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, 1998.
[_] 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)
Securities registered pursuant to Section 12(g) of the Act: Common Stock, No
par value
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 [_] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulations S-K (Paragraph 229.405 of this Chapter) is not contained herein,
and will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [_]
On March 12, 1999, there were issued and outstanding 14,042,333 shares of Common
Stock. The aggregate market value of Common Stock held by non-affiliates of the
Registrant on that date was approximately $84,345,000 based on the closing sale
price of the Common Stock, as reported by the NASDAQ National Market.
Documents Incorporated By Reference
Portions of the Registrant's definitive proxy statement for its 1999 Annual
Meeting of Shareholders are incorporated by reference into Part III hereof.
PART I
Item 1. Business
Forward-Looking Information
Statements in this report concerning expectations for the future constitute
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. These
statements are subject to a number of known and unknown risks, uncertainties and
other factors which may cause actual results, performance or achievements of the
Company or industry trends to differ materially from those expressed or implied
by such forward-looking statements. Such risks and uncertainties include,
among others, those discussed in Item I of Part I under the heading "Factors
Affecting Future Operating Results" and elsewhere in this report and those
described from time to time in the Company's other filings with the Securities
and Exchange Commission, press releases and other public communications.
General
ATG Inc. (the "Company"), founded in 1976, is a radioactive and hazardous waste
management company that offers comprehensive treatment solutions for low level
radioactive waste ("LLRW") and low level mixed waste ("LLMW") generated by the
Department of Defense ("DOD"), the Department of Energy ("DOE") and commercial
entities such as nuclear power plants, medical facilities and research
institutions. The Company's thermal treatment technologies achieve substantial
volume and mass reductions for treated waste streams while encapsulating the
non-volatile waste remains in a glass matrix (Richland, WA) or metal matrix (Oak
Ridge, TN) for final disposal. Both of these final waste forms offer intrinsic
safety and environmental benefits at competitive prices when compared to
incinerator ash or waste disposal without thermal treatment.
The Company operates through its Fixed Facilities Group, which manages its waste
treatment operations, and its Field Engineering Group, which addresses
decontamination and decommissioning ("D&D") of radioactive facilities and
environmental restoration of sites contaminated with radioactive and hazardous
waste. The synergies between the on-site remediation services of its Field
Engineering Group and the waste treatment operations of its Fixed Facilities
Group enhance the Company's ability to compete for commercial and government
LLRW and LLMW treatment contracts. The Company directs waste removed from the
field to its fixed facilities for treatment when more cost-effective for the
customer. In addition, the Company's radioactive material licenses issued by the
State of Washington with respect to its Richland facilities and the State of
Tennessee with respect to its Oak Ridge facilities include reciprocity
provisions that the Company believes allow it to thermally and non-thermally
treat radioactive waste at customer sites in all fifty states.
In December 1998, the Company acquired certain assets and business lines from
the former Molten Metal Technologies, Inc. (the "MMT Assets"). The MMT Assets
included substantially all of the operating assets, contracts, licenses and
permits associated with the wet waste treatment and catalytic extraction
processing for ion exchange resins used to clean various nuclear power plant
water streams.
The Company believes that it possesses a number of competitive advantages which
distinguish it from other radioactive and hazardous waste management companies,
including the broad and comprehensive spectrum of the services it offers, the
extensive portfolio of licenses and permits it holds or is in the process of
obtaining, the cost-efficiency and environmental integrity of its waste
treatment technologies, and its established positioning with both commercial and
government customers, as well as with U.S. federal, state and local
environmental regulators.
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Market Overview
General. The worldwide environmental services industry is diverse and
growing. This growth has been driven by extensive legislation and governmental
regulation aimed at protecting the environment and requiring responsible parties
to clean up existing environmental hazards. According to industry sources, the
overall market for environmental services, including solid waste management and
water treatment services, is approximately $190 billion a year in the United
States and $25 billion a year in Asia (excluding Japan), and is projected to
grow at an annual rate of 4% in the U.S. and 17% in Asia (excluding Japan)
through the year 2001.
The Company believes that the specific environmental services markets within
which it competes have evolved so that actual remediation and site clean-up,
including the treatment and disposal of LLRW, LLMW and hazardous waste, will
command a growing portion of environmental resources worldwide. The following
is a description of each of these types of waste and a summary of the potential
market for the services offered by the Company.
LLRW Treatment Market. Radioactive waste is categorized as either high-level
radioactive waste or low-level radioactive waste. Such waste is generated by
government facilities and by commercial enterprises such as nuclear power
plants, medical laboratories and university and industrial research and
development facilities. LLRW is all radioactive material other than high-level
radioactive waste ("HLW"). HLW is primarily comprised of spent nuclear fuel rods
from nuclear reactors and highly radioactive waste generated by the processing
of nuclear materials for weapons production. LLRW consists of relatively large
amounts of common industrial waste materials that have become contaminated with
small amounts of radioactivity, such as contaminated equipment, protective
clothing, paper, rags, packing material, liquids and sludge. Ion exchange resins
("IER"), used to clean various nuclear power plant water streams, result in a
form of LLRW that requires specialized handling. Through that cleaning process,
these resins accumulate significantly higher concentrations of radioactive
materials than other LLRW which, accordingly, increases their handling and
disposal costs. The Company has targeted the IER treatment market for its
SAFGLAS process and began offering thermal processing for certain resins in
early 1998. The acquisition of the MMT Assets in December 1998 moved the Company
into the leadership position for IER treatment offerings. The Company currently
is the only provider of the full range of services leading to final disposal of
used IER serving the US market. The Company has been engaged in the business of
handling, treating, storing, and disposing of LLRW since 1988. As of December
31, 1998, the Company was providing at least one of its LLRW service lines to
90% of the commercial nuclear power plants in the U.S.
The Company estimates that currently between $150 and $200 million is spent
annually in the United States on the treatment of commercial LLRW. The Company
believes that the size of the commercial LLRW treatment market in the United
States will increase significantly as the result of the LLRW required to be
treated in connection with the expected decommissioning of up to ten nuclear
power plants in the United States over the next decade. The Company also
believes that significant demand exists in the United States for the volume and
mass reduction of commercially generated LLRW, as there are at present only two
full-service disposal sites in the nation accepting such waste. These sites,
which are located in Barnwell, South Carolina and Richland, Washington, base the
disposal fees charged to customers on the volume and mass of the waste to be
disposed. The Barnwell disposal site, which currently services the majority of
commercial LLRW generators in the United States, has increased its disposal fees
by approximately 300% over the past five years. The current disposal fees at
this site are approximately $4.00 to $7.00 per pound ($400 per cubic foot),
depending upon the waste's density and activity levels. The disposal fees
charged by the Richland site are significantly lower than those charged by the
Barnwell site, but this site is only permitted to accept waste generated
3
in the eleven Northwestern states. There is also a disposal facility in Clive,
Utah that also charges disposal fees significantly lower than those charged by
the Barnwell site, but it is currently permitted to accept LLRW with only small
concentrations of radioactivity. At the present time ATG is the only company
providing a full range of thermal treatment services for LLRW in the U.S. GTS
Duratek, Inc. ("Duratek") provides incineration of some LLRW (but not IER) and a
new entrant, Studvik, Inc. ("Studvik") intends to provide pyrolysis services
strictly for IER.
Significant amounts of LLRW are also generated by and stored on federal
government sites, principally the former nuclear weapon production facilities
administered by the DOE. The DOE estimates that there is in excess of 53
million cubic feet of LLRW either currently stored or expected to be generated
during the next 20 years at DOE facilities throughout the United States alone.
Of this estimated total, the DOE's Hanford and Savannah River Reservations
account for approximately 6% and 34%, respectively. The DOE also estimates that
the total treatment costs for the LLRW at these two sites alone will exceed $850
million through the year 2010.
LLMW Treatment Market. Low-level mixed waste is low-level radioactive waste
co-mingled with hazardous substances regulated by the Resource Conservation and
Recovery Act of 1976 ("RCRA") and/or toxic substances regulated by the Toxic
Substances Control Act of 1976 ("TSCA"). LLMW results from a variety of
activities, including the processing of nuclear materials used in nuclear weapon
production, nuclear energy research and the generation of nuclear energy. The
clean-up of government-generated LLMW is driven by the Federal Facilities
Compliance Act of 1992 (the "FFCA"), which requires that radioactivity-
contaminated federal facilities meet waste clean-up targets by specified dates.
For example, DOE-Hanford is required to commence non-thermal treatment of the
LLMW stored there by September 30, 1999, and thermal treatment of such waste by
December 31, 2000.
Significant quantities of untreated LLMW have accumulated in the United
States, as approved treatment solutions applicable to a broad range of such
waste streams have previously not been available. The DOE estimates that there
is in excess of 7.7 million cubic feet of LLMW either currently stored or
anticipated to be generated over the next two decades throughout the United
States at DOE facilities alone, with approximately 16% and 9% of this estimated
total allocated to the DOE's Hanford and Savannah River Reservations,
respectively. The DOE also estimates that the treatment cost for the LLMW at
these sites will exceed $580 million through the year 2010. The Company is not
aware of any reliable estimates of the existing backlog of commercially
generated LLMW awaiting treatment at generators' sites. However, according to a
survey study sponsored by the Nuclear Regulatory Commission ("NRC") and the
Environmental Protection Agency ("EPA"), approximately 140,000 cubic feet of
LLMW was commercially generated in the United States in 1990. The Company
believes that the size of the commercial LLMW treatment market in the United
States will increase significantly in connection with the expected
decommissioning of nuclear power plants in the United States over the next
decade.
The Company has developed its GASVIT vitrification system for LLMW treatment
and anticipates completing the pending licensing process for both thermal and
non-thermal LLMW treatment methods at its Richland facilities in the second
quarter of 1999. Thereafter, the Company expects to take approximately three and
eight months, respectively, to place its non-thermal and thermal treatment
processing in operation. The Company believes that its mixed waste treatment
facility will, upon completion of the pending licensing process, be the first
privately owned facility in the United States licensed to thermally and non-
thermally treat a broad spectrum of commercial and government-generated LLMW.
4
Hazardous Waste Treatment Market. Hazardous waste is waste that is classified
as hazardous under RCRA and/or toxic under TSCA. The list of "hazardous
substances" covered by these laws is extensive and includes a large number of
chemicals, metals, pesticides, biological agents, toxic pollutants and other
substances. The Company to date has not attempted to penetrate the large and
highly competitive hazardous waste treatment market, except as a component of
the environmental restoration and D&D services provided by its Field Engineering
Group. Historically, the Company has processed a broad range of hazardous
substances at client sites in the execution of environmental restoration and D&D
projects.
5
approvals. Consequently, the Company may have several years in which to
establish its position in this market before experiencing significant
competition.
Enhance its Ability to Compete for Large Project Contract Awards. The
Company intends to increase its participation on project teams led by large
firms when such relationships are a practical requirement to compete
successfully for large project contract awards. Increasingly, large-scale,
multi-year D&D and environmental restoration contracts, whether to be
performed domestically or overseas, require a team of companies with
complementary expertise and skills within the industry, usually led by a
large, multinational engineering or construction company. The Company
believes that its expertise in niche areas within the radioactive and
hazardous waste management industry makes it an attractive candidate for
inclusion in teams competing for such contracts. In the last three years, the
Company has been a member of teams executing DOE and DOD projects led by,
among others, Lockheed Martin, Bechtel, Morrison Knudsen, Foster Wheeler and
Jacobs Engineering.
Expand into Pacific Rim Markets. The Company intends to offer its SAFGLAS
and GASVIT vitrification technologies for local treatment of LLRW and LLMW in
selected Pacific Rim markets. The high cost of LLRW and LLMW disposal costs
in a number of Pacific Rim countries favors thermal treatment for such wastes,
while regulatory restrictions and other environmental concerns may limit
incineration as a treatment process. The Company also believes there is a
significant market for vitrification in the treatment and recycling of fly ash
resulting from incineration of municipal waste in certain Pacific Rim markets
where scarce land resources make landfill disposal of the ash uneconomical.
Vitrification of fly ash through the Company's GASVIT system will allow the
ash to be recycled for use as construction material and for other reuse
purposes. To further promote use of its technologies and to establish
strategic alliance relationships designed to accelerate penetration of these
markets, the Company has entered into exclusive technology transfer agreements
covering its technologies for Hong Kong, Taiwan and The People's Republic of
China.
Enhance On-Site Full-Service Treatment Capabilities. In order to enhance
its ability to provide in-house a full range of D&D and environmental
restoration services, including the application of vitrification treatment
technology on-site, the Company is in the process of developing smaller-scale,
transportable field applications of its GASVIT technology. The Company
believes there is a significant trend in favor of D&D and environmental
restoration contractors able to provide in-house a full range of such services
on-site, including site assessment, feasibility study preparation, remediation
design, remediation and removal actions, and thermal and non-thermal waste
treatment. The Company believes that the development of smaller-scale,
transportable GASVIT units will further distinguish it from most other
radioactive and hazardous waste management companies.
6
Waste Treatment Technologies
A summary description of the Company's principal waste treatment technologies
for LLRW and LLMW is provided in the following table:
- ---------------------------------------------------------------------------------------------------
PRINCIPAL TECHNOLOGIES
- ---------------------------------------------------------------------------------------------------
Waste
Streams Nature of
Technology Treated Process Operating Status
- ---------------------------------------------------------------------------------------------------
SAFGLAS LLRW Thermal Commercial operation commenced in September
1997
- ---------------------------------------------------------------------------------------------------
GASVIT LLMW Thermal Commercial operation scheduled for early 2000
- ---------------------------------------------------------------------------------------------------
CATALYTICS IER Thermal Commercial operation commenced in 1997
- ---------------------------------------------------------------------------------------------------
WET WASTE IER De-Watering Commercially operational for over five years
SERVICES
- ---------------------------------------------------------------------------------------------------
AWPS LIQUIDS Filtration First system delivered March 1999
- ---------------------------------------------------------------------------------------------------
RVR LIQUIDS/ Thermal Commercially operational for over five years
SLUDGES
- ---------------------------------------------------------------------------------------------------
The core technology employed in the SAFGLAS and GASVIT systems is vitrification.
Vitrification technologies have been successfully used in Europe for over thirty
years, principally in the area of HLW treatment and are used by the DOE
currently for HLW. The EPA has identified vitrification as the Best
Demonstrated Achievable Technology (BDAT) for the treatment of HLW, and the
Company believes that vitrification will prove to be equally effective in the
treatment of waste contaminated with lower levels of radioactivity. In
addition, the vitrification process results in significantly less effluents than
the more traditional incineration methods of waste treatment. Accordingly, the
Company believes vitrification is widely perceived as an environmentally
superior waste treatment method.
SAFGLAS-Thermal Treatment of LLRW by Vitrification. The SAFGLAS system
treats a broad spectrum of LLRW in the form of dry active wastes (protective
clothing, paper, rags, plastics, wood), low level activity resins, aqueous
based liquids and sludges, and oils, which eliminates the customer's need to
pre-sort wastes to fit the specialized capabilities of a particular waste
processor's technology. The primary unit is a Joule-heated glass melter with
a multi-zone process chamber based on a technology that has been successfully
used for over 15 years in research on hazardous waste treatment. LLRW is fed
into a closed pool of molten glass at temperatures in excess of 2000oF. The
organic constituents are destroyed and the radioactive solids are captured
within the glass, which is periodically drained for disposal. The Company
adapted the basic process to the treatment of LLRW, including devising the
systems for feed preparation, waste feeding, and effluent treatment and
monitoring. The SAFGLAS system can reduce the volume of the input waste by a
factor of up to 200 to 1 and the mass of the input waste by up to 96%. The
Company believes that the highly stable and leach-resistant nature of the
glass produced by the SAFGLAS process, as compared to incineration ash, will
be significant for waste generators concerned with the potential long-term
liabilities associated with the land disposal of LLRW.
The basic SAFGLAS system has been enhanced through the addition of a high
temperature bulk processing unit (BPU) that processes a wide range of LLRW.
The BPU exhausts into the second chamber of the basic SAFGLAS unit. The
Company therefore refers to the combination of these integrated technologies
as the SAFGLAS system. The combination of these processes is permitted to
treat approximately 24,000 pounds per day at full capacity,
7
depending on the type of feedstock. The Company's license allows it to
operate SAFGLAS 24 hours a day.
GASVIT-Thermal Destruction of LLMW by Gasification/Vitrification. The
Company has acquired licensing rights to use a proprietary plasma arc
technology developed by Integrated Environmental Technologies, LLC ("IET"),
for the treatment of LLMW. The IET plasma arc technology is being integrated
with the Company's technologies to form the GASVIT system. The GASVIT system
will be used as the primary component in the Company's LLMW thermal processing
facility. Materials are fed into a process chamber where a combination of a
carbon induced plasma and joule heating at temperatures in excess of 2200oF
transforms complex organic materials into a mixture of hydrogen and carbon
monoxide that is destroyed in a subsequent flameless oxidation process. As
with the SAFGLAS system process, the end result of the GASVIT system process
is a glass material. The GASVIT system can reduce the volume of the input
waste by a factor of up to 200 to 1, and the mass of the input waste by a
factor of up to 96%. A 50 lbs./hr. prototype gasification/ vitrification
process chamber has been in operation at IET's facilities in Richland,
Washington since June, 1997. IET's process chamber is based on several
prototype units constructed and tested for the DOE, including a 100 lbs./hr.
process chamber which has been tested at the DOE's Hanford Reservation since
1996. The GASVIT system is being licensed for a total throughput of 12,000
pounds per day; however, the initial unit will provide only 50% of the
permitted capacity. The Company intends to add another unit as its capacity
needs increase.
CATALYTICS-Thermal Destruction of IER. IER with significant radionuclide
concentrations are destroyed in a patented and licensed high temperature
thermal process and the non-volatile remains are encapsulated in a metal
matrix for disposal.
WET WASTE SERVICES-Dewatering, packaging, and shielded transportation of
IER. The Company holds patent and other rights for a variety of licensed High
Integrity Containers (HICs) used to hold IER during transportation and
disposal as well as for the heavily shielded casks that are used to safely
transport IER for processing and disposal. The Company's shielded cask fleet
for IER is believed to be the largest in the country. Additionally, the
Company provides proprietary equipment and services to remove water from IER
prior to transportation and disposal to meet Department of Transportaion and
disposal site criteria achieving moisture removal levels considerably beyond
those achievable by competing technologies.
AWPS-Advanced Treatment Through Filtration. AWPS is used for the removal
of suspended and dissolved impurities from nuclear power reactor water
streams. The Company employs a variety of technologies for which it holds
either patent or licensing rights to treat a broad range of nuclear power
plant liquid waste/process streams. The Company believes the market for these
services will exceed $100 million annually as nuclear power reactor operators
focus more on their core competency areas (electricity production) and
outsource service areas.
RVR-Radioactive Volume Reduction of Liquid Wastes and Sludges. This
patented, moderate temperature, vacuum evaporation process provides a portable
and economic method for transforming radioactive liquids and sludges into dry
powders and, if desirable, recovering the water for reuse. ATG employs RVR
systems at its Tennessee facilities and at nuclear projects throughout the US.
It also sells RVR units to international power reactor operators.
8
Operations and Services
The Company provides radioactive and hazardous waste management services through
two operating units, the Fixed Facilities Group and the Field Engineering Group.
Fixed Facilities Group. The core of the Company's fixed facilities
operations, situated on a 45-acre site in Richland, Washington adjacent to the
DOE's Hanford Reservation, is one of the largest commercial radioactive waste
treatment and storage centers in the United States. This facility is currently
licensed to handle, treat and store a wide variety of LLRW and the Company is in
the process of securing the licenses, permits and approvals required in order
for this facility to thermally and non-thermally treat a broad spectrum of LLMW
streams produced by both commercial and government generators. The Company also
owns a 40,000 square foot licensed facility on a seven acre site in Oak Ridge,
TN where it thermally processes IER and non-thermally processes both IER and
radioactive sludges that are not suitable for thermal processing. A third
licensed site owned by the Company is a 16 acre facility in Columbia, SC which
is used to maintain and store equipment used for wet waste field projects
throughout the US. Finally, the Company owns a four-acre facility in Fremont,
California which houses the Company's corporate offices, as well as an LLRW
storage and transfer station that supports its Richland operations. The Company
utilizes a fleet of Company-owned trucks to transport waste intra-state to or
from its Richland and Fremont facilities, and utilizes third party commercial
carriers to transport waste inter-state to or from these facilities.
LLRW Treatment Services. Since 1988, the Company has treated and recycled
several million pounds of LLRW at its Richland facilities. Since being placed
in operation in September 1997, the SAFGLAS system has processed in excess of 2
million pounds of LLRW. In addition to the DOE, DOD and other agencies of the
U.S. government, customers for the Company's LLRW treatment services include
over 90% of the nation's nuclear power plants, many major corporations, and
numerous universities, laboratories, hospitals and other research and medical
institutions.
LLMW Treatment Services. In early 1995, the Company began the licensing,
design and facility construction process for a mixed waste treatment and storage
facility to be sited at its Richland facilities. The Company is in the final
comment period for issuance of the permit and expects the permit to be issued in
the second quarter of 1999. Construction of the facility will begin upon
issuance of the permit. The Company intends to use the mixed waste facility to
treat LLMW, initially from the Hanford reservation, and subsequently from other
DOE and other U.S. government and commercial generators of LLMW. The Company
intends to thermally treat LLMW by means of its GASVIT system; when it is
uneconomical or impractical to treat LLMW by a thermal method, the Company
intends to employ a number of stabilization and encapsulation processes,
including the Company's PLASTIMELT process.
In November 1995, the DOE awarded the Company, in a competitive bidding
process, the first privatized contract to thermally treat LLMW generated by the
Hanford Reservation. This contract has a maximum value to the Company of $24
million for treating 175,000 cubic feet of waste over ten years. In addition,
the DOE awarded the Company in September 1997, in a competitive bidding process,
the first privatized contract to non-thermally treat LLMW generated by the
Hanford Reservation. This contract has a maximum value to the Company of $5
million over a three-year period commencing when the Company begins LLMW
treatment thereunder.
Field Engineering Group. The principal services provided by the Company's
Field Engineering Group are (i) D&D of nuclear power plants and other facilities
contaminated with LLRW, LLMW and hazardous waste, and (ii) environmental
restoration of sites contaminated
9
with LLRW, LLMW and hazardous waste. The Company's comprehensive capabilities
include site investigation, characterization and assessment, negotiation with
regulatory agencies and procurement of required regulatory approvals,
preparation of feasibility and remedial design studies, removal and remediation
actions, construction, waste brokerage and transportation, waste treatment using
the Company's technologies on-site or at the Company's fixed facilities, and
storage of waste at the Company's fixed facilities.
Decontamination and Decommissioning Services. Historically, D&D services have
been the Company's core specialty area. The Company has been involved in D&D
projects for over a decade and currently is involved in several D&D projects for
the DOE. Customers for the Company's D&D services include nuclear power plants,
universities and other research institutions that utilize radioactive isotopes
in a variety of research projects, hospitals with radiological medicine
departments, companies employing nuclear materials in manufacturing and the DOE
and DOD, which oversee the nation's nuclear weapon production facilities.
The Company believes that there are significant near-term opportunities in
domestic D&D, particularly in the commercial D&D market, as up to ten U.S.
nuclear power plants are expected to be decommissioned over the next decade.
Based on recent studies prepared by utilities regarding the costs to
decontaminate and decommission nuclear power plants, as reported by the Nuclear
Energy Institute, a nuclear energy industry policy organization, the Company
estimates that the average total cost of decontaminating and decommissioning a
domestic nuclear power plant is approximately $300-$400 million. In addition,
there are over 5,000 radioactivity-contaminated DOD and DOE facilities, which
are scheduled to be decommissioned over the next decade.
Environmental Restoration Services. The Company has historically concentrated
on environmental removal and remediation actions at contaminated DOD sites.
There are over 420 DOD sites contaminated with LLRW or LLMW. According to the
Defense Environmental Restoration Program Annual Report to Congress for Fiscal
Year 1996, allocations for funding environmental restoration work on DOD sites
are projected to be $2 billion a year through the year 2000.
Since 1989 the Company has executed more than 200 field-engineering projects
relating to the environmental restoration of sites contaminated with LLRW, LLMW,
or hazardous waste throughout the United States and U.S. territories. In
addition, the Company is currently performing under three Total Environmental
Restoration Contracts (TERCs) with the U.S. Army Corps of Engineers, two Pre-
placed Remedial Action Contracts (PRACs) with the U.S. Army Corps of Engineers,
two Remedial Action Contracts (RACs) with the U.S. Navy and four environmental
restoration contracts with the DOE, collectively covering a 40 state area.
For its military and industrial clients, the Company executes environmental
restoration projects either on a planned or quick response basis. In the
execution of both planned and quick response environmental restoration projects
involving both LLRW and LLMW, the Company believes that it is one of only six
domestic companies having the in-house capability of providing on-site full-
service solutions from site investigation through the waste treatment stage for
D&D and environmental restoration projects involving LLRW and LLMW.
Customers
The Company's services are provided to a broad range of commercial, federal,
state and local government clients in the United States. Demand for the
Company's services and the distribution of such demand are influenced by the
level of implementation and enforcement of existing and
10
new environmental regulations, funding levels for government projects and
spending patterns of commercial clients.
Primarily due to its technical expertise, extensive portfolio of environmental
licenses and permits and full-service capabilities on-site, the Company has
successfully bid on and executed a substantial number of waste treatment,
environmental restoration, D&D and other contracts with commercial customers,
the DOD, DOE and a number of other federal government agencies, as both a prime
contractor and as a subcontractor. In fiscal 1998, 1997 and 1996, the percentage
of the Company's total revenue attributable to federal contracts was
approximately 55%, 71% and 77%, respectively. One contract with the U.S. Air
Force accounted for 14% of the Company's total revenue in the year ended
December 31, 1998. One contract with the U.S. Army Corps of Engineers-Sacramento
District accounted for 21.0% of the Company's total revenue in the year ended
December 31, 1997. One contract with the U.S. Army-Fort Irwin accounted for
12.5% of the Company's total revenue in the year ended December 31,1996. A
contract with the U.S. Army-Presidio accounted for 12.0% of the Company's total
revenue in the year ended December 31, 1996. The Company also serves numerous
commercial clients, including large industrial concerns, nuclear power plants,
hospitals, laboratories and other medical institutions, and universities. A
substantial portion of the Company's commercial work represents new contracts
awarded by existing clients. No single commercial client accounted for 10% or
more of the Company's revenue in fiscal years 1998, 1997 or 1996.
Sales and Marketing
The Company relies on a direct sales and marketing staff of 10 employees, its
executive management team and project managers, and brokers and other
intermediaries, to market its waste treatment and field engineering services
nationwide and internationally. Historically, the Company relied on discrete
waste treatment projects and limited term remediation projects that typically
involved planned clean-ups of sites that were contaminated in the normal course
of manufacturing activity or quick response clean-ups of spills. The Company
now targets its marketing efforts on large, multi-year private sector and
government site-specific and term contracts in the areas of LLRW and LLMW
treatment, environmental restoration and D&D.
The Company's key marketing strategy in the waste treatment area is to focus
its resources on emerging or underserved markets in which it has technological
or licensing advantages over existing and potential competitors. The Company
intends to further develop its network of strong client relationships with
commercial customers, the DOD, the DOE, other federal government agencies,
leading domestic and foreign industrial concerns and its other most significant
clients, and with major national and multinational engineering, construction and
architectural engineering firms and other of its co-participants in teams
executing large, multi-year environmental restoration and D&D projects. The
Company believes that relationship selling is becoming increasingly important as
customers display an increasing desire for good, reliable service. Accordingly,
Company strategies include deploying operators at customer sites and increasing
the frequency and quality of customer interactions by its sales force to better
identify and resolve customer problems. The Company believes that these
strategies have been validated by the significant number of additional contracts
awarded to it by existing customers for which it previously provided significant
services, and the number of teams on which it has participated in recent years
in the execution of large, multi-year environmental restoration and D&D
projects.
The Company intends to offer its SAFGLAS and GASVIT vitrification technologies
for local treatment of LLRW and LLMW in selected Pacific Rim markets. The
Company believes that the high cost of LLRW and LLMW disposal costs in a
number of Pacific Rim countries favors thermal treatment for such wastes,
while regulatory restrictions and other environmental concerns may limit
incineration as a treatment process.
To further promote use of its technologies and to establish strategic
alliances designed to accelerate its penetration of selected Pacific Rim
markets, the Company has entered into exclusive technology transfer agreements
covering its technologies for Hong Kong, Taiwan, and The People's Republic of
China. These agreements require the Company to provide assistance
11
and know-how to its alliance partners, who have the right to market the
Company's technologies in these territories. The Company will share in any
profits generated from these efforts and is also entitled to a royalty on
revenue generated by the use of its vitrification technologies in these
territories. The Company is entitled to independently pursue opportunities
within these territories if its alliance partners decline to do so, and, if
certain minimum revenue is not achieved in these territories within an agreed
upon period, the Company may terminate the agreement.
Competition
In general, the radioactive and hazardous waste management industry is highly
competitive. The Company faces varying levels of competition in its principal
current and planned business lines. The Company believes that it currently has
only one principal competitor, Duratek, for the thermal treatment of domestic
LLRW, a handful of small to mid-size competitors in the non-thermal treatment of
domestic LLRW and one competitor for thermally treating IER, Studvik, a new
market entrant. The Company is party to a non-compete agreement with Duratek
that precludes Duratek from processing IER. With respect to the domestic LLMW
treatment market, the Company believes that there are only four other companies
currently processing LLMW at their own facilities, all of which are doing so
under limited licenses which restrict them from accepting a broad spectrum of
low-level mixed waste streams. Upon completion of the pending licensing process
for its mixed waste treatment facility, the Company believes that it will
operate the first private facility in the nation licensed to thermally and non-
thermally treat a broad spectrum of LLMW streams produced by both commercial and
government generators.
The commercial LLRW disposal site in Clive, Utah recently expanded its
acceptance criteria so that it can receive waste with radioactivity levels
higher than it was previously permitted to accept, and the Company is aware that
one or more additional domestic commercial LLRW disposal sites have commenced
the licensing process. Any increase in the number of licensed commercial LLRW
disposal sites in the United States or any decrease in the disposal fees for
LLRW charged by such sites could increase the competition faced by the Company
or reduce the competitive advantage of certain of the Company's treatment
technologies.
The market for D&D and environmental restoration services is highly
competitive, with numerous companies of varying size, geographical presence and
capabilities participating. The Company believes that fewer than six of these
companies have the in-house capability of providing on-site full-service
solutions from site investigation through the waste treatment stage for D&D and
environmental restoration projects involving LLRW and LLMW.
The Company believes that the principal competitive factors applicable to all
areas of its business are price, breadth of services offered, range and breadth
of environmental licenses and permits held, reputation for customer service and
dependability, technical proficiency and environmental integrity, operational
experience, quality of working relations with federal, state and local
environmental regulators and proximity to customers and licensed waste disposal
sites. The Company believes that it is, and will continue to be, able to
compete favorably on the basis of these factors. The Company also believes that
it has several competitive advantages, including its vitrification and IER
technologies, the patents it holds, broad range of environmental services
offered, ability to provide in-house full-service environmental solutions at
customers' sites, the range and breadth of environmental licenses and permits
held and applied for, geographical positioning, and integrated technological
approach to waste treatment solutions. Many of the Company's competitors have
substantially greater managerial, technical and marketing 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 or
field service capabilities that
12
are superior to or more cost effective than those of the Company. In certain
aspects of the Company's business, substantial capital resources are required
for facilities and equipment, and many of the Company's competitors have
substantially greater financial resources than the Company.
Intellectual Property
The Company regards aspects of its waste treatment technologies and know-how
as proprietary and relies primarily on a combination of trade secret and
trademark laws, employee and third party non-disclosure agreements, licenses
from owners of patents and other intellectual property rights, and other methods
to protect such technologies and know-how. The Company has received a patent for
the SAFGLAS system as incorporating a multi-zone process chamber. The Company
holds a number of patents on the thermal and non-thermal processes and equipment
it utilizes for IER processing at its Oak Ridge, TN facilities and at its
customer's sites, as well as for the HICs and shielded shipping casks used for
the transportation of IER. It also holds the licenses and permits for its
Washington and Tennessee facilities and possesses the engineering craft
knowledge required to cost-effectively operate, maintain, and enhance the
permitted status of those facilities. The Company believes that the ownership of
patents is not presently a significant factor in its business and that its
success does not depend on the ownership of patents. However, there can be no
assurance that the Company will be successful in protecting the proprietary
aspects of its technology, nor that its proprietary rights will preclude
competitors from developing waste treatment technologies equivalent or superior
to that of the Company. In addition, effective protection for the proprietary
aspects of the Company's technologies may be unavailable or limited in certain
foreign countries. While the Company is not aware that any of its waste
treatment technologies infringe the rights of any third parties, there can be no
assurance that third parties will not claim infringement by the Company with
respect to its existing or future waste treatment technologies.
The Company from time to time licenses the rights to use the intellectual
property of third parties embodied in certain subsystems of the Company's
technologies. In particular, the Company licenses certain such rights from the
owner of the patented technology embodied in the basic SAFGLAS system melter and
from IET in connection with the design, construction and use of the melter
incorporated into the GASVIT system. The former license is non-exclusive and
royalty-free, but requires the Company to pay to the owner of the patent a
license fee in the amount of $35,000 for each SAFGLAS process chamber built by
the Company during a five-year period. With respect to any melter purchased by
the Company from IET, other than the two units it has initially contracted to
purchase, the Company's license with IET requires the payment of a royalty fee
to IET in the amount of 3% of the gross revenue generated by the Company from
processing radioactive waste using a treatment system incorporating such a
melter. The Company from time to time receives letters of inquiry from the
owners of patents requesting that the Company demonstrate that the technology
licensed to the Company by third parties does not infringe such patents. The
Company routinely refers these letters of inquiry to such licensors, who are
required pursuant to the terms of their license agreements with the Company to
defend the Company against infringement claims asserted by third parties
relating to the licensed technology and to indemnify the Company against any
resulting losses. With respect to each such letter of inquiry previously
received by the Company, the Company has been advised by the licensor that, in
the judgement of the licensor, the licensed technology as used by the Company
did not infringe the subject patents.
The Company requires each of its technical and engineering 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
13
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.
Environmental Laws and Regulations; Licensing Processes Applicable to LLRW and
LLMW Treatment Facilities
Environmental Laws and Regulations. Extensive and evolving environmental
protection laws and regulations have been adopted in the United States during
recent decades in response to public concern over the environment. The
operations of the Company and of the Company's customers are subject to these
evolving laws and regulations. The requirements of these laws and regulations
impose substantial potential liabilities. For example, a failure to comply with
current or future regulations could result in substantial fines, suspension of
production, alteration of manufacturing processes, cessation of operations, or
the expenditure of substantial clean-up costs. The requirements also create a
demand for many of the services offered by the Company.
The Company believes that its compliance with environmental laws and
regulations will not have a material effect on its capital expenditures,
earnings or competitive position, except with respect to capital expenditures
for environmental control facilities. The Company expects that the amount of
such expenditures required to be made in 1999, particularly in connection with
the construction of the mixed waste facility to be sited at the Company's
Richland facilities, will be material.
Under the Atomic Energy Act of 1954 (the "AEA") and the Energy Reorganization
Act of 1974, the NRC regulates the receipt, possession, use and transfer of
radioactive materials. Pursuant to its authority under the AEA, the NRC has
adopted regulations that address the management and disposal of LLRW and that
require the licensing of commercial LLRW disposal sites.
RCRA provides a comprehensive framework for regulation of the handling,
transportation, treatment, storage and disposal of hazardous waste. Strict
standards are imposed under RCRA on hazardous waste generators and transporters,
and on operators of hazardous waste treatment, storage and disposal facilities.
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 Achievable Technology
(BDAT) treatment standards, subject to certain exemptions. Under current
regulations, waste residues derived from listed hazardous wastes are generally
considered to be hazardous wastes subject to RCRA standards unless they are
delisted through a formal rulemaking process that may last for several years.
Liability under RCRA may be imposed for improper handling, transportation,
treatment, storage or disposal of hazardous wastes, or for failure to take
corrective action to address releases of hazardous wastes.
CERCLA, and subsequent amendments including the Superfund Amendments and
Reauthorization Act ("SARA"), imposes strict, joint and several liability upon
(among other parties) 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. Liability
under CERCLA may be imposed on the Company if releases of hazardous substances
occur at treatment, storage, or disposal sites used by the Company. This
liability potentially extends to off-site storage and disposal facilities used
by the Company, any LLMW treatment and storage facilities owned by the Company,
and releases at a customer's facility caused by the Company.
14
Because customers of the Company also face the same type of liabilities, CERCLA
and SARA create incentives for potential customers of the Company to avoid off-
site treatment and disposal of hazardous substances in favor of on-site
treatment and recycling.
The radioactive and hazardous components of LLMW are governed by separate sets
of laws and regulations discussed above. The radioactive component is governed
by the AEA and is regulated by the DOE for waste at DOE facilities and by the
NRC for commercially generated waste. The hazardous waste component is governed
by RCRA, CERCLA, and/or TSCA, and is regulated by the EPA, and by the laws of
the individual states. The Company designs its LLMW and hazardous waste
treatment and processing systems with the goal of minimizing the potential for
release of hazardous substances into the environment. In addition, the Company
has developed plans to manage and minimize the risk of CERCLA or RCRA liability,
including the training of operators, use of operational controls and structuring
of its relationships with the entities responsible for the handling of waste
materials and by-products.
The Clean Air Act of 1970, as amended (the "Clean Air Act"), imposes strict
requirements upon owners and operators of facilities and equipment which emit
pollutants into the environment, including incinerators. Although the Company
believes that its waste treatment systems effectively trap most particulates and
generally prevent hazardous emissions from being released into the environment,
the Company is required to secure additional permits from local authorities
responsible for implementing the Clean Air Act.
TSCA provides the EPA with the authority to regulate certain commercially
produced chemical substances. TSCA also established a comprehensive regulatory
program for polychlorinated biphenyls ("PCBs") which is analogous to the RCRA
program for hazardous waste.
Other federal, state, and local environmental, health and safety requirements
may also be applicable to the Company's business. For example, the federal
Occupational Safety and Health Act imposes requirements designed to protect the
health and safety of workers, and the NRC has set regulatory standards for
worker exposure to radioactive materials. In addition, the requirements of
various other statutes, including the FFCA and the Uranium Mill Tailings
Radiation Control Act, may create opportunities for additional use of the
Company's services.
Licensing Processes Applicable to LLRW and LLMW Treatment Facilities. The
process of applying for and obtaining the licenses and permits necessary to
operate a radioactive waste treatment facility is lengthy and complex. The
basic requirement is to obtain a radioactive materials license from the state in
which the facility is to be located. The first step in this process is securing
site and land use designation approval from local authorities. Most local
authorities require a public hearing before such an approval is granted. Due to
public concern about the safety of radioactive material handling, the initial
site approval step is often the most difficult. Upon site approval, the
applicant must submit an application to the NRC or the state's nuclear
regulatory agency if the state has signed an agreement to implement the NRC's
regulations. This stage of the process may take two years or longer, and in
some cases, may result in denial of a license. If the applicant intends to use
a thermal treatment method at its site, then additional permits would be needed
from the local authorities responsible for implementing the Clean Air Act
regulations. The process for approving a thermal treatment method will
generally include public hearings, environmental assessments and numerous
interactions with regulators to resolve licensing and permitting issues.
The licensing requirements applicable to a mixed waste facility are even more
complex. In addition to the steps summarized above, the applicant must submit a
RCRA Part A and Part B
15
permit application to the appropriate agencies. For processing of PCBs, a TSCA
permit from the EPA must also be obtained. In parallel with the RCRA/TSCA Part B
permitting process, the applicant must submit an application to the agencies
that issue radioactive material licenses and those that issue permits pursuant
to the Clean Air Act. Several revisions to each document submitted may have to
be made before the review process is complete and the application is granted.
From the time the initial application is filed, the mixed waste licensing and
permitting process could take as long as five years.
The Company initiated the mixed waste licensing process for its Richland
facilities in 1995 and expects to be able to commence non-thermal mixed waste
treatment there in the third quarter of 1999. In March of 1995, the Company
submitted a siting application to the Washington State Department of Ecology
("WDOE"). After conducting two different public hearings, WDOE approved the
Company's siting application in December of 1995. Immediately after procuring
this approval, the Company submitted a RCRA Part A and Part B permit application
to WDOE for an integrated waste treatment plant utilizing stabilization, macro-
encapsulation, physical extraction and other non-thermal treatment processes.
In 1996, the application was amended to include the processing of mixed wastes
using the GASVIT thermal treatment technology. A copy of the application was
also submitted to the EPA for a joint EPA/WDOE permitting process covering PCBs
under TSCA regulation. The Company presently anticipates receiving final
approval from WDOE and the EPA of its applications relating to non-thermal and
thermal treatment prior to the end of the second quarter of fiscal 1999.
In the event that the Company were to engage in the business of treating LLRW
and LLMW received from foreign generators at its fixed facilities, it would be
required to obtain a radioactive waste import permit from the NRC.
Employees
At December 31, 1998, the Company employed 319 full-time employees. To date,
the Company has been successful in attracting and retaining qualified managerial
and technical personnel, although there can be no assurance that this success
will continue.
At December 31, 1998, 50 of the Company's employees were represented by labor
unions under collective bargaining agreements. The Company cannot predict
whether any of its employees who currently are not represented by unions will
elect to be so represented in the future. The Company considers its relations
with its employees to be good and has never experienced a work stoppage or
strike.
Factors Affecting Future Operating Results
The Company's business is subject to the following risks and uncertainties, in
addition to those described elsewhere.
Dependence on Government Licenses, Permits and Approvals
The radioactive and hazardous waste management industry is highly regulated.
The Company is required to have federal, state and local governmental licenses,
permits and approvals for its waste treatment facilities and services. The
Company is currently processing its permit application for its LLMW processing
facility in Richland, WA. There can be no assurance as to the successful outcome
of any pending application by the Company for any such license, permit or
approval, and the Company's existing licenses, permits and approvals are subject
to revocation or modification under a variety of circumstances. Failure to
obtain timely, or to
16
comply with the conditions of, applicable licenses, permits or approvals could
adversely affect the Company's business, financial condition and results of
operations. As its business expands and as it introduces new technologies, the
Company will be required to obtain additional operating licenses, permits or
approvals. It may be required to obtain additional operating licenses, permits
or approvals if new environmental legislation or regulations are enacted or
promulgated or existing legislation or regulations are amended, re-interpreted
or enforced differently than in the past. Any new requirements which raise
compliance standards may require the Company to modify its waste treatment
technologies to conform to more stringent regulatory requirements. There can be
no assurance that the Company will be able to continue to comply with all of the
environmental and other regulatory requirements applicable to its business.
No Assurance of Successful Development, Commercialization or Acceptance of
Technologies
The Company is in the process of developing, refining and implementing its
technologies for the treatment of LLRW, LLMW and other wastes. The Company's
future growth will be dependent in part upon the acceptance and implementation
of these technologies, particularly its recently developed vitrification
technologies for the thermal treatment of LLRW and LLMW and its recently
acquired technologies for treatment of IER waste streams. There can be no
assurance that successful development of all these technologies will occur in
the near future, or even if successfully developed, that the Company will be
able to successfully commercialize such technologies. The successful
commercialization of the Company's vitrification technologies may depend in
part on ongoing comparisons with other competing technologies and more
traditional treatment, storage and disposal alternatives, as well as the
continuing high cost and limited availability of commercial disposal options.
There can be no assurance that the Company's vitrification and related
technologies will prove to be commercially viable or cost-effective, or if
commercially viable and cost-effective, that the Company will be successful in
timely securing the requisite regulatory licenses, permits and approvals for
such technologies or that such technologies will be selected for use in future
waste treatment projects. The Company's LLMW thermal treatment contract with
the DOE's-Hanford Reservation requires the Company to obtain all of the
required licenses, permits and approvals for, and to build and place in
operation, its LLMW treatment facility by November 10, 2000. The Company's
inability to develop, commercialize or secure the requisite licenses, permits
and approvals for its waste treatment technologies on a timely basis could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Dependence on Environmental Laws and Regulations
A substantial portion of the Company's revenue is generated as a result of
requirements arising under federal and state laws, regulations and programs
related to protection of the environment. Environmental laws and regulations
are, and will continue to be, a principal factor affecting demand for the
services offered by the Company. The level of enforcement activities by
federal, state and local environmental protection agencies and changes in such
laws and regulations also affect the demand for such services. If the
requirements of compliance with environmental laws and regulations were to be
modified in the future, particularly those relating to the transportation,
treatment, storage or disposal of LLRW, LLMW or other wastes, the demand for the
Company's services, and its business, financial condition and results of
operations, could be materially adversely affected.
Dependence on Federal Government; Limits on Government Spending; Government
Contracting
The Company expects that the percentage of its revenue attributable to federal
government contracts will continue to be substantial for the foreseeable future.
The Company's government
17
contracts generally 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.
The Company is dependent on government appropriations to fund many of its
contracts. Efforts to reduce the federal budget deficit could adversely affect
the availability and timing of government funding for the clean-up of DOE, DOD
and other federal government sites. The failure by the government to fund
future restoration of such sites could have an adverse effect on the Company's
business, financial condition and results of operations.
As a provider of services to federal and other government agencies, the
Company also faces risks associated with government contracting, which include
substantial fines and penalties for, among other matters, failure to follow
procurement integrity and bidding rules and employing improper billing practices
or otherwise failing to follow prescribed cost accounting standards. Government
contracting requirements are complex, highly technical and subject to varying
interpretations. As a result of its government contracting business, the
Company has been, and expects to be in the future, the subject of audits, and
may in the future be subject to investigations, by government agencies. Failure
to comply with the terms of one or more of its government contracts could result
in damage to the Company's business reputation and the Company's suspension or
disqualification from future government contract projects for a significant
period of time. The fines and penalties which could result from noncompliance
with applicable standards and regulations, or the Company's suspension or
disqualification, could have a material adverse effect on the Company's
business, financial condition and results of operations.
Need for Additional Capital
The Company believes that it will need additional capital in order to
implement its long-term business plan. In particular, the Company will need
approximately $20 million to finance the construction of the LLMW facility in
Richland, WA. The Company is presently considering tax exempt industrial
development bond financing for this facility. There can be no assurance that
the Company will be successful in raising the requisite amount of capital when
needed, or, that if successful, the terms of the financing will be favorable to
the Company. If the Company is not successful in raising such additional
capital, it will need to curtail or scale back its planned expansion, which
could adversely affect the Company's business, financial condition and results
of operations.
Seasonality and Fluctuation in Quarterly Results
The Company's revenue is dependent on its contract backlog and the timing and
performance requirements of each contract. Revenue in the first and second
quarters has historically been lower than in the third and fourth quarters, as
the Company's customers have tended to ship waste during the months in which
transportation is less likely to be adversely affected by weather conditions.
The Company's revenue is also affected by the timing of its clients' planned
remediation activities and need for waste treatment services, which generally
increase during the third and fourth quarters. Due to this variation in demand,
the Company's quarterly results fluctuate. Accordingly, specific quarterly or
interim results should not be considered indicative of results to be expected
for any future quarter or for the full year. Due to the foregoing factors, it
is possible that in future quarters, the Company's operating results will not
meet the expectations of securities analysts and investors. In such event, the
price of the Common Stock could be materially adversely affected.
18
Management of Growth
Since 1994, the Company has experienced significant growth, attributable in
large part to an increase in the number and size of contracts awarded. Also, in
December 1998 the Company acquired new business lines that are anticipated to
contribute to increased growth in 1999 and beyond. The Company is currently
pursuing a business plan intended to further expand its business domestically
and internationally. The Company's historical growth has placed, and any future
growth may place, significant demands on its operational, managerial and
financial resources. There can be no assurance that the Company's current
management and systems will be adequate to address any future expansion of the
Company's business. In such event, any inability to manage the Company's growth
effectively could have a material adverse effect on the Company's business,
financial condition and results of operations.
Equipment Performance; Safety and License Violations
The Company's ability to perform under current waste treatment contracts and
to successfully bid for future contracts is dependent upon the consistent
performance of its waste treatment systems at its fixed facilities in conformity
with safety and other requirements of the licenses under which the Company
operates. The Company's fixed facilities are subject to frequent routine
inspections by the regulatory authorities issuing such licenses. The Company
has experienced shut downs of its facilities for short periods of time in the
past. In the event that any of the Company's principal waste treatment systems
were to be shut down for any appreciable period of time, either due to equipment
breakdown or as the result of regulatory action in response to an alleged safety
or other violation of the terms of the licenses under which the Company
operates, the Company's business, financial condition and results of operations
could be materially adversely affected.
Competition
In general, the market for radioactive and hazardous waste management services
is highly competitive. The Company faces competition in its principal current
and planned business lines from both established domestic companies and foreign
companies attempting to introduce European waste treatment technologies into the
United States. Many of the Company's competitors have greater financial,
managerial, technical and marketing resources than the Company. To the extent
that competitors possess or develop superior or more cost-effective waste
treatment solutions or field service capabilities, or otherwise possess or
acquire competitive advantages compared to the Company, the Company's ability to
compete effectively could be materially adversely affected. Any increase in the
number of licensed commercial LLRW treatment facilities or disposal sites in the
United States or any decrease in the treatment or disposal fees charged by such
facilities or sites could increase the competition faced by the Company or
reduce the competitive advantage of certain of the Company's treatment
technologies.
International Expansion
A key component of the Company's long-term business plan is to expand its
business into selected Pacific Rim markets. There can be no assurance that the
Company or its strategic alliance partners will be able to market its
technologies or services successfully in foreign markets. In addition, there are
certain risks inherent in foreign operations, including general economic
conditions in each country, varying regulations applicable to the Company's
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
19
different tax structures, risks of increases in taxes, tariffs and other
governmental fees and involuntary renegotiation of contracts with foreign
governments. In particular, recent economic instability in certain Pacific Rim
countries could substantially impede the Company's targeted expansion into that
region. In such event, the Company's business, financial condition and results
of operations could be materially adversely affected. There can be no assurance
that laws or administrative practices relating to taxation, foreign exchange or
other matters of foreign countries within which the Company operates or will
operate will not change. Any such change could have a material adverse effect on
the Company's business, financial condition and results of operations.
Dependence on Key Personnel
The Company's future success depends on its continuing ability to attract,
retain and motivate highly qualified managerial, technical and marketing
personnel. The Company is highly dependent upon the continuing contributions
of its key managerial, technical and marketing personnel. The Company's
employees may voluntarily terminate their employment with the Company at any
time, and competition for qualified technical personnel, in particular, is
intense. The loss of the services of any of the Company's managerial, technical
or marketing personnel could materially adversely affect the Company's business,
financial condition and results of operations.
Focus on Larger Projects
The Company increasingly pursues large, 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. These larger
projects impose significant risks if actual costs are higher than those
estimated at the time of bid. A loss on one or more of such larger contracts
could have a material adverse effect on the business, financial condition and
results of operations of the Company. In addition, failure to obtain, or delay
in obtaining, targeted large, multi-year contracts could result in significantly
less revenue to the Company than anticipated.
Item 2. Properties
The Company's principal properties, all of which are owned by the Company, are
located in Richland, Wash., Fremont, Calif., Oak Ridge, Tenn., Columbia, S.C.
and Aiken, S.C., and occupy 45, four, seven, 16, and 30 acres, respectively.
The facilities sited on the Richland property presently consist of 13 buildings,
covering an area of approximately 100,000 square feet, devoted to the Company's
existing LLRW and future LLMW treatment operations. The Company presently plans
to construct two additional buildings on this site of approximately 14,000
square feet in aggregate. The facilities sited on the Fremont property consist
of a 40,000 square foot corporate office building and LLRW storage area. The
facilities cited on the Oak Ridge property consist of a 40,000 square foot
building devoted to LLRW resin treatment operations and several modular office
buildings. The Columbia property includes a 10,000 square foot building and is
principally used for storage and maintenance of equipment used in wet waste
treatment. The Company's Aiken property has not been developed to date.
In addition, the Company leases an approximately 1,200 square foot project
management office in Honolulu, Hawaii, and two approximately 4,000 square foot
project management offices in Oak Ridge, Tennessee. The Honolulu lease expires
in June 2000 and the Oak Ridge leases expire in August 1999 with three one-year
extensions available.
20
The Company's Fremont property is encumbered by a deed of trust (the "First
Deed of Trust") securing the performance of the Company under a $1.5 million
Promissory Note held by Midland Loan Services. The First Deed of Trust provides
for an interest rate of 9.5% per annum, a maturity date of December 2001,
monthly payments of principal and interest of $13,736 and a balloon payment at
maturity. At December 31, 1998, the principal amount secured by the First Deed
of Trust was approximately $1,403,000.
The Company's Fremont property is also encumbered by a second deed of trust
(the "Second Deed of Trust") securing the performance of the Company under a
$400,000 Term Loan Agreement with Sanwa Bank California. The Term Loan
Agreement provides for a variable annual interest rate of prime plus 1.75%, a
maturity date of September 30, 2002, and monthly payments of principal and
interest of $6,667. At December 31, 1998, the principal amount secured by the
Second Deed of Trust was approximately $300,000.
The Company's Richland property is encumbered by a deed of trust (the
"Richland Deed of Trust") securing the payment by the Company of a $750,000
Promissory Note held by West One Bank (the "West One Note"). The West One Note
provides for an interest rate of 8.75% during the first 42 months and an
interest rate of prime plus 2.75% (with a ceiling of 12% and a floor of 5.5%)
during the final 42 months until maturity. At December 31, 1998, the principal
balance secured by the Richland Deed of Trust was approximately $224,000. There
are no encumbrances on the Company's Oak Ridge, Tennessee or Columbia or Aiken,
South Carolina properties.
The Company believes that its existing and planned facilities will support its
operations for the foreseeable future and are adequately covered by insurance.
Item 3. Legal Proceedings
In June 1992, the Company entered into a contract with the U.S. Army under
which the Company acted as the prime contractor to "surface clear" expended
ordnance from a firing range at Fort Irwin, California (the "Fort Irwin
Contract"). In March 1997, a piece of ordnance exploded on the premises of a
scrap metal dealer (the "Scrap 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 the Company on the Fort Irwin Contract (the "Subcontractor")
had improperly certified ordnance cleared from the Fort Irwin firing range as
free of hazardous and explosive material prior to the sale of such ordnance to
the Scrap Dealer. As a result, the U.S. Army terminated the Fort Irwin Contract
for default, and demanded repayment from the Company of alleged reprocurement
costs totaling $945,000. The Company 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 the Company
settled the matter. The termination for default was rescinded and the Company
agreed to no longer bid on surface-cleaning 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 the Company, 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 Company has tendered the defense of each of these actions to
its insurance carrier, which is presently handling the matters for the Company,
and the Company intends to vigorously
21
contest all of the claims asserted in these actions. The Company believes that
it acted properly with respect to the Fort Irwin Contract, and that it should
not be liable for the injuries caused by the accident. The Company also intends
to seek indemnification from the Subcontractor for the full amount of any costs,
damages and liabilities which may be incurred by the Company in connection with
or as a result of these lawsuits. The Subcontractor has advised the Company 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 the Company believes that all of the claims
asserted against the Company are without legal merit, the outcome of these
lawsuits is uncertain. Any judgment of liability against the Company, especially
to the extent damages exceed or are not covered by insurance or are not
recoverable by the Company from the Subcontractor, could have a material adverse
effect on the Company's business, financial condition and results of operations.
Item 4. Submission Of Matters To A Vote Of Security Holders
No matters were submitted to a vote of shareholders during the fourth quarter of
the Company's 1998 fiscal year.
PART II
Item 5. Market For Registrant's Common Equity And Related Stockholder Matters
The Common Stock of the Company is traded on the NASDAQ National Market under
the symbol "ATGC." The following table sets forth, for the periods indicated,
the high and low sales prices of the Common Stock (as reported by NASDAQ):
PERIOD HIGH LOW
------ ---- ---
May 7, 1998 to June 30, 1998 10 7 1/4
Third Quarter 1998 8 7/8 5
Fourth Quarter 1998 8 1/2 4 5/8
As of February 28, 1999, there were over 1,400 holders of record of the
Company's Common Stock. The Company has never declared or paid a cash dividend
on its Common Stock and is at present restricted from paying any such dividends
by the terms of its existing line of credit facility. The Company currently
intends to retain earnings to finance the growth and development of its business
and does not anticipate paying dividends in the foreseeable future.
22
Item 6. Selected Consolidated Financial Data (In Thousands, Except Per Share
Data)
The following selected consolidated financial data should be read in conjunction
with the consolidated financial statements and related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Years Ended December 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
----------- -------- ------- -------- --------
Statement of Operations Data (1):
Revenue.................................................. $35,900 $19,107 $18,235 $16,070 $11,723
Cost of revenue.......................................... 19,816 11,172 11,082 9,659 7,194
------- ------- ------- ------- -------
Gross profit............................................. 16,084 7,935 7,153 6,411 4,529
Sales, general and administrative expenses............... 7,952 7,020 6,656 6,202 4,876
------- ------- ------- ------- -------
Operating income (loss).................................. 8,132 915 497 209 (347)
Interest income (expense), net........................... 173 58 13 (141) (19)
------- ------- ------- ------- -------
Income (loss) before income taxes........................ 8,305 973 510 68 (366)
Income tax expense (benefit)............................. 3,156 (45) 2 2 (2)
------- ------- ------- ------- -------
Net income (loss)........................................ $ 5,149 $ 1,018 $ 508 $ 66 $ (364)
======= ======= ======= ======= =======
Net income per share (2)
Basic.................................................. $ 0.40 $ 0.09
Diluted................................................ $ 0.38 $ 0.08
Weighted average shares outstanding (2)
Basic.................................................. 12,975 11,516
Diluted................................................ 13,698 12,284
December 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
----------- -------- ------- -------- --------
Balance Sheet Data: (1)
Working capital.......................................... $ 1,645 $ (151) $ 4,333 $ 3,903 $ 2,359
Total assets............................................. 79,569 37,227 26,976 21,182 15,699
Total long-term debt..................................... 11,246 6,202 2,930 4,080 4,007
Mandatorily redeemable preferred stock................... --- 19,416 16,319 9,403 5,444
Total shareholder's equity............................... 40,745 296 630 890 1,491
- -----------------------------------
(1) See Note 3 of Notes to Consolidated Financial Statements for a discussion
of the acquisition of significant assets and businesses. The acquisition
was completed on December 1, 1998.
(2) See Note 2 of Notes to Consolidated Financial Statements--Computation of
Net Income Per Share. Historic net income (loss) per share and net income
(loss) available to common shareholders have not been presented in
Statement of Operations Data since such amounts are not deemed meaningful
due to the automatic conversion immediately prior to the closing of the
initial public offering of the Company's Common Stock in May 1998 of all
shares of preferred stock issued by the Company and ATG Richland
Corporation, a subsidiary of the Company. Historic net income (loss) per
share for the fiscal years ended December 31, 1994, 1995, 1996 and 1997 was
$(0.10), $(0.10), $(0.10) and $(0.06), respectively. Net income (loss)
available to common shareholders for the fiscal years ended December 31,
1994, 1995, 1996 and 1997 was $(730), $(770), $(780) and $(451),
respectively.
23
Item 7. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
Overview
The Company is a radioactive and hazardous waste management company that
offers comprehensive treatment solutions for LLRW, LLMW and other waste
generated by the DOD, DOE and commercial entities such as nuclear power plants,
medical facilities and research institutions. The Company 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.
The U.S. government represented approximately 55%, 71% and 77% of the
Company's total revenue for the years 1998, 1997 and 1996, respectively. Revenue
from commercial entities, primarily nuclear power plants, industrial concerns
and medical and research institutions has increased in recent years and is
expected to represent an increasing portion of the Company's business. Revenue
from waste treatment processing is generally recognized upon the substantial
completion of the waste treatment process. Field engineering services are
provided under fixed price, cost plus or unit price contracts. Revenue from
fixed price and cost plus contracts is recognized utilizing the percentage of
completion method of accounting; revenue from unit price contracts is
recognized as the units are processed and completed. Revenue also includes non-
refundable fees received under the terms of technology transfer agreements.
Gross profit percentages reflect the mix of the Company's business, which
varies from time to time. Gross profit margins are generally higher for
technology transfer agreements involving up-front, non-refundable, licensing
fees payable to the Company, and due to the extensive expertise the Company has
developed in this area, when the Company is processing radioactive waste, while
margins on nonradioactive waste projects generally are lower. The Company has
focused a significant portion of its business on SAFGLAS vitrification of LLRW
in 1998 and intends to focus on its newly acquired Tennessee business interests
and LLMW processing in 1999. During 1997 the Company entered into two technology
transfer agreements with licensees in selected Asian territories and intends to
continue to seek additional such licensing arrangements as appropriate
opportunities arise.
The Company operates its fixed facilities under regulation of, and licenses
and permits issued by, various federal, state and local agencies. There can be
no assurance as to the successful outcome of any pending licensing and
permitting efforts. The licensing and permitting process is subject to
regulatory approval, time delays, community opposition and potentially stricter
governmental regulation. The Company's inability to obtain licenses or permits
on a timely basis, delays or changes in facility construction programs or the
cancellation of pending projects could have a material adverse effect on the
Company's financial position and results of operations.
The Company has historically relied upon the integration of proven
technologies with the Company'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 its fixed operating facilities, particularly in connection with
the SAFGLAS system. The Company anticipates that its research and development
efforts will continue to be moderate and that the costs associated with future
research and development will not be material to the Company's results of
operations.
24
The Company 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. The
Company currently focuses on large, multi-year site-specific and term contracts
in the areas of LLRW and LLMW treatment, environmental restoration and D&D, and
has in recent years 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.
Such projects, which may create an opportunity for the Company 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 such larger contracts could have a material
adverse effect on the Company's 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 the Company than
anticipated.
Results of Operations
The following table sets forth certain statement of operations data as a
percentage of total revenue for the periods indicated:
Years Ended December 31,
--------------------------------------------
1998 1997 1996
---------------- ------------- -----------
Revenue............................................ 100.0% 100.0% 100.0%
Cost of revenue.................................... 55.2 58.5 60.8
----- ----- -----
Gross profit....................................... 44.8 41.5 39.2
Sales, general and administrative expenses......... 22.2 36.7 36.5
----- ----- -----
Operating income................................... 22.6 4.8 2.7
Interest income , net.............................. 0.5 0.3 0.1
(Provision) benefit for income taxes............... (8.8) 0.2 --
----- ----- -----
Net income......................................... 14.3% 5.3% 2.8%
===== ===== =====
Comparison of Years Ended December 31, 1998 and 1997
Revenue. Revenue for 1998 was $35.9 million, an increase of $16.8 million,
or 87.9%, compared to $19.1 million in 1997. The growth in revenue is
principally due to the increasing commercial utilization of the Company's
SAFGLAS thermal treatment system. The SAFGLAS system began treating customer
waste streams in late 1997 and there has been a steady increase in the volume
being processed. At the end of 1997, the Company had general service agreements
in place with only four nuclear power reactors, a key target customer for the
SAFGLAS technology. By the fourth quarter of 1998, customer service agreements
were in place with over 50 nuclear power reactors. With the acquisition of new
business lines in Oak Ridge, Tennessee, the number of such reactors utilizing at
least one of the Company's technologies has increased to over 90 at December 31,
1998. In addition to the increase in waste for thermal treatment utilizing
SAFGLAS, these same customers are sending the Company increasing volumes of
waste to be treated through non-thermal means.
In addition to SAFGLAS related revenue increases, the Company's revenue
from field engineering services grew by approximately 30% as a result of several
large awards from DOD and DOE customers. One contract with the U.S. Air Force
accounted for 14% of the Company's total revenue in the year ended December 31,
1998. Finally, approximately 7% of the revenue for 1998 resulted from the new
business
25
acquired for the processing of IER waste streams.
Gross Profit. Gross profit for 1998 was $16.1 million, an increase of $8.1
million, or 102.7%, compared to $7.9 million for 1997. Gross profit as a
percentage of revenue increased to 44.8% in 1998 compared to 41.5% in 1997.
Gross profit percentages reflect the various mixes of the Company's business
services from time to time. Gross profit margins are generally higher,
reflecting its extensive expertise and operating efficiencies, when the Company
is processing radioactive waste, while margins on non-radioactive waste projects
generally are lower. The fixed facility operations, such as SAFGLAS, have a
larger percentage of fixed costs versus variable costs, so increases in
utilization, such as occurred in 1998, favorably impact gross profit realized.
Sales, General and Administrative Expenses. Sales, general and
administrative expenses (including stock-based compensation expense) were $8.0
million for 1998, an increase of $0.9 million, or 13.3%, compared to $7.0
million in 1997. Sales, general and administrative expenses were 22.2% of
revenue in 1998, compared to 36.7% of revenue in 1997. The increase in spending
from year to year reflects the growth in the Company's operations, addition of
sales personnel and the increased costs of being a public company, offset by
increased absorption of indirect engineering and operating overhead. The overall
decrease as a percentage of revenue is attributable to the Company's effort to
maintain a level of costs that does not increase at the same rate as revenue.
Sales, general and administrative expenses include indirect engineering and
operating overhead, depreciation and amortization, and expenses to support the
domestic sales and marketing activities and the financial and administrative
functions of the Company.
Interest Income and Interest Expense. Interest income was $188,000 in
1998, compared to $58,000 in 1997. The increase in interest income is directly
related to the investment of the proceeds from the Company's initial public
offering completed in May 1998. Interest expense was nil in 1998 as the result
of the Company capitalizing approximately $1.0 million of interest on
construction in progress in accordance with generally accepted accounting
principles.
Provision for Income Taxes. In 1998, the Company provided for income taxes
at a combined federal and state effective tax rate of 38%. In prior years the
Company realized the benefit of net operating loss carry forwards. All net
operating loss carry forwards were fully recognized by the end of 1997.
Comparison of Years Ended December 31, 1997 and 1996
Revenue. Revenue for 1997 was $19.1 million, an increase of $0.9 million, or
4.8%, compared to $18.2 million in 1996. The growth in revenue resulted from a
change in mix of the business services and the receipt of fees for technology
transfer agreements. Revenue from waste treatment services was $9.6 million in
1997 compared to $8.9 million in 1996. Revenue from field engineering services
was $9.5 million in 1997 compared to $9.3 million in 1996. During 1997 the
Company entered into two technology transfer agreements (with total 1997 revenue
of approximately $2.0 million derived from up-front, non-refundable, licensing
fees) that provided for the transfer of rights to the processes and technology
of the Company on an exclusive basis in selected Asian territories. Revenue
from various agencies of the U.S. government accounted for approximately 71% and
77% of total revenue in 1997 and 1996, respectively. One contract with an
agency of the U.S. government accounted for approximately 21% of the Company's
total revenue for 1997. Two contracts with agencies of the U.S. government
accounted for 12.5% and 12%, respectively, of the Company's total revenue for
1996.
26
Gross Profit. Gross profit for 1997 was $7.9 million, an increase of $0.7
million, or 10.9%, compared to $7.2 million for 1996. Gross profit as a
percentage of revenue increased to 41.5% in 1997 compared to 39.2% in 1996.
Gross profit percentages reflect the various mixes of the Company's business
services from time to time. Gross profit in 1997 includes the effect of the
technology transfer licensing fee revenue. Gross profit margins are generally
higher for technology transfer agreements and, due to the extensive expertise
the Company has developed in this area, when the Company is processing
radioactive waste, while margins on nonradioactive waste projects are generally
lower.
Sales, General and Administrative Expenses. Sales, general and administrative
expenses (including stock-based compensation expense) were $7.0 million for
1997, an increase of $0.3 million, or 5.5%, compared to $6.7 million in 1996.
Sales, general and administrative expenses were 36.7% of revenue in 1997
compared to 36.5% of revenue in 1996. The overall increase as a percentage of
revenue is attributable to the Company's hiring in 1997 of senior management
personnel to support the Company's future growth.
Interest Income and Interest Expense. Interest income was $58,000 in 1997
compared to $142,000 in 1996. The decrease in interest income is attributable
to a lower overall average of cash available for investment in 1997. In 1996
the Company sold $5.9 million of preferred stock and invested the net proceeds
in interest bearing accounts until they were needed for capital expenditures and
working capital. In 1997 the Company sold $1.7 million in additional preferred
stock. Interest expense was nil in 1997 as the result of the Company
capitalizing $891,000 of interest on construction in progress in accordance with
generally accepted accounting principles. Interest expense in 1996 was
$129,000, which was net of $446,000 of interest capitalized on construction in
progress.
Liquidity and Capital Resources
In May 1998, the Company completed an initial public offering of 1,900,000
shares of common stock and in June 1998, sold an additional 285,000 shares of
common stock at $8.50 per share. The net proceeds of the offering were
approximately $15.7 million. Approximately $4.0 million of the proceeds were
used to pay off bank lines of credit. The balance of the proceeds have been used
to acquire property and equipment.
Total cash and cash equivalents were $3.8 million at December 31, 1998, an
increase of $1.2 million from December 31, 1997. The working capital of the
Company was approximately $1.6 million at December 31, 1998, an increase of $1.8
million from December 31, 1997. The increases are attributable to the proceeds
of the initial public offering and cash flow from operations, net of cash used
for acquisition of property and equipment.
Significant outlays of cash have been needed to acquire property and
equipment and to secure or expand regulatory licenses, permits and approvals,
primarily for the Company's fixed facilities operations in Richland, Washington
and, in December 1998, for the acquisition of the MMT Assets. Property and
equipment acquisitions totaled $5.0 million, $7.8 million and $4.6 million for
the years ended December 31, 1998, 1997 and 1996, respectively. In addition, the
Company used approximately $10.7 million of cash to acquire the MMT Assets. The
Company anticipates spending in excess of $20 million to construct a mixed waste
treatment facility beginning in 1999. The Company has already invested
approximately $4 million in the design and permitting of this facility. The
Company has applied and been approved for the issuance of an industrial
development bond in the State of Washington to finance this construction. The
bond is expected to qualify as a tax exempt bond and the offering is expected to
be completed in the second quarter of 1999.
27
The Company has a bank line of credit that provides for $9.5 million of
available borrowings, including a $3.0 million sub-limit for letters of credit.
Borrowings under this credit agreement were $6.8 million at December 31, 1998,
bear interest equal to the bank's reference rate (7.75% at December 31, 1998)
and are collateralized by accounts receivable, inventory and equipment.
The Company utilized a significant amount of cash and line of credit
borrowings to finance the acquisition of the MMT Assets. The Company plans to
re-finance this acquisition with term notes at current market rates for long
term financing. The Company believes that its current cash and cash equivalents,
together with its credit facility, cash generated from operations, and re-
financing of the MMT Assets will be sufficient to meet the Company's working
capital requirements for the next 12 months. Depending on its rate of growth and
profitability, the Company may require additional equity or debt financing to
meet its future working capital or capital expenditure needs and it will require
additional equity or debt financing to construct its mixed waste facility. There
can be no assurance that such additional financing will be available or, if
available, that such financing can be obtained on terms satisfactory to the
Company.
Year 2000 Impact
The year 2000 (Y2K) computer issue relates to computer software that
utilizes a two-digit field versus a four-digit field for the calendar year
identification. Unless corrected, some computer programs and the systems that
are dependent upon these programs may be unable to function properly after
December 31, 1999. An uncorrected condition could subject the Company to
potentially significant legal liabilities, although the Company currently has no
reason to believe that these consequences are likely to ensue.
The Company is not highly dependent on internal computer systems, and does
not, as a general matter, interact electronically with its customers or
suppliers. The Company has been reviewing and is continuing to review and
update its existing software programs and interfaces for Y2K compliance.
Substantially all of the Company's software is provided by third party suppliers
and the Company has been upgrading to Y2K compliant versions of this software.
To date the costs for upgrading to Y2K compliant systems has been less than
$100,000 and the costs to complete this effort are expected to be less than an
additional $100,000. The final upgrades are currently expected to be implemented
in the second quarter of 1999 and undergo testing thereafter. The Company
believes that, as a result of these measures, its systems will be substantially
compliant by the year 2000. If there continue to be deficiencies after testing,
the Company believes it will be able to conduct its business without significant
interruption using already compliant systems.
The Company has been surveying and is continuing to survey its major
service providers as to their Y2K readiness. Responses to date indicate
substantial compliance by such providers with ongoing programs in effect.
The cost associated with upgrading internal systems to more current
versions of vendor supplied software have not been material to date. The
Company believes that it is unlikely to experience a material adverse impact on
its financial condition or results of operations due to Y2K compliance issues.
Since the Y2K updating is still ongoing, the full range of potential
complications and the full potential impact of the Y2K issue on the Company's
business, operations and financial condition is not known at this time.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company considered the provisions of Financial Reporting Release No. 48
"Disclosure about Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosure of Qualitative Information
about Market Risk Inherent in Derivative Financial Instruments, Other Financial
Instruments and Derivative Commodity Instruments". The Company had no derivative
financial or commodity instruments at December 31, 1998. The Company's line of
credit has an interest rate based on the bank's reference rate that may
fluctuate over time based on changes in the economic environment. The company is
subject to interest rate risk, and could be subjected to increased interest
payments if market interest rates fluctuate. An effective increase or decrease
of 10% in such interest rates would not have a material adverse effect on the
Company's results of operations.
28
Item 8. Consolidated Financial Statements And Supplementary Data
See pages 31 through 48.
Item 9. Changes In And Disagreements With Accountants On Accounting
And Financial Disclosure
None.
PART III
Item 10. Directors And Executive Officers Of The Registrant
The executive officers of the Company, who are elected by and serve at the
discretion of the Board of Directors, are as follows:
Name Age Position
---- --- --------
Doreen M. Chiu.................. 45 Chairman of the Board, President and Chief Executive Officer
Frank Y. Chiu................... 45 Executive Vice-President and Director
William M. Hewitt............... 52 President--Waste Management Services and Director
Steven J. Guerrettaz............ 53 Chief Financial Officer and Director
Fred Feizollahi................. 53 Vice-President--Technology and Engineering
Eric C. Su...................... 38 Vice-President--Marketing and Planning
Doreen M. Chiu has served as President, Chief Executive Officer and Chairman
of the Board since joining the Company in 1984. Prior to joining the Company,
Ms. Chiu owned her own certified public accounting firm. Ms. Chiu is a
California CPA and holds a Bachelor of Arts degree in Business Administration
from the University of Wisconsin. Ms. Chiu is the wife of Frank Chiu.
Frank Y. Chiu joined the Company in 1980 as Financial Controller, became Vice-
President and a director of the Company in 1984, and became Executive Vice-
President in 1992. Mr. Chiu holds a Bachelor of Arts degree in Business
Administration and a Master's degree in Business Administration from the
University of Wisconsin. Mr. Chiu is the husband of Doreen Chiu.
William M. Hewitt joined the Company in April 1997 as President--Waste
Management Services. Mr. Hewitt has over 26 years of domestic and international
professional management experience, primarily in the waste minimization and
environmental fields. From 1994 until joining the Company, Mr. Hewitt was the
President of Hewitt Management Services, Inc., a consulting firm providing
strategic planning and other business advice in the areas of pollution
prevention, waste minimization and strategic environmental management. During
this period, Mr. Hewitt also served as a Group President of Philip Environmental
Services Companies, in which capacity he designed and implemented the strategic,
organizational and marketing approach for integrating that group of companies.
From 1990 to 1994, he held a number of positions with companies in the WMX
Technologies Affiliates group, including Vice-President, Strategic Planning, of
Rust International, Inc. from 1993 to 1994, and President of Rust Federal
Environmental Services (formerly CWM FES) from 1991 to 1993. Mr. Hewitt holds a
Bachelor of Science degree in Chemical Engineering from the University of Rhode
Island and a Master of Science degree in Mechanical/Nuclear Engineering from
Catholic University of America.
29
Steven J. Guerrettaz has served as Chief Financial Officer since joining the
Company in December 1997. From May 1994 until joining the Company, Mr.
Guerrettaz was the Vice President--Finance of Thermatrix Inc., a publicly traded
supplier of flameless thermal oxidation equipment for the thermal treatment of
volatile organic compounds and hazardous air pollutants. From 1988 to 1994, Mr.
Guerrettaz was the Vice President Regional Controller for Chemical Waste
Management, Inc. Mr. Guerrettaz is a former audit partner of Arthur Andersen
LLP. He is a California CPA and holds a Bachelor of Science degree in
accounting from San Jose State University.
Fred Feizollahi joined the Company in 1995 as Director of Technology and
Engineering, and since 1995 has been Vice-President--Technology and Engineering.
Mr. Feizollahi has over 27 years of experience in radioactive and hazardous
waste remediation and management, decontamination and decommissioning, and the
design and operation of waste treatment equipment and technologies. Prior to
joining the Company, he worked as a Senior Project Manager for Morrison Knudsen
from 1991 to 1995 and as a Staff Engineer/Project Engineer for Bechtel Power
Corporation from 1981 to 1991. Mr. Feizollahi, who holds a Bachelor of Science
degree in Mechanical Engineering from the University of Maryland, is a
registered California Professional Engineer.
Eric C. Su has served as Vice-President--Marketing and Planning since 1995.
Mr. Su joined the Company in 1993 as Director of Business Development. Prior to
joining the Company, he acted as a sales and marketing consultant for a number
of companies, including the Company, from 1990 to 1993. From 1987 to 1990, Mr.
Su held various marketing positions with General Electric Company. Prior
thereto, he held positions in sales and marketing with W.R. Grace and Company
from 1984 to 1987, and in process engineering with E.I. DuPont de Nemours and
Company from 1982 to 1984. Mr. Su holds a Bachelor of Science degree in
Chemical Engineering from Arizona State University.
Information concerning the Company's Directors and compliance with Section 16
of the Securities Exchange Act of 1934 is incorporated herein by reference to
the Company's definitive proxy statement for its Annual Meeting of Shareholders
to be held on June 2, 1999, which is intended to be filed with the Securities
and Exchange Commission no later than 120 days after the close of the fiscal
year ended December 31, 1998.
Items 11, 12 and 13.
The information called for by Part III (Items, 11, 12, and 13) is incorporated
herein by reference to the Company's definitive proxy statement for its Annual
Meeting of Shareholders to be held on June 2, 1999, which is intended to be
filed with the Securities and Exchange Commission no later than 120 days after
the close of the fiscal year ended December 31, 1998.
30
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
ATG Inc. and Subsidiaries:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and of shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
ATG Inc. and its subsidiaries at December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
February 26, 1999
31
ATG INC.
CONSOLIDATED BALANCE SHEETS
(dollar amounts in thousands)
December 31,
------------
1998 1997
---- ----
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 3,789 $ 2,586
Accounts receivable, net of allowance for doubtful
accounts of $305 at December 31, 1998 and
$119 at December 31, 1997............................................. 22,561 5,935
Prepayments and other current assets....................................... 2,096 2,174
------- -------
Total current assets................................................... 28,446 10,695
Property and equipment, net....................................................... 42,988 22,104
Other assets...................................................................... 8,135 4,428
------- -------
Total assets..................................................... $ 79,569 $ 37,227
======== ========
LIABILITIES
Current liabilities:
Short term borrowings...................................................... $ 6,750 $ 3,996
Current portion of long term debt and capitalized leases................... 4,733 1,380
Accounts payable........................................................... 6,096 3,246
Accrued liabilities........................................................ 9,222 944
Payable to related parties................................................. -- 1,280
------- -------
Total current liabilities........................................ 26,801 10,846
Long term debt and capitalized leases, net of current portion..................... 11,246 6,202
Deferred income taxes............................................................. 777 467
------- -------
Total liabilities................................................ 38,824 17,515
------- -------
Commitments and contingencies (Note 12)
Mandatorily Redeemable Preferred Stock:
Series A and ATG Richland Series A and B, no par value
Authorized: 6,000,000 shares at December 31, 1997
Issued and outstanding 3,029,291 shares at
December 31, 1997.......................................................... -- 19,416
------- -------
SHAREHOLDERS' EQUITY
Common Stock, no par value:
Authorized: 20,000,000 shares. Issued and outstanding:
13,851,709 shares and 7,532,301 shares at December 31,
1998 and 1997, respectively................................................ 41,517 6,337
Deferred compensation............................................................. (152) (272)
Accumulated deficit............................................................... (620) (5,769)
------- -------
Total common stock, deferred compensation and
accumulated deficit.............................................. 40,745 296
------- -------
Total liabilities and shareholders' equity....................... $79,569 $37,227
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
32
ATG INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
For the Years Ended December 31,
--------------------------------
1998 1997 1996
---- ---- ----
Revenue.......................................................... $ 35,900 $ 19,107 $ 18,235
Cost of revenue.................................................. 19,816 11,172 11,082
-------- -------- --------
Gross profit............................................. 16,084 7,935 7,153
Sales, general and administrative expenses....................... 7,832 6,903 6,487
Stock based compensation expense................................. 120 117 169
-------- -------- --------
Operating income......................................... 8,132 915 497
-------- -------- --------
Interest income (expense):
Interest income.............................................. 188 58 142
Interest expense............................................. (15) -- (129)
-------- -------- --------
Interest income, net..................................... 173 58 13
-------- -------- --------
Income before income taxes....................................... 8,305 973 510
Provision (benefit) for income taxes............................. 3,156 (45) 2
-------- -------- --------
Net income............................................... 5,149 1,018 508
Accretion of mandatorily redeemable preferred stock.............. -- (1,469) (1,288)
-------- -------- --------
Net income (loss) available to common shareholders............... $ 5,149 $ (451) $ (780)
======== ======== ========
Net income (loss) per share
Basic........................................................ $ 0.40 $ (0.06) $ (0.10)
Diluted...................................................... $ 0.38 $ (0.06) $ (0.10)
Shares used in calculating net income (loss)
per share
Basic........................................................ 12,975 7,532 7,532
Diluted...................................................... 13,698 7,532 7,532
The accompanying notes are an integral part of these consolidated financial
statements.
33
ATG INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(amounts in thousands)
Total common
stock, deferred
Common Stock compensation
------------ Deferred Accumulated and accumulated
Shares Amount Compensation Deficit deficit
------ ------ ------------ ----------- ----------------
Balance, January 1, 1996..................... 7,439 $ 5,598 $ (169) $ (4,538) $ 891
Issuance of common stock................ 93 350 -- -- 350
Accretion on redeemable preferred
stock................................. -- -- -- (1,288) (1,288)
Amortized deferred compensation......... -- -- 169 -- 169
Net income.............................. -- -- -- 508 508
------- ------- ------ -------- -------
Balance, December 31, 1996................... 7,532 5,948 -- (5,318) 630
Accretion on redeemable preferred
stock................................. -- -- -- (1,469) (1,469)
Stock based compensation................ -- 389 (389) -- --
Amortized deferred compensation......... -- -- 117 -- 117
Net income.............................. -- -- -- 1,018 1,018
------- ------- ------ -------- -------
Balance, December 31, 1997................... 7,532 6,337 (272) (5,769) 296
Conversion of redeemable preferred
stock................................. 3,984 19,416 -- -- 19,416
Issuance of common stock, on initial
public offering, net of expenses...... 2,185 15,658 -- -- 15,658
Exercise of stock options............... 147 83 -- -- 83
Issuance of common stock under
Employee Stock Purchase Plan.......... 4 23 -- -- 23
Amortized deferred compensation......... -- -- 120 -- 120
Net income.............................. -- -- -- 5,149 5,149
------- ------- ------ -------- -------
Balance, December 31, 1998................... 13,852 $41,517 $ (152) $ (620) $40,745
======= ======= ====== ======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
34
ATG INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
For the Years Ended December 31,
---------------------------------
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Net income.................................................... $ 5,149 $ 1,018 $ 508
Adjustments to reconcile net income with cash
flow from operations:
Depreciation and amortization............................... 824 746 671
Provision for doubtful accounts............................. 210 73 6
Compensation expense for shares issued and
options granted.......................................... 120 117 169
Income tax benefit.......................................... -- (45) --
Change in current assets and liabilities:
Accounts receivable.................................... (16,836) 899 534
Prepayments and other current assets................... 78 (140) 230
Other assets........................................... -- -- 290
Accounts payable and accrued liabilities............... 11,128 1,085 455
Deferred income taxes.................................. 310 (230) --
-------- ------- -------
Net cash provided by
operating activities................................. 983 3,523 2,863
-------- ------- -------
Cash flows from investing activities:
Property and equipment acquisitions........................... (5,015) (3,505) (4,647)
Acquisition of MMT assets..................................... (10,731) -- --
Other assets.................................................. (3,763) (3,710) (23)
-------- ------- -------
Net cash used in investing activities....................... (19,509) (7,215) (4,670)
-------- ------- -------
Cash flows from financing activities:
Loans from (payments to) related parties...................... (1,280) 1,177 (61)
Repayment of capital leases................................... (1,226) (461) (735)
Borrowing (Repayment) of long term debt, net.................. 3,717 (196) (216)
Short term borrowings, net of repayments...................... 2,754 1,160 48
Proceeds from issuance of preferred stock, net................ -- 1,629 5,627
Proceeds from issuance of common stock, net................... 15,764 -- --
-------- ------- -------
Net cash provided by financing activities................... 19,729 3,309 4,663
-------- ------- -------
Increase (decrease) in cash and cash equivalents................ 1,203 (383) 2,856
Cash and cash equivalents, beginning of period.................. 2,586 2,969 113
-------- ------- -------
Cash and cash equivalents, end of period........................ $ 3,789 $ 2,586 $ 2,969
======== ======= =======
Supplemental Disclosures, of non cash investing and
financing activities:
Income taxes paid........................................... $ 64 $ 2 $ 2
======== ======= =======
Interest paid, net of interest capitalized.................. $ 15 $ -- $ 622
======== ======= =======
Acquisition of equipment with capital lease financing....... $ 906 $ 4,256 $ --
======== ======= =======
Acquisition of MMT assets with long term debt............... $ 5,000 $ -- $ --
======== ======= =======
Compensation expense for shares issued and options
granted................................................... $ 120 $ 117 $ 169
======== ======= =======
Conversion of notes payable to common stock................. $ -- $ -- $ 350
======== ======= =======
Reclassification of machinery and equipment to
inventory................................................. $ (475) $ -- $ --
======== ======= =======
Conversion of redeemable prefered stock..................... $ 19,416 $ -- $ --
======== ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
35
ATG INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all dollar amounts in thousands, except per share data)
--------------------
1. Formation and 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 throughout the United States. Services principally consist of
compaction, reduction, decontamination, vitrification and disposal of low-level
dry active nuclear and other hazardous waste, dewatering and thermal treatment
of ion exchange resins and site remediation and construction projects.
In May 1998, the Company completed an initial public offering of 1,900,000
shares of common stock and, in June 1998, sold an additional 285,000 shares of
common stock at $8.50 per share. Total proceeds to the Company, net of
underwriting discounts and other direct expenses, were approximately $15.7
million.
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, ATG Richland Corporation ("ATG Richland") and ATG
Nuclear Services LLC ("ATG Nuclear") and its majority owned subsidiary, ATG
Catalytics LLC ("ATG Catalytics"). All significant intercompany balances and
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying disclosures. These estimates include assessing the collectibility
of accounts receivable, contracts in process and the recoverability of self-
constructed assets and provisions for contingencies. Actual results could
materially differ from the Company's estimates.
Revenue Recognition
Revenue includes fees for waste processing services and technology license
fees. Revenue under cost plus fixed fee and fixed unit price contracts mainly
relating to site remediation is recorded as costs are incurred or units are
completed and includes estimated fees earned according to the terms of the
contracts. Revenue from U.S. government contracts includes estimates of
reimbursable overhead and general administrative expenses, which are subject to
final determination by the U.S. federal government upon project completion.
Revisions to costs and income resulting from contract settlements, which are due
to differences between actual and budgeted performance, are recognized in the
period in which the revisions are determined. Revenue from waste processing is
generally recognized upon the substantial completion of the waste treatment
process. Revenue from licensing or technology transfer agreements is recognized
when received unless there are future commitments, in which case the revenues
are recognized over the term of the agreement. Revenues of $1,975 were
recognized pursuant to technology transfer agreements in 1997. Losses on
contracts are charged to cost of revenue as soon as such losses become known.
36
ATG INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(all dollar amounts in thousands, except per share data)
--------------------
Change orders are modifications of an original contract that effectively change
the provisions of the contract. They may be initiated by either the Company or
the customer. Claims for additional contract revenue resulting from change
orders are recognized if it is probable that the claims will result in
additional revenue and the amount can be reliably estimated. Change order work
may be performed prior to approval of the change order by the customer.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost and are depreciated on the straight-
line basis over the estimated useful lives of the assets, which range from three
to forty years. Cost includes expenditures for major improvements and
replacements and the net amount of interest costs related to qualifying
construction projects. Expenditures for major renewals and betterments are
capitalized and expenditures for maintenance and repair expenses are charged to
expense as incurred. The Company's policy is to regularly review the carrying
amount of specialized assets and to evaluate the remaining life and
recoverability of such equipment in light of current market conditions.
Risks and Uncertainties
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. Substantial losses
which would have a material adverse effect on the Company's consolidated
financial position, could be incurred by the Company in the event a permit is
not granted, if facility construction programs are delayed or changed, or if
projects are otherwise abandonded. The Company reviews the status of permitting
projects on a periodic basis to assess realizability of related asset values. As
of December 31, 1998, management believes that assets which could currently be
affected by permitting efforts are recoverable at their recorded values.
The market for the Company's services is substantially dependent on state and
federal legislation and regulations. The availability of new contracts depends
significantly on government authorities. In order to build or retain its market
share the Company must continue to successfully compete for new government and
private sector contracts.
Income Taxes
The Company accounts for income taxes under the liability method, whereby
deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the
37
ATG INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(all dollar amounts in thousands, except per share data)
--------------------
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts
expected to be realized.
Concentration of Credit Risk
The majority of the Company's cash, cash equivalents and short-term
investments are held with major banks in the United States. The Company's
customers consist mainly of agencies of the U.S. government and large U.S.
companies. The Company performs ongoing credit evaluation of its customers'
financial condition. As of December 31, 1998, agencies of the U.S. government
represented 51% of accounts receivable and 55% of total revenue for the year
then ended. As of December 31, 1997, agencies of the U.S. government
represented 47% of accounts receivable and 71% of total revenue for the year
then ended. As of December 31, 1996, agencies of the U.S. government
represented 70% of accounts receivable and 77% of total revenue for the year
then ended. The Company generally does not require collateral.
Computation of Net Income Per Share
Basic income per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted income 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 conversion of convertible preferred stock (using the "if converted" method)
and exercise of stock options for all periods.
Reclassifications
Certain prior year amounts in the consolidated financial statements have been
reclassified to conform with the current year's presentation.
3. Acquisition of MMT Assets
Effective December 1, 1998, the Company, through its wholly-owned subsidiary,
ATG Nuclear, and through its 90% owned subsidiary, ATG Catalytics, acquired
certain assets and business lines from the trustee ("Seller") for debtors of
Molten Metal Technologies, Inc. or its affiliates, under Chapter 11 of the
United States Bankruptcy Code (the "MMT Assets").
The assets acquired by ATG Nuclear include substantially all of the assets,
contracts, licenses and permits associated with the Seller's wet waste business
based in Oak Ridge, Tennessee, and a facility in Columbia, South Carolina. The
assets acquired by ATG Catalytics include substantially all of the assets,
contracts, licenses and permits associated with the Seller's catalytic
extraction processing business conducted substantially in Oak Ridge, Tennessee.
38
ATG INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(all dollar amounts in thousands, except per share data)
--------------------
The total purchase price of the MMT assets and business lines acquired was
approximately $15.7 million. The purchase price was allocated as follows:
property and equipment - $15.4 million; accounts receivable - $2.8 million;
restricted cash and other assets - $2.7 million; accrued liabilities - $5.2
million. The Company paid $10.5 million in cash at closing, agreed to pay $1.0
million in cash one year from closing and agreed to make future payments of 5%
of the earnings before interest, taxes, depreciation and amortization of ATG
Catalytics, but not less than $800 annually for five years (minimum total of
$4.0 million).
The transaction has been accounted for as a purchase and accordingly, results
of operations include the operations of the new businesses since the date of
acquisition. The purchase price has been allocated to the assets acquired and
will be amortized over the lives of those assets. There was no goodwill
recorded in the transaction. The Company is unable to provide pro forma
financial information as of the filing of this annual report on Form 10-K. An
amended Form 10-K will be filed when such information becomes available.
4. Accounts Receivable
December 31,
------------------------------
1998 1997
--------------- -------------
U.S. Government:
Amounts billed........................................... $ 8,483 $3,142
Amounts unbilled......................................... 3,037 845
------- ------
Total U.S. Government............................... 11,520 3,987
------- ------
Commercial customers:
Amounts billed........................................... 9,008 2,067
Amounts unbilled......................................... 2,338 --
------- ------
Total commercial.................................... 11,346 2,067
------- ------
Total accounts receivable................................ 22,866 6,054
Less: allowances for doubtful accounts........................ (305) (119)
------- ------
$22,561 $5,935
======= ======
Recoverable costs and accrued profit on progress completed but not billed on
U.S. government contracts is based on estimates of reimbursable overhead and
general and administrative expenses calculated in accordance with contractually
determined methods of calculation. These amounts are subject to final
determination by the U.S. federal government after the contracts have been
completed. As such, the actual recoverable amounts on these contracts may
differ from these estimates. The U.S. federal government has reviewed and
approved reimbursable expenses for contracts in progress through 1995.
5. Restricted Investments
The Company owns several certificates of deposit, Treasury bills and bonds,
which are collateral for performance bonds. The certificates of deposit, which
are included in intangible and other assets, have an aggregate value of $223 at
December 31, 1998 and $210 at December 31, 1997, respectively, bear interest at
5.1% per annum, and have an original maturity of twelve months. The Treasury
bills, which are included in intangible and other assets, have an aggregate
value of $254 at December 31, 1998 and 1997, bear interest at 5.8% and have an
original maturity
39
ATG INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(all dollar amounts in thousands, except per share data)
--------------------
of twelve months. The bonds, which are included in prepayments and other
current assets, have an aggregate value of $477 and $959 at December 31, 1998
and December 31, 1997, respectively, and have an original maturity of between
one and five years.
6. Property and Equipment
December 31,
------------------------------
1998 1997
-------------- --------------
Land.................................................................. $ 2,310 $ 761
Buildings and improvements............................................ 21,205 2,848
Machinery and equipment............................................... 14,876 5,183
Office furniture and equipment........................................ 1,470 1,427
------- -------
Property and equipment at cost........................................ 39,861 10,219
Less: accumulated depreciation and amortization....................... (3,072) (2,840)
------- -------
36,789 7,379
Construction-in-progress............................................... 6,199 14,725
------- -------
$42,988 $22,104
======= =======
Property and equipment costs include capitalized labor and overhead, including
interest costs related to the construction of buildings, building improvements
and equipment. Capitalized interest costs totaled $1,027, $891 and $446 in
1998, 1997 and 1996, respectively. All property and equipment serve as
collateral to notes payable agreements to banks and other creditors.
As of December 31, 1998 and 1997, machinery and equipment included assets
acquired under capital leases with a capitalized cost of $6,876 and $7,256,
respectively. Related accumulated amortization totaled $333 and $498 in 1998 and
1997, respectively.
7. Accrued Liabilities
Accrued liabilities at December 31, 1998 and 1997 consisted of:
December 31,
------------------------------
1998 1997
-------------- --------------
Income taxes payable.................................................. $ 2,647 $ -
Legacy waste.......................................................... 2,788 -
Other................................................................. 3,787 944
------- -------
$ 9,222 $ 944
======= =======
The legacy waste accrual arose out of the purchase of the assets and
businesses described in Note 3--Acquisition of Tennessee Assets.
8. Payable to Related Parties
The Company had a payable to its Chairman and Chief Executive Officer of
$1,280 at December 31, 1997. The amount was repaid in 1998.
40
ATG INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(all dollar amounts in thousands, except per share data)
--------------------
The Company has a payable to a former Director of $225 at December 31, 1998
and 1997. The amount is repayable on July 1, 2000 and is non-interest bearing.
The amount is included in long term debt.
9. Short-Term Borrowings
Under a line of credit facility with a bank, the Company may borrow up to
$9,500. Borrowings under this credit agreement were $6,750 at December 31,
1998, bear interest equal to the bank's reference rate (7.75% at December 31,
1998) and are collateralized by accounts receivable, inventory and equipment.
Borrowings under the credit agreement were $3,996 as of December 31, 1997, and
bore interest at prime plus 0.50% (9.0% at December 31, 1997). The facility
agreement expires June 30,1999.
The credit agreement requires the Company to comply with certain covenants
including capital asset acquisition limits, limits on additional debt, minimum
levels of tangible net worth, dividend payment restrictions and maintenance of
certain financial ratios. At December 31, 1998 and at various dates throughout
the year the Company was in violation of certain covenants. The Company has
obtained waivers in respect of these violations as of December 31, 1998.
10. Long Term Debt
Long term debt consists of mortgage debt, notes payable and equipment notes
payable. The mortgage debt bears interest at 9.5%, matures in 2001, and is
collateralized by certain of the Company's buildings. The notes payable bear
interest at annual rates between 8% and 10%, mature between 1999 and 2005, and
are collateralized by certain of the Company's equipment. Equipment notes bear
interest at annual rates between 0.9% and 9.6%, mature between 1999 and 2002,
and are collateralized by specific equipment.
Future minimum principal payments are as follows as of December 31, 1998:
Mortgage Notes Equipment Total Long
Debt Payable Notes Term Debt
------------ ------------ ------------ -------------
1999................................................ $ 159 $ 3,374 $ 26 $ 3,559
2000................................................ 128 2,186 19 2,333
2001................................................ 1,341 2,162 3 3,506
2002................................................ -- 826 2 828
2003................................................ -- 828 -- 828
Thereafter.......................................... -- 77 -- 77
------ ------ ------ -------
1,628 9,453 50 11,131
Less: current portion............................... 159 3,374 26 3,559
------ ------ ------ -------
$1,469 $6,079 $ 24 $ 7,572
====== ====== ====== =======
41
ATG INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(all dollar amounts in thousands, except per share data)
--------------------
11. Capital Lease Obligations
As of December 31, 1998, future minimum lease payments under non-cancelable
capital leases are as follows:
1999......................................................................................... $1,623
2000......................................................................................... 1,540
2001......................................................................................... 1,203
2002......................................................................................... 998
2003......................................................................................... 619
------
Total minimum lease payments................................................................. 5,983
Less amount representing interest............................................................ 1,135
------
Present value of future minimum lease payments............................................... 4,848
Less: current portion........................................................................ 1,174
------
Total capital lease obligations, net of current portion...................................... $3,674
======
12. Commitments and Contingencies
In March 1998, two civil suits were filed against the Company and a Company
subcontractor, among other persons, in connection with a contract under which
the Company acted as prime contractor and the subcontractor acted as
subcontractor to "surface clear" expended ordnance from a U.S. Army firing range
at Fort Irwin, California. The suits arise out of an explosion which occurred
in March 1997 on the premises of a scrap metal dealer which had in the past
purchased military scrap metal from a number of military facilities, including
Fort Irwin. One employee of the scrap metal dealer died in the accident, and
three other persons have alleged physical injuries and emotional distress
arising from this incident. One of the suits alleges wrongful death, seeking
general damages of $3,000, special damages of $110, and exemplary damages of
$5,000. In the other suit, the three persons alleging physical injuries and
emotional distress are seeking general damages in the aggregate amount of $800,
while reserving the right to seek punitive damages in the aggregate amount of
$1,500. The Company has tendered the claims to its insurance carrier, and the
insurance carrier has accepted defense of these claims. In addition, the
Company intends to seek indemnification from its subcontractor for the full
amount of costs, damages, and liabilities, if any, incurred by the Company as a
results of these suits.
The aforementioned claims are in various stages of discovery. Management
believes that all claims asserted against the Company in each of the suits are
without legal merit. If the Company were to be found liable in the
aforementioned suits and the amount awarded exceeded available insurance limits
and amounts recoverable from its subcontractors, it could have a material
adverse effect on the Company's financial condition and results of operations.
From time to time the Company is a party to litigation or administrative
proceedings relating to claims arising from its operations in the normal course
of business. Management of the Company, on the advice of counsel, believes that
the ultimate resolution of litigation currently pending against the Company is
unlikely, either individually or in the aggregate, to have a material adverse
effect on the Company's business, financial condition or results of operations.
42
ATG INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(all dollar amounts in thousands, except per share data)
--------------------
13. Stock Based Compensation Plans
1994 Stock Option Plan ("1994 Plan")
A total of 909,878 shares of common stock have been reserved for issuance
under the 1994 Plan. Options granted under the 1994 Plan generally expire ten
years from the date of grant. During 1998, the Company adopted new stock plans
(see below); accordingly, the Company does not plan to issue further options to
purchase common stock under the 1994 Plan.
1998 Stock Ownership Incentive Plan ("Incentive Plan")
A total of 500,000 shares of common stock have been reserved for issuance
under the Incentive Plan. The Board of Directors may grant incentive stock
options or non-statutory stock options to employees at 100% of the fair market
value of the stock on the date of grant. Vesting terms are to be determined by
the Board of Directors (typically three years) and options generally expire ten
years from the date of grant.
1998 Non-Employee Directors' Stock Option Plan ("Directors' Plan")
A total of 200,000 shares of common stock has been reserved for issuance under
the Directors' Plan. The Directors' Plan provides for an automatic grant of
options to purchase 20,000 shares of common stock upon the date such person
becomes a non-employee director. Twenty-five percent of the shares subject to
the option are immediately vested and twenty-five percent vest each year
thereafter. The exercise price of the options granted under the Directors' Plan
must equal or exceed the fair market value of the Common Stock on the date of
grant. All grants expire ten years from the date of grant.
1998 Consultants and Advisors Stock Option Plan ("Consultants Plan")
A total of 200,000 shares of common stock has been reserved for issuance under
the Consultants Plan. The Consultants Plan is administered by the Board of
Directors who may grant options to purchase common stock to consultants and
advisors to the Company at prices and upon terms as determined by the Board.
43
ATG INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(all dollar amounts in thousands, except per share data)
--------------------
The following option activity occurred in all stock option plans in the three
years ended December 31, 1998:
Weighted
Options Average
Available Outstanding Exercise Exercise
for Grant Options Price Price
----------------- --------------- ----------- -----------
Balance, January 1, 1996....................... 630,000 440,000 $0.01-$7.50 $2.08
Granted.................................... (76,000) 76,000 $ 0.10 $0.10
-------- ---------
Balance, December 31, 1996..................... 554,000 516,000 $0.01-$7.50 $1.79
Granted.................................... (554,000) 554,000 $1.00-$5.00 $2.10
-------- ---------
Balance, December 31, 1997..................... - 1,070,000 $0.01-$7.50 $1.95
Authorized................................. 900,000 -
Granted.................................... (607,500) 607,500 $5.00-$8.56 $6.55
Exercised.................................. - (147,122) $0.01-$1.00 $0.23
Terminated................................. - (13,000) $0.01-$5.00 $0.62
Cancelled.................................. 143,500 (143,500) $8.50-$8.56 $8.54
-------- ---------
Balance, December 31, 1998 436,000 1,373,878 $0.01-$8.50 $3.49
======== =========
As of December 31, 1998, options to purchase 419,457 shares of Common Stock at
$0.01 to $8.50 per share were fully vested and exercisable under the Plans.
During August 1998, the Company cancelled options granted to employees to
acquire 125,500 shares of Common Stock with prices ranging from $8.50 to $8.56
and issued new options to acquire the same number of shares at a price of
$6.375.
In connection with the grant of options for the purchase of 554,000 shares of
Common Stock to employees during the period from January 1, 1997 through
December 31, 1997, the Company recorded aggregate deferred compensation expense
of approximately $389 representing the difference between the deemed fair value
of the Common Stock and the option exercise price at date of grant. Such
deferred compensation will be amortized over the vesting period relating to
these options, of which $120 and $117 has been amortized during the years ended
December 31, 1998 and 1997, respectively, and is included in the statement of
operations within the caption "Stock-based compensation expense".
44
ATG INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(all dollar amounts in thousands, except per share data)
--------------------
Stock Compensation
Effective January 1, 1996 the Company has adopted the disclosure-only
provision of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (SFAS No. 123). The Company, however, applies APB
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations in accounting for its stock-based compensation. Determination
of compensation cost for stock-based compensation based on the fair value at the
grant date for awards consistent with provisions of SFAS No. 123 would not
result in a significant difference from the reported net income for the periods
presented.
December 31,
---------------------------------------------------------
1998 1997 1996
---------------- ------------------ -------------------
Net income............................................. $5,149 $ 1,018 $ 508
Accretion on mandatorily redeemable preferred stock.... --- (1,469) (1,288)
------ ------- -------
Net income (loss) available to common shareholders..... 5,149 (451) (780)
Net income (loss) FAS 123 adjusted..................... 4,917 (593) (780)
Earnings per share as reported:
Basic................................................ 0.40 (0.06) (0.10)
Diluted.............................................. 0.38 (0.06) (0.10)
Earnings per share-FAS 123 adjusted:
Basic................................................ 0.38 (0.08) (0.10)
Diluted.............................................. 0.36 (0.08) (0.10)
The fair value of each option grant under the Plans is estimated on the date
of the grant using the Black-Scholes option-pricing model with weighted average
risk free interest rates of 4.89%, 6.47%, and 6.16% at December 31, 1998, 1997
and 1996, respectively, and an expected life of 5 years, no dividends and 0%
volatility in 1997 and 1996 and an expected life of 2.6 years, no dividends and
67.4 % volatility in 1998. The weighted average fair value at date of grant of
the options granted during the years ended December 31, 1998 and 1997 was $3.17
and $2.80, respectively.
The following table summarizes the stock options outstanding at December 31,
1998:
Options Outstanding Options Exercisable
--------------------------- ---------------------------------------
Weighted
Weighted Average
Average Weighted Weighted Fair
Range of Remaining Average Average Value at
Exercise Number Contractual Exercise Number Exercise Date of
Prices Outstanding Life Price Exercisable Price Grant
- --------- ------------- ------------ ------------ -------------- ---------- ---------
$0.01 55,000 4.5 $0.01 45,000 $0.01 $0.01
$0.10 205,500 6.9 $0.10 136,355 $0.10 $0.10
$1.00 369,878 8.0 $1.00 41,644 $1.00 $2.00
$5.00-$6.50 581,500 9.3 $5.37 161,458 $5.11 $5.37
$6.75-$8.50 162,000 7.4 $7.86 35,000 $7.93 $7.86
45
ATG INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(all dollar amounts in thousands, except per share data)
--------------------
Employee Stock Purchase Plan ("Purchase Plan")
A total of 200,000 shares of common stock are reserved for issuance under the
Purchase Plan. The Purchase Plan enables eligible employees to purchase common
stock at the lower of 85% of the fair market value of the Company's common stock
on the first or last day of each six-month offering period. The first offering
period ended on October 31, 1998, whereupon 3,691 shares were purchased under
the plan. The next offering period ends April 30, 1999.
14. Mandatorily Redeemable Preferred Stock
ATG issued 900,000 shares of Series A Preferred Stock in 1994 at $5.00 per
share. ATG Richland issued 860,000 shares of Series A Preferred Stock in 1995
at $5.00 per share and 990,355 and 278,936 shares of Series B Preferred Stock in
1996 and 1997, respectively, at $6.00 per share. All outstanding shares of the
mandatorily redeemable preferred stock were automatically converted into
3,983,595 shares of common stock on the effective date of the Company's initial
public offering.
15. Common Stock Warrants
Warrants to purchase 190,000 shares of Common Stock were granted upon the
completion of the Company's initial public stock offering. These warrants
become exercisable in May 1999 and expire in May 2003. The warrant exercise
price is $10.20 per share.
16. Income Taxes
The components of income tax expense (benefit) are approximately as follows:
December 31,
----------------------------------------------------
1998 1997 1996
------------ ----------- ------------
Current
Federal................................................... $2,439 $(383) $ __
State..................................................... 406 158 2
Deferred:
Federal................................................... 304 214 __
State..................................................... 7 (34) __
-------------- ------------ -----------
Total................................................... $3,156 $ (45) $ 2
============== ============ ===========
46
ATG INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(all dollar amounts in thousands, except per share data)
--------------------
The Company's effective tax rate differs from the U.S. federal statutory tax
rate, as follows:
December 31,
----------------------------------------------------
1998 1997 1996
---- ---- ----
Income tax provision at statutory rate......................... 34.0% 34.0% 34.0%
State taxes, net of federal tax effect......................... 3.3 1.6 0.1
Non-deductible items........................................... 0.4 3.2 0.5
Net operating loss benefit..................................... __ (48.3) (29.5)
Other.......................................................... 0.3 4.9 (4.8)
------- ------- -------
Effective tax rate............................................. 38.0% (4.6)% 0.3%
======= ======= =======
Components of the deferred income tax balance are as follows:
December 31,
----------------------------------------------------
1998 1997 1996
---- ---- ----
Deferred tax assets
Net operating loss carryforwards.............................. $ __ $ 308 $ 569
Accrued expenses.............................................. 183 245 34
Tax credits................................................... __ 120 100
Other......................................................... __ 24 17
------- ------- -------
Deferred tax assets........................................ $ 183 $ 697 $ 720
======= ======= =======
Deferred tax liabilities
Depreciation and amortization.............................. $ 473 $ 467 $ 310
======= ======= =======
Valuation allowance............................................ __ __ (410)
------- ------- -------
Net deferred tax asset (liability)............................. $ (290) $ 230 $ __
======= ======= =======
47
ATG INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(all dollar amounts in thousands, except per share data)
--------------------
17. Earnings per Share (EPS)
In accordance with the disclosure requirements of SFAS 128, a reconciliation
of the numerator and denominator of basic and diluted EPS is provided as
follows:
For the Years Ended December 31,
------------------------------------------------
1998 1997 1996
----------- ------------ ------------
Numerator - Basic and Diluted EPS
Net income........................................... $ 5,149 $ 1,018 $ 508
Accretion on mandatorily redeemable
preferred stock...................................... __ (1,469) (1,288)
------------- ------------- -------------
Net income (loss) available to
common shareholders.................................. $ 5,149 $ (451) $ (780)
============= ============= =============
Denominator - Basic EPS
Common shares outstanding............................ 12,975 7,532 7,532
------------- ------------- -------------
Basic earnings (loss) per share........................... $ 0.40 $ (0.06) $ (0.10)
============= ============= =============
Denominator - Diluted EPS
Denominator - Basic EPS................................... 12,975 7,532 7,532
Effect of Dilutive Securities
Common stock options................................. 723 __ __
------------- ------------- -------------
13,698 7,532 7,532
------------- ------------- -------------
Diluted earnings (loss) per share......................... $ 0.38 $ (0.06) $ (0.10)
============= ============= =============
Options and warrants to purchase 352,000 shares of Common Stock at exercise
prices in excess of the average market price of the Company's Common Stock were
excluded from the computation of diluted earnings per share as their effect
would be anti-dilutive.
18. Employee Retirement Plan
The Company maintains a Qualified Retirement Plan (401(k) Plan) which covers
substantially all employees. Eligible employees may contribute up to 15% of
their annual compensation, as defined, to this plan. The Company may also make
a discretionary contribution. To date the Company has not made contributions to
the 401(k) Plan.
19. Business Segments
Effective December 31, 1998, the Company adopted SFAS No. 131, " Disclosures
about Segments of an Enterprise and Related Information." Statement 131 requires
enterprises to report information about operating segments in annual financial
statements and selected information about reportable segments in interim
financial reports issued to shareholders.
ATG 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 or various engineering services for customers under long-term
contracts.
Prior to 1998, the Company evaluated its operations as one business unit.
Thermal processing of large volumes of waste began in 1998 and the Company
commenced evaluating its business as two business segments in the fourth quarter
of the year. The Company segregates revenue and gross profit by business
segment. Selling, general and administrative expenses are not allocated to the
business segments. The accounting policies of the business segments are the same
as those described in the summary of significant accounting policies.
Information about business segments in 1998:
FFG FEG OTHER TOTAL
------- ------ ----- -------
Revenue $ 18,889 $ 17,011 - $ 35,900
Gross profit 11,082 5,002 - 16,084
Sales, General and
Administrative expenses 7,832
Stock-based compensation 120
Interest income, net 173
Provision for income taxes 3,156
-------
Net income $ 5,149
=======
Segment assets 42,030 650 3,380 $ 46,060
=======
Expenditures for long -
lived assets 21,490 40 120 $ 21,650
=======
Substantially all of the segment revenues in 1998 were from customers in North
America, denominated in U.S.dollars.
48
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements. The following Consolidated Financial Statements of
ATG Inc. and Report of Independent Accountants are filed as part of this report:
Page
----
Report of Independent Accountants....................................................... 31
Consolidated Balance Sheets--As of December 31, 1997 and 1998........................... 32
Consolidated Statements of Operations--For the Three Years Ended
December 31, 1998........................................................................ 33
Consolidated Statements of Shareholders' Equity--For the Three Years Ended
December 31, 1998...................................................................... 34
Consolidated Statements of Cash Flows--For the Three Years Ended
December 31, 1998........................................................................ 35
Notes to Consolidated Financial Statements............................................... 36-48
2. Financial Statement Schedules. For years ended December 31, 1998,
1997 and 1996:
Schedule II. Valuation and Qualifying Accounts.......................................... 50
All other schedules are omitted because they are not applicable or the
required information has been included in the consolidated financial statements
or notes thereto.
3. 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*
9.1 Voting Trust Agreement*
10.1 Assumption Agreement, dated September 2, 1992, between the
Company, as transferee, Tippett-Richardson, as transferor, and
Confederation Life Insurance Company, as lender*
10.2 Deed of Trust (Non-Construction) & Assignment of Rents, dated
September 18, 1997, between the Company, as trustor, First
Bancorp, as trustee, and Sanwa Bank California, as beneficiary*
10.3 Deed of Trust, dated August 5, 1993, between the Company and ATG
Richland, collectively as trustor, Chicago Title Insurance
Company, as trustee, and West One Bank, as beneficiary*
10.4 Term Loan Agreement, dated September 18, 1997, between the
Company and Sanwa Bank California*
10.5 Letter from the Company to Steve Guerrettaz, dated December 2,
1997, regarding terms of employment*
10.6 Letter from the Company to Fred Feizollahi, dated February 20,
1995, regarding terms of employment*
10.7 Consultant Agreement, dated as of July 1, 1992, between the
Company and Edward Vinecour*
10.8 Non-Competition Agreement, dated as of July 1, 1992, between the
Company and Edward Vinecour*
10.9 Collective Bargaining Agreement between the Company and the
International Union of Operating Engineers No. 280*
10.10 Form of Stock Purchase Agreement*
10.11 Continuing Guaranty, dated as of April 19, 1996, provided by
Doreen Chiu in favor of Sanwa Bank*
10.12 Continuing Guaranty, dated as of April 19, 1996, provided by
Frank Chiu in favor of Sanwa Bank*
10.13 Continuing Guaranty, dated as of May 20, 1997, provided by
Doreen Chiu in favor of Safeco Credit Company, Inc.*
10.14 Continuing Guaranty, dated as of May 20, 1997, provided by Frank
Chiu in favor of Safeco Credit Company, Inc.*
10.15 Small Business Administration (SBA) Guaranty, dated August 6,
1993, provided by Doreen Chiu and Frank Chiu in favor of West
One Bank*
10.16 Guaranty Agreement, dated September 1, 1994, provided by Doreen
Chiu and Frank Chiu in favor of Great Western Leasing*
10.17 Guaranty, dated January 13, 1994, provided by Doreen Chiu and
Frank Chiu in favor of The CIT Group/Equipment Financing Inc.*
10.18 Guaranty of Commercial Lease Agreement, dated December 20, 1994,
provided by Doreen Chiu and Frank Chiu in favor of California
Thrift & Loan*
10.19 Contract No. MGK-SBB-A26602, dated September 5, 1997, awarded to
the Company by Waste Management Federal Services of Hanford,
Inc.*
10.20 Purchase Order No. MW6-SBV-357079, dated November 3, 1995,
issued to the Company by Westinghouse Hanford Company*
10.21 Contract No. DE-AC06-95RL13129, dated January 4, 1995, among the
U.S. Department of Energy, as the procuring agency, the U.S.
Small Business Administration, as contractor, and the Company,
as subcontractor*
10.22 Gasification Vitrification Chamber Purchase and License
Agreement, dated August 1997, between the Company and Integrated
Environmental Technologies, LLC*
10.23 Purchase Agreement between the Company and Integrated
Environmental Technologies, LLC*
10.24 Technology Transfer Purchase and Royalty Fee Agreement, dated
September 30, 1997, between the Company and Regent Star Ltd.*
10.25 Technology Transfer and Purchase Agreement, dated June 28, 1997,
between the Company and Pacific Trading Company*
10.26 Contract No. DACW05-98-C-0001, dated September 24, 1997, awarded
to the Company by the U.S. Army Corps of Engineers, Sacremento
District*
10.27 Contract No. DAKF04-92-D-0007, dated February 8, 1991, among the
Fort Irwin Directorate of Contracting, as the procuring agency,
the U.S. Small Business Administration, as contractor, and the
Company, as subcontractor*
10.28 Promissory Note, dated December 31, 1997, provided by the
Company to Doreen M. Chiu*
10.29 1998 Stock Ownership Incentive Plan*
10.30 Employee Stock Purchase Plan*
10.31 1998 Non-Employee Directors Stock Option Plan*
10.32 Letter of Credit Agreement, dated March 6, 1998, between the
Company and Sanwa Bank California*
10.33 Continuing Guaranty, dated as of March 6, 1998, provided by
Doreen M. Chiu in favor of Sanwa Bank California*
10.34 Continuing Guaranty, dated as of March 6, 1998, provided by
Frank Y. Chiu in favor of Sanwa Bank California*
10.35 Indemnity Agreement, dated August 12, 1992, made and entered
into by Doreen M. Chiu, Frank Y. Chiu, the Company and National
Safety Consultants, Inc. in favor of ACTSTAR Insurance Company*
10.36 Continuing Agreement of Idemnity--Contractors' Form, dated March
19, 1998, made and entered into by Doreen M. Chiu, Frank Y. Chiu
and the Company for the benefit of Reliance Insurance Company,
United Pacific Insurance Company, Reliance National Indemnity
Company and Reliance Surety Company*
10.37 Purchase Order, dated February 10, 1996, issued by the Company
to ToxGon Corporation*
10.38 Amendments to Letter of Credit Agreement***
10.39 Line of Credit Agreement***
10.40 Amendment to Line of Credit Agreement
10.41 Term Loan Agreement Sanwa Bank California
10.42 ATG Catalytics L.L.C. Operating Agreement
21.1 List of Subsidiaries of Registrant
23.1 Consent of PricewaterhouseCoopers LLP
27.1 Financial Data Schedule
- -----------------------
(*) 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
10-Q for the quarter ended June 30, 1998.
49
(b) Reports on Form 8-K
A report on Form 8-K, dated December 1, 1998, was filed during the last
quarter of 1998, covering the acquisition of certain assets and business lines
from the trustee for debtors in bankruptcy. The assets and business lines were
formerly owned by Molten Metal Technologies, Inc.
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders of
ATG Inc., and its Subsidiaries:
In connection with our audits of the consolidated financial statements
of ATG Inc. and its subsidiaries as of December 31, 1998 and 1997, and for each
of the three years in the period ended December 31, 1998, which financial
statements are included in this Form 10-K, we have also audited the financial
statement schedule listed in Item 14(a) herein.
In our opinion, this financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information required to be included therein.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
February 26, 1999
Schedule II
ATG INC.
VALUATION AND QUALIFYING ACCOUNTS
---------------------------------
(in thousands)
Additions
Balance at Charged to Balance
Beginning of Costs and at End of
Description Period Expenses Deductions(1) Period
----------- ------------ ----------- ------------- ----------
Year ended December 31,1996.............
Allowance for doubtful accounts $ 40 $ 6 $ -- $ 46
Year ended December 31, 1997............
Allowance for doubtful accounts $ 46 $ 73 $ -- $119
Year ended December 31, 1998............
Allowance for doubtful accounts $119 $210 $ (24) $305
- ----------------------
(1) Deductions represent accounts receivable amounts that were considered
doubtful and previously reserved for that became uncollectible and were written
off in the year.
50
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.
ATG INC.
By: /s/ Doreen M. Chiu
------------------
Doreen M. Chiu
Chairman of the Board
President and CEO
Date: March 31, 1999
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 capacities and on the dates indicated.
/s/ Doreen M. Chiu Chairman, President and Chief March 31, 1999
- ---------------------------------------- Executive Officer
Doreen M. Chiu
/s/ Frank Y. Chiu Executive Vice-President March 31, 1999
- ---------------------------------------- Director
Frank Y. Chiu
/s/ William M. Hewitt President-Waste Mgmt. Services March 31, 1999
- ---------------------------------------- Director
William M. Hewitt
/s/ Steven J. Guerrettaz Chief Financial Officer March 31, 1999
- ---------------------------------------- Director
Steven J. Guerrettaz
/s/ Earl E. Gjelde Director March 31, 1999
- ----------------------------------------
Earl E. Gjelde
/s/ Andrew C. Kadak Director March 31, 1999
- ----------------------------------------
Andrew C. Kadak
51
EXHIBIT INDEX
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*
9.1 Voting Trust Agreement*
10.1 Assumption Agreement, dated September 2, 1992, between the
Company, as transferee, Tippett-Richardson, as transferor, and
Confederation Life Insurance Company, as lender*
10.2 Deed of Trust (Non-Construction) & Assignment of Rents, dated
September 18, 1997, between the Company, as trustor, First
Bancorp, as trustee, and Sanwa Bank California, as beneficiary*
10.3 Deed of Trust, dated August 5, 1993, between the Company and ATG
Richland, collectively as trustor, Chicago Title Insurance
Company, as trustee, and West One Bank, as beneficiary*
10.4 Term Loan Agreement, dated September 18, 1997, between the
Company and Sanwa Bank California*
10.5 Letter from the Company to Steve Guerrettaz, dated December 2,
1997, regarding terms of employment*
10.6 Letter from the Company to Fred Feizollahi, dated February 20,
1995, regarding terms of employment*
10.7 Consultant Agreement, dated as of July 1, 1992, between the
Company and Edward Vinecour*
10.8 Non-Competition Agreement, dated as of July 1, 1992, between the
Company and Edward Vinecour*
10.9 Collective Bargaining Agreement between the Company and the
International Union of Operating Engineers No. 280*
10.10 Form of Stock Purchase Agreement*
10.11 Continuing Guaranty, dated as of April 19, 1996, provided by
Doreen Chiu in favor of Sanwa Bank*
10.12 Continuing Guaranty, dated as of April 19, 1996, provided by
Frank Chiu in favor of Sanwa Bank*
10.13 Continuing Guaranty, dated as of May 20, 1997, provided by
Doreen Chiu in favor of Safeco Credit Company, Inc.*
10.14 Continuing Guaranty, dated as of May 20, 1997, provided by Frank
Chiu in favor of Safeco Credit Company, Inc.*
10.15 Small Business Administration (SBA) Guaranty, dated August 6,
1993, provided by Doreen Chiu and Frank Chiu in favor of West
One Bank*
10.16 Guaranty Agreement, dated September 1, 1994, provided by Doreen
Chiu and Frank Chiu in favor of Great Western Leasing*
10.17 Guaranty, dated January 13, 1994, provided by Doreen Chiu and
Frank Chiu in favor of The CIT Group/Equipment Financing Inc.*
10.18 Guaranty of Commercial Lease Agreement, dated December 20, 1994,
provided by Doreen Chiu and Frank Chiu in favor of California
Thrift & Loan*
10.19 Contract No. MGK-SBB-A26602, dated September 5, 1997, awarded to
the Company by Waste Management Federal Services of Hanford,
Inc.*
10.20 Purchase Order No. MW6-SBV-357079, dated November 3, 1995,
issued to the Company by Westinghouse Hanford Company*
10.21 Contract No. DE-AC06-95RL13129, dated January 4, 1995, among the
U.S. Department of Energy, as the procuring agency, the U.S.
Small Business Administration, as contractor, and the Company,
as subcontractor*
10.22 Gasification Vitrification Chamber Purchase and License
Agreement, dated August 1997, between the Company and Integrated
Environmental Technologies, LLC*
10.23 Purchase Agreement between the Company and Integrated
Environmental Technologies, LLC*
10.24 Technology Transfer Purchase and Royalty Fee Agreement, dated
September 30, 1997, between the Company and Regent Star Ltd.*
10.25 Technology Transfer and Purchase Agreement, dated June 28, 1997,
between the Company and Pacific Trading Company*
10.26 Contract No. DACW05-98-C-0001, dated September 24, 1997, awarded
to the Company by the U.S. Army Corps of Engineers, Sacremento
District*
10.27 Contract No. DAKF04-92-D-0007, dated February 8, 1991, among the
Fort Irwin Directorate of Contracting, as the procuring agency,
the U.S. Small Business Administration, as contractor, and the
Company, as subcontractor*
10.28 Promissory Note, dated December 31, 1997, provided by the
Company to Doreen M. Chiu*
10.29 1998 Stock Ownership Incentive Plan*
10.30 Employee Stock Purchase Plan*
10.31 1998 Non-Employee Directors Stock Option Plan*
10.32 Letter of Credit Agreement, dated March 6, 1998, between the
Company and Sanwa Bank California*
10.33 Continuing Guaranty, dated as of March 6, 1998, provided by
Doreen M. Chiu in favor of Sanwa Bank California*
10.34 Continuing Guaranty, dated as of March 6, 1998, provided by
Frank Y. Chiu in favor of Sanwa Bank California*
10.35 Indemnity Agreement, dated August 12, 1992, made and entered
into by Doreen M. Chiu, Frank Y. Chiu, the Company and National
Safety Consultants, Inc. in favor of ACTSTAR Insurance Company*
10.36 Continuing Agreement of Idemnity--Contractors' Form, dated March
19, 1998, made and entered into by Doreen M. Chiu, Frank Y. Chiu
and the Company for the benefit of Reliance Insurance Company,
United Pacific Insurance Company, Reliance National Indemnity
Company and Reliance Surety Company*
10.37 Purchase Order, dated February 10, 1996, issued by the Company
to ToxGon Corporation*
10.38 Amendments to Letter of Credit Agreement***
10.39 Line of Credit Agreement***
10.40 Amendment to Line of Credit Agreement
10.41 Term Loan Agreement-Sanwa Bank California
10.42 ATG Catalytics L.L.C. Operating Agreement
21.1 List of Subsidiaries of Registrant
23.1 Consent of PricewaterhouseCoopers LLP
27.1 Financial Data Schedule
- --------------
(*) 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 Registrant's Form 8-K
dated December 1, 1998.
(***) Incorporated by reference to exhibits filed with the Registrant's Form
10-Q for the quarter ended June 30, 1998.