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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
Form 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1997
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to _____________
Commission File Number 0-14292
GTS DURATEK, INC.
(Exact name of Registrant as specified in its charter)
Delaware 22-2476180
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10100 Old Columbia Road, Columbia, Maryland 21046
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (410)312-5100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par
Value 0.01 Per
Share
Indicate by check mark X whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent files pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ___
As of March 13, 1998, 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 $157,363,101 based on the average closing price of the Common
Stock as reported by Nasdaq National Market on March 13, 1998. Determination of
affiliate status for this purpose is not a determination of affiliate status for
any other purpose.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the most recent practicable date.
Class Outstanding at March 13, 1998
Common stock, par value $0.01 per share 12,948,026 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants's definitive Proxy Statement for its 1998 Annual
Meeting of Stockholders are incorporated by reference into Part III hereof.
Form 10-K Cross-Reference Sheet
PART I Page
Item 1. Business ................................................. 1
Item 2. Properties ............................................... 20
Item 3. Legal Proceedings ........................................ 20
Item 4. Submission of Matters to a Vote of Security Holders ...... 20
PART II
Item 5. Market For Registrant's Common Equity and
Related Stockholder Matters ........................... 21
Item 6. Selected Financial Data .................................. 22
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations ......... 23
Item 8. Financial Statements and Supplementary Data .............. 29
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ................ 54
PART III
Item 10. Directors and Executive Officers of the Registrant* ...... 55
Item 11. Execution Compensation ................................... 56
Item 12. Security Ownership of Certain Beneficial Owners
and Management* ....................................... 56
Item 13. Certain Relationships and Related Transactions* .......... 56
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K ........................................... 57
Signatures ............................................................. 59
* Incorporated by reference from registrant's definitive Proxy Statement for
the Annual Meeting of Stockholders to be held May 19, 1998 which Proxy
Statement will be filed not later than 120 days after the end of the fiscal
year covered by this Annual Report on Form 10-K.
Part I
Item 1. Business
Overview
GTS Duratek, Inc. (the "Company") provides waste treatment solutions for
radioactive, hazardous, mixed (i.e. intermingled radioactive and hazardous) and
other wastes. The Company combines proprietary technologies for treating various
waste streams with a staff of highly skilled personnel with significant
environmental experience to offer its customers a comprehensive approach to
their waste treatment needs that includes commercial waste processing services,
government waste processing services and technical support services. The
Company's strategy is to (i) provide the low cost solution to process
contaminated waste streams, (ii) combine its proprietary technologies and
technical support services to provide full-service waste treatment, and (iii)
team, where appropriate, with other companies with complementary expertise to
advance GTS Duratek's treatment solutions within its target markets and into new
markets.
The Company conducts its commercial waste processing operations principally
at its Bear Creek Operations Facility located in Oak Ridge, Tennessee. This
facility is the largest commercial waste processing facility for low-level
radioactive waste in the United States and has the capacity to process 30
million pounds of radioactive waste per year. Generators of low-level
radioactive waste send their waste to this facility where the Company, utilizing
a combination of treatment technologies, processes the waste, achieving
significant volume and mass reduction, before sending it to a landfill for
disposal. Accordingly, the Company believes its customers benefit from
significant cost savings as compared to other commercially-available
alternatives. The Company's waste treatment technologies utilized at the Bear
Creek Operations Facility include incineration, compaction, and metal
decontamination and recycling. Other technologies used by the Company in its
commercial waste processing operations include vitrification, stream reforming,
thermal desorption and ion exchange. The Company's technologies can be used
independently or in tandem to process its customers' waste for long-term storage
and disposal. The Company's ability to integrate its waste treatment
technologies enables it to handle a diversity of waste streams in a
cost-effective manner.
The Company also provides on-site waste processing services on large
government projects for the United States Department of Energy ("DOE"). The
on-site waste processing services provided by the Company on DOE projects
include program development, waste characterization, on-site waste treatment,
facility operation, packaging and shipping of residual waste, profiling and
manifesting the processed waste and selected technical support services. In
November 1995, the Company and BNFL, Inc. ("BNFL"), the U.S. subsidiary of
British Nuclear Fuels plc, formed a strategic alliance, agreeing to team on five
major DOE environmental remediation projects. To date, the Company and BNFL have
been jointly awarded contracts from the DOE on two of such projects, the Hanford
Tank Waste Remediation System and the Idaho Advanced Mixed Waste Treatment
Facility projects.
The Company's technical support services encompass over 480 engineers,
consultants and technicians, some of whom are full-time employees and the
balance of whom are contract employees, who support and complement the Company's
commercial and government waste processing operations and also 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 operations. The technical support services provided by the Company for
its customers include site decontamination and decommissioning, radiological
engineering services, staff augmentation and outage support (principally to
assist nuclear power plants during regular maintenance shutdowns),
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environmental and computer consulting and environmental safety and health
training. Having these technical resources available has enabled the Company to
move its technologies from bench-scale laboratory testing to field operations
and commercial application more rapidly and to handle larger scope waste cleanup
projects.
On April 18, 1997, the Company acquired 100% of the outstanding capital
stock of The Scientific Ecology Group, Inc. ("SEG") from Westinghouse Electric
Corporation ("Westinghouse"). The Company's commercial waste processing at its
Bear Creek Operations Facility and a significant portion of its technical
support services, particularly the site decontamination and decommissioning
services, constituted the business of SEG and have been integrated into the
Company's operations since the date of acquisition. Also included in the
Company's current operations as a result of the acquisition are transportation
services for radioactive wastes. The Company maintains a fleet of tractors,
trailers and shipping containers for transporting radioactive wastes from
customers' sites for processing and disposal.
The Company has developed the following joint venture and collaborative
arrangements, among others, in order to advance the commercialization of its
waste treatment technologies and increase the number of markets that it serves:
o The Vitreous State Laboratory of The Catholic University of America in
Washington, D.C. ("VSL"). The Company has an established research and
development relationship with the VSL, one of the leading research centers
in the world for glass technology, including vitrification of waste.
o BNFL, Inc. ("BNFL"). In November 1995, the Company formed a strategic
alliance with BNFL to jointly pursue up to five major DOE environmental
remediation projects. BNFL is the U.S. subsidiary of British Nuclear Fuels
plc, one of the largest processors of radioactive waste in the world. To
date, the Company and BNFL have agreed to jointly pursue three major DOE
waste treatment projects and have been jointly awarded contracts from the
DOE on two of such projects.
o The Carlyle Group ("Carlyle"). In January 1995, Carlyle, a Washington,
D.C.-based private merchant bank, made a significant investment in the
Company. Carlyle provided the Company with a significant capital infusion
and, on a continuing basis, provides the Company with experience with
companies that contract with the federal government.
The Company seeks to utilize the complementary technical expertise or
commercial experience of the other parties in these collaborative arrangements
and, where possible, to develop additional collaborative arrangements, to pursue
its primary markets and expand into new markets.
Commercial Waste Processing
The Company conducts its commercial waste processing operations principally
at its Bear Creek Operations Facility located in Oak Ridge, Tennessee. This
facility is the largest commercial waste processing facility for low-level
radioactive waste in the United States and has the capacity to process 30
million pounds of radioactive waste per year. Generators of low-level
radioactive waste send their waste to this facility where the Company, utilizing
a combination of treatment technologies, processes the waste, achieving
significant volume and mass reduction, before sending it to a landfill for
disposal. Accordingly, the Company believes its customers benefit from
significant cost savings as compared to other commercially-available
alternatives. The Company's waste treatment technologies utilized at the Bear
Creek Operations Facililty include incineration, compaction and metal
decontamination and recycling.
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Other technologies used by the Company in its commercial waste processing
operations include vitrification, stream reforming, thermal desorption and ion
exchange. The Company's technologies can be used independently or in tandem to
process its customers' waste for long-term storage and disposal. The Company's
ability to integrate its waste treatment technologies enables it to handle a
diversity of waste streams in a cost-effective manner.
The Company has developed or acquired several waste treatment technologies
for use on a variety of radioactive, hazardous, mixed and other waste streams.
The following is a brief summary of the waste treatment technologies that are
being utilized by the Company.
Vitrification. The Company's vitrification technology converts waste to
environmentally stable, leach-resistant glass through a patented
high-temperature melter system known as a DuraMelter(TM). The Company's
vitrification technology involves combining radioactive, hazardous, mixed and
other waste with glass-forming additives in a DuraMelter(TM) that reaches
temperatures of 1150(degree)C to 1450(degree)C (or 2100(degree)F to
2640(degree)F). The high temperatures of the DuraMelter(TM) cause the waste and
any additives, to form a molten liquid that becomes solid glass as it cools. As
the molten liquid cools, the radioactive or hazardous atoms become chemically
bonded in the molecular structure of the glass for long-term storage or
disposal, thereby virtually eliminating contamination of the environment. For
certain waste streams, the Company's vitrification technology can achieve volume
reductions of up to 97%. The glass produced by DuraMelters(TM) passes the United
States Environmental Protection Agency's Toxicity Characteristic Leachate
Procedure (TCLP), one of the most commonly used criteria for waste acceptance,
particularly hazardous and mixed waste, at land disposal facilities.
The DuraMelter(TM) is a proprietary melter system within a refractory-lined
cavity incorporating submerged electrodes which heat up the materials within the
cavity. Contaminated waste materials are deposited onto a melt surface in either
a liquid (slurry) or a solid form. Glass forming additives are also introduced
into the system and the amount of such additives is dependent upon the
characteristics of the waste stream. As the electrodes in the DuraMelter(TM)
raise the temperature above 600(degree)C, the waste and additive mixture becomes
electrically conductive. Resistance to the passage of electricity through the
mixture causes further heating and maintains the waste and additive mixture in a
molten state. This process is known as "joule heating" and typically requires
temperatures of about 1150(degree)C. Within the DuraMelter(TM), water evaporates
and organic substances are oxidized forming simple gases which are channeled
into the patented off-gas treatment system. The inorganic radioactive or
hazardous substances in the waste are dissolved into the molten glass mixture.
The molten glass exits through a side opening near the floor of the melting
cavity and, depending upon the characteristics of the waste stream, is either
discharged in bulk or directed into the proprietary GTS Duratek gem machine
where it forms into beads, 1 to 2 centimeters in diameter, for long-term
storage. As the beads of molten mixture cool, the inorganic radioactive or
hazardous substances become chemically bonded or "locked" into the molecular
structure of the glass.
DuraMelters(TM) range in size from small bench-scale units used for testing
and characterization of waste streams to commercial sized melters designed for
large waste treatment and remediation projects. Currently, the Company's largest
commercial operating DuraMelters(TM) can process up to approximately 400 cubic
feet of waste per day. The design of the DuraMelter(TM) can be modified
depending upon the characteristics of the waste stream to be processed. To
process waste streams that have a higher content of soil or sand, the Company
has designed a DuraMelter(TM) with higher temperature capability (up to
1450(degree)C or 2640(degree)F). To process waste streams that include a high
content of corrosive elements such as sulfates, phosphates, lead and nitrates,
the Company has designed a DuraMelter(TM) with multiple waste chambers to
protect the electrodes from the corrosiveness of the waste stream.
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Incineration. Incineration is the most cost-effective treatment for most
dry active waste and is the preferred waste treatment technology of many of the
Company's customers for nonhazardous waste oils and other waste liquids. The
Company's two incinerators at its Bear Creek Operations Facility are the only
two licensed commercial low-level radioactive waste incinerators in the United
States. Each of the Company's incinerators is capable of processing solid waste
at up to 1,600 pounds per hour and up to 30 gallons of radioactive, nonhazardous
waste oils simultaneously. The proprietary ash transport system of the Company's
incinerators mixes ash with air, resulting in complete burning of all
combustible material without excessive particulate carry-over common to most
incinerators. In addition, the secondary chamber utilizes two burners at up to
2200(0)F to ensure complete combustion of all volatile materials. Incinerator
ash and fly ash are compacted in the Company's UltraCompactor(TM) to form a
high-density, nondispersible solid which is packaged and shipped for disposal.
The incinerators are also equipped with a combination of emission control
equipment and technology to maximize environmental and employee safety,
including a heat recovery boiler for off-gas temperature control, a baghouse
filter for particulate control, a dual HEPA bank for contamination control, a
wet scrubber for acid gas removal, an evaporator to concentrate and solidify
suspended and dissolved solids in the liquid from the scrubbers and a recycling
system so that water can be recycled for reuse or processed in the incinerator
which eliminates all liquid effluents.
Compaction. Achieving maximum density is critical to cost-effective
radioactive waste disposal at most burial sites. The Company's
UltraCompactor(TM) at its Bear Creek Operations Facility is the world's largest
compactor available for low-level radioactive waste, capable of compacting both
drums and boxes (up to 38 cubic feet) with the force of 10 million pounds. The
UltraCompactor(TM) has a capacity of 70,000 cubic feet per month. Average volume
reduction using the Company's compaction technology is approximately six times
for dry active waste and eight times for asbestos. Typically, the waste
processed utilizing this technology is dry active waste and includes paper,
plastic, asbestos, metals, woods and filters. Other items that have been
successfully volume reduced using the UltraCompactor(TM) include soils, motors,
pumps, pipes, valves and conduits. The Company also has a mobile compactor which
can be operated at the customer's site. The mobile supercompactor utilizes 2,200
tons of compaction force, achieves volume reduction rates of 60% to 80% and is
suited for smaller-scale jobs on concrete, rubble, steel structures, valve
bodies and other hard-to-compact material near theoretical density.
Metal Decontamination and Recycling. The Company's metals processing
program at its Bear Creek Operations Facility provides a cost-effective solution
for radioactively contaminated metals utilizing its full-service capabilities of
surveying, decontaminating and melting. Upon arrival at the Company's Bear Creek
Operations Facility, the Company examines the metal and sorts it for processing
based on the contamination level of the metal to achieve the most cost-effective
process for recycling metal. If it is more cost-effective to dispose of it
rather than to recycle it, the Company will volume reduce the metal using its
UltraCompactor(TM) and send it to an appropriate burial site. If the metal can
be decontaminated and commercially recycled, the Company will employ its
decontamination technologies which incorporate chemical, abrasive grit/shot,
sponge and carbon-dioxide processing. The Company's specialized decontamination
equipment allows multiple shapes and metal types to be successfully treated for
commercial recycling. For those metals that cannot be economically
decontaminated to levels low enough for free release, the Company will utilize
its metal melting technology. The Company's 20 ton, 7,200 kW electric induction
furnace, the largest available in the United States, operates exclusively for
melting and recycling radioactively contaminated metal. This furnace is capable
of processing various types of ferrous metals over a broad alloy spectrum and
copper and lead. All of the metal processed through the metal melt furnace is
recycled into shield blocks and provided to various high-energy physics projects
throughout the United States and Canada. The decontamination and/or recycling of
radioactively-contaminated metal has two principal benefits, it eliminates the
liability for the original waste generator and it eliminates the cost of burial.
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Steam Reforming. The Company's steam reforming technology is designed for
processing the toughest wastes including mixed waste, waste requiring
segregation and waste exhibiting high activity levels. In particular, the
Company has successfully utilized this technology to process radiologically
contaminated medical and biological wastes. The system's compact size,
containment integrity, in-drum processing option and steam-based chemistry offer
significant safety and regulatory advantages over most incinerator or other
thermal destruction systems. The Company holds exclusive rights to this
proprietary technology, which first vaporizes organics in the waste, either in
liquid or solid forms, and then converts those gases to a dry, nonhazardous,
mineral-like solid residue with greater than 99.99% efficiency. Using its steam
reforming technology, the Company is able to achieve volume reductions of 100
times.
The steam reforming process is conducted in a steam-laden, oxygen-deficient
environment that converts organic and biochemical compounds to carbon monoxide,
hydrogen, carbon dioxide and water. The two-step process first employs an
evaporation phase (between 700(0)F and 900(0)F) which breaks down and vaporizes
most organic compounds and water from the waste. The waste solids are not
exposed to higher temperatures which would tend to volatize metals and other
radionuclides from the residue. The volatized gases exit the evaporator and are
passed through a filter which removes any fine entrained particles from the
gases. Particulate-free gases exiting the filter are then co-mixed with
additional superheated steam and passed through a high-temperature reformer. The
gases, some of which are organic fractions of the original waste material, are
fully decomposed in the reformer at high destruction efficiencies. The resulting
products are simple gases and inert mineral-like residue.
Because the Company's steam reforming technology does not use combustion
and because the secondary pollutants are not formed by the steam reforming
process, it is not classified as an incinerator by the EPA and is therefore
easily permitted for on-site operations. Accordingly, the Company can provide a
compact mobile unit for on-site processing at the customer's facility. For
example, the Company successfully processed high-level radioactive wastes at
Portland General Electric's Trojan Nuclear Plant. The project included sorting
and packaging spent fuel pool wastes submerged in 20 feet of water, removing
wastes from the fuel pool, destructing hydrogen bearing materials in the mobile
steam reformer and sealing the processed wastes in dry-storage capsules for
long-term storage.
Thermal Desorption. 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. The Company utilizes this technology at its DuraTherm Recycling Center,
a RCRA Part B-permitted hazardous waste recycling center located near Houston,
Texas, where it processes high solid content petroleum refinery and
petrochemical manufacturing wastes to reclaim and recycle usable fuels. The
Company owns an 80% interest in the facility and the 20% minority interest is
owned by the operators of the facility, each of whom has entered into an
employment agreement providing for incentive compensation tied directly to the
financial performance of the facility.
In the thermal desorption process, hydrocarbon sludges and cakes are placed
in a thermal desorber which utilizes temperatures from 500(degree)F to
1,350(degree)F, depending on the particular waste being treated, 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 has conducted bench-scale and pilot-scale
testing of the thermal desorption technology for processing organic ion exchange
media and dry active waste debris. The results of this testing indicated that
the technology can be adapted to radioactive waste processing.
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Ion Exchange. The Company has developed a family of selective ion exchange
media, called DURASIL(R), which selectively targets and removes specific
radioactive, toxic or hazardous ions from wastewater while passing benign ions.
DURASIL(R) is formulated to separate specific contaminants from liquid waste
streams thereby allowing radioactive and hazardous ions to be removed and
separated into their respective species. Since radioactive and hazardous
materials are regulated by two different government agencies, this ability to
separate mixed waste greatly simplifies its disposal. DURASIL(R) also has
physical characteristics that enable it to endure extreme waste water processing
conditions. It is mechanically stable and nonflammable, does not shrink or
swell, is virtually immune to radiation damage and has no effect on the pH of
the waste stream. The Company has developed different DURASIL(R) ion exchange
media depending on the characteristics of the liquid waste stream. The Company
manufactures and supplies highly specialized waste water purification systems
and the patented DURASIL(R) for commercial nuclear power plants, DOE facilities
and industrial clients.
Other Commercial Waste Processing Services. As part of its commercial waste
processing operations, the Company provides certain complementary services to
its customers including transportation and waste screening services. Through a
wholly-owned subsidiary, Hittman Transport Services, Inc. ("Hittman"), the
Company maintains a fleet of tractors, trailers and shipping containers for
transporting radioactive waste and radioactively contaminated equipment for
processing and disposal. All of Hittman's vehicles are constantly monitored via
satellite to optimize waste pickup and delivery scheduling. Hittman maintains
terminal locations around the country that are conveniently located to 90% of
the commercial nuclear power plants in the United States. The Company also
provides waste screening services for its customers, known as the "Green is
Clean Program," which provides customers with third-party verification that
their waste materials meet free release criteria. The Green is Clean Program
enables customers to send their "clean" wastes to an industrial landfill, where
the burial costs are significantly lower, rather than to a higher priced
low-level radioactive waste landfill.
Government Waste Processing
The Company provides on-site waste processing services on large government
projects for the DOE. The on-site waste processing services provided by the
Company on DOE projects include program development, waste characterization,
on-site waste treatment, facility operation, packaging and shipping of residual
waste, profiling and manifesting the processed waste and selected technical
support services. In November 1995, the Company and BNFL formed a strategic
alliance, agreeing to team on five major DOE environmental remediation projects.
To date, the Company and BNFL have agreed to jointly pursue three major DOE
waste projects and have been jointly awarded contracts from the DOE on two of
such projects, the Hanford Tank Waste Remediation System and the Idaho Advanced
Mixed Waste Treatment Facility projects.
The Company is currently involved in several waste treatment projects for
the DOE. The following is a summary of the status of several of the Company's
major waste treatment projects with the DOE.
Savannah River M-Area Project. The DOE's Savannah River site near Aiken,
South Carolina has approximately 18.7 million cubic feet in total currently
stored inventory and twenty years' projected volume of low-level radioactive and
mixed wastes. This represents about 31% of all of such wastes throughout the DOE
weapons facilities. The Savannah River site is the largest single repository of
low-level radioactive and mixed wastes among all DOE sites.
In November 1993, the Company was awarded a subcontract by the site
management and operations contractor, Westinghouse Savannah River Company
("WSRC"), to vitrify 90,000 cubic feet of low-level mixed waste sludge stored in
the M-Area tanks at Savannah River. GTS Duratek's subcontract represents only
0.5% of the total mixed waste inventoried at Savannah River. The
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Company's obligations under this subcontract entailed 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.
Construction of the on-site DuraMelter(TM) began in July 1995 and the
Company began to process waste on-site in October 1996. The Company designed and
constructed the melter, managed construction of the facility that houses it and
serves as the operator of the melter. In addition, the Company's technical
personnel developed all operating, maintenance and radiological control
procedures and training programs and conducted the training. 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 owns and
operates 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 used as a model for contemplated future privatized DOE waste cleanup
projects. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
In March 1997, the Company decided to temporarily suspend processing of
radioactive waste and initiate an unscheduled controlled cool down of the
DuraMelter(TM) at the Savannah River site. This decision was the result of
observations by operations personnel that indicated that excessive wear could be
occurring on certain internal components of the melter. After an extensive
inspection of the condition of the melter, the Company's management decided to
undertake more extensive repairs and modification of the facility, including
melter box replacement, before resumption of radioactive waste processing. As a
result of the necessary repairs and the delay in completing the waste processing
required by the contract, the Company recorded a loss of $5.9 million on the
M-Area contract in the first quarter of 1997 which included the estimated costs
of repairs to the melter and for estimated losses by which it is required to
complete the fixed price contract. The Company resumed radioactive waste
processing in December 1997. Following resumption of processing, management was
able to refine its estimates of costs to complete the contract and recognized an
additional charge of $1.3 million in the fourth quarter of 1997. The Company is
seeking to extend the date by which it is required to complete the waste
processing under the contract from the current completion date of April 1998 and
is currently negotiating an extension of the contract. However, in the event the
Company is unable to obtain a contract extension, the Company could incur
additional losses which could be material.
Hanford Tank Waste Remediation System Project. In September 1996, the team
led by BNFL, of which the Company is a key member, was awarded a contract for
the Hanford Tank Water cleanup at the DOE's site in Hanford, Washington. The
Hanford site is the single largest DOE facility and contains the largest amount
of high-level radioactive waste in the United States with approximately 61
million gallons of high-level radioactive waste and low-level radioactive waste
which is contained in 177 underground storage tanks.
The Company will provide the technical and support services for vitrifying
both the high-level and low-level waste for the project. Part I of the project
is divided into two parts. Part IA, which was concluded in January 1998,
consisted of completing the facility conceptual design, initiating the
environmental permitting process and submitting a proposal to the DOE for the
next phase. The Company completed its portion of Part IA by delivering the
conceptual design for high level waste (HLW) and low active waste (LAW) melters,
and by generating a cost estimate for the design and construction of these
systems. In addition during Part IA, glass formulation and validation testing on
a small scale was performed at the VSL. Based on its evaluation of the proposals
submitted in January 1998, award of the Part IB contract, which could be a
single or dual award, is expected to be made by the DOE in July 1998. The Part
IB contract will be to perform detailed design, construction and operation of a
demonstration facility that will treat between 10-15% of the Hanford tank waste
concluding with the decontamination and decommissioning of the cleaned tanks in
2012.
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In preparation for beginning the detailed design of the demonstration
facility, BNFL has committed $17 million to design, construct and operate a
pilot DuraMelterTM at the Company's headquarters. This pilot DuraMelterTM will
be one-third the size of the full scale melter needed for the Hanford Tank Waste
Remediation System Project and it is anticipated that operations will begin
prior to the end of 1998.
According to DOE estimates, the total Phase I contract is estimated to be
worth $4 billion over 11 years. Phase II of the cleanup to convert all the tank
waste to glass is expected to take 20 to 30 years to complete. The total project
is estimated by the DOE to cost in excess of $20 billion. The Company's portion
of the total contract is undetermined at this point. See "Joint Venture and
Collaborative Arrangements - BNFL."
Idaho Advanced Mixed Waste Treatment Project. In December 1996, the team
led by BNFL, of which the Company is a key member, was awarded the sole contract
by the DOE for the Advanced Mixed Waste Treatment Project (AMWTP) in Idaho
Falls, Idaho. Under the contract, the team will finance, construct and operate a
treatment facility for mixed radioactive and toxic wastes at the DOE's Idaho
National Engineering and Environmental Laboratory (INEEL). The facility will
treat and package for disposal approximately 65,000 cubic meters of mixed and
transuranic waste now stored or buried at INEEL. The contract also provides an
option for the team to treat an additional 120,000 cubic meters of mixed waste
generated by future cleanup operations at INEEL or other DOE sites.
The BNFL-led team plans to utilize vitrification and incineration
technologies developed by the Company in the INEEL project. The Company will be
responsible for the design, development, procurement, and construction
supervision of the waste vitrification and incineration systems. The AMWTP is
split into three phases with the intention of meeting important and aggressive
milestones agreed to by the DOE and the State of Idaho. Phase One includes the
permitting application process and is expected to conclude in April 1999. The
Company has completed its Phase One activities with the submission of its
conceptual design for the vitrification and incineration systems to BNFL in
January 1998. BNFL began the environmental permitting process in January 1998
with the submission of the permit applications to the State of Idaho. Phase Two
includes the design and construction of the facility and operational testing for
a duration of up to three years. Phase Three includes the retrieval of the waste
and operation of the facility with an approximate duration of twelve years.
After the completion of these phases, there will be a decommissioning of the
facility anticipated to take six months. The total contract is estimated to be
worth approximately $1 billion. The Company's portion of the total contract is
undetermined at this point. See "Joint Venture and Collaborative Arrangements -
BNFL."
Technical Support Services
The Company's technical support services encompass over 480 engineers,
consultants and technicians, some of whom are full-time employees and the
balance of whom are contract employees, who support and complement the Company's
commercial and government waste processing operations and also 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 operations. The technical support services provided by the Company for
its customers include site decontamination and decommissioning, radiological
engineering services, staff augmentation and outage support (principally to
assist nuclear power plants during regular maintenance shutdowns), environmental
and computer consulting and environmental safety and health training. The
Company provides these technical support 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, Southern Nuclear Operating Company, New York Power Authority
and Rocky Mountain Remediation Services. Having these technical resources
available has enabled
8
the Company to move its technologies from bench-scale laboratory testing to
field operations and commercial application more rapidly and to handle larger
scope waste cleanup projects.
Site Decontamination and Decommissioning. The Company has performed
decontamination and decommissioning services at over 60 facilities worldwide,
including major scopes of work at two nuclear power plants which have been
completely decommissioned to United States Nuclear Regulatory Commission ("NRC")
requirements. The Company has performed decontamination and decommissioning at
the following commercial nuclear power plants: Fort St. Vrain Nuclear Generating
Station, Humboldt Bay Power Plant Unit 3, Shoreham Nuclear Power Station, Rancho
Seco Nuclear Station, Trojan Nuclear Power Plant and Maine Yankee Atomic Power
Company. Decontamination and decommissioning services provided by the Company
include site radiological surveys, waste characterization, decommissioning
planning, remediation, health physics support, radwaste services and final
surveys. The Company has the technical personnel, who have developed project
techniques accepted by the NRC, programs, procedures, equipment and
instrumentation to handle projects involving small hot cells to large nuclear
power stations. In addition, through its transportation and commercial waste
processing operations, the Company offers its customers a comprehensive solution
to their site decontamination and decommissioning problems.
Radiological Engineering Services. The Company's technical personnel
provide commercial and government customers with a variety of radiological
engineering services including development of health physics and emergency
preparedness programs, MORT analysis, licensing procurement, instrumentation and
radiological training. Most of the Company's senior technical personnel
providing radiological engineering services are fully certified and have
extensive operating plant as well as NRC and DOE experience.
Staff Augmentation and Outage Support Services. The Company provides
trained personnel to assist nuclear power plants undergoing periodic refueling,
maintenance outages, construction or decommissioning. There are 119 nuclear
power generating units in the United States, of which 108 are operational. To
control costs, utilities maintain their permanent staffs at the level needed for
steady-state power operations. They supplement their full-time staffs during
refueling and maintenance outages with skilled contract personnel. Every 12 to
24 months, nuclear power plants are shut down for scheduled maintenance that
typically takes 30 to 90 days. This shutdown and maintenance operation costs the
nuclear power facility on average $1 million for every day it is closed.
Accordingly, there is a strong economic incentive for the nuclear power
facilities to hire trained and experienced personnel for these maintenance
operations in order to complete the servicing as quickly and efficiently as
possible. The Company's trained technicians and personnel are experienced in
outage support procedures and are effective at helping to minimize the cost of
the power facilities' down time.
The offering of services for operating nuclear power plants provides a
considerable market for the Company, despite the fact that no new plants have
been ordered in over 10 years. The demand for the Company's services results
from the extensive overhaul required to extend the life of aging plants,
replacement of major components of existing plants, startup of plants recovering
from long-term shutdown, modifications to the plants resulting from changing
legislation and the decommissioning of plants that have reached the end of their
useful lives.
The Company's largest customer for staff augmentation services is Duke
Power Company, which accounted for approximately 28% and 12% of the Company's
total revenues in 1996 and 1997, respectively. Duke Power currently has seven
nuclear power units at three sites. Under a contract between the Company and
Duke Power which expires in 2000, the Company provides a group of technicians to
the Duke Power system year-round and provides additional personnel to Duke Power
during planned maintenance outages. Other nuclear power utilities to which the
Company provides augmentation and outage support services include Southern
Nuclear Operating Company and New York Power Authority.
9
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 and testing, networking, web site development, quality assurance
audits, non-destructive examination and computer training for a broad base of
clients.
Environmental Safety and Health Training. The Company provides radiation
protection and hazardous waste training services nationwide. The Company's
training specialists prepare candidates, consisting of health physics
technicians and professionals from nuclear power plants, universities and
laboratories nationwide, for the National Registry of Radiation Protection
Technologists and American Board of Health Physics certification examinations.
The Company's training programs enable customers to realize cost savings through
increased worker competence and productivity, enhanced workplace safety and
improved compliance with regulatory requirements.
Joint Venture and Collaborative Arrangements
In order to commercialize its technologies more rapidly and
cost-effectively, the Company has developed several important joint venture and
collaborative arrangements. The following is a summary of certain of these
relationships.
VSL
The Company has established a research and development relationship with
the VSL of The Catholic University in Washington, D.C. pursuant to which the VSL
provides ongoing research and development capabilities and technical services in
support of the Company's waste treatment projects, particularly its government
waste processing operations. In this complementary relationship, the VSL
provides the necessary technology and research and development support while the
Company advances the technology to commercial application.
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."
10
In addition to being the source of the vitrification technologies used by
the Company, the VSL provides ongoing services to the Company in support of its
waste treatment projects, particularly its government waste processing
operations. The VSL conducts expert waste composition and glass treatability
studies before any project is commenced, assists in the initial test melt phase
of each project and works with the Company's engineers in the design adaptation
of the DuraMelter(TM) technology to fit the waste characteristics of each new
cleanup project. In addition, the VSL conducts ongoing research and development
into improvements in the existing vitrification technologies and into entirely
new vitrification techniques, serving in effect as the research and development
arm of the Company. The primary advantage to the Company from its relationship
with the VSL is the access to leading vitrification technologies and ongoing
vitrification research without having to incur the ongoing overhead and
administrative expenses if such capabilities were in house.
In return, the Company provides ongoing project funding for research
conducted at the VSL on behalf of the Company. During 1996 and 1997, the Company
paid $1,343,000 and $255,000, respectively, in research and development funding
to the VSL. For Company waste cleanup projects in which the VSL's technical
services are utilized by the Company, the Company pays the VSL on a time and
expense basis and includes the estimated cost for such services in its formal
bid proposal. The VSL is a not-for-profit institution so it does not include
extra fees or percentage profits in its cost estimates.
BNFL
In November 1995, the Company and BNFL entered into a strategic alliance
agreement. BNFL is the U.S. subsidiary of British Nuclear Fuels plc, a United
Kingdom-based company with annual revenues of approximately $2 billion
worldwide. British Nuclear Fuels plc is one of the largest processors of
radioactive waste in the world and is one of only two companies worldwide with
commercial experience in processing and stabilizing high-level radioactive
wastes. BNFL has been active in the U.S. radioactive waste market for the past
five years, including being selected as a member of the team to manage the DOE's
nuclear waste facility in Rocky Flats, Colorado. Pursuant to the terms of the
strategic alliance, the Company will receive a $1.0 million teaming fee for each
time that BNFL and the Company agree to jointly pursue a major DOE waste
treatment project. To date, the Company and BNFL have agreed to jointly pursue
three major DOE waste treatment projects and have been jointly awarded contracts
from the DOE on two of such projects.
As part of the strategic alliance, BNFL invested $10.0 million in the
Company in the form of a convertible debenture. The debenture accrues non-cash
interest during the first five years at the one-year London Interbank Offered
Rate (LIBOR) and is convertible at the option of BNFL into 1,381,575 shares of
the Common Stock prior to November 7, 2000. BNFL also agreed to provide the
Company with research and development funding of at least $500,000 per year over
five years. The two parties will mutually agree on how the research and
development funding will be spent, but the Company will retain the rights to the
vitrification processes that it develops through this funding. The Company has
agreed as part of the strategic alliance to sublicense its radioactive waste
vitrification technologies to BNFL for use only in the United Kingdom.
In January 1998, the Company received a $17 million commitment from BNFL to
build and operate a pilot DuraMelter(TM) at the Company's headquarters. The
melter will be jointly designed and constructed by the Company's and BNFL's
engineers and it is anticipated that operations will begin prior to the end of
1998. This pilot DuraMelter(TM) will be one-third the size of the full scale
melter needed for the Hanford Tank Waste Remediation System Project.
11
DuraChem
In September 1994, the Company formed a joint venture with Chem-Nuclear
Systems, Inc. ("Chem-Nuclear"), a subsidiary of WMX Technologies, Inc., to
design, construct and operate vitrification facilities to process commercial
radioactive waste for disposal, including low-level radioactive wastes from
nuclear power plants, hospitals, research laboratories and industrial
facilities. The joint venture entity, called DuraChem, is 55% owned by
Chem-Nuclear and 45% by the Company. The joint venture represents the
combination of the Company's proprietary vitrification technology and
Chem-Nuclear's 23 years of experience in providing radioactive waste handling
and processing services. DuraChem will first pursue the disposal market for ion
exchange resins which are generated by nuclear power plants and contaminated
wastes from hospitals and laboratories. The first vitrification facility of this
joint venture is located at Chem-Nuclear's waste processing center at Barnwell,
South Carolina. The DuraChem facility is located adjacent to the Barnwell
landfill, one of the few facilities in the United States permitted to accept
commercially-generated low-level radioactive waste. The Company believes that
DuraChem's location is advantageous because of its proximity to the nation's
primary facility for handling low-level radioactive waste.
In 1995, the Company and Chem-Nuclear constructed a vitrification facility
at Chem-Nuclear's radioactive waste processing center at Barnwell, South
Carolina. The Company designed and constructed a new DuraMelter(TM) at the
facility and is responsible for the vitrification operations. Chem-Nuclear
manages the overall facility and is responsible for procuring all required
operating permits, obtaining the low-level radioactive waste from its customers,
transporting the waste to the facility and removing the waste for ultimate
disposal once it has been vitrified. The need for the services provided by
DuraChem was created by the closure of nationally accessible low-level
radioactive waste disposal sites and the delay by state compacts in opening new
regional sites. The high cost of disposal of certain low-level radioactive waste
materials has caused commercial generators of low-level radioactive waste, in
some instances, to store their waste at their facilities until regional sites
are opened or other low-cost disposal alternatives become available. The
DuraChem facility was expected to begin commercial operations in 1997; however,
as a result of the Company focusing its management and capital resources on (i)
restarting the M-Area melter, (ii) successfully and rapidly incorporating SEG's
business following the acquisition and (iii) meeting commitments to the DOE
privatization cleanups in Hanford, Washington and Idaho Falls, Idaho, the
Company announced in April 1997, that it would reduce the priority of, and
capital commitments to, other projects which have higher levels of marketplace
uncertainty or have longer-term financial prospects including the DuraChem joint
venture. The partners have agreed that the schedule for commencement of
operations at the DuraChem facility will be determined in 1998. The Company's
management anticipates commencement of the facility in 1999, however, changes in
market conditions or other factors could result in additional delays.
Vitritek
Through a joint venture with Vitritek Holdings Company, L.L.C., ("Vitritek
Holdings") a privately-held entity, the Company has extended its vitrification
technology to non-radioactive wastes. The joint venture entity, called Vitritek,
is 50% owned by each of the Company and Vitritek Holdings. The joint venture,
formed in December 1993, represents the consolidation of co-licensing rights to
non-radioactive vitrification technologies previously acquired by the Company
and Vitritek Holdings. Under the terms of the joint venture arrangement, all
funding requirements and all profits are shared equally. The joint venture may
pursue potential international opportunities during 1998; however, the Company
expects the joint venture to have limited operations during 1998.
12
Customers
In its commercial waste processing operations, the Company derives revenues
from the processing and treatment of customer waste streams and from related
waste transportation services. Customers of the Company's commercial waste
processing services include electric utilities, government agencies, industrial
facilities, laboratories, hospitals and others. Revenues derived from commercial
waste processing operations represented approximately 8.9% and 44.2% of the
Company's total revenues in 1996 and 1997, respectively. The Company's
commercial waste processing operations relate primarily to the business
conducted by the former SEG and, prior to the acquisition of SEG in April 1997,
the Company's commercial waste processing operations were limited.
In its government waste processing operations, the Company derives revenues
related to its proprietary vitrification technologies principally through
subcontracts with a combination of DOE contractors and subcontractors including
WSRC and BNFL. Revenues derived from DOE-related subcontracts represented
approximately 16.1% and 3.7% of the Company's total revenues during 1996 and
1997, respectively.
The Company provides technical support services to a diverse group of
government agencies and utilities. Customers include the DOE, the United States
Department of Defense ("DOD"), the United States Environmental Protection Agency
("EPA"), state environmental protection agencies, Duke Power Company, Southern
Nuclear Operating Company, New York Power Authority, and Rocky Mountain
Remediation Services. Revenues derived from technical support services
represented approximately 75% and 52.2% of the Company's total revenues during
1996 and 1997, respectively.
Revenues from Duke Power accounted for approximately 12% of the Company's
revenues for 1997. No other customer accounted for more than 10% of the
Company's total revenues during 1997. The Company has a contract with Duke Power
which expires in 2000 pursuant to which it provides technical support services
and personnel.
Sales and Marketing Strategy
The Company's operations to date, including the commercial waste processing
operations acquired in April 1997, have provided it with extensive knowledge of
commercial and DOE waste stream composition and the factors that influence the
remediation of those waste streams. The Company's internal sales force uses and
will continue to use that knowledge and operating experience to strengthen the
Company's competitive position when pursuing commercial and DOE waste
remediation projects. In addition, through its collaborative arrangements, the
Company will seek to utilize complementary technical expertise, marketing
resources and commercial experience of the other parties to develop additional
business in its primary markets, expand its capabilities in handling a greater
diversity of waste streams and replicate its operating model to pursue
international markets. The Company pursues markets where it can be the most
cost-effective processor of the waste due to its technologies, geographical
proximity to a waste stream, government regulation or its ability to provide a
comprehensive approach to its customers' waste treatment needs.
In its technical support services business, GTS Duratek will seek to
strengthen its relationships with its large utility customers, such as Duke
Power Company, Southern Nuclear Operating Company, New York Power Authority and
Rocky Mountain Remediation Services which are significant contributors to the
Company's total revenues. The Company is also pursuing opportunities with
utilities that are downsizing and outsourcing service work as well as DOE sites
that are privatizing departments such as training and radiological controls. To
enhance the overall profitability of the technical support services business,
the Company is focusing on increasing market share in decontamination and
decommissioning services, environmental and computer consulting,
13
radiation instrument services and environmental health and safety training, all
of which generate relatively higher profit margins than staff augmentation and
outage support. Decontamination and decommissioning services provided to nuclear
facilities encompasses services from initial site characterization to project
completion.
Environmental Matters
Environmental Laws and Regulations Creating a Demand for the Company's
Waste Treatment Technologies
Various environmental protection laws have been enacted and amended during
recent decades in response to public concern over the environment. The
operations of the Company's customers are subject to these evolving laws and the
implementing regulations. The Company believes that the obligations to comply
with the requirements of the following laws contribute to the demand for its
services:
The Atomic Energy Act of 1954 ("AEA") and the Energy Reorganization Act of
1974 (the "ERA") authorize the Nuclear Regulatory Commission ("NRC") to regulate
the receipt, possession, use and transfer of radioactive materials, including
"source material," "special nuclear material," and "byproduct material."
Pursuant to its authority under the AEA, the NRC has adopted regulations that
address the management and disposal of low-level radioactive waste and that
require the licensing of commercial low-level radioactive waste disposal sites.
The storage and disposal of high-level nuclear waste are subject to the
requirements of the Nuclear Waste Policy Act, as amended by the Nuclear Waste
Policy Act Amendments. These statutes regulate the disposal of high-level
nuclear waste by establishing procedures and schedules for siting geologic
repositories for such waste. The statutes also direct EPA to promulgate
environmental standards for the disposal of high-level nuclear waste, and
require the NRC to promulgate standards covering the licensing of waste
repositories. The NRC has issued regulations that address the storage and
disposal of high-level nuclear waste.
The Uranium Mill Tailings Radiation Control Act ("UMTRCA") and the Uranium
Mill Tailings Remedial Action Amendments Act are intended to protect public
health and the environment from hazards associated with uranium ore milling
wastes at active and inactive uranium mills. UMTRCA designates specific inactive
mill sites for remedial action, and gives the DOE the responsibility for
carrying out remedial actions at these sites.
The locations for future low-level radioactive waste disposal facilities
also may be affected by the Low-Level Radioactive Waste Policy Act of 1980
("LLRWPA") and the Low-Level Radioactive Waste Policy Amendments Act ("LLRWPA
Amendments"). The LLRWPA addresses the siting of new low-level radioactive waste
disposal facilities and establishes that each state is responsible for providing
disposal capacity for most low-level commercial radioactive waste generated
within its borders. The statute also encourages groups of states to enter into
compacts providing for the development and operation of low-level radioactive
waste disposal facilities. Incentives for the formation of interstate compacts,
and the deadlines and procedures which states must meet in designating disposal
facilities were modified by the LLRWPA Amendments. At the present time, no new
radioactive waste disposal facilities have been opened by state compacts and
none are expected to open in the near future.
The Resource Conservation and Recovery Act of 1976, as amended ("RCRA")
provides a comprehensive framework for the regulation of the generation,
transportation, treatment, storage and disposal of hazardous waste. The intent
of RCRA is to control hazardous wastes from the time they are generated until
they are properly recycled or treated and disposed. RCRA prohibits improper
hazardous waste disposal and imposes criminal and civil liability for failure to
comply with its
14
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.
The Toxic Substances Control Act ("TSCA") provides EPA with the authority
to regulate over 60,000 commercially produced chemical substances. EPA may
impose requirements involving manufacturing, record keeping, reporting,
importing and exporting. TSCA also established a comprehensive regulatory
program for PCBs which is analogous to the RCRA program for hazardous waste.
The Clean Water Act establishes standards, permits and procedures for
controlling the discharge of pollutants from industrial and municipal wastewater
sources.
The Clean Air Act of 1970, as amended (the "Clean Air Act"), empowers the
EPA to establish and enforce ambient air quality standards and limits of
emissions of pollutants from facilities. This has resulted in tight control over
emissions from technologies like incineration.
The Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA" or "Superfund"), and subsequent amendments under the
Superfund Amendments and Reauthorization Act ("SARA") impose continuing
liability upon generators of hazardous substances (among other parties) and such
potential liability may significantly affect a generator's decision on how to
dispose of the wastes. The Community Right-to-Know mandate established by SARA
requires full disclosure of all environmental releases to the public and
contributes to public awareness and activism regarding corporate environmental
management issues. To the extent a generator's waste can be reported as being
recycled, potential liability and public pressure can be eliminated or
significantly reduced.
CERCLA and SARA, as implemented by the National Contingency Plan, provide
for the investigation and remediation of sites containing hazardous substances.
The Superfund program's regulations require that any remediation of the
hazardous substances meet applicable and relevant and/or appropriate regulatory
requirements. Superfund's remedy selection process includes a preference for
innovative technology. Superfund also establishes strict liability for parties
who generated or transported hazardous substances or owned and operated the
sites containing them. This may create a strong incentive to avoid on-site waste
treatment in favor of utilizing technologies like the Company's waste treatment
technologies, which can, in certain instances, effectively recycle wastes.
The Pollution Prevention Act of 1990 establishes pollution prevention as a
national objective, naming it a primary goal wherever feasible. The act states
that if pollution cannot be prevented, materials should be recycled in an
environmentally safe manner.
Under the mandate of the Federal Facility Compliance Act ("FFCA"), the DOE
is currently engaged in a program to treat and dispose of the mixed waste
currently stored at its facilities. The FFCA required DOE to develop and comply
with treatment and disposal plans for each of its facilities and charges DOE
with developing treatment and disposal capacity for these wastes where it does
not currently exist. The plans must also address the need to treat and dispose
of mixed wastes generated from the remediation of contaminated DOE sites.
15
Environmental Laws and Regulations Affecting the Use of the Company's Waste
Treatment Technologies
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.
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 because they are
specifically listed as such or because they display certain hazardous
characteristics. Under current regulations, waste residues derived from listed
hazardous wastes are 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 U.S. Court of Appeals for
the District of Columbia Circuit, but has been temporarily reinstated until 2001
when the EPA is under court order to develop a revised regulatory approach which
would allow listed wastes to leave the hazardous waste regulatory system if they
met specified concentration limits. The Company's ownership and operation of
treatment facilities also exposes the Company to potential liability for cleanup
of releases of hazardous wastes under RCRA.
Operators of hazardous waste treatment, storage and disposal facilities are
required to obtain RCRA Part-B permits from the EPA or from states authorized to
implement the RCRA program. Obtaining such permits is a lengthy and costly
process that requires regulatory inspection and approval of, among other things,
the facility design, equipment and operating plans and procedures. In addition,
applicants for a RCRA permit for a treatment, storage or disposal facility must
submit detailed information regarding all past waste management practices at
that facility and may be required to undertake corrective action for past
contamination of the site. The Company's DuraTherm facility in San Leon, Texas,
and its facilities in Oak Ridge, Tennessee, are RCRA Part-B permitted
facilities. The Company has developed procedures to ensure compliance with RCRA
permit provisions at the DuraTherm and Bear Creek Operations facilities,
including procedures for ensuring appropriate waste acceptance and scheduling,
waste tracking, manifesting and reporting, and employee training.
If the Company engages in the transportation of hazardous materials, such
as radioactive materials, it will be subject to the requirements of the
Hazardous Materials Transportation Act, as amended by the Hazardous Materials
Transportation Uniform Safety Act. Pursuant to these statutes, the United States
Department of Transportation regulates the transportation of hazardous materials
in commerce. Shippers and carriers of radioactive materials must comply with
both the general requirements for hazardous materials transportation and with
specific requirements for the transportation of radioactive materials. If the
Company 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.
16
CERCLA effectively imposes strict, joint and several liability upon owners
or operators of facilities where a release of hazardous substances has occurred,
upon parties who generated hazardous substances that were released at such
facilities and upon parties who arranged for the transportation of hazardous
substances to such facilities. The Company's ownership and operation of
vitrification, storage and incineration facilities on-site expose the Company to
potential liability under CERCLA for releases of hazardous substances into the
environment at those sites. In the event that off-site storage or disposal
facilities utilized by the Company for final disposition of the glass and
resulting residues from the Company's vitrification and incineration processes
are targeted for investigation and cleanup under CERCLA, the Company could incur
liability as a generator of such materials or by virtue of having arranged for
their transportation and disposal. The Company designs its DuraMelters(TM) to
minimize the potential for release of hazardous substances into the environment.
In addition, the Company has developed plans to manage and minimize the risk of
CERCLA or RCRA liability, including the training of operators, use of
operational controls, and structuring of its relationships with the entities
responsible for the handling of waste materials and by-products.
Company facilities may have to obtain permits under the Clean Water Act,
the Clean Air Act, and corresponding state statutes. The necessity to obtain
such permits depends upon the facility's location and the expected emissions
from the facility. Additional state licenses or approvals may also be required.
The Clean Air Act imposes strict requirements upon owners and operators of
facilities which 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 permits prior to the construction and operation of the
Company's facilities, and may require additional emission controls and
restrictions on materials stored, used and incinerated at existing or proposed
facilities.
The Clean Water Act establishes standards, permits and procedures for
controlling the discharge of pollutants from 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 standard permits and procedures are potentially applicable
to all other water discharged from, or reused at, facilities owned or operated
by the Company.
OSHA provides for the establishment of standards governing workplace safety
and health requirements, including setting permissible exposure levels for
hazardous chemicals which may be present in mixed wastes. The Company is
required to follow OSHA standards, including the preparation of material safety
data sheets, hazardous response training and process safety management. The NRC
has set regulatory standards for exposure to radioactive materials.
Competition
The market for the Company's waste treatment services is characterized as
the treatment and stabilization of certain radioactive, hazardous, mixed and
other wastes. The Company is aware of some competition from several large
companies and numerous small companies. Any of such companies may possess or
develop technologies superior to those of the Company. While the Company is
aware of competition from companies with similar waste treatment technologies,
the primary competition comes from companies which provide waste treatment and
disposal services. The predominant waste treatment and disposal methods include
landfilling, deep-well injection, on-site containment and incineration or other
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
17
including its proprietary vitrification technologies, its comprehensive approach
to waste treatment, demonstrated commercial success of its technologies,
reputation for providing quality service to its customers and strategic
alliances. Many of the Company's competitors have substantially greater
financial and technical resources than the Company and there can be no assurance
that one or more of the Company's competitors do not possess or will not develop
waste treatment technologies that are superior to those of the Company.
In its technical support services business, the Company's competitors range
from major national and regional environmental service and consulting firms
which have large environmental remediation staffs to small local firms. Many of
the major national and regional environmental service and consulting firms have
greater financial, management and marketing resources than the Company. The
availability of skilled technical personnel, quality of performance, safety,
diversity of services and price are the key competitive factors.
Research and Development Activities
The Company's research and development activities are conducted primarily
by the VSL for the enhancement of the Company's existing vitrification and ion
exchange technologies or the introduction of new vitrification technologies.
During 1995, 1996, and 1997, research and development activities were conducted
at the VSL under contracts totaling $789,000, $1,343,000 and $255,000,
respectively. The Company did not incur any additional research and development
costs during those years. In connection with various Company contracts or
subcontracts, the VSL conducts research and development under fixed-price and
cost-plus-fixed fee contracts. Under these contracts, the research is supervised
by Drs. Macedo and Litovitz and all inventions and discoveries are owned by them
and licensed to the Company under the exclusive license agreement. The Company
expects to spend a significant portion of the research and development funding
provided by BNFL with the VSL. See "Business - Joint Venture and Collaborative
Arrangements - VSL" and "-BNFL."
Patents and Other Intellectual Property Rights
The Company licenses all of the patent and other intellectual property
rights to its proprietary vitrification and other waste treatment technologies
from the inventors of such technologies. Drs. Macedo and Litovitz, the inventors
of the Company's vitrification and ion exchange technologies, license the
patents and proprietary rights to such technologies to the Company under an
exclusive license agreement. The exclusive license agreement with Drs. Macedo
and Litovitz expires upon the expiration of the last patent covered by the
license agreement which is currently in the year 2012. The exclusive license
agreement, which currently encompasses 22 patents and one patent application,
also includes any process patents or technology rights related to the licensed
field which is subsequently developed by the VSL or Drs. Macedo and Litovitz.
Dr. Macedo and Litovitz own all of the vitrification and ion exchange patents
relating to the research and development work conducted by them at the VSL. The
Catholic University of America has agreed that all patents and technologies
developed at the VSL belong to Drs. Macedo and Litovitz and not to the
University. In turn, Dr. Macedo and Litovitz exclusively license the
vitrification technology rights and process patents developed by them at the VSL
to the Company.
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 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 descorption, one pending patent and a
European patent application.
18
In connection with the acquisition of SEG in April 1997, the Company
acquired the entire intellectual property portfolio of SEG, including all
patents and related trademarks and copyright pertaining to the detection,
storage, decontamination, processing and handling of radioactive and hazardous
waste materials. Specifically, the issued and active patents acquired by the
Company relate to the steam reforming, incineration, ultracompaction and
vitrification technologies used by SEG in its commercial waste processing
operations. As a result of the acquisition of SEG, the Company acquired rights
in 48 U.S. patents, 11 pending U.S. patent applications, 118 foreign patents and
35 pending foreign patent applications. Pursuant to the purchase agreement with
Westinghouse, the Company has granted Westinghouse a non-exclusive royalty-free
license to practice the technologies covered by certain of the patents acquired
by the Company.
From time to time, the Company acquires or licenses technologies from third
parties that complement its existing waste processing technologies. In November
1997, the Company acquired a joint interest in several patents pertaining to the
gasification and vitrification of organic materials from Proler Environmental
Services, Inc. ("Proler"). The Company now owns Proler's interest in these
patents jointly with Hylsa SA, a company located and doing business in Mexico.
The Company requires each of its employees to enter into standard
agreements pursuant to which the employee agrees to keep confidential all
proprietary information of the Company and to assign to the Company all rights
in any proprietary information or technology developed by the employee during
his or her employment or made thereafter as a result of any inventions conceived
or work done during such employment. Despite these precautions, it may be
possible for a third party to copy or otherwise obtain and use the company's
technology without authorization or to develop similar technology independently.
In addition, effective patent and trade secret protection may be unavailable or
limited in certain foreign countries.
DURASIL(R) is a registered trademark held by the Company and DuraMelter(TM)
and DuraGem(TM) are common law trademarks.
Employees
As of December 31, 1997, the Company employed 1,052 employees, including
375 temporary field-assigned employees performing services for clients, 484
full-time technical personnel and 193 in finance, administration and support
personnel. The Company contracts with most of the field-assigned personnel on an
as-needed basis and such personnel are not full-time employees of the Company.
Due to the seasonality of the technical support services business of the
Company, the number of temporary field-assigned employees generally increases to
approximately 600 during the fall peak outage season at the nation's nuclear
power plants. To date, the Company has been successful in attracting and
retaining qualified technical personnel, although there can be no assurance that
this success will continue. None of the Company's employees are subject to a
collective bargaining agreement. The Company has never experienced a work
stoppage and believes that its relations with its employees are good.
19
Item 2. Properties
The company leases approximately 35,000 square feet of office space in
Columbia, Maryland which it uses as its administration and general corporate
offices. The initial lease term expires December 31, 2006.
In April 1997, the Company acquired certain real property assets in
connection with its acquisition of SEG, including approximately 50 acres of land
in Oak Ridge, Tennessee, upon which the primary waste processing operations are
located. The Company acquired another approximately 50-acre parcel in Oak Ridge,
Tennessee, at which additional waste processing operations are conducted. The
Company also acquired a 13,500 square foot building in Richland, Washington,
which houses certain technical services operations.
The Company's 80%-owned subsidiary, DuraTherm, owns a RCRA-permitted
hazardous waste recycling center located in San Leon, Texas. The facility is
located on 14.5 acres of land and consists of a recycling center on 8.5 acres
and 4,500 square feet of office and laboratory space. The facility and the land
are owned by DuraTherm.
Item 3. Legal Proceedings
On February 3, 1998, the Company's wholly-owned subsidiary, SEG, was sued
in federal district court in Boston, Massachusetts. The suit alleges that
statements made by officers of SEG in joint press releases with Molten Metals
Technology, Inc. ("MMT") were fraudulent and misleading under federal securities
laws and state common law fraud theories. The Company has not yet responded to
the complaint, and at the present time the Company is unable to express a view
on the probable ultimate outcome of the litigation. In addition, the Company may
have rights of indemnity against CBS Corporation ("CBS"), the successor to
Westinghouse Electric Corporation which was the parent of SEG at the time the
allegedly misleading statements were made, if, among other things, certain
representations and warranties made by CBS in the definitive purchase agreement
pursuant to which the Company purchased SEG were breached. CBS has agreed to
assume all litigation costs associated with the defense of the case, but has
reserved the right to challenge the Company's claim for indemnification for any
settlement or judgment that may arise from the case.
In addition, from time to time the Company is a party to litigation or
administrative proceedings relating to claims arising from its operations in the
normal course of business. Management of the Company, on the advice of counsel,
believes that the ultimate resolution of such litigation or administrative
proceedings currently pending against the Company is unlikely, either
individually or in the aggregate, to have a material adverse effect on the
Company's results of operations or financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
20
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock is quoted on the Nasdaq National Market under
the symbol "DRTK". The following table sets forth, for the periods indicated,
the high and low sale prices of the Common Stock. The reported last sale price
of the Common Stock on the Nasdaq National Market on March 13, 1998 was $13.50.
Price Range
of Common Stock
--------------------
High Low
--------- ---------
Year ended December 31, 1995:
1st quarter $ 5 $ 3 5/8
2nd quarter 6 1/8 4 1/4
3rd quarter 6 1/4 5 3/8
4th quarter 17 7/8 5 1/2
Year ended December 31, 1996:
1st quarter $ 17 7/8 $ 11 1/4
2nd quarter 19 7/8 14 5/8
3rd quarter 19 1/2 11 1/8
4th quarter 16 5/8 10 7/8
Year ended December 31, 1997:
1st quarter $ 14 5/8 $ 4 7/8
2nd quarter 10 1/2 7 7/8
3rd quarter 15 3/8 9 1/2
4th quarter 15 9 3/4
As of March 13, 1998, there were 740 holders of record of the Common Stock
and the Company estimates that there were approximately 7,700 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 therefore in accordance with the terms of
the Convertible Preferred Stock which require the payment of quarterly dividends
of $320,000 or $2.00 per share. The Company may not pay dividends on any of the
Common Stock unless the Company has paid all accumulated dividends on all of the
outstanding shares of Convertible Preferred Stock. To date, the Company has paid
all dividends on all of the outstanding shares of the Convertible Preferred
Stock. Except with respect to the dividends on the Convertible Preferred Stock,
the Company currently intends to retain earnings primarily for working capital
and development of waste treatment technologies and therefore does not
anticipate paying any cash dividends in the foreseeable future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
21
Item 6. Selected Financial Data (in thousands, except per share amounts)
As of December 31,
------------------------------------------------------------------
1993 1994 1995 1996 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Statement of Operations Data:
Revenues $ 33,505 $ 35,968 $ 40,418 $ 44,285 $ 136,553
Cost of revenues 28,609 28,857 32,220 35,198 120,814
- -----------------------------------------------------------------------------------------------------------------------------------
Gross profit 4,896 7,111 8,198 9,087 15,739
Selling, general and administrative expenses 5,738 5,926 5,876 7,455 15,725
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations (842) 1,185 2,322 1,632 14
Interest income (expense), net (372) (595) 57 1,239 571
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and
proportionate share of loss of joint venture (1,214) 590 2,379 2,871 585
Income taxes 73 12 101 649 716
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before proportionate share
of loss of joint venture (1,287) 578 2,278 2,222 (131)
Proportionate share of loss of joint venture -- (321) (824) (165) (150)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) (1,287) 257 1,454 2,057 (281)
Preferred stock dividends and charges
for accretion -- -- (1,394) (1,500) (1,503)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) attributable
to common stockholders $ (1,287) $ 257 $ 60 $ 557 $ (1,784)
===================================================================================================================================
Basis net income (loss) per share $ (0.16) $ 0.03 $ 0.01 $ 0.05 $ (0.14)
===================================================================================================================================
Diluted net income (loss) per share $ (0.16) $ 0.03 $ 0.01 $ 0.04 $ (0.14)
===================================================================================================================================
Basic weighted average common stock
outstanding $ 7,936 $ 8,656 $ 8,820 $ 11,460 $ 12,619
===================================================================================================================================
Diluted weighted average common stock
and dilutive securities outstanding 7,936 8,966 11,213 13,404 12,619
===================================================================================================================================
As of December 31,
-------------------------------------------------------------------
1993 1994 1995 1996 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
Working capital (deficit) $ (127) $ (78) $ 24,114 $ 62,161 $ 8,363
Total assets 12,754 19,200 38,660 85,199 132,298
Long-term debt, convertible debenture
and capital lease obligation 288 502 10,123 10,939 11,557
Redeemable convertible preferred stock -- -- 14,609 14,829 15,052
Stockholders' equity 6,159 6,933 9,257 55,147 56,429
===================================================================================================================================
22
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
GTS Duratek, Inc. (the "Company") has historically derived substantially
all of its revenues from technical support services provided 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.
On April 18, 1997, the Company acquired 100% of the outstanding capital
stock of The Scientific Ecology Group, Inc. ("SEG") from Westinghouse Electric
Corporation for approximately $22.4 million in cash including transaction costs
and 156,986 shares of the Company's Common Stock. The Company paid the cash
portion of the purchase price out of available cash. The acquisition of SEG was
effective as of April 1, 1997 and, accordingly, the Company's results of
operations for the year ended December 31, 1997 reflect the operating results of
SEG from April 1, 1997. The Company has accounted for the transaction under the
purchase method of accounting. The aggregate purchase price of $72.5 million,
which includes liabilities assumed and transaction costs, exceeded the estimated
fair value of SEG's tangible assets by approximately $13.8 million. Such amount
has been allocated to intangible assets, principally goodwill, and is being
amortized over 30 years. SEG provided over 50% of the Company's revenue for 1997
and accordingly the acquisition of SEG has a significant impact on the
comparison of 1996 and 1997 results of operations.
SEG, which is based in Oak Ridge, Tennessee, is the largest commercial
radioactive waste processing Company in the United States, offering an extensive
range of commercial waste processing services and technologies including
incineration, compaction and metal decontamination and recycling to commercial
generators of radioactive waste. SEG also provides transportation services for
radioactive wastes, maintaining a fleet of tractors, trailers and shipping
containers for transporting the wastes, and provides site decontamination and
decommissioning and other technical support services to nuclear clients
including government facilities, commercial facilities and
university/research/test facilities. Commercial waste processing services are
generally provided pursuant to fixed unit rate contracts and revenues are
recognized as the waste is processed. Site decontamination and decommissioning
and other technical support services are generally provided pursuant to time and
material contracts and revenues are recognized as costs are incurred according
to predetermined rates.
Prior to the acquisition of SEG, the Company's waste treatment revenues
historically had been generated from government waste processing operations
pursuant to fixed-price and cost-plus-fixed-fee contracts with the United States
Department of Energy ("DOE"). Substantially all of the Company's waste treatment
revenues during 1996 were derived from the DOE's Savannah River M-Area project
which is a $14 million fixed price contract. Waste treatment revenues from the
DOE were not significant in 1997.
In March 1997, the Company decided to temporarily suspend processing of
radioactive waste and initiate an unscheduled controlled cool down of its glass
melter at its M-Area processing plant located at the DOE's Savannah River site
as a result of observations, by operations personnel, indicating that excessive
wear could be occurring on certain internal components of the melter. After an
extensive inspection of the condition of the melter at the Savannah River site,
the Company's management made the decision to undertake more extensive repairs
and modification of the facility, including melter box replacement, before
resumption of radioactive waste processing. As a result of the necessary repairs
and the delay in completing the waste processing required by the contract, the
23
Company recorded a loss of $5.9 million on the M-Area contract in the first
quarter of 1997 which included the estimated costs of repairs to the melter and
for estimated losses to complete the fixed price contract. In December 1997, the
Company recommenced radioactive operations and recorded an additional charge of
$1.3 million on the M-Area contract in the fourth quarter of 1997 for the
estimated increased costs to complete the contract as a result of it taking
longer than original estimates to bring the system to full processing throughput
levels. The Company is seeking to extend the date by which it is required to
complete the waste processing under the contract from the current completion
date of April 1998. The Company is currently negotiating an extension of the
contract. However, in the event the Company is not able to obtain a contract
extension, the Company could incur additional losses which could be material.
The Company's commercial waste processing operations also include
DuraTherm, Inc. ("DuraTherm"), which owns the San Leon, Texas thermal desorption
facility, and the DuraChem joint venture with Chem-Nuclear, Inc. DuraTherm
commenced commercial operations in the second quarter of 1996 and the Company
consolidates the results of DuraTherm adjusting for the 20% minority interest in
consolidation. Income or loss from the Company's 45% share in DuraChem will be
recorded by the Company on the equity method.
During 1997, the Company focused its management and capital resources on
(i) restarting the M-Area melter, (ii) incorporating SEG's business following
the acquisition and (iii) meeting commitments to the DOE privatization cleanups
in Hanford, Washington and Idaho Falls, Idaho. The Company also announced in
April 1997 that it would reduce the priority of, and capital commitments to,
other projects which have higher levels of marketplace uncertainty or have
longer-term financial prospects. Accordingly, the Company announced that the
DuraChem facility would not commence commercial operations in 1997 as previously
reported. In March 1997, the management of Chem-Nuclear and the Company
temporarily suspended construction of the project. The partners have agreed that
the schedule for commencement of operations at the DuraChem facility will be
determined in 1998. The Company's management anticipates commencement of this
facility in 1999, however, changes in market conditions or other factors could
result in additional delays.
In November 1995, the Company formed a strategic alliance with BNFL Inc.
("BNFL") to jointly pursue up to five major DOE waste treatment projects.
Pursuant to the terms of the strategic alliance, the Company will receive a $1.0
million teaming fee for each time that BNFL and the Company agree to jointly
pursue a major DOE waste treatment project. To date, the Company has reached
agreements to pursue three projects and recognized as revenue the $1.0 million
fees in the fourth quarter of 1995 and the first and third quarters of 1996,
respectively. The Company did not receive any teaming fees from BNFL in 1997.
The Company is unable to predict the timing of recognition of future teaming
fees, if any.
The Company's future operating results will be affected by, among other
things, the duration of commercial waste processing contracts and amount of
waste to be processed by the Company's commercial waste processing operations
pursuant to these contracts; the timing of new DOE waste treatment projects,
including those pursued jointly with BNFL; the duration of the Hanford and Idaho
Falls DOE projects; and the amount of new waste streams, if any, awarded to the
Company for processing at the M-Area facility in Savannah River.
Results of Operations
Year ended December 31, 1996 Compared to Year Ended December 31, 1997.
Revenues increased by $92.3 million, or 208.4%, from $44.3 million in 1996
to $136.6 million in 1997. The increase was primarily attributable to $84.3
million in revenues from the commercial waste processing operations of SEG,
which was acquired by the Company effective as of April 1, 1997, an increase in
waste processing revenues of $4.8 million at the Company's
24
DuraTherm commercial waste treatment facility, which commenced operations on May
1, 1996, and an increase in technical support services revenues of $5.3 million
which were slightly offset by a decrease in revenues from government waste
processing operations. Revenues from government waste processing operations in
1997 were adversely impacted by the shutdown of operations at the M-Area
processing facility. In addition, revenues in 1996 included $2.0 million in
teaming fees received from BNFL in exchange for the Company's agreement to
exclusively team with BNFL on two DOE waste treatment projects. The Company did
not receive any teaming fees from BNFL in 1997. Revenues from DuraTherm
increased as the result of increased waste receipts during 1997 as compared to
1996. The increase in revenues from technical support services was primarily the
result of more work performed on power plant outage and support services
contracts with Duke Power Company, New York Power Authority and Southern Nuclear
Operating Company.
Gross profit increased by $6.6 million, or 73.2%, from $9.1 million in 1996
to $15.7 million in 1997. Commercial waste processing operations accounted for
an increase in gross profit of $16.5 million, consisting of an increase of $15.4
million from SEG's operations and $1.1 million from DuraTherm's operations. This
increase was offset by a decrease in gross profit of $7.7 million in government
waste processing operations principally related to the $7.2 million of losses
recorded on the M-Area project in 1997 and the absence of $2.0 million in
teaming fees from BNFL that the Company recognized in 1996. As a percentage of
revenues, gross profit decreased from 20.5% in 1996 to 11.5% in 1997. The
decrease was principally a result of the losses recorded in 1997 on the M-Area
contract and the absence of teaming fees from BNFL. As a percentage of revenues,
gross profit for SEG's operations was 18.3% in 1997. As a percentage of
revenues, gross profit for technical support services decreased from 14.1% in
1996 to 11.7% in 1997 as a result of work performed on lower margin contracts in
1997 as compared to 1996.
Selling, general and administrative expenses increased by $8.3 million, or
110.9%, from $7.4 million in 1996 to $15.7 million in 1997. The increase is
related almost entirely to SEG. As a percentage of revenues, selling, general
and administrative expenses decreased from 16.8% in 1996 to 11.5% in 1997. The
decrease is principally related to the acquisition of SEG which has lower
selling, general and administrative expenses as a percentage of revenues as
compared with the Company's other businesses.
Interest income, net decreased by approximately $669,000 from 1996 to 1997.
The decrease was principally the result of lower average availability of excess
cash to invest in 1997 as compared to 1996 as a result of a major portion of
excess cash reserves being used to acquire SEG and for capital expenditures to
return the M-Area facility to radioactive operations.
Income tax expense was $649,000 in 1996 as compared to $716,000 in 1997.
The effective tax rate in 1996 was reduced through the use of net operating loss
carryforwards. The effective tax rate in 1997 was adversely impacted by state
income taxes on income in certain states which could not be offset by losses in
others and a valuation allowance established with respect to a portion of the
Company's decontamination and decommissioning accruals.
The Company's proportionate share in the loss of its 50% owned joint
venture, Vitritek, decreased from $165,000 in 1996 to $150,000 in 1997. The
Company expects Vitritek to have limited operations in 1998.
Year ended December 31, 1995 Compared to Year Ended December 31, 1996.
Revenues increased by $3.9 million or 9.6%, from $40.4 million in 1995 to
$44.3 million in 1996. The increase was primarily attributable to an increase in
revenues from technical support services of $4.0 million and $3.9 million in
revenues from the DuraTherm commercial waste treatment facility which commenced
operations May 1, 1996. Revenues in 1996 also included $2.0 million in teaming
fees received from BNFL, as compared to $1.0 million in 1995, in exchange for
25
the Company's agreement to exclusively team with BNFL on two DOE waste treatment
projects. Such increases were partially offset by a decline in revenues from
government waste processing operations of $5.0 million, from $10.1 million in
1995 to $5.1 million in 1996. Revenues from technical support services were
$29.3 million in 1995 and $33.3 million in 1996.
The increase in revenues from technical support services was the result of
more work performed on power plant outage and support service contracts with
Duke Power Company and Southern Nuclear Operating Company, partially offset by
reduced demand for training and consulting services to commercial nuclear power
plants. The decrease in revenues from government waste processing operations,
was attributable to lower revenues achieved on the Savannah River M-Area
contract resulting from the delay in starting up this facility and the
completion of several other projects in 1995. Revenues from the Savannah River
M-Area contract were $6.1 million in 1995 and $3.4 million in 1996.
Gross profit increased by $900,000, or 10.8%, from $8.2 million in 1995 to
$9.1 million in 1996. The increase in gross profit was primarily the result of
the additional teaming fee from BNFL in 1996 as compared to 1995 and additional
higher margin service contracts obtained in 1996. As a percentage of revenues,
gross profit was comparable at 20.3% in 1995 and 20.5% in 1996. Gross profits
from government waste processing operations were lower in 1996 as compared to
1995 principally as a result of project mix and modifications to the estimated
costs to complete the Savannah River M-Area project. The estimated cost to
complete the Savannah River M-Area project was increased in 1996 due to the
Company's decision to make additional investments in the on-site facility to
better position the Company to handle additional waste streams at that site.
Gross profits from technical support services were $4.1 million in 1995 and $4.7
million in 1996, as a result of additional higher margin technical consulting
service contracts obtained in 1996 as compared to 1995.
Selling, general and administrative expenses increased by $1.6 million or
26.9% from 1995 to 1996. As a percentage of revenues, selling, general and
administrative expenses increased from 14.5% in 1995 to 16.8% in 1996. The
increase was principally the result of higher administrative costs incurred by
the Company to support waste treatment projects for the DOE and commercial
projects, costs incurred to develop and expand the Company's business as well as
pre-operating costs for the DuraTherm commercial waste treatment facility.
Interest income, net increased by approximately $1.2 million from 1995 to
1996. The increase was principally the result of interest income from the net
proceeds of the Company's public stock offering in April 1996 partially offset
by interest expense on the convertible debenture held by BNFL.
Income tax expense was $101,000 in 1995 compared to $649,000 in 1996.
Utilization of net operating loss carryforwards in 1995 resulted in no federal
income taxes other than alternative minimum tax. The Company's 1996 tax
provision includes an approximately $400,000 benefit from utilization of a net
operating loss carryforward. As of December 31, 1996, the Company had utilized
all net operating losses which could benefit future earnings. As of December 31,
1996, the Company had a net operating loss of approximately $1.3 million as the
result of compensation deductions related to the exercise of non-qualified stock
options. The Company has recorded the income tax benefit of such net operating
loss as a deferred tax asset and as a credit to stockholders' equity.
The Company's proportionate share in the loss of its 50% owned joint
venture, Vitritek, decreased from $824,000 in 1995 to $165,000 in 1996.
As a result of factors discussed above, net income increased by $600,000 or
40.0% from $1.5 million in 1995 to $2.1 million in 1996.
26
Liquidity and Capital Resources
During 1997, the Company acquired 100% of the capital stock of SEG for
approximately $22.4 million in cash, including transaction costs and 156,986
shares of the Company's common stock. The aggregate purchase price was $72.5
million, including the liabilities assumed. In addition, the Company invested
approximately $11 million in property, plant and equipment. The investments in
property, plant and equipment primarily consisted of $4.4 million representing
additional costs of the Company's waste treatment facility constructed on the
DOE Savannah River site in South Carolina, $1.1 million for improvements to the
DuraTherm facility in San Leon, Texas, and $3.6 million for improvements to the
SEG facility in Oak Ridge, Tennessee.
As of December 31, 1997, the Company has capitalized approximately $8.5
million of equipment and installation costs related to the Savannah River M-Area
facility. It is the Company's intention to recover these costs through
additional waste treatment contracts at the Savannah River facility or by
dismantling the equipment and using it in other waste treatment facilities the
Company expects to construct throughout the United States. The recoverability of
such costs will be impacted if future operating cash flow from the additional
waste treatment projects are not achieved or the equipment cannot be fully
deployed on future waste treatment projects. At December 31, 1997, the Company
has not contracted with the DOE for any new waste treatment projects at the
Savannah River site. In 1998, the Company plans to spend approximately $4.5
million on capital expenditures principally related to the Bear Creek facility
for machinery and equipment.
Of the $39.3 million in accounts receivable and costs and estimated
earnings in excess of billings on uncompleted contracts at December 31, 1997,
$8.2 million relates to a contract with one DOE contractor which is expected to
be collected in 1998. The Company has a backlog of orders of approximately
$102.3 million at December 31, 1997, of which approximately $80.0 million is
expected to be completed in 1998.
The Company has a revolving line of credit agreement with a bank providing
for borrowings up to $8.8 million based upon eligible amounts of accounts
receivable, as defined in the credit agreement. Borrowings under the revolving
line of credit bear interest at the LIBOR plus 2% (7.7% as of December 31,
1997). Under this credit facility, the Company's bank has also issued letters of
credit in the aggregate amount of $15.3 million to the State of Tennessee to
provide security for SEG's obligation to clean and remediate the Bear Creek
facility upon its closure. At December 31, 1997, no borrowings were outstanding
and the Company had available borrowings of $8.8 million.
The Company believes cash flows from operations, cash resources at December
31, 1997 and, if necessary, borrowings available under the bank line of credit
will be sufficient to meet its operating needs, including the quarterly
preferred dividend requirement of $320,000 for at least the next twelve months.
New Accounting Pronouncements
During 1998, the Company will adopted the provisions of Statements of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income", and No.
131 Disclosures about Segments of an Enterprise and Related Information". The
Company does not expect that the new pronouncements will have a material effect
on the Company's financial condition or results of operations.
27
Year 2000
In 1997, the Company developed a plan to deal with the Year 2000 problem
and began converting its computer systems to be Year 2000 compliant. The plan
provides for the conversion efforts to be completed by the end of 1999. The Year
2000 problem is the result of computer programs being written using two digits
rather than four to define the applicable year. The total cost of the project is
estimated to be $100,000 and is being funded through operating cash flows. The
Company will be expensing all costs associated with these systems changes as the
costs are incurred. During 1998, the Company anticipates surveying its major
customers and suppliers as to the compliance of their systems with respect to
the year 2000 problem.
Forward Looking Information
In response to the "safe harbor" provisions contained in the Private
Securities Litigation Reform Act of 1995, the Company is including in this
Annual Report on Form 10-K the following cautionary statements which are
intended to identify certain important factors that could cause the Company's
actual results to differ materially from those projected in forward-looking
statements of the Company made by or on behalf of the Company. Many of these
factors have been discussed in prior filings with the Securities and Exchange
Commission.
The Company experienced significant growth in revenues during 1997,
primarily as a result of the acquisition of SEG in April 1997. The Company's
future operating results are largely dependent upon the Company's ability to
manage its commercial waste processing operations, which are formerly the
operations of SEG, including obtaining commercial waste processing contracts and
processing the waste under such contracts in a timely and cost-effective manner.
The Company's future operating results are also largely dependent upon the
Company's ability to extend the existing contract with the DOE for the Savannah
River M-Area site, complete the waste processing required by that contract
without further delay and secure contracts to handle additional waste streams at
that facility or deploy the equipment of future waste treatment projects. In
addition, the Company's future operating results are dependent upon the timing
and awarding of contracts by the DOE for the cleanup of the other waste sites
administered by it. The timing and award of such contracts by the DOE is
directly related to the response of governmental authorities to public concerns
over the treatment and disposal of radioactive, hazardous, mixed and other
wastes. The lessening of public concern in this area or other changes in the
political environment could adversely affect the availability and timing of
government funding for the cleanup of DOE and other sites containing radioactive
and mixed wastes. Additionally, revenues from technical support services have in
the past and continue to account for a substantial portion of the Company's
revenues and loss of one or more technical support service contracts could
adversely affect the Company's future operating results.
The Company's future operating results may fluctuate due to factors such
as: the timing of new commercial waste processing contracts and duration of and
amount of waste to be processed pursuant to those contracts; the acceptance and
implementation of the Company's waste treatment technologies in the government
and commercial sectors; the evaluation by the DOE and commercial customers of
the Company's technologies versus other competing technologies as well as
conventional storage and disposal alternatives; the timing of new government
waste processing projects, including those pursued jointly with BNFL, the
duration of such projects; and the timing of outage support projects and other
large technical support services projects at its customers' facilities.
28
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
GTS DURATEK, INC. AND SUBSIDIARIES
PAGE
Independent Auditors' Report .............................................. 30
Consolidated Balance Sheets at December 31, 1996 and 1997 ................. 31
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997 .................................... 32
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1995, 1996 and 1997 .............................. 33
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997 .................................... 34
Notes to Consolidated Financial Statements ................................ 35
================================================================================
29
Independent Auditors' Report
The Board of Directors and Stockholders
GTS Duratek, Inc.:
We have audited the consolidated financial statements of GTS Duratek, Inc.
and subsidiaries as listed in the accompanying index. In connection with our
audits of the consolidated financial statements, we have also audited the
consolidated financial statement schedule listed under Item 14(a)(2). These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of GTS Duratek,
Inc. and subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles. Also in our opinion, the related consolidated financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG Peat Marwick LLP
Baltimore, Maryland
March 11, 1998
30
GTS DURATEK, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1997
- ------------------------------------------------------------------------------------------------------------------
1996 1997
- ------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 46,336,126 $ 7,026,249
Receivables, less allowance for doubtful accounts of $107,964 in 1996
and $487,905 in 1997 7,462,688 28,912,271
Other accounts receivable 1,547,755 1,373,704
Cost and estimated earnings in excess of billings on uncompleted contracts 8,956,200 9,072,828
Prepaid expenses and other current assets 1,893,251 3,193,224
- ------------------------------------------------------------------------------------------------------------------
Total current assets 66,196,020 49,578,276
Property, plant and equipment, net 10,780,748 60,356,784
Investments in and advances to joint ventures, net 5,960,984 6,362,526
Goodwill and other intangible assets, net 464,344 13,877,802
Deferred charges and other assets 1,797,290 2,122,793
- ------------------------------------------------------------------------------------------------------------------
$ 85,199,386 $ 132,298,181
- ------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,630,939 $ 12,235,006
Accrued expenses and other current liabilities 2,403,621 12,042,413
Unearned revenues -- 8,256,541
Waste processing and disposal liabilities -- 8,681,102
- ------------------------------------------------------------------------------------------------------------------
Total current liabilities 4,034,560 41,215,062
Convertible debentures 10,682,897 11,348,925
Facility and equipment decontamination and decommissioning liabilities -- 7,270,681
Other noncurrent liabilities 506,096 981,824
- ------------------------------------------------------------------------------------------------------------------
Total liabilities 15,223,553 60,816,492
- ------------------------------------------------------------------------------------------------------------------
8% Cumulative Convertible Redeemable Preferred Stock, $.01 par value; 160,000
shares authorized, issued and outstanding (liquidation value $16,320,000) 14,828,965 15,052,355
- ------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock - $.01 par value; authorized 4,840,000 shares; none issued
- Common stock - $.01 par value; authorized 35,000,000 shares; issued
12,419,231 in 1996 and 12,879,057 in 1997 124,191 128,790
Capital in excess of par value 64,216,440 67,278,739
Accummulated deficit (9,021,986) (10,806,418)
Treasury stock at cost, 70,458 shares (171,777) (171,777)
- ------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 55,146,868 56,429,334
- ------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
- ------------------------------------------------------------------------------------------------------------------
$ 85,199,386 $ 132,298,181
- ------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
31
GTS DURATEK, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1995, 1996 and 1997
- --------------------------------------------------------------------------------------------------------------
1995 1996 1997
- --------------------------------------------------------------------------------------------------------------
Revenues $ 40,418,066 $ 44,284,618 $ 136,552,821
Cost of revenues 32,220,569 35,197,830 120,814,140
- --------------------------------------------------------------------------------------------------------------
Gross profit 8,197,497 9,086,788 15,738,681
Selling, general and administrative expenses 5,875,688 7,455,069 15,724,895
- --------------------------------------------------------------------------------------------------------------
Income from operations 2,321,809 1,631,719 13,786
Interest income, net 57,453 1,239,667 570,795
- --------------------------------------------------------------------------------------------------------------
Income before income taxes and proportionate share of
loss of joint venture 2,379,262 2,871,386 584,581
Income taxes 100,926 649,375 716,000
- --------------------------------------------------------------------------------------------------------------
Income (loss) before proportionate share of
loss of joint venture 2,278,336 2,222,011 (131,419)
Proportionate share of loss of joint venture (824,025) (165,164) (149,620)
- --------------------------------------------------------------------------------------------------------------
Net income (loss) 1,454,311 2,056,847 (281,039)
Preferred stock dividends and charges for accretion (1,394,064) (1,500,075) (1,503,393)
- --------------------------------------------------------------------------------------------------------------
Net income (loss) attributable to common stockholders $ 60,247 $ 556,772 $ (1,784,432)
- --------------------------------------------------------------------------------------------------------------
Basic net income (loss) per share for net income (loss)
attributable to common stockholders $ 0.01 $ 0.05 $ (0.14)
- --------------------------------------------------------------------------------------------------------------
Diluted net income (loss) per share for net income (loss)
attributable to common stockholders $ 0.01 $ 0.04 $ (0.14)
- --------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
32
GTS DURATEK, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1995, 1996 and 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Common stock Capital in Total stock
------------------------ excess of Accumulated Treasury holders'
Shares Amount par value deficit stock equity
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 8,759,775 $ 87,598 $ 16,656,009 $ (9,639,005) $ (171,777) $ 6,932,825
Net income -- -- -- 1,454,311 -- 1,454,311
Exercise of options and warrants 716,103 7,160 1,946,742 -- -- 1,953,902
Income tax benefit from exercise of
non-qualified stock options -- -- 30,000 -- -- 30,000
Issuance of common stock
option for cash -- -- 280,000 -- -- 280,000
Preferred stock dividends 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
Net income -- -- -- 2,056,847 -- 2,056,847
Exercise of options and warrants 442,183 4,421 1,120,201 -- -- 1,124,622
Income tax benefit from exercise of
non-qualified stock options -- -- 1,036,040 -- -- 1,036,040
Other issuances of common stock 1,170 12 19,338 -- -- 19,350
Issuance of common stock
for cash 2,500,000 25,000 43,128,110 -- -- 43,153,110
Preferred stock dividend and
charges for accretion -- -- -- (1,500,075) -- (1,500,075)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 12,419,231 124,191 64,216,440 (9,021,986) (171,777) 55,146,868
Net loss -- -- -- (281,039) -- (281,039)
Exercise of options and warrants 302,015 3,021 1,037,757 -- -- 1,040,778
Income tax benefit from exercise of
non-qualified stock options -- -- 827,000 -- -- 827,000
Other issuances of common stock 825 8 6,489 -- 6,497
Issuance of common stock in
acquisition of The Scientific
Ecology Group, Inc. 156,986 1,570 1,191,053 -- -- 1,192,623
Preferred stock dividend and
charges for accretion -- -- -- (1,503,393) -- (1,503,393)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 12,879,057 $ 128,790 $ 67,278,739 $(10,806,418) $ (171,777) $ 56,429,334
- ----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
33
GTS DURATEK, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1995, 1996 and 1997
- ----------------------------------------------------------------------------------------------------------------------------------
1995 1996 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 1,454,311 $ 2,056,847 $ (281,039)
Adjustments to reconcile to net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 608,165 826,613 3,721,239
Accrued interest on convertible debenture 86,931 595,966 666,028
Proportionate share of loss of joint venture 824,025 165,164 149,620
Deferred income tax benefit -- (693,857) (357,581)
Income tax benefit from exercise of non-qualified stock options 30,000 1,036,040 827,000
Changes in operating items, net of effects from businesses
acquired in 1995, 1996 and 1997 :
Receivables (759,195) 1,528,795 (8,933,233)
Costs and estimated earnings in excess of
billings on uncompleted contracts (3,280,263) (1,248,766) 1,811,372
Prepaid expenses and other current assets 124,804 (537,483) 1,074,154
Accounts payable, accrued expenses and other
current liabilities 145,995 (283,858) (1,537,425)
Unearned revenues -- -- (6,866,459)
Waste processing and disposal liabilities -- -- 3,026,900
Facility and equipment decontamination
and decommissioning liabilities -- -- 1,550,408
Other (81,729) (201,139) (293,482)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (846,956) 3,244,322 (5,442,498)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property, plant and equipment (1,586,062) (7,438,862) (10,995,723)
Acquisitions of businesses, net of cash acquired (260,619) (278,446) (22,330,427)
Advances to joint ventures (2,465,332) (2,067,070) (551,162)
Advances to (repayments from) employees, net (366,495) (730,249) 322,701
Other (344,222) (269,516) (31,866)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (5,022,730) (10,784,143) (33,586,477)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from (repayments of) short-term borrowings (7,630,512) -- --
Reduction of long-term debt and capital lease obligation (702,802) (537,143) (48,177)
Preferred stock dividends paid (875,200) (1,280,000) (1,280,000)
Proceeds from issuance of common stock 1,953,902 44,297,082 1,047,275
Proceeds from issuance of convertible debentures, 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 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 17,265,694 42,479,939 (280,902)
- ----------------------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 11,396,008 34,940,118 (39,309,877)
Cash and cash equivalents, beginning of year -- 11,396,008 46,336,126
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 11,396,008 $ 46,336,126 $ 7,026,249
- ----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
34
GTS DURATEK, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
================================================================================
(1) Organization, Description of Business and Basis of Presentation
GTS Duratek, Inc. (GTS or the Company) is an environmental services company
that provides waste treatment solutions for radioactive, hazardous, mixed
(i.e. intermingled radioactive and hazardous) and other wastes. The Company
combines proprietary technologies for treating various waste streams with a
staff of highly skilled personnel with significant environmental experience
to offer its customers a comprehensive approach to their waste treatment
needs that includes commercial waste processing services, government waste
processing services and technical support services. Proprietary
technologies include vitrification, incineration, compaction, metal
decontamination and recycling, thermal desorption and ion exchange used
independently or in tandem to process its customers waste for long-term
storage and disposal. The Company has a staff of engineers, consultants and
technicians who implement the Company's waste treatment technologies and
provide highly specialized technical support services for its customers.
The technical support services provided by the Company include site
decontamination and decommissioning, radiological engineering services,
staff augmentation and outage support to assist nuclear power plants during
maintenance shutdowns and environmental and computer consulting and
environmental safety and health 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
The Company considers all highly liquid investments with initial maturities
of three months or less to be cash equivalents. Cash equivalents,
consisting principally of overnight repurchase agreements, were $46,336,126
and $7,026,249 at December 31, 1996 and 1997, respectively.
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.
35
GTS DURATEK, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(2) Continued
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount of an asset to future undiscounted net cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less
costs to sell.
Goodwill and Other Intangible Assets
Goodwill is attributable to the acquisition of The Scientific Ecology
Group, Inc. (SEG) during 1997 (see note 3), and is being amortized on a
straight-line basis over a 30 year period. Other intangibles 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 goodwill by determining whether
amortization of the goodwill balance over its remaining life can be
recovered through undiscounted cash flows of the acquired entities. The
amount of impairment, if any, is measured based on projected discounted
cash flows using a discount rate reflecting the Company's average cost of
funds. The assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved.
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.
Facility and Equipment Decontamination and Decommissioning
The Company accrues decontamination and decommissioning (D&D) costs for
facilities and equipment ratable over the period to the estimated date of
site closure (see note 12).
36
GTS DURATEK, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(2) Continued
Revenue recognition
Revenue from the Company's commercial waste processing facilities is
recognized when waste is processed. Generally, the Company processes
customer wastes under fixed-unit-price contracts which allow for additional
billings for burial price increases occurring within a set period of time
following the Company's receipt of the waste, or if the waste differs from
contract specifications. The Company is responsible for placing processed
waste in containers and in a form that meets disposal site criteria. The
Company delivers reports to customers confirming that their waste has been
processed and buried in accordance with terms of its contracts. Upon
completion of processing, the Company accrues for burial and secondary
waste processing costs. Unearned revenues related principally to progress
billings for customer waste received and not yet processed.
Revenue from long-term waste treatment projects and technical support
services is generated under fixed-price and time-and-materials 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 method. Contract costs includes 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.
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.
Stock Option Plan
The Company accounts for stock options using the intrinsic value method
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations, with
proforma disclosures of net income (loss) and net income (loss) per share
as if the fair value based method prescribed by Statement of Financial
Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation, had been used.
37
GTS DURATEK, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(2) Continued
Net income per share
The Company adopted SFAS No. 128, Earnings Per Share, which establishes
standards for computing and presenting earnings per share (EPS) during the
fourth quarter of 1997. As a result of the adoption of SFAS No. 128, the
Company restated its 1995 and 1996 EPS data. Such restatement was not
material.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares
outstanding for the period. Weighted average shares used in computing basic
EPS were 8,820,000, 11,460,000, and 12,619,000 for the years ended December
31, 1995, 1996 and 1997. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. Weighted
average shares used in computing diluted EPS were 11,213,000, 13,404,000
and 12,619,000 for the years ended December 31, 1995, 1996 and 1997. The
difference between basic and diluted weighted average shares relates to the
dilutive effect of stock options and warrants where the exercise price is
less than the average market value of the Company's common stock for the
year of calculation. Conversion of the Company's convertible debentures and
preferred stock is not included in the calculation of diluted EPS as such
conversion is anti-dilutive.
Fair Value of Financial Instruments
The estimated fair value of financial instruments, including accounts
receivable, accounts payable and long-term debt, approximate carrying
values.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
judgments that affect the reported amounts of assets and liabilities and
disclosures of contingencies at the date of the financial statements and
revenues and expenses recognized during the reporting period. Actual
results could differ significantly from those estimates.
Significant estimates and judgments made by management include: (i) the
recovery of investments in and advances to joint ventures (see note 7),
(ii) the recovery of property and equipment at the M-Area facility in
Savannah River (see note 8), (iii) the amount of waste processing and
disposal liabilities (see note 11) and (iv) the current cost to
decommission and decontaminate the commercial waste processing facilities
and equipment (see note 12).
Reclassifications
Certain amounts for 1995 and 1996 have been reclassified to conform to the
presentation for 1997.
38
GTS DURATEK, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(3) The Scientific Ecology Group, Inc. Acquisition
On April 18, 1997, the Company acquired 100% of the outstanding capital
stock of SEG, since renamed GTS Duratek-Bear Creek, Inc., from Westinghouse
Electric Corporation for approximately $22.4 million in cash including
transactions costs and 156,986 shares of the Company's common stock. The
Company paid the cash portion of the purchase price out of available cash.
SEG, which is based in Oak Ridge, Tennessee, is the largest commercial
radioactive waste processing Company in the United States, offering an
extensive range of waste processing services and technologies including
incineration, compaction and metal decontamination and recycling to
commercial generators of radioactive wastes. SEG also provides site
decontamination and decommissioning and other technical support services to
clients including government facilities, commercial facilities and
university/research/test facilities. In addition, SEG provides
transportation services of radioactive wastes, maintaining a fleet of
tractors, trailers and shipping containers for transporting radioactive
wastes.
The acquisition was effective as of April 1, 1997 and, accordingly, the
Company's results of operations for the year ended December 31, 1997
reflect the operating results of SEG from such date. The Company has
accounted for the transaction under the purchase method of accounting. The
aggregate purchase price of $72.5 million, which includes liabilities
assumed and transaction costs, exceeded the estimated fair value of SEG's
tangible assets by approximately $14 million. Such amount has been
allocated to intangible assets, principally goodwill, and is being
amortized over 30 years.
The aggregate purchase price for SEG was as follows:
Cash purchase price $20,702,000
Fair value of 156,986 shares of common stock at an estimated
value of $7.60 per share 1,193,000
Liabilities assumed 48,927,573
Transaction costs 1,688,427
---------------------------------------------------------------------------
$72,511,000
---------------------------------------------------------------------------
39
GTS DURATEK, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(3) Continued
The aggregate purchase price was allocated to acquired assets based upon
their estimated fair values as follows:
Cash $ 60,000
Accounts receivable 12,665,000
Cost and estimated earnings in excess of billings on uncompleted contracts 1,928,000
Prepaid expenses and other assets 1,842,000
Property, plant and equipment 41,907,000
Goodwill and other intangible assets 13,806,000
Other assets 303,000
------------------------------------------------------------------------------------------
$ 72,511,000
------------------------------------------------------------------------------------------
The following unaudited pro forma information for the years ended December
31, 1996 and 1997 presents a summary of consolidated results of operations
of the Company and SEG as if the acquisition of SEG had occurred on January
1, 1996:
1996 1997
--------------------------------------------------------------------------
Revenues $ 157,253,000 $ 162,720,000
Net loss (34,118,000) (12,188,000)
Net loss per share (3.07) (0.97)
--------------------------------------------------------------------------
These unaudited pro forma results have been prepared for comparative
purposes only. Management of the Company does not believe them to be
reflective of the consolidated results of operations after the acquisition.
In order to achieve profitability, the Company and SEG have taken a number
of steps to, among others, narrow the range of waste they will accept and
process, limit the maximum holding period for waste on site, increase
processing pricing, adjust processing schedules to increase throughput and
reduce overhead costs.
(4) Other Accounts Receivable
Other accounts receivable, at December 31, 1996, include loans of $394,198
and $287,341 to two of the Company's executive officers. Other accounts
receivable, at December 31, 1997, includes a loan of $314,426 to one of the
Company's executive officers. The loan bears interest at market rates and
is due by December 31, 1998.
40
GTS DURATEK, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(5) Property, Plant and Equipment
Property, plant and equipment at December 31 consists of the following:
1996 1997
--------------------------------------------------------------------------------------------
Land and land improvements $ -- $ 560,000
Buildings -- 14,926,452
Machinery and equipment 9,747,895 42,016,324
Leasehold improvements, furniture and fixtures 1,566,775 8,552,971
Construction in progress 4,063,209 1,738,627
--------------------------------------------------------------------------------------------
15,377,879 67,794,374
Less accumulated depreciation and amortization 4,597,131 7,437,590
--------------------------------------------------------------------------------------------
$ 10,780,748 $ 60,356,784
--------------------------------------------------------------------------------------------
Machinery and equipment, at December 31, 1997, includes approximately $8.5
million of costs related to a waste processing facility constructed on
United States Department of Energy (DOE) property in South Carolina by the
Company that was placed in service in December 1997. It is the Company's
intention to recover these costs through additional waste treatment
contracts at the DOE facility where the equipment is currently located or
to dismantle the equipment and use it in other waste treatment projects
throughout the United States. The recoverability of such costs will be
impacted if future operating cash flows from the additional waste treatment
projects are not achieved. At December 31, 1997, the Company has not
contracted with the DOE for any new waste treatment projects at the South
Carolina site.
(6) Goodwill and Other Intangible Assets
Goodwill and other intangible assets at December 31 consist of the
following:
1996 1997
---------------------------------------------------------------------------
Goodwill $ -- 13,806,000
Other intangible assets 1,217,257 1,285,849
---------------------------------------------------------------------------
1,217,257 15,091,849
Less accumulated amortization 752,913 1,214,047
---------------------------------------------------------------------------
$ 464,344 13,877,802
---------------------------------------------------------------------------
41
GTS DURATEK, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(7) Joint Ventures and Other Agreements
In order to commercialize its technologies more rapidly and
cost-effectively, the Company has developed several important joint venture
and collaborative arrangements. The following is a summary of certain of
those relationships:
BNFL, Inc.
In 1995, the Company and BNFL, Inc. (BNFL) entered into a strategic
alliance agreement. BNFL is the U.S. subsidiary of BNFL plc, a United
Kingdom-based company experienced in processing and stabilizing high level
radioactive waste. Under the terms of the strategic alliance, the Company
and BNFL have agreed to jointly pursue up to five major DOE waste
stabilization 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 DOE waste stabilization
project. Upon the execution of the strategic alliance agreement in 1995,
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. During 1996, the Company recognized as revenue two
additional $1 million fees for its agreement to pursue two additional DOE
waste treatment projects at the Idaho Falls and Oak Ridge facilities,
exclusively with BNFL. No fees were received by the Company in 1997. During
1996, the team of BNFL and the Company were awarded Phase 1 contracts at
the DOE's Hanford and Idaho facilities.
As part of the strategic alliance, BNFL invested $10 million in the Company
in the form of a convertible debenture (see note 13) and agreed to provide
the Company with research and development funding of up to $500,000 per
year over the next five years. For the years ended December 31, 1996 and
1997, BNFL provided research and development funding of $442,000 and
$251,000, respectively.
DuraChem
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 to process
commercial radioactive waste for disposal. The Company will contribute 45%
of the facility construction costs and share proportionately in the
venture's profits. The joint venture, DuraChem, operates as a limited
partnership. The Company's investment in, and advances to, DuraChem at
December 31, 1996 and 1997 of $4,881,355 and $5,341,046, respectively,
related to construction of a facility in Barnwell, South Carolina. In March
1997, the management of Chem-Nuclear and the Company temporarily suspended
construction of the project. The partners have agreed that the schedule for
commencement of operations at the DuraChem facility will be determined in
1998. The Company's management anticipates commencement of the facility in
1999, however, changes in market conditions, or other factors could result
in additional delays.
42
GTS DURATEK, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(7) Continued
Vitritek Environmental, Inc.
Through a joint venture with Vitritek Holdings LLC, a privately-held
entity, the Company has extended its vitrification technology to
non-radioactive hazardous waste such as asbestos, fly ash and medical
waste. The joint venture entity, Vitritek Environmental, Inc. ("Vitritek"),
is owned equally by the Company and Vitritek Holdings LLC. 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 LLC. Under the
terms of the joint venture arrangement, all funding requirements and all
profits are shared equally.
The Company's investment in, and advance to, Vitritek at December 31, 1996
and 1997, were $1,079,629 and $1,021,480, respectively. For the years ended
December 31, 1995, 1996 and 1997, Vitritek had net losses of $1,997,655,
$680,327 and $649,240, respectively. For the years ended December 31, 1995,
1996 and 1997 the Company recognized its proportionate share of loss in the
consolidated statement of operations after intercompany eliminations.
(8) DOE Savannah River M-Area Project
In March 1997, the Company decided to temporarily suspend processing of
radioactive waste and initiate an unscheduled controlled cool down of its
glass melter at its M-Area processing plant located at the DOE's Savannah
River site. After an extensive inspection of the condition of the melter at
the Savannah River site, the Company's management made the decision to
undertake more extensive repairs and modification of the facility,
including melter box replacement, before resumption of radioactive waste
processing. The M-Area facility resumed radioactive waste processing
operations during the fourth quarter of 1997. As a result of the necessary
repairs and the delay in completing the waste processing required by the
contract, the Company recorded losses of $7.2 million on the M-Area
contract in 1997 which includes the estimated costs of repairs to the
melter and for the estimated losses to complete the fixed price contract.
The Company is seeking to extend the date by which it is required to
complete the waste processing under the contract from the current
completion date of April 1998 and is currently negotiating an extension of
the contract. However, in the event the Company is not able to obtain a
contract extension, the Company could incur additional losses which could
be material.
43
GTS DURATEK, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(9) Short-Term Borrowings
The Company has a revolving line of credit providing for borrowings up to
$8.8 million based upon eligible amounts of accounts receivable, as defined
in the credit agreement. Borrowings outstanding under the revolving line of
credit are due on demand and bear interest at the London Interbank Offered
Rate (LIBOR) rate plus 2% (7.7% at December 31, 1997). In addition, the
Company's bank has also issued letters of credit in the aggregate amount of
$15.3 million to the State of Tennessee to provide security for SEG's
obligation to clean and remediate SEG's facility upon its closure. At
December 31, 1997, no borrowings were outstanding and the Company had
available borrowings of $8.8 million.
The Company paid interest expense of $189,347, $62,890 and $8,701 during
the years ended December 31, 1995, 1996 and 1997, respectively.
(10) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities at December 31 consist of
the following:
1996 1997
---------------------------------------------------------------------------
Salaries and related expenses $ 753,302 $ 3,189,709
Preferred stock dividend payable 320,000 320,000
Other accrued expenses 1,330,319 8,532,704
---------------------------------------------------------------------------
$ 2,403,621 $ 12,042,413
---------------------------------------------------------------------------
(11) Waste Processing and Disposal Liabilities
During customer waste processing at the Company's Oak Ridge, Tennessee
facility, the Company creates waste by-products (secondary waste) which
become the Company's responsibility to process and send to burial.
Management evaluates the content of this waste and accrues the estimated
costs of processing and disposal based on anticipated processing methods
and current disposal sites and rates. The ultimate cost of processing and
disposal, however, will depend on the actual contamination of the waste,
the amount of processing, volume reduction and disposal density. At
December 31, 1997, the Company has accrued $6,212,900 related to such
waste.
44
GTS DURATEK, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(11) Continued
In addition, the Company has accrued $2,468,202 for processed customer
waste awaiting burial at December 31, 1997. The Company ships a significant
portion of waste to Envirocare of Utah, Inc. (Envirocare), at a cost
significantly lower than waste shipped to the burial site in Barnwell,
South Carolina. The accompanying consolidated financial statements reflect
various accruals and estimates assuming Envirocare continues to be a viable
disposal site at rates presently in effect. If Envirocare's licenses are
not renewed or at some future date if Envirocare's rate structure were to
change significantly, the Company's costs to dispose of waste would likely
increase. Management has not determined what impact, if any, either of
these scenarios would have on the Company's liabilities or future operating
costs.
(12) Facility and Equipment Decontamination and Decommissioning (D&D)
The Company has estimated the current costs to decontaminate and
decommission (D&D) its commercial waste processing facilities and equipment
to be approximately $21.8 million. Based on the current market and
projections for the demand for future waste processing, the Company
estimates they will operate at their Tennessee and Texas sites for at least
the next 30 years. Accordingly, the Company is accruing the expected D&D
costs plus an amount for inflation over such period. Management is unable
to estimate the effects of changes in technology, future increases in
burial rates and the timing of D&D activities on the estimated D&D costs.
Uncertainties related to any of these factors could have a significant
impact on the Company's estimated D&D costs. Management updates the D&D
estimates on an annual basis. During the year ended December 31, 1997, the
Company accrued D&D costs of $1,550,000.
The Company has issued $15.3 million of letters of credit to the State of
Tennessee to provide security for the Company's obligation to clean and
remediate SEG's facilities upon closure and has funded with cash $774,000
of a $2.1 million bond required by the State of Texas with respect to its
San Leon, Texas desorption facility.
(13) 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, 1996 and 1997, the balance due BNFL of $10,682,897 and
$11,348,925 included accrued interest of $682,897 and $1,348,925,
respectively.
45
GTS DURATEK, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(13) Continued
The estimated fair value of the convertible debentures at December 31, 1997
was $11.3 million.
(14) 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 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,
1997 was approximately $40 million.
(15) Stockholders' Equity
In April 1996, the Company completed the sale of 2,500,000 shares of common
stock resulting in proceeds of $43,153,110, net of transaction costs.
During the years ended December 31, 1995, 1996 and 1997, the Company
received compensation deductions, for income tax purposes, upon exercise of
non-qualified stock options by employees. The benefits of such deductions,
which are included in stockholders' equity, were $30,000, $1,036,040 and
$827,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.
46
GTS DURATEK, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(16) 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.
At December 31,1997, there were 781,900 additional shares available for
grant under the Plan. The per share weighted-average fair value of stock
options granted during 1996 and 1997 were $6.25 and $6.00, respectively on
the date of grant using the Black Scholes option-pricing model with the
following weighted-average assumptions: expected dividend yield 0%,
risk-fee interest rate of 6.6%, expected votality of 69.4% (56% in 1996),
and an expected life of 4 years.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options
in the financial statements. Had the Company determined compensation cost
based on the fair value at the grant date for its stock options under SFAS
No. 123, the Company's net income (loss) attributable to common
stockholders and net income (loss) per share on a diluted basis, would have
been $259,000 and $.02 and $(2,524,000) and $(.20) for the years ended
December 31, 1996 and 1997, respectively.
Pro forma net income reflects only options granted in 1996 and 1997.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income
amounts presented above because compensation cost is reflected over the
options' vesting period of five years and compensation cost for options
granted prior to January 1, 1995 is not considered.
47
GTS DURATEK, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(16) Continued
Changes in options and warrants outstanding, options and warrants
exercisable and shares reserved for issuance are as follows:
Weighted average Number of
exercise price shares
--------------------------------------------------------------------------
December 31, 1994 $3.01 2,490,000
Granted 2.97 173,401
Caryle Option 3.75 1,250,000
Exercised 2.73 (716,103)
Terminated 2.56 (2,500)
--------------------------------------------------------------------------
December 31, 1995 3.26 3,194,798
Granted 12.59 77,000
Exercised 2.54 (442,183)
Terminated 1.50 (2,900)
--------------------------------------------------------------------------
December 31, 1996 3.74 2,826,715
Granted 10.46 144,500
Exercised 3.45 (302,015)
--------------------------------------------------------------------------
December 31, 1997 $4.15 2,669,200
--------------------------------------------------------------------------
At December 31, 1997, the Company has reserved 10,166,008 shares for
issuance of options, warrants and securities convertible into the Company's
common stock. The following table summarizes information about outstanding
and exercisable options and warrants at December 31, 1997:
Outstanding Exercisable
-------------------------------------------------------------------------- ------------------------------------
Weighted average
Range of Number remaining Weighted average Number Weighted average
exercise price outstanding contractual life exercise price exercisable exercise price
----------------------------------------------------------------------------------------------------------------------
$1.00 - 1.50 18,300 1.4 years $ 1.03 18,300 $ 1.03
2.34 243,000 2.0 years 2.34 243,000 2.34
2.97 - 3.75 2,186,400 1.4 years 3.65 1,957,015 3.67
10.13 - 10.50 144,500 4.6 years 10.46 -- --
12.75 - 13.75 77,000 3.0 years 12.91 38,500 12.91
----------------------------------------------------------------------------------------------------------------------
2,669,200 2,256,815
--------- ---------
48
GTS DURATEK, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(17) Income Taxes
The provision for income taxes for the years ended December 31 consist of
the following:
1995 1996 1997
-------------------------------------------------------------------------
Current:
State $ 50,230 $ 182,826 $ 400,000
Federal 50,696 1,160,406 673,581
-------------------------------------------------------------------------
100,926 1,343,232 1,073,581
-------------------------------------------------------------------------
Deferred:
State -- (88,956) (53,637)
Federal -- (604,901) (303,944)
-------------------------------------------------------------------------
-- (693,857) (357,581)
-------------------------------------------------------------------------
$ 100,926 $ 649,375 $ 716,000
-------------------------------------------------------------------------
The provision for income taxes for the years ended December 31, 1995, 1996,
and 1997 is reconciled to the amount computed by applying the statutory
Federal income tax rate of 34% to income before income taxes and
proportionate share of loss of joint venture as follows:
1995 1996 1997
-------------------------------------------------------------------------------------------------
Federal income tax at statutory rate $ 809,000 $ 976,000 $ 199,000
State income taxes, net of Federal tax benefit 33,152 61,954 228,599
Use of net operating loss carryforwards (741,226) (388,579) --
Valuation allowance -- -- 269,000
Other -- -- 19,401
-------------------------------------------------------------------------------------------------
$ 100,926 $ 649,375 $ 716,000
-------------------------------------------------------------------------------------------------
49
GTS DURATEK, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(17) Income Taxes
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:
1996 1997
---------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts $ 41,991 $ 59,668
Capitalized inventory costs 56,410 56,410
Accelerated depreciation (242,362) (564,386)
Reserve for contract loss -- 507,000
Facility and equipment decontamination and decommissioning liabilities -- 604,659
Net operating loss carryforwards 516,339 766,128
Alternative minimum tax 280,127 126,980
Other 41,352 (236,021)
---------------------------------------------------------------------------------------------------------------
693,857 1,320,438
Less valuation allowance -- 269,000
---------------------------------------------------------------------------------------------------------------
$ 693,857 $ 1,051,438
---------------------------------------------------------------------------------------------------------------
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 deemed a valuation allowance of $269,000 is necessary at
December 31, 1997.
At December 31, 1997, 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. The Company paid income taxes of
$60,091, $551,089 and $334,067 in the years ended December 31, 1995, 1996
and 1997.
50
GTS DURATEK, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(18) Profit Investment and Deferred Compensation Plans
The Company maintains a Profit Investment 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 $162,000, $102,000 and $466,485 for
the years ended December 31, 1995, 1996 and 1997, respectively.
(19) Business and Credit Concentrations
The Company's revenues are derived primarily from utilities and through
subcontracts from a combination of DOE contractors and subcontractors. In
1995, three customers comprised 23%, 17% and 16% of the Company's annual
revenues, respectively. In 1996, two customers comprised 28%, and 12% of
the Company's annual revenues, respectively. In 1997, one customer
comprised 12% of the Company's annual revenue. During 1997, no other
customer comprised more than 10% of the Company's annual revenues.
Accounts receivable and costs and estimated earnings in excess of billing
on uncompleted contracts relating to DOE contractors and subcontractors
amounted to $2,217,772 and $8,739,684 at December 31, 1996 and $5,350,245
and $9,692,568 at December 31, 1997, respectively. The Company estimates an
allowance for doubtful accounts based on the credit worthiness 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.
(20) Commitments and Contingencies
Royalty Agreements
The Company has entered into an exclusive licensing agreement with the
inventors of the vitrification technology, pursuant to which the inventors
have granted to the Company the exclusive license and rights to all
vitrification technology and process patents which they develop. 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 for the year ended December 31, 1995. During 1996, the Company was
obligated to make payments of 1% to 3% of net sales values, as defined.
Royalty expense was $100,000 for the each of years ended December 31, 1996
and 1997.
51
GTS DURATEK, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(20) Continued
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. No royalty expense was earned for the
year ended December 31, 1996. Royalty expense was $50,000 for the year
ended December 31, 1997.
Leases
The Company has several noncancellable leases which cover real property,
machinery and equipment and certain manufacturing facilities. Such leases
expire at various dates with, in some cases, options to extend their terms.
Several of the leases contain provisions for rent escalation based
primarily on increases in real estate taxes and through operating costs
incurred by the lessor. Rent expense approximated $315,000, $292,000 and
$2,317,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.
The following is a schedule of future minimum annual lease payments for all
long-term operating leases for the year ending December 31, 1997:
1998 $ 1,572,000
1999 1,462,000
2000 1,190,000
2001 935,000
2002 801,000
Thereafter 2,403,000
--------------------------------------------------------------------------
$ 8,363,000
--------------------------------------------------------------------------
Legal Proceedings
On February 3, 1998, the Company's wholly-owned subsidiary, SEG, was sued
in federal district court in Boston, Massachusetts. The suit alleges that
statements made by officers of SEG in joint press releases with Molten
Metals Technology, Inc. ("MMT") were fraudulent and misleading under
federal securities laws and state common law fraud theories. The Company
has not yet responded to the complaint, and at the present time the Company
is unable to express a view on the probable ultimate outcome of the
litigation. In addition, the Company may have rights of indemnity against
CBS Corporation ("CBS"), the successor to Westinghouse Electric Corporation
which was the parent of SEG at the time the allegedly misleading statements
were
52
GTS DURATEK, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(20) Continued
made, if, among other things, certain representations and warranties made
by CBS in the definitive purchase agreement pursuant to which the Company
purchased SEG were breached. CBS has agreed to assume all litigation costs
associated with the defense of the case, but has reserved the right to
challenge the Company's claim for indemnification for any settlement or
judgment that may arise from the case.
In addition, 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, results of
operations or liquidity.
================================================================================
53
GTS DURATEK, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
54
Part III
Item 10. Directors and Executive Officers of the Registrant
Executive Officers of GTS Duratek as of March 13, 1998
The following table sets forth the names of the executive officers of the
Company, 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 51 Chairman of the Board of Directors Managing Director, The Carlyle Group
since 1987. Chairman of the Board of the
Company since January 1995.
Robert E. Prince 50 President, Chief Executive President and Chief Executive Officer of
Officer and Director the Company 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 41 Executive Vice President and Executive Vice President of the Company
Chief Financial Officer since May 1993; Chief Financial Officer
and Chief Administrative Officer of the
Company since 1987; Vice President of
the Company from 1987 to 1993.
Craig T. Bartlett 35 Treasurer Treasurer of the Company since February
1996; Controller of the Company since
February 1993; Director, Financial
Operations of the Company from 1991 to
1993; Assistant Controller of the
Company from 1988 to 1991.
C. Paul Deltete 49 Senior Vice President, Senior Vice President of Technology
Technology Services and Services and Operations and Support of
Operations the Company since January 1996;
President of Analytical Resources, Inc.
(an environmental consulting firm
acquired by the Company in 1996) from
1984 to January 1996.
Diane L. Leviski 37 Vice President, Human Resources Vice President of Human Resources of the
Company since February 1996; Director of
Human Resources from 1988 to 1996;
Manager of Human Resources of the
Company from 1985 to 1988.
55
Leslie M. Hill 42 President, Bear Creek Operations President of Bear Creek Operations since
May 1997. Mr. Hill held several senior
management positions with New York Power
Authority from January 1982 to April
1997.
Donald R. Neely 59 Service Vice President, Senior Vice President of Radiological
Radiological Engineering and Engineering and Field Services of the
Field Services Company since April 1997. Vice President
of The Scientific Ecology Group from
January 1990 to March 1997
Information regarding the Company's Board of Directors is incorporated by
reference from the text and tables under "Election of Board of Directors" in the
Company's definitive Proxy Statement for the Annual Meeting of Stockholders to
be held May 19, 1998 (the "1998 Proxy Statement"), 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.
Item 11. Executive Compensation
The text and tables under "Executive Compensation" in the Company's 1998
Proxy Statement are incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Except as indicated in the 1998 Proxy Statement, the Company knows of
no person who on March 13, 1998, 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 the Company's 1998 Proxy Statement is
incorporated herein by reference.
(c) The Company knows of no arrangements the operation of which may at a
subsequent date result in a change of control of the Company.
Item 13. Certain Relationships and Related Transactions
The text under "Executive Compensation and Certain Transactions with
Management and Others" in the Company's 1998 Proxy Statement is incorporated
herein by reference.
56
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, 1996 and December 31, 1997
Consolidated Statement of Operations for the years ended December 31, 1995,
1996 and 1997
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1995, 1996 and 1997
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997
Notes to Consolidated Financial Statements
(a) (2) The following is a list of all financial statement schedules for
the years ended December 31, 1995, 1996 and 1997 filed as part of this Report:
Schedule II - Valuation and Qualifying Accounts
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.............................. 60
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of 1997.
(c) The following is a list of exhibits filed herewith:
Exhibit No. Document
----------- --------
21.1 Subsidiaries of the Registrant
23.1 Consent of KPMG Peat Marwick LLP
27.1 Financial Data Schedule
(d) The following is a list of financial statement schedules filed
herewith:
Schedule II - Valuation and Qualifying Accounts
57
GTS DURATEK, INC. AND SUBSIDIARIES
Valuation and qualifying accounts
SCHEDULE II
- ------------------------------------------------------------------------------------------------------------------------------------
Charges Charges
Balance at to costs to other Balance at
beginning and accounts- Deductions- at end
of period expenses describe(a) describe(b) of period
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts:
Year ended December 31, 1997 $ 107,964 48,000 334,615 (2,674) 487,905
Year ended December 31, 1996 $ 68,964 39,000 -- -- 107,964
Year ended December 31, 1995 $ 97,732 51,263 -- (80,031) 68,964
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Charges to other accounts represent allowance for doubtful accounts related
to SEG at the date of acquisiton.
(b) Deductions represent write-offs of specifically identified accounts.
58
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 26, 1998
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 26, 1998 /s/ ROBERT E. PRINCE
---------------------------------------
ROBERT E. PRINCE
President and Chief Executive Officer
Principal Financial Officer:
March 26, 1998 /s/ ROBERT F. SHAWVER
---------------------------------------
ROBERT F. SHAWVER
Executive Vice President and
Chief Financial Officer
Principal Accounting Officer:
March 26, 1998 /s/ CRAIG T. BARTLETT
---------------------------------------
CRAIG T. BARTLETT
Treasurer
The Board of Directors:
March 26, 1998 /s/ DANIEL A. D'ANIELLO
---------------------------------------
Daniel A. D'Aniello
March 26, 1998 /s/ WILLIAM E. CONWAY, JR.
---------------------------------------
William E. Conway
March 26, 1998 /s/ EARLE C. WILLIAMS
---------------------------------------
Earle C. Williams
March 26, 1998 /s/ STEVEN J. GILBERT
---------------------------------------
Steven J. Gilbert
March 26, 1998 /s/ ADMIRAL JAMES D. WATKINS
---------------------------------------
Admiral James D. Watkins
March 26, 1998 /s/ GEORGE V. MCGOWAN
---------------------------------------
George V. McGowan
March 26, 1998 /s/ ROBERT E. PRINCE
---------------------------------------
Robert E. Prince
59
EXHIBITS INDEX
Exhibit
No.
- -------
3.1 Amended and Restated Certificate of Incorporation of the Registrant.
Incorporated herein by reference to Exhibit 3.1 of the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996
(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 Exhibit
10.20 of 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).
60
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).
10.3 Credit and Security Agreements dated April 18, 1997 between First
Union National Bank of Maryland and First Union National Bank of
North Carolina and GTS Duratek, Inc., The Scientific Ecology Group,
Inc., SEG Colorado, Inc., Hittman Transport Services, Inc., General
Technical Service, Inc., GTS Instrument Services, Inc. and
Analytical Resources, Inc. Incorporated herein by reference to
Exhibits (c)(3), (c)(4) and (c)(5) of the Registrant's Current
Report on Form 8-K filed on April 18, 1997. (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).
61
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).
10.14 Sublicense Agreement by and between GTS Duratek, Inc. and BNFL Inc.
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).
10.18 Stock Purchase Agreement by and between Westinghouse Electric
Corporation and GTS Duratek, Inc. dated as of April 18, 1997.
Incorporated herein by reference to Exhibit (c)(2) of the
Registrant's Current Report on Form 8-K filed on April 18, 1997.
(File No. 0-14292).
10.19 GTS Duratek, Inc. Executive Compensation Plan. Incorporated herein
by reference to Exhibit 10.19 of the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1997. (File No.
0-14292).
62
21.1 Subsidiaries of the Registrant. (Filed herewith).
23.1 Consent of KPMG Peat Marwick LLP. (Filed herewith).
27.1 Financial Data Schedule. (Filed herewith).