UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2001.
[_] 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
0-23781
ATG INC.
(Exact name of registrant as specified in its charter)
California 94-2657762
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
47375 Fremont Boulevard
Fremont, California 94538
(Address of principal executive offices)
(510) 490-3008
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days:
Yes X No ____
-----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at April 27, 2001
----- -----------------------------
Common stock, no par value 17,014,746
1
ATG INC.
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. The actual results of ATG Inc. (the "Company") could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under "Certain Business
Considerations" in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and elsewhere in, or incorporated by reference into,
this report on Form 10-Q and other documents and reports previously filed or
hereafter filed by the Company from time to time with the Securities and
Exchange Commission.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements.................................................... 3
Condensed Consolidated Balance Sheets................................... 3
Condensed Consolidated Statements of Operations......................... 4
Condensed Consolidated Statements of Cash Flows......................... 5
Notes to Condensed Consolidated Financial Statements.................... 6
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations................................................... 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk.............. 27
PART II OTHER INFORMATION
Item 1. Legal Proceedings....................................................... 27
Item 2. Changes In Securities And Use Of Proceeds............................... 28
Item 3. Defaults Upon Senior Securities......................................... 28
Item 4. Submission Of Matters To A Vote Of Security Holders..................... 28
Item 5. Other Information....................................................... 28
Item 6. Exhibits and Reports on Form 8-K........................................ 29
SIGNATURE............................................................... 30
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
ATG INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
2001 2000
------------ -------------
(Unaudited)
ASSETS
------
Current assets:
Cash and cash equivalents $ 272 $ 351
Accounts receivable, net 17,533 18,666
Prepayments and other 5,739 5,315
--------- ---------
Total current assets 23,544 24,332
Property and equipment, net 92,309 90,109
Restricted cash 452 452
Other assets 5,390 5,408
--------- ---------
Total assets $ 121,695 $ 120,301
========= =========
LIABILITIES
-----------
Current liabilities:
Short-term borrowings $ 25,374 $ 25,374
Current portion of long-term debt and capital leases 5,191 5,159
Accounts payable 20,143 16,160
Accrued liabilities 13,329 12,878
--------- ---------
Total current liabilities 64,037 59,571
Long-term debt and capitalized leases, net 33,407 34,413
--------- ---------
Total liabilities 97,444 93,984
--------- ---------
Commitments and contingencies (Note 4 and 6)
SHAREHOLDERS' EQUITY
--------------------
Common stock 47,324 47,308
Accumulated deficit (23,073) (20,991)
--------- ---------
Total shareholders' equity 24,251 26,317
--------- ---------
Total liabilities and shareholders' equity $ 121,695 $ 120,301
========= =========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
ATG INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months
Ended March 31,
--------------------
2001 2000
-------- --------
Revenue $ 9,774 $ 11,103
Cost of revenue 6,233 6,687
-------- --------
Gross profit 3,541 4,416
Sales, general and administrative expenses 5,120 3,877
Stock-based compensation expense - 30
-------- --------
Operating income/(loss) (1,579) 509
Other income 420 -
Net interest income (expense) (923) (499)
-------- --------
Income/(loss) before provision for taxes (2,082) 10
Provision for income taxes - 4
-------- --------
Net income/(loss) $ (2,082) $ 6
======== ========
Net income/(loss) per share
Basic $ (0.12) $ 0.00
Fully diluted $ (0.12) $ 0.00
Weighted average shares
Basic 17,332 14,091
Fully diluted 17,332 15,032
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
ATG INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
------------------------------
March 31, March 31,
2001 2000
------------ -------------
Cash flows from operating activities:
Net income/(loss) $ (2,082) $ 6
Adjustments to reconcile net income with cash flow
from operations:
Depreciation and amortization 647 610
Compensation expense for shares issued and options granted - 30
Gain from sale of property (420) --
Change in current assets and liabilities:
Accounts receivable 1,133 2,017
Prepayment and other current assets (424) (100)
Accounts payable and accrued liabilities 4,854 (4,087)
--------- ---------
Net cash used in operating activities 3,708 (1,524)
--------- ---------
Cash flows from investing activities:
Property and equipment acquisitions (2,819) (7,761)
Resticted cash - 6,428
Other assets (10) (2)
--------- ---------
Net cash used in investing activities (2,829) (1,335)
--------- ---------
Cash flows from financing activities:
Borrowing from related party - 960
Repayment of long-term debt and capital leases (974) (420)
Short-term borrowing - (1)
Proceeds from issuance of common stock 16 2
--------- ---------
Net cash provided by financing activities (958) 541
--------- ---------
Decrease in cash and cash equivalents (79) (2,318)
Cash and cash equivalents, beginning of period 351 2,776
--------- ---------
Cash and cash equivalents, end of period $ 272 $ 458
========= =========
Supplemental cash flow information:
Income taxes paid $ - $ 65
========= =========
Interest paid, net of capitalized interest $ 924 $ 613
========= =========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
ATG INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(Unaudited)
1. Business of the Company
ATG Inc. (the "Company" or "ATG") provides technical personnel and specialized
services and products primarily to the U.S. government and the nuclear power
industry. Services principally consist of compaction, reduction,
decontamination, vitrification and disposal of low-level nuclear waste,
dewatering and thermal treatment of ion exchange resins, decontamination,
stabilization and volume reduction of low-level mixed waste, site remediation
and construction projects.
The accompanying condensed consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. The condensed
consolidated financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2000 and the Audited Consolidated Financial Statements included therein.
The unaudited condensed consolidated financial statements included herein
reflect all adjustments (which include only normal, recurring adjustments) which
in the opinion of management are necessary for a fair statement of the results
for the three months ended March 31, 2001 and 2000. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ materially
from those estimates. The results for the three months ended March 31, 2001 are
not necessarily indicative of the results for the full fiscal year.
Liquidity and Going Concern Considerations
The accompanying unaudited financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 5, the
Company is in default of certain provisions related to the Company's credit
facility. The default allows the bank consortium to demand repayment of the
outstanding balance. The Company has
6
incurred a substantial operating loss during 2000 and for the three months ended
March 31, 2001, and had negative working capital of $35,239 at December 31, 2000
and $40,493 at March 31, 2001. The Company requires additional capital to meet
its obligations and accomplish the Company's business plan, which raises
substantial doubt about its ability to continue as a going concern. The
accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
2. Net Income/(Loss) Per Share
Basic net income/(loss) per share is computed by dividing net income by the
weighted average number of common shares outstanding for the period. Diluted
net income/(loss) per share is computed giving effect to all dilutive potential
common shares that were outstanding during the period. Dilutive potential
common shares consist of the incremental common shares issuable upon the
exercise of stock options, warrants, and penalty shares for all periods.
A reconciliation of the numerator and denominator of basic and diluted net
income/(loss) per share is provided as follows (in thousands, except per share
data):
Three Months
Ended March 31,
---------------------------
2001 2000
---- ----
Numerator - Basic and Diluted
Income per share
Net income/(loss) $ (2,082) $ 6
========= =======
Denominator - Basic
Common shares outstanding 17,332 14,091
--------- -------
Basic net income /(loss) per share $ (0.12) $ 0.00
========= =======
Denominator - Diluted
Denominator - Basic 17,332 14,091
Common stock options, warrants, and penalty shares - 941
--------- -------
17,332 15,032
--------- -------
Diluted net income/(loss) per share $ (0.12) $ 0.00
========= =======
Diluted net loss per share for the three months ended March 31, 2001 and 2000,
excludes options and warrants to acquire 1,607,000 shares and 576,000 shares,
respectively, of stock which were anti-dilutive.
In addition, under agreements with certain shareholders of the Company related
to the private placement common stock issuance of June 2000, ATG is currently
required to issue a total of 582,725 shares and maybe required to issue a
maximum of 3,109,932 additional common shares all of which have been excluded
from the computation of diluted earnings per share as their effect would be
anti-dilutive.
7
3. Business Segments
The Company manages its operations within two business segments: waste
processing, conducted by its Fixed Facilities Group (FFG); and field services,
conducted by its Field Engineering Group (FEG). FFG processes customer waste
utilizing the Company's thermal and non-thermal technologies. FEG performs
remediation, construction and various engineering services for customers under
long-term contracts. The Company segregates revenue and gross profit by business
segment. Selling, general and administrative expenses are not allocated to the
business segments.
Segment Information
(dollars in millions)
- ---------------------
Three months ended March 31, 2001 FFG FEG Other Total
--- --- ----- -----
Revenue...................................... $ 7.6 $ 2.2 $ -- $ 9.8
Gross Profit................................. 3.3 0.2 -- 3.5
Sales, general & administrative expenses..... 5.1
Stock-based compensation..................... --
Other income................................. 0.4
Interest expense, net........................ (0.9)
Provision for income taxes................... --
-------
Net income.................................. $ (2.1)
=======
Segment assets............................... 95.2 0.7 3.5 $ 99.4
Expenditures for long-lived assets........... 2.8 -- -- $ 2.8
=======
Three months ended March 31, 2000 FFG FEG Other Total
--- --- ----- -----
Revenue....................................... $ 8.6 $ 2.5 $ -- $ 11.1
Gross Profit.................................. 3.9 0.5 -- 4.4
Sales, general & administrative expenses...... 3.9
Stock-based compensation...................... --
Interest expense, net......................... (0.5)
Provision for income taxes.................... --
-------
Net income................................... $ 0.0
=======
Segment assets................................ 88.8 0.7 3.5 $ 93.0
Expenditures for long-lived assets............ 7.8 -- -- $ 7.8
=======
4. Commitments and Contingencies
In June 1992, ATG entered into a contract with the U.S. Army under which ATG
acted as the prime contractor to "surface clear" expended ordnance from a firing
range at Fort Irwin, California. In March 1997, a piece of ordnance exploded on
the premises of a scrap metal dealer in Fontana, California. An employee of the
scrap dealer died in the accident. Although the scrap dealer had purchased
expended ordnance and other military scrap metal from a number of military
facilities, including Fort Irwin, the scrap dealer indicated
8
that the ordnance which exploded was purchased from Fort Irwin. The U.S. Army
contended that a subcontractor to ATG on the Fort Irwin contract had improperly
certified ordnance cleared from the Fort Irwin firing range as free of hazardous
and explosive material prior to the sale of ordnance to the scrap dealer. As a
result, the U.S. Army terminated the Fort Irwin contract for default, and
demanded repayment from ATG of alleged reprocurement costs totaling $945,000.
ATG believes it fully complied with the terms of the Fort Irwin contract and
applicable laws and regulations and challenged the default termination in an
action against the U.S. Army filed in the Court of Federal Claims in July 1997.
In July 1998, the U.S. Army and ATG settled the matter. The termination for
default was rescinded and ATG agreed to no longer bid on surface-clearing work
at active U.S. Army firing ranges.
In connection with the accident, in March 1998 a wrongful death civil action was
filed in San Bernardino County Superior Court against the subcontractor, a
supervisory employee of the subcontractor, the owners of the premises occupied
by the scrap dealer, and ATG, seeking damages in excess of $8 million, including
exemplary damages of $5 million. A second action was filed at the same time in
San Bernardino County Superior Court against the same defendants by three other
persons alleging physical injuries and emotional distress caused by the
accident. The parties in the second action are seeking general damages subject
to proof estimated to be in the amount of $200,000. A third action was also
filed in San Bernardino County Superior Court against the same defendants by the
property owner where the accident occurred asserting business interruption and
property damage caused by the accident in the amount of $1,200,000. ATG has
tendered the defense of each of these actions to its insurance carrier, which is
presently handling the matters for ATG, and we intend to vigorously contest all
of the claims asserted in these actions. We believe that we acted properly with
respect to the Fort Irwin contract, and that we should not be liable for the
injuries caused by the accident. We also intend to seek indemnification from the
subcontractor for the full amount of any costs, damages and liabilities which we
may incur in connection with or as a result of these lawsuits. The subcontractor
has advised ATG that the subcontractor's comprehensive general liability
insurance policy covers the claims asserted against the subcontractor, and that
the policy coverage limit is $7 million per occurrence. Although we believe that
all of the claims asserted against ATG are without legal merit, the outcome of
these lawsuits is uncertain. Any judgment of liability against ATG, especially
to the extent damages exceed or are not covered by insurance or are not
recoverable by ATG from the subcontractor, could have a material adverse effect
on our business, financial condition and results of operations.
In addition to the contingency disclosed above, from time to time we are a party
to litigation or administrative proceedings relating to claims arising from our
operations in the normal course of business. Management, on the advice of
counsel, believes it remote that the ultimate resolution of litigation currently
pending against ATG, either individually or in the aggregate, will have a
material adverse effect on our business, financial condition or results of
operations.
5. Liquidity and Going Concern Considerations
9
Operating results in the quarter ended March 31, 2001 were adversely affected by
the delay in capacity expansion at its low-level radioactive waste thermal
processing facility originally planned to be completed in the quarter ended
March 31, 2000 and rescheduled for completion in 2001 due to restrictions
imposed by lenders and operational issues.
Cash flow in the three months ended March 31, 2001 and 2000 and well as fiscal
year 2000 was negatively affected by the Company's inability to collect field
services trade accounts as projected. As a result of the aforementioned factors,
the Company is in default of certain financial ratio covenant provisions (debt
service to tangible net worth, debt service coverage ratio, and quick ratio) and
the mandatory repayment of $5.75 million at June 30, 2000 related to the
Company's credit facility at December 31, 2000 and each measurement period
within the year 2000, and at March 31, 2001.
ATG failed to make interest payments in the last quarter of 2000 of amounts
totaling $765,443 and failed to make interest payments in the first quarter of
2001 of amounts totaling $715,634. In addition, ATG failed to make fee payments
of $60,035 in the last quarter of 2000 and failed to make a letter of credit fee
payment in the first quarter of 2001 in the amount of $218,640. ATG also was
unable to pay a $1,500,000 short-term loan from an individual lender dated
August 11, 2000 which was originally due on October 5, 2000 and was subsequently
extended to December 15, 2000. ATG is seeking to obtain an extension of the
December 15, 2000 due date, but to date has not obtained this extension.
The occurrence of an event of default permits the lenders of the credit facility
to accelerate the maturity of borrowings already made and may prohibit ATG from
making additional borrowings under the facility. While the lenders have allowed
ATG to draw under the facility and have not notified ATG of their intention to
accelerate repayment, management believes that ATG will not be able, on a
prospective basis, to comply with the financial covenants in the agreements
governing the credit facility without significant accommodations from the
lending syndicate. The aforementioned raises substantial doubt regarding ATG's
ability to continue as a going concern. The accompanying financial statements
have been prepared assuming that the company will continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
ATG is reviewing alternative forms of financing in order to comply with the
credit facility agreement. Management is reviewing the company's business plan
with financial advisors and lenders with the objective of seeking appropriate
accommodations and to ascertain what actions can be taken to enhance liquidity
and generate cash to assist in paying the company's debt service. The company is
also evaluating potential changes in its capital structure and additional
financial resources. In June 2000 the company raised approximately $5.1 million
in additional equity through the sale of common stock, and $1.5 million in
short-term debt during August 2000.
10
The company's ability to meet its obligations in the normal course of business
is dependent upon, among other items, its ability to collect trade accounts
receivable, primarily field services trade accounts receivable, competitively
price services with the market at a profit, successfully bring on line its mixed
waste processing facility, add capacity to its low-level radioactive waste
thermal processing facility, return to profitable operations, obtain additional
financing and/or restructure the current debt agreement, and obtain waivers of
debt covenant violations.
6. Contingencies, Risks, and Uncertainties
Environmental Permits
The Company operates its fixed facilities under regulations of, and permits
issued by, various state and federal agencies. The Company, typically, is in the
process of seeking new permits, renewals and/or expansion permits. There can be
no assurance of the successful outcome of any permitting efforts. The permitting
process is subject to regulatory approval, time delays, local opposition and
potentially stricter governmental regulation. In the event a permit is not
granted, facility construction programs could be delayed, changed, or abandoned
and could result in substantial losses which would have a material adverse
effect on the Company's consolidated financial position. The Company reviews the
status of permitting projects on a periodic basis to assess realizability of
related asset values. As of March 31, 2001, management believes that assets
which could currently be affected by permitting efforts are recoverable at their
recorded values.
Department of Energy -- Hanford
In connection with the Company's contract with the Department of Energy's
Hanford Reservation (DOE Hanford), DOE Hanford by US federal law, was required
to commence non-thermal treatment of the DOE Hanford low-level mixed waste
stored in Richland, Washington by September 30, 1999, and thermal treatment of
this waste by December 31, 2000. ATG, which the Department of Energy contracted
with to process this waste, commenced non-thermal treatment of the waste by
December 1999 and thermal treatment by December 2000. Although ATG's contract
also required that ATG obtain all licenses, permits and approvals for, and place
our treatment facility for low-level mixed waste in operation by November 10,
2000, ATG did not meet this deadline due to the lack of completion of the
demonstration testing of our Richland facility. The Department of Energy has
been notified of the 2001 schedule for completion of demonstration testing and
ATG's violation of the November 10, 2000 deadline. To date, the Department of
Energy has not notified ATG of any corrective actions nor has ATG obtained a
waiver of this violation.
Governmental Regulation
ATG may not be able to comply with all of the environmental and other regulatory
requirements applicable to ATG's business, which could prevent ATG from
operating the business according to the business plan. If ATG fails to timely
obtain, or to comply with
11
the conditions of applicable federal, state and local governmental licenses,
permits or approvals for the Company's waste treatment facilities and services,
ATG could be prevented from operating the facilities and providing services,
resulting in a significant loss of revenue. ATG is required to complete thermal
demonstration testing to receive approval to become fully operational at the ATG
processing facility for low-level mixed waste in Richland, Washington. ATG is
scheduled to conduct demonstration testing in 2001. The cost to complete this
testing is approximately $2 million. ATG currently does not have the funds to
complete demonstration testing. ATG must acquire the $2 million from additional
equity or debt financing or from a government funded research and development
program at the Department of Energy. Currently, the regulatory authorities are
allowing ATG to process contracted waste streams as ATG prepares for
demonstration testing. The regulatory agencies allow up to 720 hours, or with an
extension, up to 1440 hours, of waste stream processing prior to demonstration
testing. After completion of these 720 hours, or 1440 hours if an extension has
been granted, ATG will no longer be able to process contracted waste streams at
our Richland facility without successful completion of demonstration testing.
ATG is targeting three months or approximately until June 2001, to complete the
initial 720 hours, and may request an extension for an additional 720 hours from
the regulatory agencies. To date, ATG has processed approximately 310 hours of
contracted waste streams. Once thermal demonstration testing of the Richland
facility has commenced, if the thermal processing systems do not meet
governmental standards, this would delay or prevent this facility from becoming
operational for thermal decontamination of mixed waste, resulting in a loss of
significant revenue potential at this facility.
In addition, licenses, permits and approvals for ATG's existing operational
facilities and services are subject to revocation or modification under a
variety of circumstances. As our business expands and as ATG introduces new
technologies, ATG will be required to obtain additional operating licenses,
permits or approvals. ATG may also be required to obtain additional operating
licenses, permits or approvals if new environmental legislation or regulations
are enacted or existing legislation or regulations are amended, reinterpreted or
enforced differently than in the past. Any new governmental requirements that
raise compliance standards may require us to modify our waste treatment
technologies to conform to more stringent regulatory requirements. ATG may not
be able to continue to comply with all of the environmental and other regulatory
requirements applicable to ATG's business.
Company facilities may be shut down due to equipment failure or failure to
comply with government regulations, which could significantly reduce our
revenues. If any of the Company's principal waste treatment systems were to be
shut down for any appreciable period of time, because of either equipment
breakdown or regulatory action in response to an alleged safety or other
violation of the terms of the licenses under which we operate, our revenues
could be significantly reduced. A shutdown of operating facilities will result
in the loss of revenues and possibly other future potential revenues from future
contracts if the Company was not able to bid for contracts successfully because
the waste treatment systems at the Company's fixed facilities did not perform
consistently in conformance with safety and other requirements. ATG's fixed
facilities are subject to frequent routine
12
inspections by the regulatory authorities issuing the licenses. The SAFGLAS
system was shut down from September 5 to September 28, 1999 due to an equipment
failure, resulting in business interruption losses and property damage of $2.7
million, of which to date only $829,000 has been reimbursed by insurance. ATG
has experienced other shutdowns of our facilities for short periods of time in
the past.
Dependence on Large Customers
A loss on one or more of the Company's larger contracts could significantly
reduce the Company's revenues. If ATG is unable to accurately calculate or
integrate the cost of performing a large, multi-year contract in its contract
bid and the costs are understated significantly, ATG would likely incur a loss
which would significantly reduce the Company's revenues. ATG increasingly
pursues large, governmental and private sector, multi-year contracts as a method
of achieving more predictable revenue, more consistent utilization of equipment
and personnel, and greater leverage of sales and marketing costs. The government
contracts in particular are usually awarded as a result of a competitive bidding
process requiring ATG to estimate and accurately predict its cost of
performance. These large contracts impose significant risks if actual costs are
higher than those estimated by ATG at the time of bid.
7. Subsequent Events
Contract Modification.
ATG has obtained a letter agreement for a contract modification of its low-level
mixed waste thermal processing contract with the Department of Energy for the
funding of approximately $2 million to complete demonstration testing of its
thermal processing facility. The modification is to include five milestone
achievements that will allow ATG to receive periodic payments at the completion
of each milestone. During April 2001, ATG completed the first two milestones and
received payments totaling $990,000. ATG is expecting to meet milestones three
and four during June 2001.
Settlement of Claims and Modification of Contract Agreements.
During May 2001, ATG reached agreements with two federal government customers
and insurance company in the settlement of contract claims, modification of
customer payment terms and a business interruption insurance claim in the
aggregate amount of $8.0 million. The agreements are with two federal customers
to settle contract modification requests by ATG in the amount of $6.05 million.
Of the $6.05 million, approximately $2.0 million represents advances on waste
that has been received and is to be processed at a later date. The company has
also accepted a $1.94 million insurance settlement offer for its business
interruption as a result of the September 1999 SAFGLAS unscheduled shut-down.
Under the term of the agreements, the company agrees not to disclose the terms
of the settlement agreements nor the individual customers. Other than the
advances on waste to be processed, substantially all of the aforementioned items
have been recognized in the financial statements as of December 31, 2000 and
March 31, 2001 in accordance with generally accepted accounting principles and
have been included in the balance sheet caption "Accounts receivable, net",
except the insurance claim that is included in the balance sheet caption
"Prepayments and other."
13
ATG INC.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion contains forward-looking statements that involve known
and unknown risks and uncertainties which may cause the Company's actual results
in future periods to differ materially from those indicated herein as a result
of certain factors, including those set forth under "Factors Affecting Future
Operation Results." The Company undertakes no obligation to publicly release
updates or revisions to these statements.
The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and the notes thereto included in
Item 1 of this Quarterly Report and the audited consolidated financial
statements and notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in the Company's 2000
Annual Report on Form 10-K.
General
ATG is a radioactive and hazardous waste management company that offers
comprehensive treatment solutions for low-level radioactive waste, low-level
mixed waste, and other waste generated by the U.S. Department of Defense, the
U.S. Department of Energy and commercial entities including, nuclear power
plants, medical facilities and research institutions. ATG principally derives
its revenue from the waste treatment operations of its Fixed Facilities Group
and the on-site remediation services of its Field Engineering Group. ATG
currently focuses a significant portion of its business on SAFGLAS(TM)
vitrification of low-level radioactive waste and on its business interests in
Tennessee for treating ion exchange resins and on processing of low-level mixed
waste. During the quarter ended June 30, 1999, ATG's permit application for its
low-level mixed waste processing facility in Richland, Washington was granted,
and in the quarter ended September 30, 1999, we began construction of this
processing facility. ATG commenced non-thermal processing and thermal processing
of low-level mixed waste at this facility in late December 1999 and late
December 2000, respectively.
ATG has historically relied upon the integration of proven technologies with
ATG's know-how and processes, and has not incurred significant levels of
research and development spending. Most of the research and development
activities conducted to date have related to the design and construction of our
fixed operating facilities, particularly in connection with the SAFGLAS(TM)
system. We anticipate that our research and development efforts will continue to
be moderate and that the costs associated with future research and development
will not be material to our results of operations.
ATG increasingly pursues multi-year and longer term contracts as a method of
achieving more predictable revenue, more consistent utilization of equipment and
personnel, and greater leverage of sales and marketing costs. ATG currently
focuses on large, multi-year
14
site-specific and term contracts in the areas of treatment of low-level
radioactive waste and low-level mixed waste, environmental restoration and D&D.
In recent years we have been awarded a number of large government term contracts
which, in most cases, require several years to complete. These government term
contracts are subject to cancellation, delay or modification at the sole option
of the government at any time, to annual funding limitations and public sector
budget constraints and, in many cases, to actual delivery orders being released.
These projects, which may create an opportunity for ATG to realize margins
higher than on other types of contracts, also impose heightened risks of loss
if, for example, actual costs are higher than those estimated at the time of
bid. A loss on one or more of these larger contracts could have a material
adverse effect on our financial condition and results of operations. In
addition, failure to obtain, or delay in obtaining, targeted large, multi-year
contracts could result in significantly less revenue to ATG than anticipated.
Results of Operations
Revenue and Net Income/(Loss). Revenue for the first quarter of fiscal 2001 was
$9.8 million, a decrease of 12% from the $11.1 million recorded in the
comparable quarter in the prior year. ATG recorded a net loss of $2.1 million or
$0.12 per share, in the first quarter of fiscal 2001, compared to net income of
$6,000, or $0.00 per share fully diluted, in the first quarter of fiscal 2000.
The decrease in revenue is principally attributable to a shortfall in spent ion
exchange resin receipts at our facility in Oak Ridge, Tennessee. ATG's
transition to the non-thermal resin decontamination process has continued
through the first quarter of fiscal 2001 and is anticipated to be completed
during the second quarter of fiscal 2001. In addition, revenue and gross margin
during the first quarter was negatively impacted by LLRW thermal production
capacity constraints at ATG's Richland, Washington processing facilities. The
production capacity constraints were due to the inability of acquiring the
second bulk processing unit (BPU) that was scheduled for installation during
the fourth quarter of 2000. ATG anticipates that the unit will be installed
during the second quarter of 2001.
ATG's negative revenue impacts were partially offset by increased production
from the Richland, Washington mixed waste processing facilities. ATG during the
first quarter of 2001 began the production ramp-up of its new thermal treatment
processing facility.
Gross Profit. Gross profit for the first quarter of fiscal 2001 was $3.5 million
or 36% of revenue, compared to $4.4 million or 40% of revenue in the comparable
quarter in 2000. The gross profit percentage may change from year to year and is
related to the varying mixes of business during these periods. Overall gross
profit on waste processing services was approximately 44% in the first quarter
of 2001 compared to 46% in the first quarter of 2000. The percentage decrease is
due to the decreased utilization of the Tennessee fixed facilities and the LLRW
thermal production capacity constraints at the Richland, Washington facilities
15
as discussed previously under the section entitled "Revenue and Net
Income/(Loss)." The negative gross profit impact was partially offset by the
Richland, Washington mixed waste thermal treatment processing facility ramp-up
as discussed previously under the section entitled "Revenue and Net
Income/(Loss)." The fixed facilities operations generally have a larger
percentage of fixed costs versus variable costs that result in increases in
utilization favorably impacting gross profit while decreases in utilization
unfavorably impact gross profit. The overall cost of revenue for waste
processing services for the first quarter of 2001 was $4.3 million compared to
$4.7 million for the first quarter of 2000. The decrease in costs is primarily
attributable to the Tennessee plant consolidation and workforce reduction that
resulted in a decrease in costs for labor, supplies, utilities, maintenance, and
waste disposal expenditures.
Overall gross profit on field service projects was approximately 9% in the first
quarter of 2001 compared to 20% in the first quarter of 2000. The principal
reason for the difference is the mix of projects and stage of completion. The
overall cost of revenue for field service projects for the first quarter of 2001
and the comparable period of 2000 was $2.0 million. The percentage increase in
costs is primarily attributable to an increase in costs for material and
equipment rental.
Sales, General and Administrative Expenses. Sales, general and administrative
expenses for the first quarter of fiscal 2001 were $5.1 million or 52% of
revenue, compared to $3.9 million or 35% of revenue for the comparable period in
2000. The increase in spending from year to year is principally due to an
increase in infrastructure at our Richland facility and includes general and
administrative expense increases primarily attributable to labor, supplies,
utilities, equipment rental, and depreciation. The increased infrastructure is
required for ATG to meet its contractual obligations regarding the start-up of
its mixed waste processing operations. In addition, the overall increase in
sales, general and administrative expenses as a percentage of revenue was
impacted by decreased utilization of the Tennessee fixed facilities and the
Richland, Washington LLRW thermal processing facilities as discussed
previously under the section entitled "Revenue and Net Income/(Loss)."
Other Income. During the second quarter of fiscal 2000, we completed the sale
and leaseback of our corporate offices in Fremont, California, resulting in a
pre-tax gain of $1.7 million. The gain is being recognized in equal increments
of $420,000 each over the next four quarters beginning in the second quarter of
fiscal 2000. The final quarter of installment gain was recorded during the first
quarter of 2001.
Provision for Income Taxes. ATG provides for income taxes during interim periods
at an estimated combined federal and state annual rate to be expected for the
full year. ATG does not anticipate a tax benefit for the first quarter of 2001.
ATG does not expect an income tax expense for 2001 since it is expected that net
operating loss carry forwards from 2000 will offset any income tax expense.
Based on events known at March 31, 2000, ATG used an effective tax rate of 40%.
During 2000, ATG determined that its cumulative net operating losses incurred
exceeded the amount of tax carryback available. Due to the uncertainty of future
recoverability, ATG recorded a full valuation allowance against its deferred tax
assets. ATG has provided a full valuation against its deferred tax assets until
such time as evidence shows it is more likely than not that the deferred tax
assets are recoverable.
Liquidity and Capital Resources
16
Total cash and cash equivalents were $272,000 at March 31, 2001, a decrease of
$79,000 from December 31, 2000. The working capital of the Company was
approximately a negative $40.5 million at March 31, 2001, a decrease of $5.3
million from December 31, 2000. The decrease in working capital is partially due
to the reclassification of $23.75 million of long-term debt to short-term
borrowing due to loan covenant violations. See discussion of our credit facility
below.
Significant outlays of cash have been needed to acquire property and equipment
and to secure or expand regulatory licenses, permits and approvals, primarily
for improvements to the Company's LLRW facility and refinements of the LLMW
facility in Richland, Washington and for improvements to its fixed facilities in
Oak Ridge, Tennessee. Property and equipment acquisitions totaled $2.8 million
for the three months ended March 31, 2001.
Subsequent Events
ATG has obtained a letter agreement for a contract modification of its low-level
mixed waste thermal processing contract with the Department of Energy for the
funding of approximately $2 million to complete demonstration testing of its
thermal processing facility. The modification is to include five milestone
achievements that will allow ATG to receive periodic payments at the completion
of each milestone. During April 2001, ATG completed the first two milestones and
received payments totaling $990,000. ATG is expecting to meet milestones three
and four during June 2001.
During May 2001, ATG reached agreements with two federal government customers
and an insurance company in the settlement of contract claims, modification of
customer payment terms and a business interruption insurance claim in the
aggregate amount of $8.0 million. The agreements are with two federal customers
to settle contract modification requests by ATG in the amount of $6.05 million.
Of the $6.05 million, approximately $2.0 million represents advances on waste
that has been received and is to be processed at a later date. The company has
also accepted a $1.94 million insurance settlement offer for its business
interruption as a result of the September 1999 SAFGLAS unscheduled shut-down.
Under the term of the agreements, the company agrees not to disclose the terms
of the settlement agreements nor the individual customers.
Credit Facility
In November 1999, ATG completed an agreement with a consortium of banks for a
credit facility in the amount of $45 million. The credit facility includes a
letter of credit in support of tax-exempt Solid Waste Revenue Bonds in the
aggregate face amount of $26.5 million. The bonds were issued during November
1999, and bear interest at a floating rate (3.65% at March 31, 2001), based upon
prevailing market conditions, which is redetermined every seven days. The bonds
are due October 31, 2014 and may be prepaid at any time without penalty. The
proceeds are to be applied exclusively for the construction of low-level mixed
waste facility in Richland, Washington. The credit facility also includes a five
year revolving working capital line of credit, due October 2004, in the amount
of $18 million, including a letter of credit facility of $5 million. Borrowings,
when made, bear a variable interest rate based on financial ratio criteria. The
credit facility is collateralized by accounts receivable, inventory and
equipment.
The credit facility agreement requires ATG to comply with a number of covenants,
including capital asset acquisition limits, limits on additional debt, minimum
levels of tangible net worth, dividend payment restrictions and maintenance of
financial ratios. At December 31, 1999, ATG was in violation of some of these
financial ratio covenants. ATG obtained a permanent waiver, subsequent to year-
end, in respect of these violations as of December 31, 1999. In connection with
the waiver, the banks agreed to revise and lower some of the financial ratio
covenants that ATG failed to meet as of December 31, 1999, and substitute new
covenants, for which ATG was in compliance for the original violated covenants
and revise and lower some of the financial covenants for each of the quarterly
periods in the year ended December 31, 2000, and increase the borrowings
available to ATG by $6 million, for a total of $24 million, through June 30,
2000. The
17
borrowing limit subsequent to June 30, 2000 is $18 million. In addition, the
interest rate applied to the working capital facility was revised.
At March 31, 2000 ATG was in violation of the revised financial ratios under the
credit facility. Pursuant to a forbearance and consent agreement dated as of
June 1, 2000, the lenders agreed to forbear in the exercise of any of their
rights or remedies with respect to March 31, 2000 covenant defaults through June
30, 2000.
At June 30, 2000 ATG was in violation of the revised financial ratios under the
credit facility. Furthermore, at June 30, 2000, ATG failed to make a required
payment of principal in the approximate amount of $5,750,000 as a mandatory
paydown under the revolving credit facility, so as to bring total borrowings
under that facility to the $18 million limit. ATG currently has borrowings of
$23.75 million and is paying interest at the default rate of 11.25%.
ATG has requested that the banks grant a forbearance in respect of the
violations described above beyond June 30, 2000. As one of the conditions to
granting a forbearance, the banks requested that ATG deposit into a segregated
account the amount of $1,500,000 to finance the completion and demonstration
testing of the company's new low-level mixed waste facility in Richland,
Washington. The mixed waste thermal facility is presently in commercial
operation and is operating at a lower level of production during the testing
phase of operations. Consequently, on August 11, 2000, ATG obtained a short-term
loan in the amount of $1,500,000 bearing a maturity date of October 5, 2000 from
an individual lender. The loan bears interest at a rate of 12% per annum. The
proceeds were used to fund certain facility expenditures through December 31,
2000. ATG estimates that it will be required to spend $2,000,000 to complete its
demonstration testing and receive its permits. ATG was unable to repay the loan
on its stated maturity date and subsequently obtained an extension until
December 15, 2000. ATG is seeking to obtain an extension to the December 15,
2000 due date, but to date has not obtained this extension. ATG anticipates that
it will need to obtain additional financing or obtain another extension on the
due date in order to repay the loan.
ATG failed to make interest payments in the last quarter of 2000 of amounts
totaling $765,443 and failed to make interest payments in the first quarter of
2001 of amounts totaling $715,634. In addition, ATG failed to make fee payments
of $60,035 in the last quarter of 2000 and failed to make a letter of credit fee
payment in the first quarter of 2001 in the amount of $218,640.
ATG will not be able, without obtaining concessions from the banks or new
financing, to make the mandatory principal paydown of approximately $5,750,000,
$765,443 interest owing for the last quarter of 2000, $715,634 interest owing
for the first quarter of 2001, $60,035 fee owing for the last quarter of 2000,
and the $218,640 letter of credit fee owing for the first quarter of 2001 under
the credit facility, or to comply with the current financial covenants set forth
in the agreements governing the credit facility.
As of May 11, 2001, the banks have not granted a forbearance in respect of the
violations of the credit agreement beyond June 30, 2000. The lenders could elect
at any time to enforce their rights and remedies under the credit agreement. The
banks' remedies could include a demand for repayment of all outstanding loans,
which raises substantial doubt
18
about the ability of the company to continue as a going concern if it cannot
obtain additional cash to repay or restructure the debt. ATG is continuing to
negotiate with the lenders to modify the financial covenants and the time frame
for the mandatory paydown. ATG is seeking alternative forms of financing in
order to make the mandatory paydown. ATG is also reviewing its business plan
with its financial advisors and lenders with the objective of seeking
appropriate accommodations and to ascertain what actions can be taken to enhance
liquidity and thereby generate cash to assist in paying the company's debt
service. ATG is also evaluating potential changes in its capital structure and
additional financial resources. If ATG is unable to service its indebtedness, we
may be required to alter our business plans, seek to restructure or refinance
our indebtedness or seek additional equity capital.
We will not have sufficient cash generated from operations to meet our working
capital requirements for the next twelve months unless we are able to negotiate
accommodations from our lenders or refinance our current level of indebtedness
and obtain additional debt or equity.
The accompanying financial statements have been prepared assuming that ATG will
continue as a going concern. As discussed in the Note 5 to the unaudited
condensed financial statements, ATG is in default of certain provisions related
to our credit facility. The default allows the bank consortium to demand
repayment of the outstanding balance. ATG has incurred a substantial operating
loss during 2000 and the first quarter of 2001 and has negative working capital
of $40.5 million at March 31, 2001. ATG requires additional capital to meet its
obligations and accomplish our business plan, which raises substantial doubt
about ATG's ability to continue as a going concern. The accompanying financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Factors Affecting Future Operating Results
ATG's business is subject to the following risks and uncertainties, in addition
to those described elsewhere.
Credit Facility Default
We are in default under one of our credit facilities; as a result, our lenders
could at any time elect to accelerate repayment of all amounts owed under the
credit facilities. ATG is in violation of a requirement under one of its credit
facilities to make a mandatory paydown of approximately $5,750,000 by June 30,
2000, is late in paying interest amounts in the last quarter of 2000 totaling
$765,443, late in paying interest amounts in the first quarter of 2001 totaling
$715,634, late in paying fee amounts in the last quarter of 2000 totaling
$60,035, and late in paying a letter of credit fee amount in the first quarter
of 2001 totaling $218,640 due under its credit facilities, and is in violation
of financial covenants in the credit facility agreements. ATG also was unable to
pay a $1,500,000 short-term loan from an individual lender that was originally
due on October 5, 2000 and was subsequently extended to December 15, 2000. ATG
is seeking to obtain an extension of the December 15, 2000 due date, but to date
has not obtained this extension. ATG will not be able, without obtaining
concessions from its banks or obtaining new financing, to make the mandatory
$5,750,000 paydown, to bring its
19
interest payments current, to comply with current financial covenants in the
credit facility agreements or to repay its $1,500,000 loan. At any time ATG's
lenders could elect to enforce their rights and remedies under the credit
facilities agreements to accelerate repayment of all amounts owed. ATG does not
have the funds to repay all its loans if the lenders accelerate repayment.
We may not be able to continue as a going concern if our lenders elect to
accelerate the payment of indebtedness under our credit facilities. Since we do
not currently have sufficient funds to repay all of our indebtedness under our
credit facilities, we may not be able to continue as a going concern if our
lenders elect to accelerate payment under the credit facilities. In that case,
we would likely become insolvent and subject to voluntary or involuntary
bankruptcy proceedings, and the value of our equity securities would likely be
significantly diminished. The report of our independent auditors appearing in
our Annual Report on Form 10-K for the year ended December 31, 2000 and the
Audited Consolidated Financial Statements included therein includes a "going
concern" qualification.
Capital Requirements
If we cannot raise additional capital, we may not be able to implement and
complete testing of our Richland, Washington mixed waste facility, pay-off our
debts, meet our business expenses, or otherwise implement our business plan. We
believe that ATG will need additional financing for working capital and capital
expenditure requirements in order to implement its long-term business plan. If
we are not successful in raising additional working capital we may not be able
to implement and complete thermal demonstration testing of our Richland,
Washington mixed waste facility which is currently scheduled for testing in 2001
and to make mandatory paydowns and payoffs of loans currently due or which will
be due in 2001. Our working capital deficit as of March 31, 2001 is $40.5
million, a decrease of $5.3 million from working capital deficit of $35.2
million at December 31, 2000. If we are not successful in raising additional
capital, we may need to curtail or scale back our planned operation of this
facility. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
Profitability
We have experienced a downward trend in our revenue and net income for fiscal
2000 and during the first quarter of 2001. To date, we have experienced a
downward trend in revenue and net income for the first quarter of fiscal 2001
compared to the comparable period in 2000, and those trends will continue if we
cannot generate significant additional revenues in our Oak Ridge, Tennessee and
Richland, Washington facilities. ATG recorded revenue of $41.7 million and a net
loss of $25.5 million for the fiscal year ended December 31, 2000, compared to
revenue of $60.7 million and net income of $5.2 million for 1999. The decrease
in revenue and net income was principally due to a major shortfall in receipts
from spent ion exchange resin at our Oak Ridge facility, a consolidation of our
operations and workforce reduction at our Oak Ridge facility in the second
quarter of fiscal 2000, the transition of our thermal waste processing system at
our Oak Ridge facility to a more cost effective non-thermal resin
decontamination process which commenced in the second quarter of fiscal 2000,
and the plant write-off and
20
abandonment expenses at our Oak Ridge facility in the fourth quarter of 2000. As
a result of the restructuring of the Oak Ridge facility, ATG recorded a $500,000
inventory write-down charge to cost of revenue and a $1.9 million restructuring
charge in the second quarter of fiscal 2000. During the fourth quarter of 2000,
the Company completed a review of the Tennessee fixed facilities concerning the
utilization of a modified Q-CEP thermal treatment system for the processing of
specialty niche waste streams. Due to the prohibitive cost and the unknown
prospect of success related to the proposed system modification, the Company
formally abandoned the Q-CEP thermal treatment system during the fourth quarter
of 2000 and recorded a non-cash asset impairment charge of $14.1 million. In
addition, the Company recorded non-cash charges regarding the $1.4 million
write-down of goodwill from its acquisition of the Q-CEP assets, a $307,000
maintenance supply inventory write-down that was charged to cost of revenue, and
an $828,000 write-down of other assets. Furthermore, a charge of $1.2 million
was recorded for processing and disposal of secondary waste associated with the
shutdown of the Q-CEP facility, of which $1.0 million remains at December 31,
2000. The Q-CEP thermal treatment process was utilized for the treatment of ion
exchange resins from nuclear power plants. The company is continuing the pursuit
of its non-thermal resin decontamination technology for the treatment of ion
exchange resins. Additionally, ATG has completed construction and is processing
low level mixed waste streams as we prepare for demonstration testing in 2001 of
our new thermal mixed waste facility in Richland, Washington. In the absence of
significant revenue generation at these facilities, ATG will continue to
experience this downward trend in revenue and net income for the foreseeable
future.
Dilution
The book value and earnings per share of our common stock may be diluted
significantly and the price of our common stock may also decline because of our
current and future obligations to issue additional shares of common stock to the
shareholders purchasing newly issued shares in June 2000. During June and July
2000, ATG completed a $5.5 million private placement of 2.75 million shares of
common stock at $2 per share. In addition, ATG issued 192,500 warrants at an
exercise price of $2.75 per share in connection with the private placement. ATG
received a total of approximately $5.1 million in net proceeds from this private
placement. Under agreements with the aforementioned shareholders, ATG is
currently required to issue a total of 582,725 shares and may be required to
issue up to a maximum of 1,059,300 shares of common stock to the selling
shareholders without payment of additional consideration. ATG may also be
required to issue up to a maximum of 2,050,632 additional shares of common stock
to three of the selling shareholders pursuant to the terms of an agreement with
these three selling shareholders should the average closing price of ATG's stock
for the 30 trading days prior to November 1, 2001 be less than $2.00 per share.
The issuance of these additional shares, including the shares that may be issued
should ATG's stock fall below $2.00 for the 30 trading days prior to November 1,
2001, will have a dilutive effect. ATG may further be required to issue up to a
total of 1,530,000 shares of common stock upon the exercise of outstanding
warrants and options, which on December 31, 2000 had a weighted average exercise
price of $4.03 per share. Additionally, because of existing defaults on our
credit facility and the need to complete demonstration testing at a cost of
approximately $2 million, we will likely be required to
21
raise significant additional financing in the near future through the sale of
equity securities, which could have a further dilutive effect.
Technology
We may not be able to comply with all of the environmental and other regulatory
requirements applicable to our business, which could prevent us from operating
our business according to our business plan. If we fail to timely obtain, or to
comply with the conditions of applicable federal, state and local governmental
licenses, permits or approvals for our waste treatment facilities and services,
we could be prevented from operating our facilities and providing services,
resulting in a significant loss of revenue. We are required to complete our
thermal demonstration testing to receive approval to become fully operational at
our processing facility for low-level mixed waste in Richland, Washington. We
are scheduled to conduct demonstration testing in 2001. The cost to complete
this testing is approximately $2 million. ATG currently does not have the funds
to complete demonstration testing. ATG must acquire the $2 million from
additional equity or debt financing or from a government funded research and
development program at the Department of Energy. Currently, the regulatory
authorities are allowing ATG to process contracted waste streams as we prepare
for demonstration testing. The regulatory agencies allow up to 720 hours, or
with an extension, up to 1440 hours, of waste stream processing prior to
demonstration testing. After completion of these 720 hours, or 1440 hours if an
extension has been granted, ATG will no longer be able to process contracted
waste streams at our Richland facility without successful completion of
demonstration testing. ATG is targeting three months or approximately until June
2001, to complete the initial 720 hours, and may request an extension for an
additional 720 hours from the regulatory agencies. To date, ATG has processed
approximately 310 hours of contracted waste streams. Once thermal demonstration
testing of the Richland facility has commenced, if our thermal processing
systems do not meet governmental standards, this would delay or prevent this
facility from becoming operational for thermal decontamination of mixed waste,
resulting in a loss of significant revenue potential at this facility. In
addition, licenses, permits and approvals for our existing, operational
facilities and services are subject to revocation or modification under a
variety of circumstances. As our business expands and as we introduce new
technologies, we will be required to obtain additional operating licenses,
permits or approvals. We may also be required to obtain additional operating
licenses, permits or approvals if new environmental legislation or regulations
are enacted or existing legislation or regulations are amended, reinterpreted or
enforced differently than in the past. Any new governmental requirements that
raise compliance standards may require us to modify our waste treatment
technologies to conform to more stringent regulatory requirements. We may not be
able to continue to comply with all of the environmental and other regulatory
requirements applicable to our business.
We may not be able to grow our business if we cannot develop commercially viable
technologies for treatment of wastes in a manner which is responsive to our
clients' requirements. Our future growth is dependent upon our ability to
implement our technologies for the treatment of low-level radioactive waste,
low-level mixed waste and other waste, particularly our vitrification
technologies and technologies for treatment of ion exchange resin waste streams,
in a manner which makes them commercially viable
22
and responsive to our clients' requirements. Our technologies for treatment of
waste compete with other technologies, as well as with more traditional
treatment, storage and disposal alternatives. Our success depends on our ability
to convince our clients that our vitrification and related technologies are at
least as cost-effective as other waste treatment or waste disposal methods.
Furthermore, our ability to comply with the terms of our contracts will affect
whether clients will continue to utilize our technologies. For example, our
contract for treatment of low-level mixed waste with the Department of Energy's
Hanford Reservation requires us to obtain all of the required licenses, permits
and approvals for, and to build and place in operation, our treatment facility
for low-level mixed waste by November 10, 2000. Before ATG can acquire all
required licenses, permits and approvals for the facility and place this
facility in permanent operation, it must complete demonstration testing of the
facility. Demonstration testing is scheduled to be completed in 2001. The
Department of Energy has been notified of the schedule for completion of
demonstration testing and ATG's violation of the November 10, 2000 deadline. To
date, the Department of Energy has not notified ATG of any corrective actions
nor has ATG obtained a waiver of this violation. On March 15, 2001, ATG received
$1.9 million from the Department of Energy under the Hanford contract.
Approximately 42% of the $1.9 million was for previously processed waste and
58%, or $1.1 million, was for on-site receipt of waste for future thermal
processing. If ATG fails to process this waste, it would be obligated to return
the $1.1 million. Additionally, should ATG be unable to process future waste
received by the Department of Energy under the Hanford contract, or otherwise
fail to satisfy the terms of the Hanford contract, ATG could suffer material
losses.
Change in Environmental/Laws and Enforcement
A substantial relaxation of the requirements of compliance with environmental
laws or a substantial reduction of enforcement activities by governmental
agencies would reduce the demand for our services. In excess of 90% of our
revenues are generated as a result of requirements arising under federal and
state laws, regulations and programs related to protection of the environment.
If the requirements of compliance with environmental laws and regulations were
substantially relaxed in the future or were less vigorously enforced,
particularly those relating to the transportation, treatment, storage or
disposal of low-level radioactive waste, low-level mixed waste, or other wastes,
the demand for our services would decrease, and our revenues would be
significantly reduced.
Government Spending
The cancellation or modification of our government contracts or a reduction in
government funding could significantly reduce our revenues. Our government
contracts are generally subject to cancellation or modification at the sole
option of the government at any time, to annual funding limitations and public
sector budget constraints and, in many cases, to actual delivery orders being
released. Any cancellation or modification of our federal government contracts
could result in a significant reduction in our revenues. Efforts to reduce the
federal budget deficit and reduce government appropriations could adversely
affect the availability and timing of government funding for the cleanup of
Department of Energy, Department of Defense and other federal government sites
resulting in cancellations, modifications or reductions in the government
contracts for the restoration of clean-up sites with ATG, and a consequential
reduction in ATG's revenues.
23
The percentage of ATG's revenues attributable to federal government contracts
for the fiscal years ending 1998, 1999 and 2000 are 55%, 27%, and 30%
respectively.
Failure to Comply with Contract Provisions
We are subject to fines and penalties if we fail to comply with the requirements
of government contracts. As a provider of services to federal and other
government agencies, we must comply with government contracting requirements
which are complex, highly technical and subject to varying interpretations. If
we fail to comply with governmental contracting requirements, the government
could impose on us fines and penalties for failure to follow procurement
integrity and bidding rules and employing improper billing practices or
otherwise failing to follow prescribed cost accounting standards, including
disqualification from future government contract projects for a significant
period of time. We have been, and expect to be in the future, the subject of
audits, and may in the future be subject to investigations, by government
agencies regarding our compliance with government contracting requirements.
Fluctuations in Quarterly Results
Fluctuations in quarterly results due to seasonal factors may cause our
operating results to fail to meet analysts' and investors' expectations, which
could cause the price of our common stock to decline. Our revenue is dependent
on our contract backlog and the timing and performance requirements of each
contract. Our revenue is also affected by the timing of our clients' planned
remediation activities and need for waste treatment services, which generally
increase during the third and fourth quarters based largely on weather
conditions. Due to this variation in demand and resulting fluctuation in
quarterly results, future quarterly operating results may not meet the
expectations of securities analysts and investors which could result in the
decline in the price of our stock.
Management of Business Growth
If we fail to manage our growth effectively, our financial, operational and
managerial resources may be inadequate. Our rapid growth has placed, and any
future growth may place, significant demands on our financial resources and to a
lesser extent, our operational and managerial resources which could impact the
timing and operation of waste treatment facilities. We have had and continue to
have substantial working capital deficits as a result of the strain on our
financial resources due to our rapid revenue growth, losses from operations,
lack of operating capital, and substantial uncollected trade accounts
receivable. These working capital deficits may impact the timing and our ability
to successfully implement the operation of our waste treatment facilities in
Richland, Washington and Oak Ridge, Tennessee. Our growth has increased
significantly since 1994, when we experienced a significant increase in the
number and size of contracts awarded. In December 1998, we acquired new business
lines that contributed to increased growth in 1999. Also in 1999, we began
construction of our new Richland, Washington facility for processing of low-
level mixed waste that is anticipated to contribute to increased growth in 2001
and beyond. In the second quarter of fiscal 2000 at our Oak Ridge, Tennessee
facility, we discontinued our Q-CEP thermal process for decontaminating resin
and are replacing it with a more cost effective non-thermal resin
decontamination process which has a greater long-term commercial viability.
Facilities Shutdown
Our facilities may be shut down due to equipment failure or failure to comply
with government regulations, which could significantly reduce our revenues. If
any of our principal waste treatment systems were to be shut down for any
appreciable period of
24
time, because of either equipment breakdown or regulatory action in response to
an alleged safety or other violation of the terms of the licenses under which we
operate, our revenues could be significantly reduced. Not only could we lose
revenues from shut downs, but we could also lose potential revenues from future
contracts if we could not bid for contracts successfully because the waste
treatment systems at our fixed facilities did not perform consistently in
conformance with safety and other requirements. Our fixed facilities are subject
to frequent routine inspections by the regulatory authorities issuing the
licenses. Our SAFGLAS(TM) system was shut down from September 5 to September 28,
1999 due to an equipment failure, resulting in business interruption losses and
property damage of $2.7 million, of which to date only $829,000 has been
reimbursed by insurance. We have experienced other shutdowns of our facilities
for short periods of time in the past.
Competition
We face competition from companies with greater resources and potentially more
cost-effective waste treatment solutions. Any increase in the number of licensed
commercial treatment facilities or disposal sites for low-level radioactive
waste or low-level mixed waste in the United States, or any decrease in the
treatment or disposal fees charged by the facilities or sites, could reduce the
competitive advantage of ATG's treatment technologies. The market for
radioactive and hazardous waste management services is highly competitive and we
face competition in our current and planned business lines from both established
domestic companies and foreign companies attempting to introduce European waste
treatment technologies into the United States.
Expansion into Foreign Markets
Risks associated with foreign markets could impede our planned expansion into
the Pacific Rim. A key component of our long-term business plan is to expand our
business into select Pacific Rim markets, which requires that we or our
strategic alliance partners be able to market our technologies or services
successfully in foreign markets. However, our expansion into the Pacific Rim
region could be delayed or prevented by various risks which are inherent in
foreign operations, including general economic conditions in each country,
varying regulations applicable to our business, seasonal reductions in business
activities, fluctuations in foreign currencies or the U.S. dollar,
expropriation, nationalization, war, insurrection, terrorism and other political
risks, the overlap of different tax structures, risks of increases in taxes,
tariffs and other governmental fees and involuntary renegotiation of contracts
with foreign governments.
Loss on Commercial Contracts
A loss on one or more of our larger contracts could significantly reduce our
revenues. If ATG is unable to accurately calculate or integrate the cost of
performing a large, multi-year contract in its contract bid and the costs are
understated significantly, ATG would likely incur a loss which would
significantly reduce our revenues. ATG increasingly pursues large, governmental
and private sector, multi-year contracts as a method of achieving more
predictable revenue, more consistent utilization of equipment and personnel, and
greater leverage of sales and marketing costs. The government contracts in
particular are usually awarded as a result of a competitive bidding process
requiring ATG to estimate and accurately predict its cost of performance. These
large contracts impose significant risks if actual costs are higher than those
estimated by ATG at the time of bid.
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Litigation
If we were to lose any of three pending civil actions against us, including a
wrongful death action, we might become subject to a potentially large damage
award. ATG is a defendant in a pending wrongful death civil action seeking
damages in excess of $8 million, including exemplary damages of $5 million, for
the death of an employee of a scrap metal dealer who died as a result of an
exploding piece of ordnance. The action alleges that ATG's sub-contractor
supplied the ordnance to the scrap dealer. A second lawsuit seeking damages of
$200,000 was filed by three other persons alleging physical injuries and
emotional distress caused by the accident. A third lawsuit seeking damages of
$1,200,000 was filed by the property owner where the explosion occurred alleging
business interruption and property damage. ATG is a named defendant in the
second and third actions as well.
NASDAQ Listing
If we fail to maintain a Nasdaq listing for our common stock, it will become
more difficult for owners of our common stock to dispose of their shares. Our
common stock is presently traded on the Nasdaq National Market. If we fail to
maintain our listing for our common stock, and no other exclusion from the
definition of "penny stock" under the Exchange Act of 1934 is available, then
any broker engaging in a transaction in our securities would be required to
provide any customer with a risk disclosure document and the compensation of the
broker-dealer in the transaction and monthly account statements showing the
market values of ATG's securities held in the customer's accounts. If brokers
become subject to the "penny stock" rules when engaging in transactions in our
securities, they may become less willing to engage in the offer and sale of our
securities. This, in turn, may make it more difficult for owners of our common
stock to dispose of their shares.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
There had been no change to the disclosures made in the Company's 2000 Form
10-K.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
In June 1992, ATG entered into a contract with the U.S. Army under which ATG
acted as the prime contractor to "surface clear" expended ordnance from a firing
range at Fort Irwin, California. In March 1997, a piece of ordnance exploded on
the premises of a scrap metal dealer in Fontana, California. An employee of the
scrap dealer died in the accident. Although the scrap dealer had purchased
expended ordnance and other military scrap metal from a number of military
facilities, including Fort Irwin, the scrap dealer indicated that the ordnance
which exploded was purchased from Fort Irwin. The U.S. Army contended that a
subcontractor to ATG on the Fort Irwin contract had improperly certified
ordnance cleared from the Fort Irwin firing range as free of hazardous and
explosive material prior to the sale of ordnance to the scrap dealer. As a
result, the U.S. Army terminated the Fort Irwin contract for default, and
demanded repayment from ATG of alleged reprocurement costs totaling $945,000.
ATG believes it fully complied with the terms of the Fort Irwin contract and
applicable laws and regulations and challenged the default termination in an
action against the U.S. Army filed in the Court of Federal Claims in July 1997.
In July 1998, the U.S. Army and ATG settled the matter. The termination for
default was rescinded and ATG agreed to no longer bid on surface-clearing work
at active U.S. Army firing ranges.
In connection with the accident, in March 1998 a wrongful death civil action was
filed in San Bernardino County Superior Court against the subcontractor, a
supervisory employee of the subcontractor, the owners of the premises occupied
by the scrap dealer, and ATG, seeking damages in excess of $8 million, including
exemplary damages of $5 million. A second action was filed at the same time in
San Bernardino County Superior Court against the same defendants by three other
persons alleging physical injuries and emotional distress caused by the
accident. The parties in the second action are seeking general damages subject
to proof estimated to be in the amount of $200,000. A third action was also
filed in San Bernardino County Superior Court against the same defendants by the
property owner where the accident occurred asserting business interruption and
property damage caused by the accident in the amount of $1,200,000. ATG has
tendered the defense of each of these actions to its insurance carrier, which is
presently handling the matters for ATG, and we intend to vigorously contest all
of the
27
claims asserted in these actions. We believe that we acted properly with respect
to the Fort Irwin contract, and that we should not be liable for the injuries
caused by the accident. We also intend to seek indemnification from the
subcontractor for the full amount of any costs, damages and liabilities which we
may incur in connection with or as a result of these lawsuits. The subcontractor
has advised ATG that the subcontractor's comprehensive general liability
insurance policy covers the claims asserted against the subcontractor, and that
the policy coverage limit is $7 million per occurrence. Although we believe that
all of the claims asserted against ATG are without legal merit, the outcome of
these lawsuits is uncertain. Any judgment of liability against ATG, especially
to the extent damages exceed or are not covered by insurance or are not
recoverable by ATG from the subcontractor, could have a material adverse effect
on our business, financial condition and results of operations.
In addition to the contingency disclosed above, from time to time we are a party
to litigation or administrative proceedings relating to claims arising from our
operations in the normal course of business. Management, on the advice of
counsel, believes that the ultimate resolution of litigation currently pending
against ATG is remote, either individually or in the aggregate, to have a
material adverse effect on our business, financial condition or results of
operations.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
None.
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Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
2.1 Final bankruptcy court bid dated November 13, 1998**
2.2 Form of letter agreement dated December 1, 1998, among the
purchasers and the Trustee**
3.1 Articles of Incorporation of the Company *
3.2 Bylaws of the Company *
3.3 Certificate of Amendment of Articles of Incorporation *
4.1 Specimen Common Stock Certificate *
10.43 Credit and reimbursement agreement, dated November 1, 1999, among
ATG Inc., Sanwa Bank California and Keybank National Association
***
10.44 Loan agreement , dated November 1, 1999, between Port of Benton
Economic Development Corporation and ATG Inc. ***
10.52 Employment agreement dated October 27, 2000 as amended and
restated on February 8, 2001 between ATG Inc. and Vik Mani.
(b) Reports on Form 8-K
None.
__________
(*) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1 (No. 333-46107) which became effective
May 6, 1998.
(**) Incorporated by reference to exhibits filed with the Registrant's
Form 8-K dated December 1, 1998.
(***) Incorporated by reference to exhibits filed with the Registrant's
Form 8-K dated February 22, 2000.
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SIGNATURE
Pursuant to the requirements 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.
ATG INC.
Date: May 18, 2001 By: /s/ DENNIS WILLIAMSON
---------------------
Dennis Williamson
Controller and Acting Chief Financial Officer
(Principal Financial and Accounting Officer)
30