and tables under "Executive Compensation" in GTS Duratek's 1996
Proxy Statement are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Except as indicated in the 1996 Proxy Statement, GTS Duratek knows of no
person who on March 15, 1996, owned beneficially more than 5% of its Common
Stock.
(b) The stock ownership information contained in the text and tables under
"Securities Beneficially Owned" in GTS Duratek's 1996 Proxy Statement is
incorporated herein by reference.
(c) GTS Duratek knows of no arrangements the operation of which may at a
subsequent date result in a change of control of GTS Duratek.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The text under "Executive Compensation and Certain Transactions with
Management and Others" in GTS Duratek's 1996 Proxy Statement is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements of GTS Duratek and
its subsidiaries are included in Item 8:
Independent Auditors' Report
Consolidated Balance Sheets at December 31, 1994 and December 31, 1995
Consolidated Statements of Operations for the years ended December 31, 1993,
1994, and 1995
Consolidated Statements of Stockholders' Equity for the years ended December
31, 1993, 1994 and 1995
Consolidated Statements of Cash Flows for the years ended December 31, 1993,
1994 and 1995
Notes to Consolidated Financial Statements
The following consolidated financial statements of Vitritek Environmental,
Inc. are included in herein and are set forth beginning at page 43 of this
Annual Report on Form 10-K:
Independent Auditors' Report
Consolidated Balance Sheets at December 31, 1994 and December 31, 1995
Consolidated Statements of Operations for the years ended December 31, 1994,
and 1995
Consolidated Statements of Stockholders' Equity for the years ended December
31, 1994 and 1995
Consolidated Statements of Cash Flows for the years ended December 31, 1994
and 1995
Notes to Financial Statements
39
(a)(2) The following is a list of all financial statement schedules for the
years ended December 31, 1993, 1994 and 1995 filed as part of this
Report:
Schedule II -- Valuation and Qualifying Accounts...................41
Schedules other than those listed above have been omitted because they are
not required or are not applicable, or the required information has been
included in the Consolidated Financial Statements or the Notes thereto.
(a)(3) See accompanying Index to Exhibits................................51
(b) Reports on Form 8-K.
(1) Current Report on Form 8-K dated November 29, 1995, filed on
December 11, 1995.
(2) Amendment No. 1 filed on February 12, 1996 to the Current Report on
Form 8-K, dated November 29, 1995, filed on December 11, 1995.
(c) The following is a list of exhibits filed herewith.
EXHIBIT NO. DOCUMENT
- ----------- --------------------------------------------------------------------------------------
21 Subsidiaries of the Registrant
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
(d) The following is a list of financial statement schedules filed herewith:
Schedule II -- Valuation and Qualifying Accounts.
Financial Statement of Vitritek Environmental, Inc. as listed in
Item 14(a)(1) above.
40
GTS DURATEK, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
ADDITIONS
--------------------------------
BALANCE AT CHARGES TO CHARGES TO DEDUCTIONS (A) BALANCE AT
BEGINNING COSTS AND OTHER ACCOUNTS -- -- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
- --------------------------------------------------- ----------- ----------- ------------------- ---------------- -----------
Allowance for doubtful accounts:
Year Ended December 31, 1995..................... $ 97,732 $ 51,263 $ -- $ (80,031) $ 68,964
----------- ----------- ----- -------- -----------
Year Ended December 31, 1994..................... $ 67,732 $ 30,000 $ -- $ -- $ 97,732
----------- ----------- ----- -------- -----------
Year Ended December 31, 1993..................... $ 95,303 $ 54,373 $ -- $ (81,944) $ 67,732
----------- ----------- ----- -------- -----------
- ------------------------
(a) Deductions represent write-offs of specifically identified accounts.
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GTS DURATEK, INC.
Dated: March 19, 1996
By: /s/ ROBERT E. PRINCE
-----------------------------------
Robert E. Prince
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacity and on the dates indicated.
Principal Executive Officer:
March 19, 1996 /s/ ROBERT E. PRINCE
---------------------------------------------
ROBERT E. PRINCE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Principal Financial Officer:
March 19, 1996 /s/ ROBERT F. SHAWVER
---------------------------------------------
Robert F. Shawver
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER
Principal Accounting Officer:
March 19, 1996 /s/ Craig T. Bartlett
---------------------------------------------
Craig T. Bartlett
CONTROLLER AND TREASURER
A Majority of the Board of Directors:
March 19, 1996 /s/ DANIEL A. D'ANIELLO
---------------------------------------------
Daniel A. D'Aniello
March 19, 1996 /s/ WILLIAM E. CONWAY, JR.
---------------------------------------------
William E. Conway
March 19, 1996 /s/ JEROME I. FELDMAN
---------------------------------------------
Jerome I. Feldman
March 19, 1996 /s/ STEVEN J. GILBERT
---------------------------------------------
Steven J. Gilbert
March 19, 1996 /s/ MARTIN M. POLLAK
---------------------------------------------
Martin M. Pollak
March 19, 1996 /s/ ROBERT E. PRINCE
---------------------------------------------
Robert E. Prince
March 19, 1996 /s/ EARLE C. WILLIAMS
---------------------------------------------
Earle C. Williams
42
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Vitritek Environmental, Inc.:
We have audited the accompanying balance sheets of Vitritek Environmental, Inc.
as of December 31, 1994 and 1995 and the related statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Vitritek Environmental, Inc. as
of December 31, 1994 and 1995 and the results of their operations and their cash
flows for the years then ended in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Baltimore, Maryland
March 1, 1996
43
VITRITEK ENVIRONMENTAL, INC.
Balance Sheets
December 31, 1994 and 1995
- --------------------------------------------------------------------------------
1994 1995
- --------------------------------------------------------------------------------------------
ASSETS
Current assets:
Accounts receivable $ -- $ 403,600
Cost and estimated earnings in excess of billings on
uncompleted contracts -- 19,000
- --------------------------------------------------------------------------------------------
Total current assets -- 422,600
Machinery and equipment, net of accumulated depreciation of
$70,351 and $228,119 1,507,304 1,349,536
Intangibles, net of accumulated amortization of $58,403 and $75,000 2,237,013 925,000
- --------------------------------------------------------------------------------------------
$3,744,317 $ 2,697,136
- --------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities -- Due to GTS Duratek, Inc. $ -- $ 422,600
- --------------------------------------------------------------------------------------------
Note payable -- Vitritek Holdings Company, L.L.C. 1,750,000 1,750,000
Note payable -- GTS Duratek, Inc. 1,637,432 1,750,000
- --------------------------------------------------------------------------------------------
Total liabilities 3,387,432 3,500,000
- --------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock, $.01 par value; 1,000,000 shares authorized,
issued and outstanding 10,000 10,000
Capital in excess of par value 1,238,037 1,888,037
Deficit (891,152) (2,888,807)
Capital contributions due from stockholders -- (234,694)
- --------------------------------------------------------------------------------------------
Total stockholders' equity 356,885 (1,225,464)
- --------------------------------------------------------------------------------------------
Commitments and contingencies
- --------------------------------------------------------------------------------------------
$3,744,317 $ 2,697,136
- --------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
44
VITRITEK ENVIRONMENTAL, INC.
Statements of Operations
Years ended December 31, 1994 and 1995
- --------------------------------------------------------------------------------
1994 1995
- -------------------------------------------------------------------------------------------
Revenues $ 105,173 $ 678,989
Cost of revenues 72,096 546,230
- -------------------------------------------------------------------------------------------
Gross profit 33,077 132,759
- -------------------------------------------------------------------------------------------
Expenses:
Selling, general and administrative 440,274 488,807
Research and development 85,918 --
Royalties paid to related parties 150,000 80,000
Write-off of intangible asset -- 1,211,607
- -------------------------------------------------------------------------------------------
676,192 1,780,414
- -------------------------------------------------------------------------------------------
Loss from operations (643,115) (1,647,655)
Interest expense on stockholder notes (248,037) (350,000)
- -------------------------------------------------------------------------------------------
Net loss $(891,152) $(1,997,655)
- -------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
45
VITRITEK ENVIRONMENTAL, INC.
Statements of Stockholders' Equity
Years ended December 31, 1994 and 1995
- --------------------------------------------------------------------------------
Capital Total
Common stock Capital in contributions stock-
---------------------- excess of due from holders'
Shares Amount par value Deficit stockholders equity
- -------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 1,000,000 $ 10,000 $ 990,000 $ -- $ -- $ 1,000,000
Net loss -- -- -- (891,152) -- (891,152)
Interest expense
forgiven by
stockholders -- -- 248,037 -- -- 248,037
- -------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 1,000,000 $ 10,000 1,238,037 (891,152) -- 356,885
Capital contributions
due from stockholders -- -- 300,000 -- (300,000) --
Capital contributions
received from
stockholders -- -- -- -- 65,306 65,306
Net loss -- -- -- (1,997,655) -- (1,997,655)
Interest expense
forgiven by
stockholders -- -- 350,000 -- -- 350,000
- -------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 1,000,000 $ 10,000 $1,888,037 $(2,888,807) $ (234,694) $(1,225,464)
- -------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
46
VITRITEK ENVIRONMENTAL, INC.
Statements of Cash Flows
Years ended December 31, 1994 and 1995
- --------------------------------------------------------------------------------
1994 1995
- -------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $(891,152) $(1,997,655)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 128,754 267,176
Write-off of intangible asset -- 1,211,607
Interest expense forgiven 248,037 350,000
Change in operating items:
Accounts receivable -- (19,000)
Cost and estimated earnings in excess of billings on
uncompleted contracts -- (403,600)
Due to GTS Duratek, Inc. -- 422,600
- -------------------------------------------------------------------------------------------
Net cash used in operations (514,361) (168,872)
- -------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to machinery and equipment (342,843) --
Additions to intangibles (30,228) (9,002)
- -------------------------------------------------------------------------------------------
Net cash used in investing activities (373,071) (9,002)
- -------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from note payable -- GTS Duratek, Inc. 887,432 112,568
Capital contributions received from stockholders -- 65,306
- -------------------------------------------------------------------------------------------
Net cash provided by financing activities 887,432 177,874
- -------------------------------------------------------------------------------------------
Net increase in cash -- --
- -------------------------------------------------------------------------------------------
Cash at beginning of year -- --
- -------------------------------------------------------------------------------------------
Cash at end of year $ -- $ --
- -------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
47
VITRITEK ENVIRONMENTAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
(1) ORGANIZATION, DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Vitritek Environmental, Inc. (the "Company") is a corporate joint venture
formed on December 28, 1993 to market and commercialize technologies for the
vitrification of non-radioactive asbestos, medical and hazardous waste.
The Company is 50% owned by Vitritek Holdings Company, L.L.C. (VHC) and 50%
owned by GTS Duratek, Inc. (GTS). On the date of formation, the stockholders
contributed in exchange for 500,000 shares each of the Company's Common Stock,
medical and hazardous waste technology which they had jointly acquired from
Environmental Corporation of America for $1 million in October 1993.
In addition, the parties jointly contributed $2.5 million of equipment and
asbestos vitrification technology in exchange for notes payable of $1,750,000 to
VHC and $750,000 to GTS. The stockholders of VHC had developed the technology in
a predecessor entity which was merged into the Company. GTS acquired its
interest in the equipment and technology at the date of formation through
issuing shares of its common stock valued at $750,000 to the stockholders of the
predecessor entity.
In connection with the joint venture agreement, GTS agreed to fund the first
$1 million of operating costs through issuance of notes on the same terms and
conditions as the VHC note payable. As of December 31, 1995 and 1994, GTS had
funded $1,000,000 and $887,432 of its obligation, respectively.
During 1995, the stockholders agreed to contribute an additional $150,000
each to the Company. At December 31, 1995, $65,306 of the capital contribution
had been received. In the event that the Company requires additional funds the
stockholders have the ability and intent to support the Company through 1996.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MACHINERY AND EQUIPMENT
Machinery and equipment are carried at cost. The Company provides for
depreciation when such assets become operational on a straight-line basis over a
ten-year estimated useful life. Replacements, maintenance and repairs which do
not extend the lives of the assets are expensed as incurred.
INTANGIBLES
Intangible assets consist principally of amounts assigned to asbestos,
medical and hazardous waste technology rights. These amounts are being amortized
over 20 years, on a straight-line basis. The Company assesses the recoverability
of intangible assets by determining whether the amortization over the remaining
life of the assets can be recovered through undiscounted future cash flows. The
amount of impairment, if any, is measured based on projected discounted
operating cash flows.
REVENUE RECOGNITION
The Company generates substantially all of its revenue under fixed-price
contracts. Revenue from contracts is recognized on the percentage-of-completion
method as costs are incurred and includes estimated fees at predetermined rates
as measured by the cost-to-cost basis. Contract costs include all direct labor,
material costs and the indirect costs related to contract performance.
Differences between recorded costs, estimated earnings and final billings are
recognized in the period in which they become determinable. Costs and estimated
earnings in excess of billings on uncompleted contracts are recorded as assets.
Billings in excess of costs and estimated earnings on uncompleted contracts are
recorded as liabilities. Retainages, amounts subject to future negotiation and
amounts related to claims are not material.
48
VITRITEK ENVIRONMENTAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Deferred tax assets and liabilities are recognized for the estimated future
tax consequences of temporary differences between the financial reporting and
tax bases of assets and liabilities based on enacted tax rates in effect when
such amounts are expected to be realized or settled. Recognition of deferred tax
assets is limited to amounts expected to be realized based on consideration of
available evidence, including tax planning strategies and other factors. The
effects of changes in tax laws or rates on deferred tax assets and liabilities
are recognized in the period that includes the enactment date.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments, consisting of accounts
receivable and due to GTS Duratek, Inc. approximate carrying value.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and their respective
disclosures to prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ significantly from
those estimates.
(3) NOTES PAYABLE
The Company has notes payable of $1,750,000 due to each of VHC and GTS at
December 31, 1995. The notes bears interest at prime rate plus 1% (9.5% at
December 31, 1995) and are due on December 22, 2003. Interest is payable
semi-annually on June 30 and December 31, of each year.
Accrued interest on notes payable to VHC and GTS through December 31, 1994
and 1995 of $248,037 and $350,000 was forgiven by the parties through a
contribution to capital, respectively.
(4) WRITE-OFF OF INTANGIBLE ASSET
During 1995, management of the Company determined that the market for
asbestos waste virtification was not developing as expected, not due to the
viability of the technology but rather as a result of the economic factors in
the marketplace. Currently, traditional asbestos waste disposal methods are
significantly less expensive than vitrification. When the technology rights were
acquired in 1993, the Company had several promising opportunities which have
never came to fruition.
While the Company will continue to monitor the asbestos vitrification
market, management presently believes it is unlikely that the Company will
generate any cash flows from these activities in the near term and accordingly,
has written-off the carrying value of the technology right related to asbestos
vitrification of $1,211,607 in the statement of operations for the year ended
December 31, 1995.
(5) INCOME TAXES
At December 31, 1995, the Company has a net operating loss carryforward of
approximately $650,000 which is available to offset future taxable earnings of
the Company through 2009. Deferred tax assets at December 31, 1995 and 1994 are
offset by a valuation allowance.
(6) BUSINESS AND CREDIT CONCENTRATIONS
The Company's revenues from 1995 are derived primarily from two customers
and at December 31, 1995, all of the Company's accounts receivable were due from
these entities.
49
VITRITEK ENVIRONMENTAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
(7) COMMITMENTS AND CONTINGENCIES
The Company has licensed from two scientists, who are currently stockholders
of VHC, certain proprietary technology relating to asbestos, medical and
hazardous waste vitrification. The agreement, as amended October 15, 1993,
expires 17 years after the effective date of the agreement or upon the
expiration of the last expiring patent, whichever shall occur later. The
agreement stipulates the Company make royalty payments attributable to the
licensed technology. The Company made three quarterly payments of $50,000 in
1994 and four quarterly payments of $20,000 in 1995.
50
EXHIBITS INDEX
EXHIBIT NO. PAGE
- ----------- -----------
3.1 Amended and Restated Certificate of Incorporation of the Registrant. Incorporated herein by
reference to Exhibit 3.6 of the Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 (File No. 0-14292).
3.2 By-Laws of the Registrant. Incorporated herein by reference to Exhibit 3.3 of the Registrant's
Registration Statement on Form S-1 (File No. 33-2062).
4.1 Certificate of Designations of the 8% Cumulative Convertible Redeemable Preferred Stock dated
January 23, 1995. Incorporated herein by reference to Exhibit 4.1 of the Registrant's Current
Report on Form 8-K filed on February 1, 1995 (File No. 0-14292).
4.2 Stock Purchase Agreement among Carlyle Partners II, L.P., Carlyle International Partners II,
L.P., Carlyle International Partners III, L.P., C/S International Partners, Carlyle-GTSD
Partners, L.P., Carlyle-GTSD Partners II, L.P. and GTS Duratek, Inc. and National Patent
Development Corporation dated as of January 24, 1995. Incorporated herein by reference to
Exhibit 4.2 of the Registrant's Current Report on Form 8-K filed on February 1, 1995 (File No.
0-14292).
4.3 Stockholders Agreement by and among GTS Duratek, Inc., Carlyle Partners II, L.P., Carlyle
International Partners II, L.P., Carlyle International Partners III, L.P., C/S International
Partners, Carlyle-GTSD Partners, L.P., Carlyle-GTSD Partners II, L.P. and GTS Duratek, Inc. and
National Patent Development Corporation dated as of January 24, 1995. Incorporated herein by
reference to Exhibit 4.3 of the Registrant's Current Report on Form 8-K filed on February 1,
1995 (File No. 0-14292).
4.4 Registration Rights Agreement by and among GTS Duratek, Inc., Carlyle Partners II, L.P., Carlyle
International Partners II, L.P., Carlyle- International Partners III, L.P., C/S International
Partners, Carlyle-GTSD Partners, L.P., Carlyle-GTSD Partners II, L.P. and GTS Duratek, Inc. and
National Patent Development Corporation dated as of January 24, 1995. Incorporated herein by
reference to Exhibit 4.4 of the Registrant's Current Report on Form 8-K filed on February 1,
1995 (File No. 0-14292).
4.5 Convertible Debenture issued by GTS Duratek, Inc., General Technical Services, Inc., GTS
Instrument Services Incorporated to BNFL Inc. dated November 7, 1995. Incorporated herein by
reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30,
1995 (File No. 0-14292).
10.1 1984 Duratek Corporation Stock Option Plan, as Amended. Incorporated herein by reference to
Exhibit 10.9 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990
(File No. 0-14292).
10.2 Asset Purchase Agreement dated August 20, 1990 between Chem-Nuclear Systems, Inc. and Duratek
Corporation. Incorporated herein by reference to Exhibit 1 to the Registrant's Current Report on
Form 8-K filed on August 20, 1990 (File No. 0-14292).
51
EXHIBIT NO. PAGE
- ----------- -----------
10.3 Loan and Security Agreement dated February 9, 1993 between The Bank of Baltimore and GTS Duratek,
Inc., General Technical Service, Inc., and GTS Instrument Services, Inc. Incorporated herein by
reference to Exhibit 10.8 of the Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1993 (File No. 0-14292).
10.4 License Agreement dated as of August 17, 1992 between GTS Duratek, Inc. and Dr. Theodore Aaron
Litovitz and Dr. Pedro Buarque de Macedo. Incorporated herein by reference to Exhibit 10.9 of
the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992 (File No. 0-
14292).
10.5 Purchase Agreement dated October 15, 1993 between GTS Duratek, Inc. and Environmental Corporation
of America. Incorporated herein by reference to Exhibit 2 of the Registrant's Current Report on
Form 8-K dated October 15, 1993 (File No. 0-14292).
10.6 Warrant Agreement dated October 15, 1993 between GTS Duratek, Inc. and Environmental Corporation
of America. Incorporated herein by reference to Exhibit 2 of the Registrant's Current Report on
Form 8-K dated October 15, 1993 (File No. 0-14292).
10.7 Stock Purchase Agreement dated December 22, 1993 between GTS Duratek, Inc. and Jack J. Spitzer.
Incorporated herein by reference to Exhibit 1 of the Registrant's Current Report on Form 8-K
dated December 22, 1993 (File No. 0-14292).
10.8 Stock Purchase Agreement dated December 22, 1993 between GTS Duratek, Inc. and Joseph H.
Domberger. Incorporated herein by reference to Exhibit 2 of the Registrant's Current Report on
Form 8-K dated December 22, 1993 (File No. 0-14292).
10.9 Stockholders' Agreement dated December 28, 1993 between GTS Duratek, Inc. and Vitritek Holdings,
L.L.C. Incorporated herein by reference to Exhibit 3 of the Registrant's Current Report on Form
8-K dated December 22, 1993 (File No. 0-14292).
10.10 Agreement dated January 14, 1994 between GTS Duratek, Inc. and Westinghouse Savannah River
Company. Incorporated herein by reference to Exhibit 10.17 of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1993 (File No. 0-14292).
10.11 Agreement dated February 24, 1994 between GTS Duratek, Inc. and the University of Chicago
(Operator of Argonne National Laboratory). Incorporated herein by reference to Exhibit 10.18 of
the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 (File No.
0-14292).
10.12 Agreement dated September 15, 1994 between DuraChem Limited Partnership, a Maryland limited
partnership, by and among CNSI Sub, Inc. and GTSD Sub, Inc. as the General Partners, and
Chemical Waste Management, Inc. and GTS Duratek, Inc. as the Limited Partners. Incorporated
herein by reference to Exhibit 10.19 of the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994 (File No. 0-14292).
10.13 Teaming Agreement by and between GTS Duratek, Inc. and BNFL, Inc. dated November 7, 1995.
Incorporated herein by reference to Exhibit 10.20 of the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1995 (File No. 0-14292).
52
EXHIBIT NO. PAGE
- ----------- -----------
10.14 Sublicense Agreement by and between GTS Duratek, Inc. and BNFL dated November 7, 1995.
Incorporated herein by reference to Exhibit 10.21 of the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1995 (File No. 0-14292).
10.15 Stock Purchase Agreement by and among Bird Environmental Gulf Coast, Inc., Bird Environmental
Technologies, Inc., Bird Corporation, GTS Duratek, Inc. and GTSD Sub II, Inc. dated as of
November 29, 1995. Incorporated herein by reference to Exhibit (c)(2) of the Registrant's
Current Report on Form 8-K filed on December 11, 1995 (File No. 0-14292).
10.16 Stockholders' Agreement by and among Bird Environmental Gulf Coast, Inc., GTS Duratek, Inc., GTSD
Sub II, Inc., Jim S. Hogan, Mark B. Hogan, Barry K. Hogan and Sam J. Lucas III dated November
29, 1995. Incorporated herein by reference to Exhibit (c)(3) of the Registrant's Current Report
on Form 8-K filed on December 11, 1995 (File No. 0-14292).
10.17 Technology License Agreement by and among GTS Duratek, Inc., Bird Environmental Gulf Coast, Inc.
and Jim S. Hogan dated November 29, 1995. Incorporated herein by reference to Exhibit (c)(4) of
the Registrant's Current Report on Form 8-K filed on December 11, 1995 (File No. 0-14292).
21 Subsidiaries of the Registrant (filed herewith).
23 Consent of KPMG Peat Marwick LLP (filed herewith).
27 Financial Data Schedule.
53