<PAGE>
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-46107 & 333-52009
1,900,000 SHARES
[LOGO OF ALLIED TECHNOLOGY]
COMMON STOCK
All 1,900,000 shares of Common Stock offered hereby are being sold by ATG
Inc. (the "Company"). Prior to this offering (the "Offering") there has been
no public market for the Common Stock. See "Underwriting" for a discussion of
the factors considered in determining the initial public offering price. The
Common Stock has been approved for quotation on the Nasdaq National Market
under the symbol "ATGC."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS," COMMENCING ON PAGE 6 OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNTS(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................................. $8.50 $0.595 $7.905
- --------------------------------------------------------------------------------
Total(3)................................... $16,150,000 $1,130,500 $15,019,500
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
(1) Excludes a non-accountable expense allowance payable to the representative
of the Underwriters (the "Representative") and the value of warrants to be
issued to the Representative to purchase up to 190,000 shares of Common
Stock at a price per share equal to 120% of the Price to Public as shown
above (the "Representative's Warrants"). See "Underwriting" for
information relating to indemnification of the Underwriters.
(2) Before deducting expenses payable by the Company, estimated at $1.15
million, including the non-accountable expense allowance payable to the
Representative.
(3) The Company has granted to the Underwriters a 45-day option to purchase up
to 285,000 additional shares of Common Stock, solely for the purpose of
covering over-allotments, if any. To the extent that the option is
exercised, the Underwriters will offer the additional shares at the Price
to Public as shown above. If the Underwriters exercise this option in
full, the total Price to Public, Underwriting Discounts and Proceeds to
Company will be $18,572,500, $1,300,075 and $17,272,425, respectively. See
"Underwriting."
The shares of Common Stock are offered by the several Underwriters subject
to receipt and acceptance by them and subject to their right to reject any
order in whole or in part. It is expected that delivery of the certificates
representing such shares will be made against payment therefor at the offices
of Van Kasper & Company, San Francisco, California on or about May 12, 1998.
VAN KASPER & COMPANY
MAY 7, 1998
<PAGE>
INSIDE FRONT COVER OF PROSPECTUS:
[LOGO OF ATG]
The Company offers comprehensive waste treatment
solutions for low-level radioactive and mixed waste.
The Company's SAFGLAS(TM) process results in a more
stable end product than traditional incineration methods.
[Picture of waste being drained from vitrification chamber]
Organic constituents are destroyed
and the radioactive solids are
captured within the glass
[Picture of SAFGLAS(TM) vitrification system]
Waste is fed into a pool of molten glass at
temperatures in excess of 2000(degrees)F
[Picture of end product of vitrification process]
The end product is a highly stable
and leach-resistant glass form
with up to 200 : 1
volume reduction
[Picture of waste arriving from client in box]
Waste arrives from clients nationwide in
tankers, boxes and drums
[Picture of SAFGLAS(TM) vitrification system]
Waste is fed into SAFGLAS(TM)
via an automated system
[Picture of SAFGLAS(TM) vitrification system]
The SAFGLAS(TM) system is licensed to operate
24 hours a day
----------------
FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES, SUCH AS STATEMENTS OF THE COMPANY'S OR ITS MANAGEMENT'S PLANS,
OBJECTIVES, EXPECTATIONS, INTENTIONS, BELIEFS AND ESTIMATES. THE CAUTIONARY
STATEMENTS MADE IN THIS PROSPECTUS SHOULD BE READ AS BEING APPLICABLE TO ALL
FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR IN THIS PROSPECTUS. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE
DISCUSSED IN "RISK FACTORS" AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS," AS WELL AS THOSE DISCUSSED
ELSEWHERE IN THIS PROSPECTUS.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY OVER-ALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE
COVERING TRANSACTIONS OR THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Company's Consolidated Financial
Statements and the Notes thereto, appearing elsewhere in this Prospectus.
THE COMPANY
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 U.S.
Department of Defense ("DOD") and U.S. Department of Energy ("DOE"), as well as
commercial entities, such as nuclear power plants, medical facilities and
research institutions. The Company's thermal treatment technologies vitrify
waste into leach-resistant glass for long-term storage or disposal. Compared
with the more traditional incineration methods, the Company's vitrification
process results in significantly less effluents, provides a more stable end
product and achieves comparable volume and mass reduction at similar total
treatment and disposal costs.
The Company's growth strategy is to: (i) increase its share of the domestic
commercial LLRW treatment market; (ii) establish a significant position in the
emerging domestic LLMW treatment market; (iii) increase its participation in
large-scale domestic and international waste clean-up projects; (iv) expand
into selected Pacific Rim markets; and (v) enhance its on-site waste treatment
capabilities.
The Company operates one of only two commercial facilities in the United
States licensed to thermally treat a broad spectrum of LLRW, and is the only
company in the United States licensed to vitrify both commercial and
government-generated LLRW. Since 1988, the Company has treated several million
pounds of LLRW, over 150,000 pounds of which have been treated since September
1997 using the Company's SAFGLAS vitrification system. As of December 31, 1997,
the Company was a party to service agreements with three nuclear utilities,
covering four nuclear power plants, to accept and treat LLRW generated by such
utilities. In the first quarter of 1998, the Company entered into such service
agreements with an additional seven nuclear utilities, covering an additional
fifteen nuclear power plants.
In 1994, the Company commenced the licensing process for its Richland,
Washington facilities to treat LLMW, which is LLRW mixed with hazardous
constituents. The Company believes it will receive final approval in 1998 for
full-scale thermal and non-thermal LLMW processing, which is anticipated to
begin in 1999. The Company believes that its mixed waste treatment facility
will 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.
The Company operates through its Fixed Facilities Group, which manages its
waste treatment operations, and its Field Engineering Group, which addresses
on-site decontamination and decommissioning of radioactive facilities ("D&D")
and environmental restoration of sites contaminated with radioactive and
hazardous waste. Historically, a majority of the Company's revenue has been
derived from on-site services. The Company has completed over 150 environmental
restoration projects since 1989 and provided D&D services for over a decade.
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.
In the last three years, the Company has formed teaming relationships with,
among others, Lockheed Martin Corporation ("Lockheed Martin"), Morrison Knudsen
Corporation ("Morrison Knudsen") and Jacobs Engineering Group Inc. ("Jacobs
Engineering") to pursue large contract awards requiring diverse waste
management and treatment expertise. The Company intends to continue to enter
into such relationships and is currently in the early stage of pursuing similar
strategic alliances with foreign entities in selected Pacific Rim markets with
established LLRW or LLMW clean-up initiatives or where scarcity of land and
high disposal costs create an opportunity for vitrification treatment
technologies.
The Company was incorporated in Texas in 1976 under the name "Allied Nuclear,
Inc.," reincorporated in California in 1980 and changed its name to "ATG Inc."
in 1987. Its principal executive offices are located at 47375 Fremont
Boulevard, Fremont, California 94538, and its telephone number is: (510) 490-
3008.
3
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered....................... 1,900,000 shares
Common Stock to be outstanding after the
Offering.................................. 13,415,896 shares(1)
Use of proceeds............................ For capital expenditures,
repayment of short-term
indebtedness, and working capital
and general corporate purposes,
which may include acquisitions
and joint ventures.
Nasdaq National Market symbol ............. ATGC
</TABLE>
- --------------------
(1) Based on the number of shares outstanding on March 31, 1998. Excludes
1,000,000 shares of Common Stock reserved for issuance upon exercise of
outstanding stock options at a weighted average exercise price of $2.09 per
share, 291,858 of which were exercisable on such date. See "Description of
Capital Stock--Options."
Unless otherwise indicated, all information in this Prospectus assumes (i)
that the Underwriters' over-allotment option and the Representative's Warrants
are not exercised, and (ii) that all of the outstanding shares of the Company's
Series A Preferred Stock, no par value per share (the "Preferred Stock"), and
all of the outstanding shares of the Series A and Series B Redeemable Non-
Voting Preferred Stock issued by the Company's consolidated subsidiary, ATG
Richland Corporation ("ATG Richland"), are converted prior to the closing of
the Offering into an aggregate of 3,983,595 shares of Common Stock. Unless the
context suggests otherwise, references in this Prospectus to the "Company" mean
ATG Inc. and its consolidated subsidiaries. SAFGLAS(TM), GASVIT(TM) and
PLASTIMELT(TM) are trademarks of the Company for which registration is pending.
All other trademarks, service marks or trade names referred to in this
Prospectus are the property of the respective owners thereof.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED ENDED
DECEMBER 31, MARCH 31,
------------------------ --------------
1995 1996 1997 1997 1998
------- ------- ------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue............................ $16,070 $18,235 $19,107 $2,751 $5,495
Gross profit....................... 6,411 7,153 7,935 1,332 2,865
Operating income (loss)............ 209 497 915 (307) 1,138
Interest income (expense), net..... (141) 13 58 41 (4)
------- ------- ------- ------ ------
Income (loss) before income taxes.. 68 510 973 (266) 1,134
Provision (benefit) for income
taxes............................. 2 2 (45) -- 464
------- ------- ------- ------ ------
Net income (loss).................. $ 66 $ 508 $ 1,018 $ (266) $ 670
======= ======= ======= ====== ======
Pro forma net income per share(1)
Basic............................ $ 0.09 $ 0.06
Diluted.......................... 0.08 0.05
Pro forma weighted average shares
outstanding(1)
Basic............................ 11,516 11,516
Diluted.......................... 12,284 12,284
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998 (UNAUDITED)
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA(2) AS ADJUSTED(3)
------- ------------ --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................... $ 1,772 $ 1,772 $15,642
Total assets.............................. 39,435 39,435 53,305
Total long-term debt...................... 6,400 6,400 6,400
Mandatorily redeemable preferred stock.... 19,681 -- --
Shareholders' equity...................... 731 20,412 34,282
</TABLE>
- --------------------
(1) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of the basis for calculating pro forma net income per share.
(2) Presented on a pro forma basis to give effect to the conversion of all
outstanding shares of Mandatorily Redeemable Preferred Stock into an
aggregate of 3,983,595 shares of Common Stock prior to the closing of the
Offering.
(3) Adjusted to reflect the sale of 1,900,000 shares of Common Stock offered
hereby. See "Use of Proceeds" and "Capitalization."
5
<PAGE>
RISK FACTORS
In addition to the other information set forth in this Prospectus, investors
should carefully consider the following risk factors when evaluating the
Company and its business before purchasing shares of the Common Stock offered
hereby.
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. Such licenses, permits or approvals are subject to denial,
revocation or modification under a variety of circumstances. Failure to
obtain, or to 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.
The Company recently was notified by the Washington Department of Health
that certain emissions generated by its SAFGLAS operation exceeded those
allowed under the Company's original air quality permit application, which was
based on the Company's original estimate of the amount of such emissions to be
generated by operation of the SAFGLAS system. In addition to the requirements
of the Clean Air Act, the Company operates under air quality permits issued by
the Washington Department of Health and by the Benton County, Washington Clean
Air Authority. Until the Department of Health approves the Company's updated
air quality permit application seeking an increase in allowable emissions, the
Company will limit SAFGLAS processing to certain waste streams in order to
ensure compliance with the Company's existing permit. The Company does not
believe this limitation on waste stream processing will have a material
adverse effect on its operations, but does anticipate it may take up to 90
days to receive approval of the updated application. Failure to obtain
approval of the updated application to increase allowable emissions would
limit the Company's ability to process certain waste streams in the future.
See "Business--Environmental Laws and Regulations; Licensing Processes
Applicable to LLRW and LLMW Treatment Facilities."
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 treatment of LLRW and LLMW. 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 December 31, 1999. 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. See "Business--Waste Treatment Technologies."
6
<PAGE>
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. See "Business--
Environmental Laws and Regulations; Licensing Processes Applicable to LLRW and
LLMW Treatment Facilities."
DEPENDENCE ON FEDERAL GOVERNMENT; LIMITS ON GOVERNMENT SPENDING; GOVERNMENT
CONTRACTING
For the fiscal years ended December 31, 1995, 1996 and 1997 and the three
months ended March 31, 1998, approximately 86.3%, 76.8%, 71.3% and 54.5%,
respectively, of the Company's total revenue was derived from federal
government contracts. The Company expects that the percentage of its revenue
attributable to such contracts will continue to be substantial for the
foreseeable future. The Company's government contracts generally are subject
to cancellation, delay or modification at the sole option of the government.
See "Management's Discussion and Analysis of Financial Conditions and Results
of Operations" and "Business--Customers."
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. In addition, the
taxing authority of the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 ("CERCLA" or "Superfund") has expired. Although bills to
reauthorize Superfund were introduced in Congress in late calendar 1997 and
action is anticipated in 1998, the potential for further delay could adversely
affect the environmental remediation industry. See "Business--Environmental
Laws and Regulations; Licensing Processes Applicable to LLRW and LLMW
Treatment Facilities."
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. See
"Business--Environmental Contractor Risks."
NEED FOR ADDITIONAL CAPITAL
In addition to the proceeds from the Offering, the Company believes that it
will need additional capital in order to implement its long-term growth
strategy. 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. In the event that
such financing is effected through the sale of shares of the Common Stock, or
securities convertible into such shares, the percentage ownership of the
Company's then shareholders
7
<PAGE>
will be diluted proportionately. 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. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources" and "Business--Growth Strategy."
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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Quarterly Operating Results."
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. The
Company is currently pursuing a growth strategy intended to 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. 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. See "Business--Waste
Treatment Technologies" and "--Operations and Services."
ENVIRONMENTAL CONTRACTOR AND REGULATORY MATTERS
The rapidly developing and changing regulatory framework governing the
Company's business creates significant risks, including potential liabilities
from violations of environmental statutes and regulations and liabilities to
customers and third parties for damages arising from services performed. The
Company's failure to comply with such statutes and regulations, or with the
terms and conditions of licenses and permits it holds under these and other
statutes and regulations, may result in the imposition of substantial fines
and penalties and could adversely affect the Company's ability to carry on its
business as presently constituted. In performing services, the Company could
potentially be liable for claims brought by its customers for breach of
contract, personal injury, property damage, and negligence, including claims
for lack of timely performance or for failure to deliver the service promised
(including improper or negligent performance or design, failure to meet
specifications, and breaches of express or implied warranties). The damages
available to a customer, should it prevail in its claims,
8
<PAGE>
are potentially large and could include consequential damages. The Company's
potential liability is amplified by the increasing tendency to attempt to
shift various liabilities arising out of remediation of environmental
contamination to contractors through contractual indemnities, such as
provisions seeking to require the contractor to assume liabilities for damage
or injury to third parties and property and for environmental fines and
penalties. Radioactive and hazardous waste management contractors also
potentially face liabilities to third parties from various claims, including
claims for property damage, personal injury or wrongful death stemming from a
release of radioactive or hazardous substances, improper handling of
explosives and other hazardous materials, or otherwise. In addition,
increasing numbers of claimants assert that companies performing radioactive
and hazardous waste management services should be adjudged strictly liable
(i.e., liable for damages even though their services were performed using
reasonable care), on the grounds that such services involved "abnormally
dangerous activities." The Company has adopted a range of risk management
programs designed to reduce these risks and potential liabilities, including
policies to seek contractual indemnities, other contract administration
procedures, and employee health, safety, training and environmental monitoring
programs; however, there can be no assurance that such programs will protect
the Company from such risks and liabilities. See "Business--Environmental
Contractor Risks," "--Operations and Services," "--Risk Management and
Insurance," and "--Legal Proceedings."
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. See "Business--Market
Overview" and "--Competition."
INTERNATIONAL EXPANSION
A key component of the Company's long-term growth strategy 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 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. See "Business--Growth Strategy."
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
9
<PAGE>
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. The
Company maintains a $1.5 million key man life insurance policy on the life of
each of Doreen M. Chiu and Frank Y. Chiu. There can be no assurance that such
amount will be sufficient to compensate the Company for the loss of the
services of these individuals. See "Business--Employees" and "Management."
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. See "Business--
Customers," "--Sales and Marketing" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Overview."
POTENTIAL ENVIRONMENTAL LIABILITY AND INSURANCE
Since the Company routinely works with radioactive and hazardous materials,
the Company may be subject to liability claims by employees, customers and
third parties. There can be no assurance that the Company's existing liability
insurance is adequate to cover claims asserted against the Company, that all
claims asserted against the Company will be covered by insurance or that the
Company will be able to maintain such insurance in the future. An uninsured
claim, if successful and of sufficient magnitude, could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Risk Management and Insurance."
DEPENDENCE ON AND LIMITED PROTECTION OF TECHNOLOGY AND INTELLECTUAL PROPERTY;
POTENTIAL LITIGATION
The Company's ability to compete effectively is dependent upon its
vitrification and other waste treatment technologies. The Company principally
relies upon 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 establish and protect
the proprietary aspects of its waste treatment technologies. In addition, the
Company has filed one patent application currently pending in the U.S. Patent
and Trademark Office. There can be no assurance that the patent will issue,
and there can be no assurance regarding the scope, validity or value of any
patents or other methods of intellectual property rights protection relied
upon by the Company. Further, there can be no assurance that the steps taken
to protect proprietary technologies by the Company and the owners of any
licensed patents and other intellectual property rights will be adequate to
prevent the use of these technologies by third parties. There can be no
assurance that others will not develop proprietary technologies and processes
which are the same as or superior to those of the Company. In the event that
the Company pursues overseas projects, there can be no assurance that steps
taken by the Company and the owners of any licensed patents and other
intellectual property rights to protect their proprietary technologies will be
adequate under the laws of certain foreign countries. The loss of patent or
other forms of intellectual property rights protection on the Company's
technology or the circumvention of such protection by competitors could have a
material adverse effect on the Company's ability to compete successfully with
its waste treatment technologies. See "Business--Intellectual Property."
Many technology fields are characterized by the existence of a large number
of patents and frequent litigation regarding possible infringement. Although
the Company does not believe that any of its technologies infringes the patent
rights of third parties, there can be no assurance that infringement claims
will not be asserted
10
<PAGE>
against the Company in the future or that any such claims will not require the
Company to enter into royalty or other settlement arrangements or result in
costly litigation.
ABSENCE OF PRIOR PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE;
DILUTION
Prior to the Offering there has been no public market for the Common Stock.
Although the Common Stock has been approved for quotation on the Nasdaq
National Market upon completion of the Offering, there can be no assurance
that an active trading market for the Common Stock will develop or be
sustained after the Offering. The initial public offering price will be
determined through negotiations between the Company and the Representative,
and may not be indicative of the market price at which the Common Stock will
trade after the Offering. (See "Underwriting" for a discussion of the factors
to be considered in determining the initial public offering price.)
Additionally, the market price of the Common Stock may be subject to
significant fluctuations in response to variations in actual and anticipated
quarterly operating results and other factors, including announcements of new
contracts or technical innovations by the Company or its competitors, changes
in government regulations relating to the environment, the volume of market
transactions in the Common Stock and general market conditions.
Purchasers of the Common Stock offered hereby will incur immediate and
substantial dilution in the net tangible book value of their shares. See
"Dilution." To the extent that the Representative's Warrants, any of the
outstanding options to purchase an aggregate of 1,000,000 shares of Common
Stock or any options granted in the future under the Company's 1998 Stock
Ownership Incentive Plan or 1998 Non-Employee Directors' Stock Option Plan are
exercised, the percentage ownership of the Company's shareholders will be
diluted proportionately. See "Underwriting," "Description of Capital Stock--
Options," "Management--Employee Benefit Plans--Stock Ownership Incentive Plan"
and "--Board of Directors--Non-Employee Directors' Stock Option Plan."
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of Common Stock in the public market
could have an adverse effect on the market price of the Common Stock. Upon
completion of the Offering, the Company will have outstanding approximately
13,415,896 shares of Common Stock (13,700,896 shares, if the Underwriters'
over-allotment option is exercised in full), of which 1,900,000 shares offered
hereby (2,185,000 shares if the Underwriters' over-allotment option is
exercised in full) will be freely tradeable without restriction or further
registration under the Securities Act to the extent they are not held by
"affiliates" of the Company, as that term is defined in Rule 144 ("Rule 144")
promulgated under the Securities Act of 1933, as amended (the "Securities
Act"). The remaining 11,515,896 shares of Common Stock outstanding upon
completion of the Offering will be "restricted securities" as that term is
defined in Rule 144. The Company's officers, directors and certain
shareholders have executed lock-up agreements generally providing that they
will not sell or otherwise dispose of Common Stock for a period of 180 days
after the date of this Prospectus without the prior written consent of Van
Kasper & Company (and in certain cases that they will only sell subject to
certain conditions on sale for an additional 180 days thereafter). Taking into
account the existence of such lock-up agreements and assuming the shareholders
are not released from these agreements, all 11,515,896 shares constituting
restricted securities will become eligible for sale under Rule 144 180 days
after the date of this Prospectus, with 8,248,201 of such shares being subject
to certain conditions on sale for an additional 180 days thereafter, of which
2,520,926 shares will be held by affiliates. Shares eligible to be sold by
affiliates are generally subject to volume limitations under Rule 144. The
existence of a large number of shares eligible for future sale could have an
adverse effect on the Company's ability to raise additional equity capital or
on the price at which such equity capital could be raised. See "Shares
Eligible for Future Sale."
ABSENCE OF DIVIDENDS
The Company has never declared or paid any dividends on the Common Stock.
The Company currently anticipates that it will retain all future earnings for
use in the operation and growth of its business and does not anticipate paying
any cash dividends in the foreseeable future. In addition, the terms of the
Company's outstanding bank borrowings currently prohibit the payment by the
Company of dividends without the lender's prior approval. See "Dividend
Policy."
11
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby at an initial public offering price of $8.50 per share, after
deducting estimated offering expenses and underwriting discounts, are
estimated to be approximately $13,869,500 ($16,086,088 if the Underwriters'
over-allotment option is exercised in full).
The Company intends to use the net proceeds from the Offering approximately
as follows: (i) $4.0 million for capital equipment at its Richland, Washington
facilities; (ii) $4.0 million to repay all amounts of principal and interest
outstanding under its bank line of credit facility, which expires in June 1998
and bears interest at a rate per annum of prime plus 0.5%; and (iii) the
balance for working capital and general corporate purposes, which may include
the construction of additional fixed waste treatment facilities and possible
acquisitions or joint ventures in connection with the expansion of its
existing business lines. The Company is not currently a party to any
commitments or agreements relating to, and is not currently involved in any
negotiations with respect to, any such acquisitions or joint ventures.
The Company expects that the net proceeds of the Offering, together with
anticipated cash flow from operations and available borrowings under the
Company's credit facility, will satisfy its capital requirements for the next
12 months. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources." Pending
application of the net proceeds of the Offering to the uses described above,
the Company intends to invest the proceeds in short-term investment grade,
interest-bearing securities.
DIVIDEND POLICY
The Company currently intends to retain any future earnings for use in the
operation and growth of its business. The Company does not anticipate paying
any cash dividends on the Common Stock in the foreseeable future. Any future
decision to declare or pay cash dividends on the Common Stock will depend upon
the results of operations, financial condition and capital expenditure plans
of the Company at that time, as well as other factors that the Company's Board
of Directors (the "Board"), in its sole discretion, may consider relevant. In
addition, the terms of the Company's bank borrowings currently prohibit the
payment by the Company of cash dividends on the Common Stock without the
lender's prior approval.
12
<PAGE>
DILUTION
As of March 31, 1998, the pro forma net tangible book value per share of the
Common Stock was $1.73. Pro forma net tangible book value per share of Common
Stock is equal to the total tangible assets of the Company less total
liabilities, divided by the number of shares of Common Stock deemed to be
outstanding. After giving effect to the issuance of shares in the Offering at
an initial public offering price of $8.50 per share, and after deducting
estimated offering expenses and underwriting discounts, the adjusted pro forma
net tangible book value per share of Common Stock as of March 31, 1998 would
have been $2.52. This represents an immediate dilution of $5.98 per share to
new investors purchasing Common Stock in the Offering. The following table
illustrates this per share dilution.
<TABLE>
<S> <C> <C>
Initial public offering price per share ......................... $8.50
Pro forma net tangible book value per share as of March 31,
1998(1) ...................................................... 1.73
Increase attributable to the Offering ......................... 0.79
----
Adjusted pro forma net tangible book value per share after
Offering ....................................................... $2.52
-----
Dilution to new investors........................................ $5.98
=====
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1998,
the number of shares purchased from the Company, the total consideration paid
and the average price per share paid by the existing shareholders of the
Company and new investors purchasing shares offered hereby at an initial
public offering price of $8.50 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing
shareholders(1)........ 11,515,896 85.8% $21,488,000 57.1% $1.87
New investors........... 1,900,000 14.2 16,150,000 42.9 8.50
---------- ----- ----------- -----
Total................. 13,415,896 100.0% $37,638,000 100.0%
========== ===== =========== =====
</TABLE>
- ---------------------
(1) The above computations assume no exercise after March 31, 1998 of any of
the outstanding options to purchase shares of the Common Stock. As of
March 31, 1998, there were options outstanding to purchase a total of
1,000,000 shares of Common Stock at a weighted average exercise price of
$2.09 per share, 291,858 of which were exercisable on such date. To the
extent these options are exercised, there will be further dilution to new
investors. See "Description of Capital Stock--Options."
13
<PAGE>
CAPITALIZATION
The following table sets forth the actual and pro forma capitalization of
the Company as of March 31, 1998, and the pro forma capitalization as adjusted
to give effect to the sale of 1,900,000 shares of Common Stock offered hereby,
and the receipt and application of the estimated net proceeds therefrom. The
pro forma capitalization gives effect to the conversion of all outstanding
shares of Mandatorily Redeemable Preferred Stock into an aggregate of
3,983,595 shares of Common Stock prior to the closing of the Offering. The
capitalization information set forth in the table below is unaudited and
qualified by and should be read in conjunction with the Company's more
detailed Consolidated Financial Statements and the Notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998 (UNAUDITED)
------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term borrowings, including current portion
of long-term debt.............................. $ 6,722 $ 6,722 $ 1,726
======= ======= =======
Long-term debt, less current portion............ $ 6,400 $ 6,400 $ 6,400
------- ------- -------
Mandatorily Redeemable Preferred Stock:
Series A and ATG Richland's Series A and B
Preferred Stock, no par value, 6,000,000
shares authorized, 3,029,291 shares issued
and outstanding (actual); none issued and
outstanding (pro forma and as adjusted)...... 19,681 -- --
------- ------- -------
Shareholders' equity:
Common Stock, no par value, 20,000,000 shares
authorized, 7,532,301 shares issued and
outstanding (actual); 11,515,896 shares
issued and outstanding (pro forma);
13,415,896 shares issued and outstanding (as
adjusted).................................... 6,337 26,018 39,888
Deferred compensation......................... (242) (242) (242)
Accumulated deficit........................... (5,364) (5,364) (5,364)
------- ------- -------
Total shareholders' equity.................. 731 20,412 34,282
------- ------- -------
Total capitalization...................... $26,812 $26,812 $40,682
======= ======= =======
</TABLE>
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected statement of operations data for the years ended
December 31, 1995, 1996 and 1997 and the selected balance sheet data as of
December 31, 1996 and 1997 are derived from and are qualified by reference to
and should be read in conjunction with the more detailed Consolidated
Financial Statements and the Notes thereto included elsewhere in this
Prospectus, audited by Coopers & Lybrand L.L.P., independent accountants, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The selected unaudited statement of operations data for the three
months ended March 31, 1997 and 1998 and the selected unaudited balance sheet
data as of March 31, 1998 are derived from and are qualified by reference to
and should be read in conjunction with the more detailed unaudited
Consolidated Financial Statements and the Notes thereto included elsewhere in
this Prospectus, and reflect, in the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
presentation of the results of operations and financial condition for such
periods. The selected statement of operations data for the year ended December
31, 1994 and selected balance sheet data as of December 31, 1994 and 1995 are
derived from audited financial statements of the Company which are not
included herein. The selected unaudited statement of operations data for the
year ended December 31, 1993 and the selected unaudited balance sheet data as
of December 31, 1993 are derived from unaudited financial statements of the
Company which are not included herein. Operating results for the three months
ended March 31, 1998 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 31, 1998.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------------------------- --------------
1993 1994 1995 1996 1997 1997 1998
----------- ------- ------- ------- ------- ------ ------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................. $11,451 $11,723 $16,070 $18,235 $19,107 $2,751 $5,495
Cost of revenue......... 6,277 7,194 9,659 11,082 11,172 1,419 2,630
------- ------- ------- ------- ------- ------ ------
Gross profit............ 5,174 4,529 6,411 7,153 7,935 1,332 2,865
Sales, general and
administrative
expenses............... 4,453 4,876 6,202 6,656 7,020 1,639 1,727
------- ------- ------- ------- ------- ------ ------
Operating income (loss). 721 (347) 209 497 915 (307) 1,138
Interest income
(expense), net......... (394) (19) (141) 13 58 41 (4)
------- ------- ------- ------- ------- ------ ------
Income (loss) before
income taxes........... 327 (366) 68 510 973 (266) 1,134
Income tax expense
(benefit).............. -- (2) 2 2 (45) -- 464
------- ------- ------- ------- ------- ------ ------
Net income (loss)....... $ 327 $ (364) $ 66 $ 508 $ 1,018 $ (266) $ 670
======= ======= ======= ======= ======= ====== ======
Pro forma net income per
share(1)
Basic................. $ 0.09 $ 0.06
Diluted............... 0.08 0.05
Pro forma weighted
average shares
outstanding(1)
Basic................. 11,516 11,516
Diluted............... 12,284 12,284
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------------------- -----------------------
PRO FORMA
1993 1994 1995 1996 1997 1998 1998
----------- ------- ------- ------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital ........ $ 569 $ 2,359 $ 3,903 $ 4,333 $ 1,652 $1,772 $1,772
Total assets............ 10,396 15,699 21,182 26,976 37,227 39,435 39,435
Total long-term debt.... 4,600 4,007 4,080 2,930 6,202 6,400 6,400
Mandatorily redeemable
preferred stock........ -- 5,444 9,403 16,319 19,416 19,681 --
Total shareholders'
equity................. 1,480 1,491 890 630 296 731 20,412
</TABLE>
- ---------------------
(1) See Note 2 of Notes to Consolidated Financial Statements--Computation of
Pro Forma 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 Offering of all shares of preferred stock issued by the
Company and ATG Richland. Historic net income (loss) per share for the
fiscal years ended December 31, 1993, 1994, 1995, 1996 and 1997 was $0.04,
$(0.10), $(0.10), $(0.10) and $(0.06), respectively. Net income (loss)
available to common shareholders for the fiscal years ended December 31,
1993, 1994, 1995, 1996 and 1997 was $327, $(730), $(770), $(780) and
$(451), respectively.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and the Notes thereto and the
other financial information included elsewhere in this Prospectus. Except for
the historical information contained herein, the discussions in this
Prospectus contain forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed below and in the section
entitled "Risk Factors" as well as those discussed elsewhere in this
Prospectus.
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. Founded in 1976 to
provide technical consulting and support services to participants in the
nuclear power industry, the Company expanded into D&D services in 1980 when it
received its first multi-year contract for a DOE facility. Following an
employee leveraged buy-out in 1984, new management commenced the
diversification of the Company's business into waste processing and treatment.
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 86.3%, 76.8%, 71.3% and 54.5% of the
Company's total revenue for the years 1995, 1996 and 1997 and the three months
ended March 31, 1998, 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 recognized as waste is processed. 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, exclusive
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 intends to focus a significant portion of its business on SAFGLAS
vitrification of LLRW in 1998 and on 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 is 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.
16
<PAGE>
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:
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED ENDED
DECEMBER 31, MARCH 31,
------------------- ---------------
1995 1996 1997 1997 1998
----- ----- ----- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue............................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue..................... 60.1 60.8 58.5 51.6 47.9
----- ----- ----- ------ ------
Gross profit........................ 39.9 39.2 41.5 48.4 52.1
Sales, general and administrative
expenses........................... 38.6 36.5 36.7 59.6 31.4
----- ----- ----- ------ ------
Operating income.................... 1.3 2.7 4.8 (11.1) 20.7
Interest income (expense), net...... (0.9) 0.1 0.3 1.5 --
Provision (benefit) for income
taxes.............................. -- -- 0.2 -- 8.5
----- ----- ----- ------ ------
Net income (loss)................... 0.4% 2.8% 5.3% (9.6)% 12.2%
===== ===== ===== ====== ======
</TABLE>
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Revenue. Revenue for the three months ended March 31, 1998 was $5.5 million,
an increase of $2.7 million, or 99.7%, compared to $2.8 million for the three
months ended March 31, 1997. The growth in revenue for the three months ended
March 31, 1998 as compared to the same period in 1997 resulted principally
from an increase in the size and number of waste treatment customers and
contracts, the recognition in the three months ended March 31, 1998 of revenue
of $0.5 million from a change order related to a field engineering services
contract completed in 1997, and the sale in that period of a fluorescent glass
recycling system, resulting in recurring revenue of $0.9 million. Revenue from
waste treatment services was $2.1 million for the three months ended March 31,
1998, compared to $0.9 million for the comparable period in 1997. Revenue from
field engineering services was $2.5 million for the three months ended March
31, 1998, compared to $1.9 million for the comparable period in 1997. Revenue
from various agencies of the U.S. government accounted for 54.5% and 72.0% of
total revenue for the three months ended March 31, 1998 and 1997,
respectively. One contract with an agency of the U.S. government accounted for
approximately 16.5%, and one contract with a commercial customer accounted for
approximately 10.0%, of the Company's total revenue for the three months ended
March 31, 1997. No contract accounted for 10% or more of the Company's total
revenue for the three months ended March 31, 1998.
Gross Profit. Gross profit for the three months ended March 31, 1998 was
$2.9 million, an increase of $1.6 million, or 115.1%, compared to $1.3 million
for the three months ended March 31, 1997. Gross profit as a
17
<PAGE>
percentage of revenue increased to 52.1% in the three months ended March 31,
1998, compared to 48.4% for the comparable period in 1997. The increase in
gross profit is attributable to higher gross margin earned on waste treatment
contracts and the change order revenue recognized in the three months ended
March 31, 1998, for which all related costs had been recognized as of December
31, 1997.
Sales, General and Administrative Expenses. Sales, general and
administrative expenses were $1.7 million for the three months ended March 31,
1998, compared to $1.6 million for the three months ended March 31, 1997.
Sales, general and administrative expenses were 31.4% of revenue for the three
months ended March 31, 1998, compared to 59.6% of revenue for the comparable
period in 1997. 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 $30,000 in the
three months ended March 31, 1998, compared to $40,000 in the three months
ended March 31, 1997. Interest expense was $34,000 for the three months ended
March 31, 1998, and nil for the three months ended March 31, 1997.
Provision For Income Taxes. For the three months ended March 31, 1998, the
Company recorded a provision for income taxes in the amount of $0.5 million,
reflecting an effective tax rate of 41.0%, compared to nil for the three
months ended March 31, 1997. Prior to the three months ended March 31, 1998,
the Company realized the benefit of net operating loss carryforwards and tax
credits.
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,
exclusive 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 71.3% and 76.8% of total revenue in 1997 and 1996, respectively.
One contract with an agency of the U.S. government accounted for approximately
21.0% of the Company's total revenue for 1997. Two contracts with agencies of
the U.S. government accounted for 12.5% and 12.0%, respectively, of the
Company's total revenue for 1996.
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 generally
are lower. Although the gross profit margins increased from 1997 to 1996,
there can be no assurance that similar margins will be attained in future
periods. Any shift in the mix of business in future periods to lower margin
projects could adversely affect the Company's results of operations.
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.
18
<PAGE>
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. (See Note 5 of Notes to
Consolidated Financial Statements.) Interest expense in 1996 was $129,000,
which was net of $446,000 of interest capitalized on construction in progress.
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995
Revenue. Revenue for 1996 was $18.2 million, an increase of $2.1 million, or
13.5%, compared to $16.1 million for 1995. The growth in revenue resulted from
increases in the size and number of both field engineering and waste treatment
projects, and an increase in the number of new customers. Revenue from waste
treatment services was $8.9 million in 1996 compared to $8.0 million in 1995.
Revenue from field engineering services was $9.3 million in 1996 compared to
$8.1 million in 1995. Revenue from various agencies of the U.S. government
accounted for 76.8% and 86.3% of total revenue in 1996 and 1995, respectively.
One contract with an agency of the U.S. government accounted for 12.5% and
21.9% of the Company's total revenue in 1996 and 1995, respectively. A
contract with one other agency of the U.S. government accounted for 12.0% of
the Company's total revenue for 1996.
Gross Profit. Gross profit for 1996 was $7.2 million, an increase of $0.8
million, or 11.6%, compared to $6.4 million in 1995. Gross profit as a
percentage of revenue remained relatively constant at 39.2% in 1996 compared
to 39.9% in 1995. Gross profit percentages reflect the various mixes of the
Company's business services from time to time. The decrease in the gross
profit percentage from 1995 to 1996 reflects this change in mix.
Sales, General and Administrative Expenses. Sales, general and
administrative expenses (including stock-based compensation expense) were $6.7
million for 1996, an increase of $0.5 million, or 7.3%, compared to $6.2
million for 1995. Sales, general and administrative expenses were 36.5% of
revenue in 1996 compared to 38.6% of revenue in 1995. 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.
Interest Income and Interest Expense. Interest income was $142,000 in 1996
compared to $185,000 in 1995. The decrease in interest income is attributable
to a lower overall average of cash available for investment in 1996 than in
1995 due to the timing of sales of preferred stock and the use of the cash for
capital expenditures and working capital. Interest expense for 1996 was
$129,000 compared to $326,000 for 1995. The higher interest expense in 1995
resulted from an increase in working capital borrowing to finance the increase
in accounts receivable in 1995 over 1994. Accounts receivable increased from
approximately $3.9 million at fiscal year-end 1994 to $7.4 million at fiscal
year-end 1995. Additionally, in 1995 and 1996 the Company capitalized a
portion of its interest expense in accordance with generally accepted
accounting principles. The interest expense capitalized was directly
attributable to construction in progress on the SAFGLAS system.
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<PAGE>
QUARTERLY OPERATING RESULTS
The following table sets forth selected consolidated unaudited quarterly
financial data for the five fiscal quarters ended March 31, 1998. The
quarterly consolidated financial data were derived from unaudited interim
financial statements for those periods prepared on the same basis as the
audited financial statements and, in the opinion of management of the Company,
include all adjustments necessary (consisting only of normal recurring
adjustments) for a fair presentation of such financial data when read in
conjunction with the Consolidated Financial Statements and Notes thereto
included elsewhere herein.
<TABLE>
<CAPTION>
THREE MONTHS ENDED (UNAUDITED)
------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1997 1997 1997 1997 1998
--------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenue........................ $2,751 $3,581 $4,424 $8,351 $ 5,495
Gross profit................... 1,332 1,565 2,633 2,404 2,865
Operating income (loss)........ (307) 63 688 470 1,138
Income (loss) before income
taxes......................... (266) 73 692 474 1,134
Provision (benefit) for income
taxes......................... 0 1 0 (46) 464
------ ------ ------ ------ -------
Net income (loss).............. $ (266) $ 72 $ 692 $ 520 $ 670
====== ====== ====== ====== =======
AS A PERCENTAGE OF REVENUE:
Revenue........................ 100.0 % 100.0% 100.0% 100.0% 100.0%
Gross profit................... 48.4 43.7 59.5 28.7 52.1
Operating income (loss)........ (11.1) 1.8 15.5 5.6 20.7
Income (loss) before income
taxes......................... (9.7) 2.0 15.6 5.7 20.6
Provision (benefit) for income
taxes......................... 0.0 0.0 0.0 (0.5) (8.4)
------ ------ ------ ------ -------
Net income (loss).............. (9.7)% 2.0% 15.6% 6.2% 12.2%
====== ====== ====== ====== =======
</TABLE>
Revenue and Gross Profit. In the fourth quarter of 1997, the Company
completed a contract for which a significant change order was submitted in the
three months ended March 31, 1998. The Company did not recognize revenue from
the change order or record any gross profit with respect to the contract in
the fourth quarter of 1997, resulting in a significant decline in gross profit
as a percentage of revenue in that quarter as compared to the three prior
quarters.
The Company's revenue is dependent on the amount of its contract backlog,
the timing and performance requirements of each contract and, in the case of
government contracts, annual budget limitations and public sector budget
constraints. 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. The Company's gross profit margins are affected by numerous
factors, including the revenue factors referred to above, growth in the
Company's operations infrastructure, international expansion and the extent
and timing of change orders, which factors can vary significantly from quarter
to quarter. Due to these factors, 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. See "Risk Factors--Seasonality and Fluctuation in Quarterly Results."
LIQUIDITY AND CAPITAL RESOURCES
Prior to 1994, the Company financed its operations, acquired equipment and
met its working capital requirements through sales of common stock, borrowings
under its revolving line of credit and long-term loans and capital leases
secured by property and equipment. In 1994 the Company sold 900,000 shares of
Preferred Stock at $5.00 per share. The proceeds from this financing were used
to acquire property and equipment in the amount of $3.2 million, and the
balance for working capital needs.
In 1995 the Company's subsidiary, ATG Richland, sold 860,000 shares of its
Series A Redeemable Non-Voting Preferred Stock at $5.00 per share and in 1996
sold 990,355 shares of its Series B Redeemable Non-
20
<PAGE>
Voting Preferred Stock at $6.00 per share. Of the $10.2 million raised in
these two financings, $7.3 million was used to acquire property and equipment,
and $2.9 million for working capital. In 1997 ATG Richland sold an additional
278,936 shares of its Series B Redeemable Non-Voting Preferred Stock at $6.00
per share. The $1.7 million raised in this transaction was primarily used to
fund the installation and start-up of the SAFGLAS system at the Company's
Richland facilities.
During 1995 the Company used cash of $3.4 million in its operating
activities. Operating cash used in 1995 resulted primarily from an increase in
accounts receivable related to significant growth in sales. In 1996, cash of
$2.9 million was generated from operations, primarily from increased
profitability and reduction in accounts receivable as well as other working
capital changes. In 1997, cash of $1.0 million was generated from operations,
primarily from increased profitability.
Significant outlays of cash have been needed to acquire property and
equipment, primarily for the Company's Richland facilities. Property and
equipment acquisitions totaled $2.7 million, $4.6 million, $7.8 million and
$1.6 million in 1995, 1996, 1997 and the three months ended March 31, 1998,
respectively. The Company anticipates that continued expansion of its Richland
LLRW treatment facilities will cost approximately $4.0 million, which the
Company plans to finance from the proceeds of the Offering. The Company
currently expects to spend in 1999 in excess of $10 million for the
construction of the mixed waste treatment facility to be sited at its Richland
facilities.
The working capital of the Company was approximately $1.8 million at March
31, 1998. The Company's principal source of liquidity at March 31, 1998
consisted of $1.3 million of cash and cash equivalents. It is anticipated that
short term bank borrowings will be repaid from the proceeds of the Offering.
Under the terms of a revolving credit facility with a bank, the Company may
borrow up to the lesser of 90% of eligible accounts receivable or $5.0
million. Borrowings under this credit facility were $5.0 million at March 31,
1998, bear interest at an annual rate of prime plus 0.5% (9.0% at March 31,
1998) and are collateralized by accounts receivable, property and equipment
and the personal guarantee of the Company's principal shareholder. The credit
agreement requires the Company to comply with certain covenants, including
covenants relating to quick ratio, capital expenditure limits, limits on
additional indebtedness, debt service coverage, minimum levels of tangible net
worth and dividend payment restrictions. At December 31, 1997 and at various
dates throughout the year, the Company was in violation of the quick ratio,
capital expenditure and additional indebtedness covenants. The Company has
obtained waivers in respect of each of these violations as of December 31,
1997. The Company was not in compliance with all of the financial covenants
under its credit agreement at March 31, 1998.
The Company believes that the net proceeds from the Offering, together with
the availability of its line of credit and cash generated from operations,
will be sufficient to meet the Company's 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. 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.
ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and displaying comprehensive income and its components in the
consolidated financial statements. It does not, however, require a specific
format for the statement, but requires the Company to display an amount
representing total comprehensive income for the period in that financial
statement. The Company has adopted the provisions of SFAS No. 130 as of March
31, 1998 as reflected in the unaudited Consolidated Financial Statements
included elsewhere in this Prospectus.
YEAR 2000 MODIFICATIONS
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 is currently reviewing its computer systems in order to
evaluate what, if any, corrections or modifications may be necessary for the
year 2000.
21
<PAGE>
BUSINESS
See "Glossary" for definition of certain terms used in this section and
elsewhere in this Prospectus.
GENERAL
The Company, founded in 1976, is a radioactive and hazardous waste
management company that offers comprehensive treatment solutions for LLRW and
LLMW generated by the DOD, the DOE and commercial entities such as nuclear
power plants, medical facilities and research institutions. The Company's
thermal treatment technologies vitrify waste into leach-resistant glass for
long-term storage or disposal. Compared with the more traditional incineration
methods, the Company's vitrification process results in significantly less
effluents, provides a more stable end product and achieves comparable volume
and mass reduction at similar total treatment and disposal costs.
The Company operates through its Fixed Facilities Group, which manages its
waste treatment operations, and its Field Engineering Group, which addresses
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 license issued by the State of
Washington with respect to its Richland facilities includes reciprocity
provisions that the Company believes allow it to thermally and non-thermally
treat radioactive waste at customer sites in all fifty states.
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.
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. Although the ultimate impact of the
recent economic instability in certain Pacific Rim countries on the local
economies cannot yet be determined, the underlying structural problems, if not
ameliorated in the near term, could lead to a significant reduction in the
projected demand for environmental services in that region.
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. Most LLRW consists of
relatively large amounts of
22
<PAGE>
waste materials contaminated with small amounts of radioactivity, such as
contaminated equipment, protective clothing, paper, rags, packing material,
liquids and sludge. The Company has been engaged in the business of handling,
treating, storing and disposing of LLRW since 1988.
The Company estimates that currently more than $150 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 $400 per cubic foot, and from
$4.00 to $7.00 per pound, depending upon the waste's density and activity
levels. The disposal fees charged by the Richland site are significantly
lower, but this site is only permitted to accept waste generated in 11 states.
In addition, there is 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. See "--Competition." There are at present only two companies
licensed to offer volume and mass reduction by thermal treatment of a broad
spectrum of commercial LLRW in the United States: the Company, through its
SAFGLAS vitrification technology, and GTS Duratek, Inc. ("Duratek"), through
its incineration treatment processes.
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 alone 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 as the result of the LLMW
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.
23
<PAGE>
The Company believes that its mixed waste treatment facility will, upon
completion of its pending permitting 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.
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.
GROWTH STRATEGY
To expand its business, the Company plans to (i) establish significant
positions in certain emerging or underserved, higher-margin segments within
the markets for treatment of LLRW, LLMW, hazardous and other waste, (ii)
increase its participation on teams bidding for and executing large-scale,
multi-year D&D and environmental restoration contracts, and (iii) enhance its
ability to provide on-site full-service solutions for D&D and environmental
restoration projects. The Company's growth strategy is focused on achieving
the following five objectives:
Increase Market Share in Domestic Commercial LLRW Treatment Market. The
Company intends to increase its share of the domestic commercial LLRW
treatment market by marketing its SAFGLAS vitrification system as a
competitive alternative to incineration, the only other thermal treatment
method widely available in the United States for commercial LLRW. As
disposal costs have increased significantly in recent years, the volume and
mass reduction achievable by thermal treatment has become a critical factor
in selecting a waste treatment solution for many commercial LLRW
generators. With the commencement of the commercial operation of its
SAFGLAS system in the third quarter of 1997, the Company now offers a non-
incineration thermal process that results in total treatment and disposal
costs for the customer comparable to those achieved by incineration.
Additionally, the end-stage glass product resulting from this process is
more suitable for long-term storage and disposal than incineration fly ash.
The Company believes that any competitor attempting to build and operate a
commercial LLRW thermal treatment facility in the United States would
require several years to secure the requisite regulatory approvals. As of
December 31, 1997, the Company was a party to service agreements with three
nuclear utilities, covering four nuclear power plants, to accept and treat
LLRW generated by such utilities. In the first quarter of 1998, the Company
entered into such service agreements with an additional seven nuclear
utilities, covering an additional fifteen nuclear power plants.
Establish Significant Position in Domestic LLMW Treatment Market. The
Company intends to establish a significant position in the United States
market for treatment of LLMW. The market for domestic LLMW treatment is in
an early stage because approved technologies capable of treating a broad
spectrum of low-level mixed waste streams previously have not been
available. 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 fourth quarter of 1998. Thereafter, the Company expects
to take approximately six and 12 months, respectively, to place its non-
thermal and thermal treatment processes in operation. As a consequence, the
Company believes it is positioned to be the first company to own and
operate a private facility in the United States capable of thermally and
non-thermally treating a broad spectrum of low-level mixed waste streams
produced by commercial and government waste generators. The Company
believes that any competitor attempting to build and operate a commercial
LLMW thermal treatment facility in the United States would require a
significant start-up period in which to develop and commercialize its
technology and secure the requisite regulatory approvals. Consequently, the
Company may have several years in which to establish its position in this
market before experiencing significant competition.
24
<PAGE>
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, Morrison Knudsen 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.
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
<TABLE>
- ----------------------------------------------------------------------------
<CAPTION>
WASTE STREAMS NATURE OF
TECHNOLOGY TREATED PROCESS OPERATING STATUS
- ----------------------------------------------------------------------------
<C> <C> <C> <S>
SAFGLAS LLRW Thermal Commercial operation commenced
in September 1997
- ----------------------------------------------------------------------------
GASVIT LLRW Thermal Commercial operation:
LLMW LLRW scheduled for mid-1998
LLMW scheduled for late 1999
- ----------------------------------------------------------------------------
PLASTIMELT LLMW Non-Thermal Commercial operation scheduled
for early 1999
</TABLE>
The core technology employed in the SAFGLAS and GASVIT systems is
vitrification. Although not widely utilized in this country to date,
vitrification technologies have been successfully used in Europe for over
thirty
25
<PAGE>
years, principally in the area of HLW treatment. 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. There can be no
assurance that the steps taken to protect the Company's technologies will be
adequate to prevent the use of such technologies by third parties. See "Risk
Factors--Dependence on and Limited Protection of Technology and Intellectual
Property; Potential Litigation."
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 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
2000(degrees)F. Most of the organic constituents are destroyed and the
radioactive solids are captured within the glass, which is periodically
drained into drums 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 a factor of 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 is currently being enhanced through the addition of
a high temperature drum oven that will process biological LLRW as well as
materials with a high water content, and a small (100 lbs./hr.) version of the
Company's GASVIT system that will process wastes that either require small
batch processing or have very corrosive effluent gas that requires "scrubbing"
to remove corrosive constituents. Both the drum oven and the small GASVIT unit
exhaust into the second chamber of the basic SAFGLAS unit. The Company
therefore refers to the combination of these integrated technologies as the
SAFGLAS system, which is expected to be fully operational in the second
quarter of 1998. The combination of these processes is permitted to treat
approximately 12,000 pounds per day at full capacity. The basic SAFGLAS unit
has a permitted capacity of approximately 5,000-6,000 pounds per day,
depending on the type of feedstock. The Company's license allows it to operate
the SAFGLAS system 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 part of the SAFGLAS system for processing LLRW and will also
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
2200(degrees)F transforms complex organic materials into a "syngas," which is
a mixture of hydrogen and carbon monoxide. The syngas can be either used as
fuel or destroyed in a subsequent flameless oxidation process. As with the
SAFGLAS system process, the end result of the GASVIT system process is a
glass-like 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.
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PLASTIMELT--Non-Thermal Encapsulation of LLMW. The Company has developed the
PLASTIMELT process for the encapsulation of LLMW in a plastic matrix when the
volume or mass reduction achievable by thermal treatment methods is
uneconomical or impractical. In this process, molten plastic is extruded into
or around the LLMW to create a waste form that meets applicable requirements
for land disposal. The Company has integrated this technology with its
supercompaction processes in a system which achieves a volume reduction factor
of greater than 9 to 1.
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 low-level mixed waste streams produced by both commercial and government
generators. The Company also 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.
In 1997, the Company purchased 30 acres of undeveloped industrial land in
Aiken, South Carolina, located adjacent to the DOE's Savannah River
Reservation. The Company is currently considering construction of a fixed
facility principally devoted to LLRW treatment on this site. If constructed,
this facility will provide the Company with two LLRW processing sites, each
situated adjacent to one of the two full-service commercial LLRW disposal
sites currently open in the United States.
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
150,000 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 20% of the nation's nuclear power plants, many major corporations, and
numerous universities, laboratories, hospitals and other research and medical
institutions. In 1995, the DOE awarded the Company, in a competitive bidding
process, a fixed unit price contract to process LLRW generated by the Hanford
Reservation. The maximum value of the contract to the Company is $17 million
over five years.
LLMW Treatment Services. In December 1994, 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 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. The
Company has until the year 1999 to permit and construct an LLMW treatment
facility and to commence LLMW treatment. 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.
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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 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, 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 of the cost 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 150 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. The Company believes that the reciprocity provisions of its
radioactive material license issued by the State of Washington with respect to
the Company's Richland facilities allow the Company to thermally and non-
thermally treat radioactive waste at customer sites in all fifty states.
BACKLOG
The Company's backlog consists of confirmed purchase order contracts that
have been received and which are scheduled for completion within 12 months. A
large percentage of these contracts are with agencies and facilities within
the U.S. government, principally the DOD and DOE, and many have been awarded
under indefinite delivery or quantity terms. These 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 to
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actual delivery orders being released. Accordingly, the Company's backlog as
of a particular date may not be indicative of sales for any period and the
Company therefore believes that backlog is not a reliable indicator of future
revenue. The Company's backlog for contracts planned to be completed in fiscal
1998 that are not subject to indefinite delivery or quantity terms is
approximately $16 million. See "Risk Factors--Dependence on Federal
Government; Limits on Government Spending; Government Contracting" and "--
Seasonality and Fluctuation in Quarterly Results."
CUSTOMERS
The Company's services are provided to a broad range of federal, state and
local government and commercial clients in the United States. Demand for the
Company's services and the distribution of such demand are heavily influenced
by the level of implementation and enforcement of existing and 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 the DOD,
DOE and a number of other federal government agencies, as both a prime
contractor and as a subcontractor. In fiscal 1995, 1996 and 1997, and the
three months ended March 31, 1998, the percentage of the Company's total
revenue attributable to such contracts was 86.3%, 76.8%, 71.3% and 54.5%,
respectively. In the three months ended March 31, 1998, no such contract
accounted for more than 10% of the Company's total revenue. 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 21.9% and 12.5% of the Company's
total revenue in the years ended December 31, 1995 and 1996, respectively. 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
1995, 1996 or 1997 or the three months ended March 31, 1998. See "Risk
Factors--Dependence on Federal Government; Limits on Government Spending;
Government Contracting."
SALES AND MARKETING
The Company relies on a direct sales and marketing staff of six 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 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 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. See "Risk Factors--Focus on Larger
Projects."
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
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agreements covering its technologies for Hong Kong, Taiwan, and The People's
Republic of China. These agreements require the Company to provide assistance
and know-how to its alliance partners, which have the right to exclusively
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 agreements.
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, and a handful of small to mid-size competitors in
the non-thermal treatment of domestic LLRW. 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 low-level mixed waste
streams produced by both commercial and government generators.
The Company is aware that the commercial LLRW disposal site in Clive, Utah
is seeking to expand its acceptance criteria so that it can receive waste with
radioactivity levels higher than it is currently permitted to accept, and 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
technologies, 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 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.
See "Risk Factors--Competition."
ENVIRONMENTAL CONTRACTOR RISKS
Although the Company believes that it generally benefits from increased
environmental regulations affecting business, and from enforcement of those
regulations, increased regulation and enforcement also create significant
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risks for the Company. The assessment, remediation, analysis, handling,
treatment and management of radioactive or hazardous substances necessarily
involve significant risks, including the risk of potentially large liabilities
arising from violations of environmental laws and regulations and of
liabilities to customers and third parties for damages arising from performing
services, either of which could have a material adverse effect on the
Company's business, financial condition and results of operations. In
addition, the Company, as a provider of services to federal and other
government agencies, is also subject to the specific risks associated with
government contracting. See "Risk Factors--Equipment Performance; Safety and
License Violations," "--Environmental Contractor and Regulatory Matters" and
"--Dependence on Federal Government; Limits on Government Spending; Government
Contracting."
RISK MANAGEMENT AND INSURANCE
The Company has adopted a range of risk management programs designed to
reduce potential liabilities, including policies to seek indemnity in its
contracts, other contract administration procedures, and employee health,
safety, training, and environmental monitoring programs. In addition, as a
result of the substantial number of government contracts it has been awarded
over the past several years, the Company has implemented a government
contracts compliance program. Although the Company believes its risk
management programs are appropriate, the Company cannot assure their adequacy
and their failure to adequately protect the Company could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company carries nuclear liability, comprehensive general liability,
comprehensive property damage, workers' compensation and other insurance
coverage that management considers adequate for the protection of the
Company's assets and operations. However, there can be no assurance that the
coverage limits of such policies will be adequate or that insurance will
continue to be available to the Company on commercially reasonable terms in
the future. A successful claim against the Company in excess of its insurance
coverage, or outside the scope of such coverage, could have a material adverse
effect on the Company's business, financial condition and results of
operations. Claims against the Company, regardless of their merit or outcome,
and whether or not insured, may also have an adverse effect on the Company's
reputation, which could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Risk Factors--
Potential Environmental Liability and Insurance."
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 presently has a
patent application pending for the SAFGLAS system as incorporating a multi-
zone process chamber; however, there can be no assurance that such application
will be granted. 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. See "Risk
Factors--Dependence on and Limited Protection of Technology and Intellectual
Property; Potential Litigation."
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
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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 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. While it does not anticipate that the
amount of such expenditures will be material in 1998, 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.
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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. 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 Emergency Planning Community Right-to-Know Act, which is part of SARA,
requires full disclosure of certain environmental releases to the public and
contributes to public awareness and activism regarding corporate environmental
management issues. To the extent a generator's waste can be reported as being
recycled, public pressure can be eliminated or significantly reduced and the
generator's image enhanced.
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.
In transporting radioactive materials, the Company is subject to the
requirements developed by the U.S. Department of Transportation under the
Hazardous Materials Transportation Act, as amended by the Hazardous Materials
Transportation Uniform Safety Act. Shippers and carriers of radioactive
materials must comply with both the general requirements for hazardous
materials transportation and with specific requirements for the transportation
of radioactive materials.
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. See "Licensing
Processes Applicable to LLRW and LLMW Treatment Facilities."
The Clean Water Act of 1972 (the "Clean Water Act") establishes standards,
permits and procedures for controlling the discharge of pollutants from
industrial and municipal wastewater sources. The Company believes that its
waste treatment technologies generally will not be subject to the water
pollution control requirements of the Clean Water Act because they are
designed to have no residual wastewater discharge.
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.
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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 material 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 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 second 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 is at
present involved in negotiations with the agencies to resolve their comments
thereon. The next step in the permitting process is the development of the
permit language by the agencies and the holding of public hearings to solicit
public comments, as required by RCRA and TSCA regulations. 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 fourth quarter of fiscal 1998.
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.
The Company's fixed facilities may have to obtain permits under the Clean
Water Act, the Clean Air Act, RCRA and state equivalents. The requirement to
obtain such permits depends upon a facility's location and the expected
emissions from the facility. Additional state and local licenses or approvals
may also be required.
In addition to compliance with the requirements of the Clean Air Act, the
Company operates under air quality permits issued by the Washington Department
of Health and by Benton County, Washington Clean Air Authority. The Company
recently was notified by the Washington Department of Health that certain
emissions generated by its SAFGLAS operation exceeded those allowed under its
original air quality permit application, which was based on the Company's
original estimate of the amount of such emissions to be generated by operation
of the SAFGLAS system. The Company believes its operations have complied with
emission
34
<PAGE>
guidelines established under the Clean Air Act. In response to this situation,
the Company will submit a modification of its original air quality permit
application to the Department of Health. Until the Department of Health
approves the Company's updated air quality permit application seeking an
increase in allowable emissions, the Company will limit SAFGLAS processing to
certain waste streams in order to ensure compliance with the Company's
existing permit. The Company does not believe this limitation on waste stream
processing will have a material adverse effect on its operations, although it
anticipates that it may take up to 90 days to receive approval of the updated
application. Based on discussions with the Department of Health, the Company
believes it will obtain a new permit increasing allowable emissions. Failure
to obtain approval of the updated application would limit the Company's
ability to process certain waste streams in the future. See "Risk Factors--
Dependence on Government Licenses, Permits and Approvals."
EMPLOYEES
At March 31, 1998, the Company employed 154 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. See "Risk Factors--Dependence on Key Personnel."
At March 31, 1998, 38 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.
PROPERTIES AND FACILITIES
The Company's principal properties, all of which are owned by the Company,
are located in Richland, Wash., Fremont, Calif. and Aiken, S.C., and occupy
45, four 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 include a 10,000 square foot
corporate office building, as well as an LLRW storage area. 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 an approximately 2,500 square foot
project management office in Oak Ridge, Tennessee (approximately one mile from
the DOE's Oak Ridge Reservation). The Honolulu lease expires in June 2000,
while the Oak Ridge lease is month-to-month.
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 March 31, 1998, the principal amount secured by the
First Deed of Trust was $1,431,066.
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 March 31, 1998, the principal amount secured by the
Second Deed of Trust was $359,998.
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 March 31, 1998, the principal
balance secured by the Richland Deed of Trust was $315,803. There are no
encumbrances on the Company's Aiken, South Carolina property.
35
<PAGE>
The Company believes that its existing and planned facilities will support
its operations for the foreseeable future and are adequately covered by
insurance.
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 totalling $945,000. The Company believes it fully complied
with the terms of the Fort Irwin Contract and applicable laws and regulations
and has challenged the default termination in an action against the U.S. Army
filed in the Court of Federal Claims in July 1997. The Company also believes
it has no obligation to make repayments to the U.S. Army because the costs
sought are not proper reprocurement costs. The Company has tendered the U.S.
Army's claim to its insurance carrier and believes any costs and liability
associated with the claim should be covered by the Company's comprehensive
general liability insurance policy, which has a coverage limit of $2 million
per occurrence. The Company also intends to seek indemnification from the
Subcontractor for any costs or liability incurred by the Company as a result
of this claim.
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 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. See "Risk Factors--
Environmental Contractor and Regulatory Matters."
36
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers, directors and director designees of the Company and
their ages as of the date of this Prospectus are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Doreen M. Chiu.......... 44 Chairman of the Board, President and Chief Executive Officer
Frank Y. Chiu........... 44 Executive Vice-President and Director
William M. Hewitt....... 51 President--Waste Management Services and Director Designee(1)
Steven J. Guerrettaz.... 52 Chief Financial Officer and Director Designee(1)
Fred Feizollahi......... 52 Vice-President--Technology and Engineering
Eric C. Su.............. 37 Vice-President--Marketing and Planning
Edward L. Vinecour...... 59 Director
Andrew C. Kadak......... 51 Director Designee(1)(2)
Earl E. Gjelde.......... 53 Director Designee(1)(2)
Yasushi Chikagami....... 59 Director Designee(1)(2)
</TABLE>
- ---------------------
(1) Each Director Designee has been elected, and has consented to become, a
director of the Company effective upon the consummation of the Offering.
(2) Has agreed to serve as member of Audit and Compensation Committees from
effective date of election to the Board.
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, and has been elected, and has agreed to serve as, a
director of the Company effective upon the consummation of the Offering. Mr.
Hewitt has over 25 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. Prior to joining
WMX, Mr. Hewitt was the Vice-President for Major Programs and served on the
Board of Directors of Roy F. Weston Inc. 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.
37
<PAGE>
Steven J. Guerrettaz has served as Chief Financial Officer since joining the
Company in December 1997, and has been elected, and has agreed to serve as, a
director of the Company effective upon the consummation of the Offering. 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 26 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.
Edward L. Vinecour has served as a director of the Company since 1984. Mr.
Vinecour joined the Company in 1984, serving as its Vice President--Marketing
before retiring and becoming a consultant to the Company in 1992. Mr. Vinecour
has a Bachelor of Science degree in Biochemistry from Suffolk University. Mr.
Vinecour's term as a director expires upon the consummation of the Offering.
Andrew C. Kadak has been elected, and has agreed to serve as, a director of
the Company effective upon the consummation of the Offering. Mr. Kadak has
over 30 years of experience in the nuclear power industry. Since 1997 he has
been President of Kadak Associates, Incorporated, a firm providing consulting
services to the nuclear power industry. From 1989 to 1997, Mr. Kadak served as
President and Chief Executive Officer of Yankee Atomic Electric Company
("Yankee"), a company which operates nuclear power plants in the Northeastern
United States. In that capacity, he oversaw the decommissioning of Yankee's
nuclear power plant in Rowe, Massachusetts. Mr. Kadak serves on the Board of
Directors of the American Nuclear Society, a nuclear industry trade group, and
is currently a visiting Senior Lecturer in the Nuclear Engineering Department
of the Massachusetts Institute of Technology ("MIT"). He holds a Bachelor of
Science degree in Mechanical Engineering from Union College, a Master's degree
in Business Administration from Northeastern University and a Master of
Science degree and a Ph.D. in Nuclear Engineering from MIT.
Earl E. Gjelde has been elected, and has agreed to serve as, a director of
the Company effective upon the consummation of the Offering. Since 1993 Mr.
Gjelde has been Managing Director of Summit Energy Group, Ltd., an energy
development company. From 1991 to 1993, he served as Vice President of Waste
Management Inc., and from 1989 to 1993 as Vice President of Chemical Waste
Management, Inc. From 1982 to 1989, he served in a number of senior federal
government positions, including Under Secretary of the U.S. Department of the
Interior ("Interior") from 1987 to 1989, and as Chief Operating Officer of
Interior from 1985 to 1989. Mr. Gjelde is currently a member of the boards of
directors of two publicly held companies: DIDAX, Inc., a company in the
Internet field, and Electrosource, Inc., a technology company specializing in
metals and bi-metals extrusion and battery development and manufacturing. He
holds a Bachelor of Science degree in Engineering from Oregon State
University.
38
<PAGE>
Yasushi Chikagami has been elected, and has agreed to serve as, a director
of the Company effective upon the consummation of the Offering. Since 1993,
Mr. Chikagami has served as the Chairman of the Board of Keian K.K. Company, a
Japanese trading company. Prior thereto, he founded in 1979 and served as
Chairman and President from 1979 to 1993 of GVC Corporation, a Taiwanese
company that manufactures electronic computer equipment. In addition to being
a member of the board of directors of GVC Corporation, Mr. Chikagami is
currently a member of the boards of directors of two U.S. publicly held
companies: Trident Microsystems, Inc., a company specializing in computer
videographics and multimedia products, and Silicon Storage Technology, Inc., a
supplier of computer memory devices. He holds a Bachelor of Science degree in
Engineering from National Taiwan University and a Master of Science degree in
the same field from National Tokyo University.
BOARD OF DIRECTORS
There are currently three members of the Board, with the number of directors
increasing to seven upon the consummation of the Offering. The directors serve
until the next annual meeting of shareholders or until successors are elected
and qualified. The Company's executive officers are appointed by and serve at
the discretion of the Board.
The Board has established an Audit Committee and a Compensation Committee.
The functions of the Audit Committee include recommending to the Board the
selection and retention of independent auditors, reviewing the scope of the
annual audit and the progress and results of the auditors' work, and reviewing
the Company's financial statements and internal accounting and auditing
procedures. The functions of the Compensation Committee include establishing
the compensation of the Chief Executive Officer, reviewing and approving
executive compensation policies and practices, reviewing salaries and bonuses
for certain executive officers, and considering such other matters as the
Board may, from time to time, delegate to the Compensation Committee.
Each non-employee director will receive a cash fee of $2,000 per Board
meeting attended and an additional $2,000 per Board committee meeting attended
if such committee meeting is held on a day different from that of a Board
meeting. The directors are reimbursed for expenses incurred in connection with
the performance of their services as directors.
Non-Employee Directors' Stock Option Plan
In February 1998, the Board adopted the Company's 1998 Non-Employee
Directors' Stock Option Plan (the "Directors' Plan") to provide for the
automatic grant of options to purchase shares of Common Stock to non-employee
directors of the Company. The Directors' Plan is administered by the Board. To
date, no options have been granted under the Directors' Plan.
The maximum number of shares of Common Stock that may be issued pursuant to
options granted under the Directors' Plan is 200,000. Pursuant to the terms of
the Directors' Plan, each person serving as a director of the Company who is
not an employee of the Company (a "Non-Employee Director") shall automatically
be granted an option to purchase 20,000 shares of Common Stock upon the later
of the date such person first becomes a Non-Employee Director or the date of
the effectiveness of the initial public offering of the Common Stock, with
5,000 of such shares vesting immediately and the balance vesting in three
equal installments on the three succeeding anniversaries of the grant date.
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. No option granted under the Directors' Plan may be exercised after the
expiration of ten years from the date it was granted. Options granted under
the Directors' Plan are generally non-transferable except by will or by the
laws of descent and distribution. The Directors' Plan will terminate at the
discretion of the Board; provided, however, that in no event will the term of
the Directors' Plan extend beyond the tenth anniversary of its adoption by the
Board.
In the event of certain changes of control of the Company (as defined in the
Directors' Plan), any outstanding options will automatically become fully
vested and will terminate if not exercised prior to such change of control.
39
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
During its fiscal year ended December 31, 1997, the Company had no
compensation committee or other committee of the Board performing similar
functions, and all decisions concerning compensation of executive officers
were made by the Chairman of the Board. On January 14, 1998, the Board created
a Compensation Committee consisting of Doreen M. Chiu, Frank Y. Chiu and
Edward L. Vinecour. No interlocking relationship exists between any member of
the Company's Compensation Committee and any member of any other company's
board of directors or compensation committee. See "Management--Executive
Officers and Directors."
EXECUTIVE COMPENSATION
The following table sets forth information with respect to compensation paid
by the Company during the fiscal year ended December 31, 1997, to the Chief
Executive Officer and the three other most highly compensated executive
officers of the Company whose total salary and bonus during such year exceeded
$100,000 (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------
NAME AND PRINCIPAL POSITION SALARY BONUS
--------------------------- ---------- ---------
<S> <C> <C>
Doreen M. Chiu......................................... $ 150,000 $ 0
Chief Executive Officer
Frank Y. Chiu.......................................... 120,000 0
Executive Vice-President
William M. Hewitt(1)................................... 103,269 30,000
President--Waste Management Services
Eric C. Su............................................. 108,127 0
Vice-President--Marketing and Planning
</TABLE>
- ---------------------
(1) Mr. Hewitt joined the Company in April 1997 at an initial annual base
salary of $150,000. The amount of salary reflected in the table is the
prorated amount paid to him in 1997.
Steven J. Guerrettaz was appointed to the position of Chief Financial
Officer of the Company in December 1997, with an initial annual base salary of
$150,000. Options to purchase an aggregate of 60,000 shares of Common Stock,
at an exercise price of $5.00 per share, have been granted to Mr. Guerrettaz.
The options vest in four equal installments during the period beginning on
June 30, 1998 and ending on December 31, 2000, with accelerated vesting as to
options covering 10,000 shares upon an initial public offering of the Common
Stock and as to options covering 20,000 shares upon the Company's obtaining
specified financing for its LLMW treatment facility.
Each of the Named Executive Officers receives perquisites and other personal
benefits from the Company, the aggregate amount of which during fiscal 1997
did not exceed the lesser of $50,000 or 10% of the annual base salary reported
for such Named Executive Officer. The Named Executive Officers did not receive
any additional compensation in fiscal 1997. To date, the Company has not made
any awards under its 1998 Stock Ownership Incentive Plan to any of the Named
Executive Officers or any other person. None of the Named Executive Officers
is a party to an employment agreement with the Company.
40
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to grants of stock
options to the Named Executive Officers during fiscal 1997.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
PERCENT OF ANNUAL RATES
NUMBER OF TOTAL OF STOCK PRICE
SHARES OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE FAIR VALUE TERM(4)
OPTIONS EMPLOYEES PRICE PER AT DATE EXPIRATION --------------------------
NAME GRANTED IN YEAR SHARE OF GRANT DATE 0% 5% 10%
---- ---------- ---------- --------- ---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Doreen M. Chiu(1)....... 150,000 27.8% $1.00 $2.00 12/31/06 $150,000 $338,668 $628,123
Frank Y. Chiu(1)........ 159,900 29.7% 1.00 2.00 12/31/06 159,900 361,021 669,579
William M. Hewitt(2).... 70,000 15.9% 5.00 5.00 03/31/07 -- 220,113 557,810
Eric C. Su(3)........... 20,000 3.7% 1.00 2.00 12/31/06 20,000 45,156 83,750
</TABLE>
- -------------------
(1) 500 of the option shares vest on each of December 31, 1997, 1998 and 1999,
the balance vesting on December 31, 2000.
(2) 36,666 of the option shares vest on May 1, 1998, and 16,667 of the option
shares vest on each of May 1, 1999 and May 1, 2000.
(3) 500 of the option shares vest on December 31, 1997, 9,500 of the option
shares vest on December 31, 1998 and the remaining 10,000 option shares
vest on December 31, 1999.
(4) This column shows the hypothetical gains or option spreads of the options
granted based on (i) the fair market value of the Common Stock on the date
of grant, as determined by the Board, and (ii) assumed annual compound
stock appreciation rates of 0%, 5% and 10% over 10 years. The assumed
rates of appreciation are mandated by the rules of the Securities and
Exchange Commission and do not represent the Company's estimate or
projection of future Common Stock prices.
AGGREGATE OPTION EXERCISES AND YEAR-END OPTION VALUES
The following table sets forth certain information regarding the year-end
value of options held by the Named Executive Officers. No options were
exercised by the Named Executive Officers during 1997.
<TABLE>
<CAPTION>
NUMBER OF SHARES SUBJECT VALUE OF UNEXERCISED
TO UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1997 DECEMBER 31, 1997(1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Doreen M. Chiu........... 500 149,500 $ 3,000 $ 897,000
Frank Y. Chiu............ 3,500 222,400 23,700 1,391,100
William M. Hewitt........ 0 70,000 0 140,000
Eric C. Su............... 70,500 19,500 486,000 117,000
</TABLE>
- -------------------
(1) Based on the estimated fair market value of the Common Stock as of
December 31, 1997 ($7.00), as determined by the Board, minus the per share
exercise price, multiplied by the number of shares underlying the option.
EMPLOYEE BENEFIT PLANS
Stock Ownership Incentive Plan
In February 1998, the Board adopted the Company's 1998 Stock Ownership
Incentive Plan (the "Incentive Plan"). The Incentive Plan authorizes the award
of stock options, shares of restricted stock and performance units (which may
be paid in cash or shares of Common Stock). The Incentive Plan reserves for
issuance an aggregate of 500,000 shares of Common Stock, no more than 250,000
shares of which may be issued in the form of shares of restricted stock. The
Incentive Plan is intended to advance the interests of the Company by
encouraging the Company's employees who contribute to the Company's long-term
success and development to acquire and retain an ownership interest in the
Company. To date, no awards have been made under the Incentive Plan.
41
<PAGE>
The Incentive Plan will be administered by the Board. The Board will select
employees to receive awards under the Incentive Plan and determine the terms,
conditions and limitations applicable to each award. Each award will be
evidenced by a grant letter from the Board to the recipient setting forth the
terms and conditions of the award. The Incentive Plan will terminate at the
discretion of the Board; provided, however, that in no event will the term of
the Incentive Plan extend beyond the tenth anniversary of its adoption by the
Board.
Stock options granted pursuant to the Incentive Plan may either be incentive
stock options ("ISOs") intended to qualify under Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), or stock options not intended
to so qualify. Each stock option awarded under the Incentive Plan must have an
exercise price equal to at least 100% of the fair market value of the Common
Stock on the date of grant, and ISOs granted to any employee possessing more
than 10% of the combined voting power of all classes of stock of the Company
must have an exercise price equal to at least 110% of such fair market value.
Optionees may exercise options under the Incentive Plan by paying cash, by
tendering shares of Common Stock, by using a cashless exercise procedure
provided for in the Incentive Plan, or by a combination thereof, as permitted
by the Board. Options vest in equal installments over a five year period and,
upon a change of control of the Company (as defined in the Incentive Plan),
any outstanding options become fully vested and immediately exercisable.
Options granted under the Incentive Plan are generally non-transferable except
by will or by the laws of descent and distribution. No option granted under
the Incentive Plan may be exercised after the expiration of ten years from the
date it was granted.
Employee Stock Purchase Plan
In February 1998, the Board approved the Company's Employee Stock Purchase
Plan (the "Purchase Plan") covering an aggregate of 200,000 shares of Common
Stock. The Purchase Plan is intended to qualify as an employee stock purchase
plan within the meaning of Section 423 of the Code. Under the Purchase Plan,
the Board may authorize participation by eligible employees of the Company,
including officers, in periodic offerings following the adoption of the
Purchase Plan. The offering period for any offering will be determined by the
Board, but in no event will be more than 27 months.
Employees are eligible to participate if they are employed by the Company or
an affiliate of the Company designated by the Board. Employees who participate
in an offering may have up to 15% of their earnings (provided that such amount
does not exceed $25,000 in value per calendar year) withheld pursuant to the
Purchase Plan and applied, on specified dates determined by the Board, to the
purchase of shares of Common Stock. The price of Common Stock purchased under
the Purchase Plan will be equal to 85% of the lower of the fair market value
of the Common Stock on the commencement date of each offering period or the
relevant purchase date. Employees may end their participation in the offering
at any time during the offering period, and participation ends automatically
on termination of employment with the Company.
In the event of certain changes of control of the Company (as defined in the
Purchase Plan), the Board has discretion to provide that each right to
purchase Common Stock will be assumed or an equivalent right substituted by
the successor corporation, or the Board may shorten the offering period and
provide for all sums collected by payroll deductions to be applied to purchase
stock immediately prior to the change in control. The Purchase Plan will
terminate at the discretion of the Board.
401(k) Plan
In 1995, the Company established a tax-qualified employee savings and
retirement plan (the "401(k) Plan") covering all of its employees. Pursuant to
the 401(k) Plan, employees may elect to reduce their current compensation by
up to the lower of 15% of such compensation or the annual limit prescribed by
statute ($9,500 in 1997) and contribute the amount of such reduction to the
401(k) Plan. The 401(k) Plan allows for matching contributions to the 401(k)
Plan by the Company, such matching and the amount of such matching to be
determined at the sole discretion of the Board. To date, no such matching
contributions have been made with respect to the 401(k) Plan. The trustee
under the 401(k) Plan, at the direction of each participant, invests the
42
<PAGE>
assets of the 401(k) Plan in numerous investment options. The 401(k) Plan is
intended to qualify under Section 401 of the Code so that contributions by
employees to the 401(k) Plan, and income earned on plan contributions, are not
taxable until withdrawn, and so that the contributions by employees will be
deductible by the Company when made.
LIMITATION ON DIRECTORS' LIABILITY
The Company's Articles of Incorporation (the "Articles") provide that,
pursuant to the California Corporations Code, the liability of the directors
of the Company for monetary damages shall be eliminated to the fullest extent
permissible under California law. This is intended to eliminate the personal
liability of a director for monetary damages in an action brought by, or in
the right of, the Company for breach of a director's duties to the Company or
its shareholders. This provision in the Articles does not eliminate the
directors' fiduciary duty and does not apply to certain liabilities: (i) for
acts or omissions that involve intentional misconduct or a knowing and
culpable violation of law; (ii) for acts or omissions that a director believes
to be contrary to the best interests of the Company or its shareholders or
that involve the absence of good faith on the part of the director; (iii) for
any transaction from which a director derived an improper personal benefit;
(iv) for acts or omissions that show a reckless disregard for the director's
duty to the Company or its shareholders in circumstances in which the director
was aware, or should have been aware, in the ordinary course of performing a
director's duties, of a risk of serious injury to the Company or its
shareholders; (v) for acts or omissions that constitute an unexcused pattern
of inattention that amounts to an abdication of the director's duty to the
Company or its shareholders; (vi) with respect to certain transactions or the
approval of transactions in which a director has a material financial
interest; and (vii) expressly imposed by statute for approval of certain
improper distributions to shareholders or certain loans or guarantees. This
provision also does not limit or eliminate the rights of the Company or any
shareholder to seek non-monetary relief such as an injunction or rescission in
the event of a breach of a director's duty of care.
The inclusion of the above provision in the Articles may have the effect of
reducing the likelihood of shareholder derivative suits against directors and
may discourage or deter shareholders or management from bringing a lawsuit
against directors for breach of their duty of care, even though such an
action, if successful, might otherwise have benefitted the Company and its
shareholders. The Company believes that it is the position of the Securities
and Exchange Commission (the "Commission") that insofar as the foregoing
provision may be invoked to disclaim liability for damages arising under the
Securities Act, the provision is against public policy as expressed in the
Securities Act and is therefore unenforceable. The Company believes that the
foregoing provision of its Articles is necessary to attract and retain
qualified persons as directors.
43
<PAGE>
CERTAIN TRANSACTIONS
The following is a summary of certain transactions to which the Company was
or is a party and in which certain executive officers, directors or
shareholders of the Company had or have a direct or indirect material
interest.
From 1992 to 1997, Doreen M. Chiu, the Company's Chairman of the Board and
Chief Executive Officer, extended a series of loans to the Company, each of
which is repayable in full upon demand (collectively, the "Loan"). The Loan,
which is unsecured, bears interest at an annual rate of 10%, payable
concurrently with principal. The outstanding principal balance of the Loan,
including accrued interest, at March 31, 1998 was $1,280,180.
Doreen M. Chiu and Frank Y. Chiu, the Executive Vice-President and a
director of the Company, have each guaranteed the obligations of the Company
under (i) a credit facility between the Company and Sanwa Bank California, up
to a maximum principal liability amount of $8,000,000; (ii) a Promissory Note
in the principal amount of $3,000,500 held by Safeco Credit Company, Inc.;
(iii) a Term Loan Agreement in the principal amount of $400,000 held by Sanwa
Bank California; (iv) an Equipment Lease between the Company and Great Western
Leasing that provides for an aggregate rental amount of $215,673; (v) an
Equipment Lease between the Company and The CIT Group/Equipment Financing,
Inc. that provides for an aggregate rental amount of $174,640; and (vi) a
Commercial Lease Agreement between the Company and California Thrift and Loan
with an aggregate rental amount of $125,767.
In connection with the sale by the Company of shares of Preferred Stock,
Doreen M. Chiu and Frank Y. Chiu entered into a Co-Sale and Put Option
Agreement with the Company and each purchaser of such shares (the "Co-Sale
Agreement"), pursuant to which Mr. and Mrs. Chiu are obligated to purchase
shares of the Preferred Stock from the holders in the event that the Company
fails to redeem such shares in accordance with the Company's Restated Articles
of Incorporation or in the event of a sale of Common Stock by Mr. and Mrs.
Chiu in contravention of the rights to participate pro rata in any such sale
conferred on such holders by the terms of the Co-Sale Agreement. The
obligations of Mr. and Mrs. Chiu to purchase shares of Preferred Stock under
the Co-Sale Agreement are secured by a security interest in certain of their
personal assets.
In connection with the repurchase by the Company of all of the shares of
Common Stock owned by him, Edward L. Vinecour, a director of the Company, in
1992 entered with the Company into (i) a Consultant Agreement, pursuant to
which, in consideration of certain future consulting services to be rendered
by Mr. Vinecour to the Company, the Company agreed to pay him consulting fees
in a monthly amount of $5,000 for a period of 10 years commencing in August of
1992 and assumed the payment obligations under a mortgage loan with a then
remaining principal balance of $146,351, requiring monthly mortgage payments
of $1,816 over a period of 15 years, and (ii) a Non-Competition Agreement,
pursuant to which, in consideration of Mr. Vinecour's agreement not to compete
with the business of the Company, the Company agreed to pay him the sum of
$290,000 in installments. Of the original sum of $290,000 due to Mr. Vinecour
under the Non-Competition Agreement, $65,000 has been paid by the Company as
of March 31, 1998, with Mr. Vinecour agreeing to extend payment of the entire
balance until the year 2000.
In connection with the issuance of certain bonds, undertakings and other
instruments of guarantee in favor of the Company, Doreen M. Chiu and Frank Y.
Chiu have each executed (i) a blanket Indemnity Agreement in favor of ACTSTAR
Insurance Company ("ACTSTAR"), indemnifying ACTSTAR against any losses that
ACTSTAR may incur in connection with the issuance of any such bonds,
undertakings or other instruments of guarantee, and (ii) a blanket Continuing
Agreement of Indemnity-Contractor's Form for the benefit of Reliance Insurance
Company, United Pacific Insurance Company, Reliance National Indemnity Company
and Reliance Surety Company, indemnifying such entities against any losses
that such entities may incur in connection with the issuance of any such
bonds, undertakings or other instruments of guarantee. As of March 31, 1998,
the potential aggregate liability of Mr. and Mrs. Chiu under these blanket
indemnities was approximately $10 million.
The Company believes that each of the foregoing transactions was on terms at
least as favorable to the Company as those that could have been obtained from
nonaffiliated third parties. The Company currently intends that any future
transactions with affiliates of the Company will be on terms at least as
favorable to the Company as those that can be obtained from nonaffiliated
third parties.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of Common Stock as of March 31, 1998, and immediately following the
completion of the Offering, by (i) each person who is known by the Company to
own beneficially more than 2.5% of the outstanding shares of Common Stock,
(ii) each director, director designee and Named Executive Officer having
beneficial ownership of Common Stock, and (iii) all executive officers,
directors and director designees as a group:
<TABLE>
<CAPTION>
PERCENT OF SHARES
OUTSTANDING
-----------------
NAME AND ADDRESS OF BENEFICIAL SHARES BENEFICIALLY BEFORE AFTER
OWNER(2) OWNED(1) OFFERING OFFERING
------------------------------ ------------------- -------- --------
<S> <C> <C> <C>
Doreen M. Chiu(3)**................... 2,514,926 21.84% 18.75%
First Taiwan(4)**..................... 685,993 5.95% 5.11%
Chi-San Fang**........................ 685,993 5.95% 5.11%
George Doubleday**.................... 501,843 4.36% 3.74%
First Formosa(5)**.................... 453,030 3.93% 3.38%
Liang Lo Ching Yung**................. 375,000 3.26% 2.80%
Chan Mei Ngan**....................... 373,000 3.24% 2.78%
Jeannette Ching-Tsun**................ 340,000 2.95% 2.53%
Bo-Yuan Chiu**........................ 333,333 2.89% 2.48%
Alice Eng**........................... 325,553 2.83% 2.43%
Yau Tin Kam**......................... 295,499 2.57% 2.20%
Edward L. Vinecour.................... 100,000 * *
Eric C. Su............................ 80,500 * *
William M. Hewitt..................... 36,666 * *
All executive officers, directors and
director designees as a group
(9 persons).......................... 2,787,092 23.66% 20.37%
</TABLE>
- ---------------------
* Less than 1%.
** Each person named in the above table whose name is followed by "**" has
entered into a lock-up agreement generally providing that such person will
not sell or otherwise dispose of Common Stock for a period of 180 days
after this Prospectus without the prior written consent of Van Kasper &
Company, and will sell Common Stock only subject to certain conditions on
sale for an additional 180 days thereafter. See "Underwriting."
(1) Beneficial ownership is determined in accordance with the rules of the
Commission. In computing the number of shares beneficially owned by a
person and the percentage ownership of that person, shares of Common Stock
subject to options or warrants held by that person that are currently
exercisable, or will become exercisable within 60 days from March 31,
1998, are deemed outstanding. Such shares, however, are not deemed
outstanding for purposes of computing the percentage ownership of any
other person.
(2) The address of each beneficial owner identified is care of the Company,
47375 Fremont Boulevard, Fremont, California 94538. Each person has sole
voting and investment power over the shares of Common Stock listed
opposite his or her name, subject to community property laws where
applicable.
(3) Includes 3,500 shares beneficially owned by spouse; does not include
530,083 shares held in a voting trust of which Ms. Chiu is the trustee.
(4) First Taiwan Investment and Development, Inc. ("FTID"), owns 474,532
shares of Common Stock; First Taiwan Venture Capital, an affiliate of
FTID, owns 211,461 shares of Common Stock.
(5) First Formosa Technology Corporation ("FFTC") owns 250,000 shares of
Common Stock; First Formosa Technology II Corporation and First Formosa
Technology II Investment Corporation, each of which is an affiliate of
FFTC, own respectively 166,666 and 36,364 shares of Common Stock.
45
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company and material
provisions of the Articles is a summary and is qualified in its entirety by
the provisions of the Articles, which have been filed as an exhibit to the
Company's Registration Statement of which this Prospectus is a part.
The authorized capital stock of the Company currently consists of 20,000,000
shares of Common Stock, no par value per share ("Common Stock"), of which
7,532,301 shares are currently outstanding, and 1,000,000 shares of Preferred
Stock, of which 900,000 shares are currently outstanding. As of March 31,
1998, there were 66 record holders of the Common Stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the shareholders. The holders of
Common Stock are entitled to cumulative voting rights with respect to the
election of directors so long as at least one shareholder has given notice at
the meeting of shareholders prior to the voting of that shareholder's desire
to cumulate votes. Under cumulative voting, each shareholder may give any one
candidate whose name is placed in nomination prior to the commencement of
voting a number of votes equal to the number of directors to be elected,
multiplied by the number of votes to which the shareholder's shares are
normally entitled, or distribute such number of votes among as many
candidates, in whatever proportions, as the shareholder sees fit. The effect
of cumulative voting is that the holders of a majority of the outstanding
shares of Common Stock may not be able to elect all of the Company's
directors. Subject to preferences that may be applicable to any shares of
preferred stock issued in the future, holders of Common Stock are entitled to
receive ratably such dividends as may be declared by the Board out of funds
legally available therefor. See "Dividend Policy." In the event of a
liquidation, dissolution or winding up of the Company, holders of the Common
Stock are entitled to share ratably with the holders of any then outstanding
preferred stock in all assets remaining after payment of liabilities and the
liquidation preference of any then outstanding preferred stock. Holders of
Common Stock have no preemptive rights and no right to convert their Common
Stock into any other securities. There are no redemption or sinking fund
provisions applicable to the Common Stock. All outstanding shares of Common
Stock are, and all shares of Common Stock to be outstanding upon completion of
the Offering will be, fully paid and nonassessable.
PREFERRED STOCK
The following is a brief summary of the material rights, preferences,
privileges, restrictions and limitations of the outstanding shares of
Preferred Stock.
Dividends. Any dividends declared by the Board are to be distributed pari
passu among all holders of Preferred Stock and all holders of Common Stock in
proportion to the number of shares of Common Stock which would be held by each
such holder if all shares of Preferred Stock were converted into Common Stock
at the then effective Conversion Price (as defined below).
Liquidation Preference; Right of First Offer. In the event of a liquidation,
dissolution or winding up of the Company, the holders of Preferred Stock are
entitled to a cash payment equal to the Liquidation Value (as defined below)
of each share held, before any distribution of the Company's assets to holders
of the Common Stock. The "Liquidation Value" per share means an amount equal
to (i) $5.00 plus (ii) a premium equal to an annual rate of ten percent (10%)
of such amount compounded annually from the date the share was issued (the
"Issue Date"), plus (iii) all declared but unpaid dividends thereon. Each
holder of Preferred Stock has certain rights of first offer to subscribe for
new issuances of securities by the Company (not including securities offered
to the public pursuant to a registration statement filed under the Securities
Act).
Voluntary Conversion. Each share of Preferred Stock is, at the option of the
holder, convertible into such number of shares as results from dividing $5.00
by the Conversion Price then in effect. The initial Conversion Price is $5.00,
subject to adjustments for subsequent dilutive issuances of securities by the
Company. In addition, the Conversion Price is specifically adjusted upon the
closing of an underwritten public offering of the Common
46
<PAGE>
Stock after July 1, 1996 to the lower of (i) the then current Conversion Price
and (ii) the price determined by multiplying the price to the public in such
underwriting by .25. The Conversion Price is currently $5.00.
Automatic Conversion. Immediately prior to the closing of a firm commitment,
underwritten public offering of the Common Stock having an aggregate price to
the public of not less than $12 million and closing on or prior to June 30,
1998, each share of Preferred Stock is automatically converted into 1 2/3
shares of Common Stock. Each such share is also automatically converted into
shares of Common Stock at the then effective Conversion Price at the election
of the holders of a majority of the outstanding shares of Preferred Stock.
Redemption. Commencing on or about the third anniversary of the Issue Date,
each holder of Preferred Stock will have the right to demand that the Company
redeem all or any part of the shares of Preferred Stock held by him at a
redemption price per share consisting of a base redemption price of $6.67,
plus any declared but unpaid dividends thereon.
Voting Rights. Except as otherwise required by law and as to certain matters
set forth in the Articles as requiring the prior affirmative vote or written
consent of the holders of not less than a majority of the outstanding shares
of Preferred Stock, the Preferred Stock is non-voting. The matters set forth
in the Articles include (i) the payment by the Company of cash dividends, (ii)
the redemption or repurchase by the Company of any of the Common Stock (other
than from employees, officers, directors and consultants of the Company upon
the termination of their relationship with the Company), (iii) the sale of all
or substantially all of the assets of the Company or the consummation by the
Company of any transaction or series of transactions resulting in a change of
control of the Company, and (iv) the Company's incurrence of any indebtedness
or grant of any security interest in any of the Company's assets, other than
in connection with equipment leases entered into in the ordinary course of
business, a revolving credit line from a commercial bank that does not exceed
80% of eligible accounts receivable or the refinancing of existing mortgages.
Registration Rights. Pursuant to the terms of a Shareholder Rights Agreement
between the Company and each purchaser of Preferred Stock, if the Company
determines to register any of its securities (other than a registration
relating solely to employee benefit plans or a transaction covered by Rule 145
promulgated under the Securities Act), then the holders of Preferred Stock
have piggyback registration rights to cause the Company to include the shares
of Common Stock issued upon conversion of the Preferred Stock (the
"Registrable Shares") to be included in the related registration statement (a
"Piggyback Registration"). The Company may, however, reduce on a pro rata
basis, to the extent so advised by the underwriters of the offering, the
amount of Registrable Shares to be included in any such registration.
Additionally, the holders of an aggregate of at least 300,000 Registrable
Shares (as adjusted for stock splits or reverse stock splits), or a lesser
number, if the offering thereof results in aggregate proceeds (net of selling
expenses) exceeding $15 million, have a demand right on two separate occasions
to cause the Company to register such Registrable Shares, and each holder of
Registrable Shares has the additional right on an unlimited number of
occasions, subject to certain timing limitations, to cause the Company to
register his Registrable Shares on Form S-3 under the Securities Act, if the
aggregate price to the public of the shares offered thereby exceeds $1.5
million (each, a "Demand Registration"). The Company is obligated to pay all
registration expenses (other than underwriting discounts and commissions and
subject to certain limitations) incurred by virtue of including shares of
Common Stock subject to such registration rights in either a Demand
Registration or Piggyback Registration.
OTHER CONVERSION RIGHTS
Immediately prior to the closing of a firm commitment, underwritten public
offering of the Common Stock having an aggregate price to the public of not
less than $12 million and closing on or prior to June 30, 1998, each
outstanding share of the Series A and Series B Redeemable Non-Voting Preferred
Stock issued by ATG Richland is automatically converted into Common Stock at a
stated conversion ratio of one share of Series A Redeemable Non-Voting
Preferred Stock into 1.4119814 shares of Common Stock and one share of Series
B Redeemable Non-Voting Preferred Stock into 1 share of Common Stock. As of
March 31, 1998, 860,000 shares of Series A Redeemable Non-Voting Preferred
Stock and 1,269,291 shares of Series B Redeemable Non-Voting Preferred Stock
were outstanding.
47
<PAGE>
OTHER REGISTRATION RIGHTS
As parties to certain portions of the Shareholder Rights Agreement between
the Company and each purchaser of Preferred Stock, certain holders of Common
Stock have acquired piggyback registration rights, with respect to all shares
of Common Stock owned by them, identical to those held by the purchasers of
Preferred Stock with respect to the Registrable Shares owned by them. Certain
other holders of Common Stock who are not parties to certain portions of the
Shareholder Rights Agreement have piggyback registration rights, with respect
to all shares of Common Stock owned by them, similar to the piggyback
registration rights held by the purchasers of the Preferred Stock.
OPTIONS
At March 31, 1998, options to purchase up to 1,000,000 shares of Common
Stock, at a weighted average exercise price of $2.09, were outstanding,
291,858 of which were exercisable on such date.
OVER-ALLOTMENT OPTION AND REPRESENTATIVE'S WARRANTS
The Company has granted the Underwriters an over-allotment option, pursuant
to which the Underwriters have the right, exercisable during the 45-day period
after the date of this Prospectus, to purchase up to 285,000 additional shares
of Common Stock from the Company at the same price per share as the Company
will receive for the 1,900,000 shares that the Underwriters have agreed to
purchase in the Offering. In addition, the Company has agreed to issue to Van
Kasper & Company, as the Representative, for nominal consideration, the
Representative's Warrants, pursuant to which the Representative will have the
right, exercisable for a period of four years beginning one year from the date
of this Prospectus, to purchase up to 190,000 shares of Common Stock at an
exercise price per share equal to 120% of the initial public offering price of
the Offering. See "Underwriting."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is U.S. Stock Transfer
Corporation.
48
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 13,415,896 shares of
Common Stock outstanding (assuming no exercise of outstanding stock options
after March 31, 1998). Of these shares, the 1,900,000 shares sold in the
Offering will be freely tradeable without restriction or registration under
the Securities Act unless they are held by "affiliates" of the Company, as
that term is defined in Rule 144. The remaining 11,515,896 shares will be
"restricted securities" as defined in Rule 144 ("Restricted Shares"). Of such
Restricted Shares, 9,590,841 shares may not be sold without the consent of Van
Kasper & Company for 180 days after the date of this Prospectus, and 8,248,201
of such shares are subject to certain conditions on sale for an additional 180
days. As a result of the lock-up agreements and the provisions of Rule 144(k)
and Rule 144 generally, all currently outstanding shares will be available for
sale in the public market 180 days after the date of this Prospectus, subject
to the provisions of Rule 144 and, as to 8,248,201 of such shares, certain
conditions on sale for an additional 180 days. See "Underwriting."
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for
at least one year is entitled to sell, within any three-month period, a number
of such shares that does not exceed the greater of (i) 1.0% of the then
outstanding shares of the Common Stock (approximately 132,159 shares
immediately after the Offering) and (ii) the average weekly trading volume
during the four calendar weeks preceding such sale. Sales under Rule 144 are
also currently subject to certain requirements as to the manner of sale,
notice and availability of current public information about the Company. Rule
144 also provides that affiliates who own securities that are not Restricted
Shares must nonetheless comply with the same restrictions applicable
thereunder to Restricted Shares, as if such securities were Restricted Shares,
with the exception of the one-year holding period requirement. A person who
has not been an affiliate of the Company at any time within three months prior
to the sale and has beneficially owned the Restricted Shares for at least two
years is entitled to sell such shares under Rule 144(k) without regard to the
volume limitations or any of the other requirements described above.
An employee, officer or director of or consultant to the Company who
purchased or was awarded shares or options to purchase shares pursuant to a
written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701 promulgated under the Securities Act, which permits
affiliates and non-affiliates to sell their Rule 701 shares without having to
comply with Rule 144's holding period restrictions, in each case commencing 90
days after the date of this Prospectus. In addition, non-affiliates may sell
Rule 701 shares without complying with the public information, volume and
notice provisions of Rule 144.
The Company intends to file with the Commission registration statements on
Form S-8 under the Securities Act to register the shares of Common Stock
reserved for issuance under the Incentive Plan, the Directors' Plan and the
Purchase Plan, thus permitting the resale of shares issued under such plans by
non-affiliates in the public market without restriction under the Securities
Act. Such registration statements will be filed at management's discretion
following the closing of the Offering and will be automatically effective upon
filing.
Prior to the Offering, there has been no public market for the Common Stock,
and any sale of substantial amounts of Common Stock in the open market may
adversely affect the market price of Common Stock offered hereby.
49
<PAGE>
UNDERWRITING
The Underwriters, acting through the Representative, have severally agreed,
subject to the terms and conditions set forth in the Underwriting Agreement
with the Company, to purchase from the Company the number of shares of Common
Stock set forth opposite their respective names:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Van Kasper & Company............................................... 1,080,000
BT Alex. Brown Incorporated........................................ 70,000
Furman Selz LLC.................................................... 70,000
HSBC Securities, Inc. ............................................. 70,000
Lehman Brothers, Inc. ............................................. 70,000
D.A. Davidson & Co., Inc. ......................................... 45,000
Everen Securities, Inc. ........................................... 45,000
First of Michigan Corporation...................................... 45,000
First Analysis Secuities Corporation............................... 45,000
Jefferies & Company................................................ 45,000
Ormes Capital Markets, Inc. ....................................... 45,000
Pacific Crest Securities........................................... 45,000
Pennsylvania Merchant Group........................................ 45,000
Sanders Morris Mundy Inc. ......................................... 45,000
Sutro & Co. Incorporated........................................... 45,000
Tucker Anthony Incorporated........................................ 45,000
Wedbush Morgan Securities, Inc. ................................... 45,000
---------
Total............................................................ 1,900,000
=========
</TABLE>
The shares of Common Stock are being offered by the Underwriters named
herein, subject to their right to reject any order in whole or in part, and to
certain other conditions. The Underwriters are committed to purchase all of
the above shares of Common Stock if any are purchased.
The Representative has advised the Company that the Underwriters propose to
offer the shares of Common Stock at the offering price set forth on the
outside front cover page of this Prospectus: (i) to the public; and (ii) to
certain dealers at that price less a concession of not more than $0.31 per
share, of which a discount of $0.10 may be reallowed to other dealers. After
the consummation of the Offering, the public offering price, concession and
reallowance to dealers may be changed by the Representative as a result of
market conditions and other factors. No such change shall affect the amount of
proceeds to be received by the Company as set forth on the outside front cover
page of this Prospectus.
The Company has granted the Underwriters the over-allotment option, pursuant
to which the Underwriters have the right, exercisable during the 45-day period
after the date of this Prospectus, to purchase up to 285,000 additional shares
of Common Stock from the Company at the initial offering price, less
underwriting discounts. The Underwriters may exercise such option only to
cover over-allotments made in connection with the sale of Common Stock offered
hereby. To the extent that the Underwriters exercise such option, each of the
Underwriters will have a firm commitment to purchase approximately the same
percentage of the additional Common Stock that the number of shares of Common
Stock to be purchased by the Underwriter set forth in the above table bears to
the total number of shares of Common Stock listed in such table.
Upon completion of the Offering, the Company has agreed to sell to the
Representative, for nominal consideration, the Representative's Warrants,
pursuant to which the Representative will have the right to purchase up to
190,000 shares of Common Stock at an exercise price per share equal to 120% of
the initial public offering price. The Representative's Warrants are
exercisable for a period of four years beginning one year from the date of
this Prospectus. The Representative's Warrants will be restricted from
transfer for a period of one year from
50
<PAGE>
the date of this Prospectus, except for transfers to officers or partners of
the Representative and members of the selling group. The Representative's
Warrants will contain provisions providing for adjustment of exercise price
and number and type of securities issuable upon exercise should one or more of
certain specified events occur, including the Company's declaration of a stock
dividend, a split or reverse split of the Common Stock, reclassification of
the Common Stock, the Company's distribution of property to all holders of the
Common Stock and the issuance to all such holders of rights or warrants to
purchase Common Stock at an exercise price less than the then current market
value. In addition, the Company has granted certain rights to the holders of
the Representative's Warrants to register the Representative's Warrants and
the Common Stock underlying the Representative's Warrants under the Securities
Act.
The Company has agreed to pay the Representative a non-accountable expense
allowance equal to 1.5% of the total proceeds of the Offering (including with
respect to shares of Common Stock underlying the over-allotment option, if and
to the extent it is exercised) for expenses in connection with the Offering,
payable at the close of the Offering.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act.
The Company's officers and directors and certain beneficial owners of the
Common Stock have agreed not to, directly or indirectly, offer to sell,
contract to sell, sell or otherwise dispose of any shares of Common Stock or
any securities convertible into or exchangeable for shares of Common Stock or
any rights to purchase or acquire Common Stock for the 180-day period
commencing with the date of this Prospectus (the "lock-up period") without the
prior written consent of Van Kasper & Company, and, in certain cases, that
they will only sell subject to certain conditions on sale for an additional
period of 180 days thereafter. All 9,590,841 shares of Common Stock subject to
the lock-up agreements will become eligible for immediate public sale
following expiration of the lock-up period, subject to the provisions of the
Securities Act, the rules promulgated thereunder, including Rule 144, and, as
to 8,248,201 of such shares, certain conditions on sale for an additional
period of 180 days. Van Kasper & Company may, in its sole discretion, and at
any time without notice, release all or a portion of the securities subject to
the lock-up agreements. In addition, the Company has agreed that until the
expiration of the lock-up period, the Company will not, without the prior
written consent of Van Kasper & Company, offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock, any options or warrants to
purchase Common Stock or any securities convertible into or exchangeable for
shares of Common Stock, except for sales of shares of Common Stock in the
Offering, the issuance of shares of Common Stock upon the exercise of
outstanding options, warrants and rights or pursuant to the conversion of all
of the outstanding shares of the Preferred Stock and of ATG Richland's Series
A and Series B Redeemable Non-Voting Preferred Stock into an aggregate of
3,983,595 shares of Common Stock, and the grant of options to purchase or the
issuance of shares of Common Stock under the Incentive Plan, the Directors'
Plan or the Purchase Plan.
The Representative has advised the Company that, pursuant to Regulation M
promulgated under the Securities Exchange Act of 1934, as amended, certain
persons participating in the Offering may engage in transactions, including
stabilizing bids, syndicate covering transactions or the imposition of penalty
bids, which may have the effect of stabilizing or maintaining the market price
of the Common Stock at a level above that which might otherwise prevail in the
open market. A "stabilizing bid" is a bid for or the purchase of the Common
Stock on behalf of the Underwriters for the purpose of pegging, fixing or
maintaining the price of the Common Stock. A "syndicate covering transaction"
is the bid for or the purchase of the Common Stock on behalf of the
Underwriters to reduce a short position created in connection with the
Offering. The Underwriters may also cover all or a portion of such short
position by exercising the over-allotment option. A "penalty bid" is an
arrangement permitting the Representative to reclaim the selling concession
otherwise accruing to an Underwriter or syndicate member in connection with
the Offering if the Common Stock originally sold by such Underwriter or
syndicate member is purchased by the Representative in a syndicate covering
transaction and has therefore not been effectively placed by such Underwriter
or syndicate member. The Representative has advised the Company that such
transactions may be effected on the Nasdaq National Market or otherwise and,
if commenced, may be discontinued at any time.
51
<PAGE>
The Representative has advised the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
Prior to the Offering, there has been no public market for the Company's
securities. The initial public offering price of the Common Stock was
determined by negotiations between the Company and the Representative. Among
the factors considered in such negotiations were prevailing market conditions,
the results of operations of the Company in recent periods, market valuations
of publicly traded companies that the Company and the Representative believe
to be comparable to the Company, estimates of the business potential of the
Company, the present state of the Company's development, the current state of
the Company's industry and the economy as a whole, and other factors deemed
relevant by the Company and the Representative.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Graham & James LLP, Los Angeles, California. Certain legal matters
with respect to the Offering will be passed upon for the Underwriters by
Heller Ehrman White & McAuliffe, Palo Alto, California.
EXPERTS
The Consolidated Financial Statements of the Company as of December 31, 1996
and 1997, and for each of the three years in the period ended December 31,
1997, included in this Prospectus, have been included herein in reliance on
the report thereon of Coopers & Lybrand L.L.P., independent accountants, given
upon the authority of that firm as experts in accounting and auditing.
In May 1996, the Board appointed Coopers & Lybrand L.L.P. as the Company's
independent certified public accountants. Prior thereto, Storek, Carlson &
Strutz ("SC&S") served as the Company's independent accountants. The change in
accountants from SC&S to Coopers & Lybrand L.L.P. was effective for fiscal
1995, was unanimously approved by the Board and was not due to any
disagreements between the Company and SC&S on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedures.
ADDITIONAL INFORMATION
The Company has filed with the Commission in Washington, D.C. a Registration
Statement on Form S-1 under the Securities Act with respect to the Common
Stock being offered hereby. As permitted by the rules and regulations of the
Commission, this Prospectus does not contain all the information set forth in
the Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement, and such exhibits and
schedules. A copy of the Registration Statement, and the exhibits and
schedules thereto, may be inspected without charge at the public reference
facilities maintained by the Commission in Room 1024, Judiciary Plaza, 450
Fifth Street N.W., Washington, D.C. 20549, and at the Commission's regional
offices located at the Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661, and Seven World Trade Center, 13th Floor,
New York, New York 10048, and copies of all or any part of the Registration
Statement may be obtained from such offices upon payment of the fees
prescribed by the Commission. In addition, the Registration Statement may be
accessed at the Commission's site on the World Wide Web located at
(http://www.sec.gov). Statements contained in this Prospectus as to the
contents of any contract or other document, while complete in material
respects, are nonetheless summaries and, in each instance, reference is made
to the copy of such contract or document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference.
52
<PAGE>
GLOSSARY
The following is a glossary of certain environmental industry and Company-
specific terms used in this Prospectus:
<TABLE>
<C> <S>
AEA.............................. The U.S. Atomic Energy Act of 1954.
BDAT............................. Best Demonstrated Achievable Technology. As
identified by the EPA, the most effective
commercially available means of treating
specific types of hazardous waste. BDATs
may change with advances in treatment
technologies.
CERCLA........................... The U.S. Comprehensive Environmental
Response, Compensation and Liability Act of
1980. Also known as "Superfund."
Clean Air Act.................... The U.S. Clean Air Act of 1970.
Clean Water Act.................. The U.S. Clean Water Act of 1972.
D&D.............................. Decontamination and decommissioning of
facilities contaminated with radioactivity.
DOD.............................. The U.S. Department of Defense.
DOE.............................. The U.S. Department of Energy.
EPA.............................. The U.S. Environmental Protection Agency.
FFCA............................. The U.S. Federal Facilities Compliance Act
of 1992.
GASVIT........................... The Company's name and trademark for a
vitrification technology developed by the
Company for treatment of LLRW and LLMW
streams.
High-level radioactive waste..... Radioactive waste primarily composed of
spent nuclear fuel rods from nuclear
reactors and highly radioactive waste
generated by the processing of nuclear
materials for weapons production.
HLW.............................. High-level radioactive waste.
LLMW............................. Low-level mixed waste.
LLRW............................. Low-level radioactive waste.
Low-level mixed waste............ LLRW co-mingled with hazardous substances
regulated by RCRA and/or toxic substances
regulated by TSCA.
Low-level radioactive waste...... All radioactive waste other than HLW.
NRC.............................. The U.S. Nuclear Regulatory Commission.
PCBs............................. Polychlorinated biphenyls, a substance
regulated under TSCA.
PLASTIMELT....................... The Company's name and trademark for a
technology developed by the Company for the
macroencapsulation of LLMW.
RCRA............................. The U.S. Resource Conservation and Recovery
Act of 1976.
SAFGLAS.......................... The Company's name and trademark for a
vitrification technology developed by the
Company for treatment of LLRW streams.
SARA............................. The U.S. Superfund Amendments and
Reauthorization Act of 1986.
Superfund........................ See "CERCLA."
</TABLE>
53
<PAGE>
GLOSSARY--(CONTINUED)
<TABLE>
<C> <S>
TSCA............................. The U.S. Toxic Substances Control Act of
1976.
Vitrification.................... A non-incineration, thermal treatment
process which converts radioactive and
other waste into an environmentally stable,
leach-resistant glass product. The EPA has
identified vitrification as the BDAT for
HLW.
WDOE............................. The Washington State Department of Ecology.
</TABLE>
54
<PAGE>
ATG INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants.......................................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Shareholders' Equity............................ F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
ATG Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheets of ATG Inc. and
its subsidiary as of December 31, 1996 and 1997, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of ATG Inc. and
its subsidiary as of December 31, 1996 and 1997 and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
San Jose, California
January 31, 1998 (except for Note 16
as to which the date is April 14, 1998)
- -------------------------------------------------------------------------------
F-2
<PAGE>
ATG INC.
CONSOLIDATED BALANCE SHEETS
(dollar amounts in thousands)
--------
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------- --------------------------
1998 PRO FORMA
SHAREHOLDERS'
EQUITY
1996 1997 1998 (NOTE 2)
------- ------- ----------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....... $ 2,969 $ 2,586 $1,307
Accounts receivable, net of
allowance for doubtful accounts
of $46 at December 31, 1996 and
$119 at December 31, 1997 and
March 31, 1998, respectively... 6,907 8,435 10,119
Prepayments and other current
assets......................... 1,554 1,477 2,502
------- ------- -------
Total current assets.......... 11,430 12,498 13,928
Property and equipment, net....... 15,045 22,104 22,773
Intangible and other assets, net.. 501 1,928 2,037
Deferred income taxes............. -- 697 697
------- ------- -------
Total assets.................. $26,976 $37,227 $39,435
======= ======= =======
LIABILITIES
Current liabilities:
Short-term borrowings........... $ 2,836 $ 3,996 $4,996
Current portion of long-term
debt and capitalized leases.... 1,053 1,380 1,726
Accounts payable................ 2,014 3,246 2,511
Accrued liabilities............. 1,091 944 1,643
Payable to related parties...... 103 1,280 1,280
------- ------- -------
Total current liabilities..... 7,097 10,846 12,156
Long-term debt and capitalized
leases, net...................... 2,930 6,202 6,400
Deferred income taxes............. -- 467 467
------- ------- -------
Total liabilities............. 10,027 17,515 19,023
------- ------- -------
Commitments and contingencies
(Notes 10 and 16)
Mandatorily Redeemable Preferred
Stock:
Series A and ATG Richland Series
A and B, no par value
Authorized: 6,000,000 shares at
December 31, 1996 and 1997 and
March 31, 1998, respectively.
Issued and outstanding:
2,750,355 shares at December
31, 1996; 3,029,291 shares at
December 31, 1997 and March 31,
1998, respectively; and none
pro forma; stated at
liquidation value.............. 16,319 19,416 19,681
------- ------- -------
SHAREHOLDERS' EQUITY
Common Stock, no par value:
Authorized: 20,000,000 shares at
December 31, 1996 and 1997, and
March 31, 1998, respectively.
Issued and outstanding:
7,532,301 shares at December
31, 1996 and 1997, and March
31, 1998, respectively and
11,515,896 pro forma........... 5,948 6,337 6,337 $26,018
Deferred compensation............. -- (272) (242) (242)
Accumulated deficit............... (5,318) (5,769) (5,364) (5,364)
------- ------- ------- -------
Total common stock, deferred
compensation and accumulated
deficit...................... 630 296 731 $20,412
------- ------- ------- =======
Total liabilities and
shareholders' equity......... $26,976 $37,227 $39,435
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
ATG INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
--------
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS
FOR THE YEARS ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------- ----------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue (Note 2)........ $ 16,070 $ 18,235 $ 19,107 $ 2,751 $ 5,495
Cost of revenue......... 9,659 11,082 11,172 1,419 2,630
---------- ---------- ---------- ------- -------
Gross profit........ 6,411 7,153 7,935 1,332 2,865
Sales, general and
administrative
expenses............... 6,033 6,487 6,903 1,609 1,697
Stock-based compensation
expense................ 169 169 117 30 30
---------- ---------- ---------- ------- -------
Operating income
(loss)............. 209 497 915 (307) 1,138
---------- ---------- ---------- ------- -------
Interest income
(expense):
Interest income....... 185 142 58 41 32
Interest expense...... (326) (129) -- -- (36)
---------- ---------- ---------- ------- -------
Interest income
(expense), net..... (141) 13 58 41 (4)
---------- ---------- ---------- ------- -------
Income before income
taxes.................. 68 510 973 (266) 1,134
Provision (benefit) for
income taxes........... 2 2 (45) -- 464
---------- ---------- ---------- ------- -------
Net income (loss)... 66 508 1,018 (266) 670
Accretion of mandatorily
redeemable preferred
stock.................. (836) (1,288) (1,469) (446) (265)
---------- ---------- ---------- ------- -------
Net income (loss)
available to common
shareholders........... $ (770) $ (780) $ (451) $ (712) $ 405
========== ========== ========== ======= =======
Pro forma net income per
share
Basic................. $ 0.09 $ 0.06
Diluted............... $ 0.08 $ 0.05
Pro forma shares used in
calculating pro forma
net income per share
Basic................. 11,516 11,516
Diluted............... 12,284 12,284
Historic net income
(loss) per share
Basic................. $ (0.10) $ (0.10) $ (0.06) $ (0.09) $ 0.05
========== ========== ========== ======= =======
Diluted............... $ (0.10) $ (0.10) $ (0.06) $ (0.09) $ 0.05
========== ========== ========== ======= =======
Historic shares used in
calculating historic
net income (loss) per
share
Basic................. 7,439 7,532 7,532 7,532 7,532
========== ========== ========== ======= =======
Diluted............... 7,439 7,532 7,532 7,532 8,300
========== ========== ========== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
ATG INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(amounts in thousands)
--------
<TABLE>
<CAPTION>
TOTAL COMMON
STOCK, DEFERRED
COMMON STOCK COMPENSATION
------------- DEFERRED ACCUMULATED AND ACCUMULATED
SHARES AMOUNT COMPENSATION DEFICIT DEFICIT
------ ------ ------------ ----------- ---------------
<S> <C> <C> <C> <C> <C>
Balance, January 1,
1995................... 7,439 $5,598 $(338) $(3,768) $ 1,492
Accretion on
redeemable preferred
stock................ -- -- -- (836) (836)
Amortized deferred
compensation......... -- -- 169 -- 169
Net income............ -- -- -- 66 66
----- ------ ----- ------- -------
Balance, December 31,
1995................... 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
Accretion on
redeemable preferred
stock................ -- -- -- (265) (265)
Amortized deferred
compensation......... -- -- 30 -- 30
Net income............ -- -- -- 670 670
----- ------ ----- ------- -------
Balance, March 31, 1998
(unaudited)............ 7,532 $6,337 $(242) $(5,364) $ 731
===== ====== ===== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
ATG INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
--------
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------- ----------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)...... $ 66 $ 508 $ 1,018 $ (266) $ 670
Adjustments to
reconcile net income
(loss) with cash flow
from operations:
Depreciation and
amortization........ 458 671 746 135 492
Provision for
doubtful accounts... -- 6 73 -- --
Compensation expense
for shares issued
and options granted. 169 169 117 30 30
Income tax benefit... -- -- (45) -- --
Change in current
assets and
liabilities:
Accounts
receivable........ (3,560) 534 (1,601) (551) (1,684)
Prepayments and
other current
assets............ (369) 230 (140) 733 (1,025)
Inventory ......... -- -- -- -- 475
Other assets....... (444) 290 -- -- --
Accounts payable
and accrued
liabilities....... 255 455 1,085 611 (36)
Deferred income
taxes............. -- -- (230) -- --
---------- ---------- ---------- ------- -------
Net cash provided
by (used in)
operating
activities...... (3,425) 2,863 1,023 692 (1,078)
---------- ---------- ---------- ------- -------
Cash flows from investing
activities:
Property and equipment
acquisitions.......... (1,249) (4,647) (3,505) (2,649) (715)
Other assets........... 131 (23) (1,210) (384) (124)
---------- ---------- ---------- ------- -------
Net cash used in
investing
activities.......... (1,118) (4,670) (4,715) (3,033) (839)
---------- ---------- ---------- ------- -------
Cash flows from financing
activities:
Loans from (payments
to) related parties... -- (61) 1,177 -- --
Repayment of capital
leases................ (466) (735) (461) (180) (306)
Repayment of long-term
debt.................. (842) (216) (196) (51) (56)
Bank borrowings, net of
repayments............ 1,771 48 1,160 (730) 1,000
Proceeds from issuance
of preferred stock,
net................... 3,123 5,627 1,629 1,104 --
---------- ---------- ---------- ------- -------
Net cash provided by
financing
activities.......... 3,586 4,663 3,309 143 638
---------- ---------- ---------- ------- -------
Increase (decrease) in
cash and cash
equivalents............. (957) 2,856 (383) (2,198) (1,279)
Cash and cash
equivalents, beginning
of period............... 1,070 113 2,969 2,969 2,586
---------- ---------- ---------- ------- -------
Cash and cash
equivalents, end of
period.................. $ 113 $ 2,969 $ 2,586 $ 771 $1,307
========== ========== ========== ======= =======
Supplemental Disclosures
of non-cash investing
and financing
activities:
Income taxes paid...... $ 1 $ 2 $ 2 $ -- $ 14
========== ========== ========== ======= =======
Interest paid, net of
interest capitalized.. $ 266 $ 622 $ -- $ 161 $ 277
========== ========== ========== ======= =======
Acquisition of
equipment with capital
lease financing....... $ 1,407 $ -- $ 4,256 $ -- $ 906
========== ========== ========== ======= =======
Compensation expense
for shares issued and
options granted....... $ 169 $ 169 $ 117 $ 30 $ 30
========== ========== ========== ======= =======
Conversion of notes
payable to common
stock................. $ -- $ 350 $ -- $ -- $ --
========== ========== ========== ======= =======
Reclassification of
machinery and
equipment to
inventory............. $ -- $ -- $ -- $ -- $ (475)
========== ========== ========== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
ATG INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all dollar amounts in thousands, except per share data)
--------
1. FORMATION AND BUSINESS OF THE COMPANY:
The accompanying consolidated financial statements of ATG Inc. (the
"Company" or "ATG") include the accounts of its wholly-owned subsidiary, ATG
Richland Corporation ("ATG Richland"). The Company 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, site remediation and fluorescent lamp recycling.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The consolidated financial statements include the accounts of ATG and its
wholly-owned subsidiary. 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 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 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.
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 claim 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. As of
December 31, 1997, 1996, and 1995, there were no claims recognized as revenue.
In the three months ended March 31, 1998, the Company recognized revenue of
$0.5 million from a change order related to a field services engineering
contract completed in 1997.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
F-7
<PAGE>
ATG INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(all dollar amounts in thousands, except per share data)
--------
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 fifteen 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
is no assurance of the 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 abandoned. The Company reviews the status of permitting
projects on a periodic basis to assess realizability of related asset values.
As of December 31, 1997, 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 largely on governmental 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 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 mainly consist 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, 1997, agencies of the U.S. government
represented 46.6% of accounts receivable and 71.3% of total revenue for the
year then ended. As of December 31, 1996, agencies of the U.S. government
represented 70.0% of accounts receivable and 76.8% of total revenue for the
year then ended. As of December 31, 1995, agencies of the U.S. government
represented 84.0% of accounts receivable and 86.3% of total revenue for the
year then ended. As of March 31, 1998 (unaudited), agencies of the U.S.
government represented 45.4% of accounts receivable and 54.5% of total revenue
for the three months then ended. As of March 31, 1997, agencies of the U.S.
government represented 69.3% of accounts receivable and 72.0% of total revenue
for the three months then ended. The Company generally does not require
collateral.
F-8
<PAGE>
ATG INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(all dollar amounts in thousands, except per share data)
--------
Computation of Pro Forma Net Income Per Share
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 128, Earnings Per Share ("SFAS 128"), effective December 31,
1997. SFAS 128 requires the presentation of basic and diluted earnings 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. Pro
forma basic net income per share and pro forma diluted net income per share
are computed using the weighted average number of shares of Common Stock
outstanding and the incremental inclusion of 3,983,595 shares of common stock
issuable upon the conversion of preferred stock.
Unaudited Pro Forma Consolidated Balance Sheet
Upon closing of the Company's proposed initial public offering, all
outstanding shares of mandatorily redeemable preferred stock will be converted
into 3,983,595 shares of common stock. (See Note 16.) The unaudited pro forma
consolidated balance sheet as of March 31, 1998 (unaudited), reflects this
conversion.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards
for the reporting and display of comprehensive income and its components in a
full set of general purpose financial statements. Comprehensive income is
defined as the change in equity of a business enterprise during a period,
resulting from transactions and other events and circumstances from nonowner
sources. The Company has adopted the provisions of SFAS No. 130 as of
January 1, 1998. For all periods presented, there was no comprehensive income.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." SFAS No. 131 requires publicly-held
companies to report financial and other information about key revenue-
producing segments of the entity for which such information is available and
is utilized by the chief operating decision maker. Specific information to be
reported for individual segments includes profit or loss, certain revenue and
expense items and total assets. A reconciliation of segment financial
information to amounts reported in the financial statements would be provided.
SFAS No. 131 is effective for the Company in 1998. The Company currently
evaluates its operations as one segment.
Unaudited Interim Financial Information
The accompanying interim consolidated balance sheet as of March 31, 1998 and
the consolidated statements of operations, consolidated changes in
shareholders' equity and consolidated cash flows for the three months ended
March 31, 1997 and 1998 together with the related notes are unaudited and
include all adjustments, consisting of only normal recurring adjustments,
which the Company considers necessary to present fairly in all material
respects, the financial position, the results of operations and cash flows for
the three months ended March 31, 1997 and 1998. Results for the three months
ended March 31, 1997 and 1998 are not necessarily indicative of results for an
entire year.
F-9
<PAGE>
ATG INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(all dollar amounts in thousands, except per share data)
--------
3. ACCOUNTS RECEIVABLE:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- MARCH 31,
1996 1997 1998
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
U.S. Government:
Amounts billed.................................... $3,502 $3,142 $ 4,283
Amounts unbilled.................................. 1,433 845 314
------ ------ -------
Total U.S. Government........................... 4,935 3,987 4,597
Commercial customers:
Amounts billed.................................... -- 2,067 2,094
Amounts unbilled.................................. 2,018 2,500 3,547
------ ------ -------
Total commercial 2,018 4,567 5,641
------ ------ -------
Total accounts receivable......................... 6,953 8,554 10,238
Less: allowance for doubtful receivables............ (46) (119) (119)
------ ------ -------
$6,907 $8,435 $10,119
====== ====== =======
</TABLE>
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.
4. 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 $30 at
December 31, 1996, and $210 at March 31, 1997 (unaudited), December 31, 1997,
and March 31, 1998 (unaudited), respectively, bear interest at 4.7% 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, 1996, March 31, 1997, December 31, 1997, and March 31, 1998,
respectively, bear interest at 5.7% and have an original maturity of twelve
months. The Bonds, which are included in prepayments and other current assets,
have an aggregate value of $133, $299, $959, and $1,399 at December 31, 1996,
March 31, 1997 (unaudited), December 31, 1997, and March 31, 1998 (unaudited),
respectively, and have an original maturity of between one and five years.
5. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- MARCH 31,
1996 1997 1998
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Land.............................................. $ 581 $ 761 $ 761
Buildings......................................... 2,864 2,848 2,869
Machinery and equipment........................... 7,429 5,183 4,332
Office furniture and equipment.................... 662 1,427 1,492
------- ------- -------
Property and equipment at cost.................... 11,536 10,219 9,454
Less: accumulated depreciation and amortization... (3,060) (2,840) (2,713)
------- ------- -------
8,476 7,379 6,741
Construction-in-progress.......................... 6,569 14,725 16,032
------- ------- -------
$15,045 $22,104 $22,773
======= ======= =======
</TABLE>
F-10
<PAGE>
ATG INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(all dollar amounts in thousands, except per share data)
--------
Depreciation and amortization expense was $417, $630 and $698 for the years
ended December 31, 1995, 1996 and 1997, respectively, and $135 and $492 for
the three months ended March 31, 1997 and March 31, 1998 (unaudited),
respectively.
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 $479, $446 and
$891 in 1995, 1996 and 1997, respectively. All property and equipment serve as
collateral to holders of the Company's Series A Preferred Stock, notes payable
agreements to a bank and other creditors.
As of December 31, 1996 and 1997, machinery and equipment included assets
acquired under capital leases with a capitalized cost of $3,000 and $7,256,
respectively. Related accumulated amortization totaled $1,945 and $2,318, in
1996 and 1997, respectively.
During the three month period ended March 31, 1998, in the normal course of
business, the Company transferred machinery and equipment with a net book
value of $475 from property and equipment to inventory. The inventory was sold
during the three month period ended March 31, 1998 (unaudited).
6. PAYABLE TO RELATED PARTIES
The Company has a payable to its Chairman and Chief Executive Officer of
$1,280 at March 31, 1998 (unaudited) and December 31, 1997 and $103 at
December 31, 1996. The amount is repayable on demand and bears interest at 10%
per annum.
The Company has a payable to a Director of $225 at March 31, 1998
(unaudited), December 31, 1997 and December 31, 1996. The amount is repayable
on July 1, 2000 and is non-interest bearing. The amount is included in long
term debt.
7. BANK LINE OF CREDIT:
Under a revolving credit facility with a bank, the Company may borrow up to
the lesser of 90% of eligible accounts receivable or $4,000. Borrowings under
this credit agreement were $3,996 at December 31, 1997, bear interest at prime
plus 0.50% (9.0% at December 31, 1997) and are collateralized by accounts
receivable, property and equipment and the personal guarantees of the
Company's principal shareholder. Borrowings under the credit agreement were
$2,836 as of December 31, 1996, and bore interest at prime plus 1.25% (9.5% at
December 31, 1996). The facility agreement expires June 1998.
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 and dividend payment restrictions. At December
31, 1997 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, 1997. The Company was not in compliance with a
covenant as of March 31, 1998 (unaudited).
The revolving credit facility was amended during February 1998 such that the
Company may borrow up to the lesser of 90% of eligible accounts receivable or
$5,000. Borrowings under this credit agreement were $4,996 at March 31, 1998
(unaudited).
F-11
<PAGE>
ATG INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(all dollar amounts in thousands, except per share data)
--------
8. LONG TERM DEBT:
Long term debt consists of mortgage debt, notes payable and equipment notes
payable. The mortgage debt bears interest at annual rates between 8.75% and
10.5%, matures between the years 2000 and 2007, and is collateralized by
certain of the Company's buildings. The notes payable bear interest at annual
rates between 8% and 10%, mature between 1998 and 2002, and are collateralized
by the Company's equipment. Equipment notes bear interest at annual rates
between 7.9% and 11.9%, mature between 1999 and 2000, and are collateralized
by specific equipment.
Future minimum principal payments are as follows as of December 31, 1997:
<TABLE>
<CAPTION>
MORTGAGE NOTES EQUIPMENT TOTAL LONG
DEBT PAYABLE NOTES TERM DEBT
-------- ------- --------- ----------
<S> <C> <C> <C> <C>
1998...................................... $ 177 $ 11 $24 $ 212
1999...................................... 170 12 24 206
2000...................................... 139 237 17 393
2001...................................... 1,382 13 -- 1,395
2002...................................... 15 25 -- 40
Thereafter................................ 82 -- -- 82
------ ---- --- ------
1,965 298 65 2,328
Less: current portion..................... 177 11 24 212
------ ---- --- ------
$1,788 $287 $41 $2,116
====== ==== === ======
</TABLE>
9. CAPITAL LEASE OBLIGATIONS:
As of December 31, 1997, future minimum lease payments under non-cancelable
capital leases are as follows:
<TABLE>
<S> <C>
1998.................................................................... $1,667
1999.................................................................... 1,392
2000.................................................................... 1,175
2001.................................................................... 917
2002.................................................................... 746
Thereafter.............................................................. 799
------
Total minimum lease payments............................................ 6,696
Less amount representing interest....................................... 1,442
------
Present value of future minimum lease payments.......................... 5,254
Less: current portion................................................... 1,168
------
Total capital lease obligations, net of current portion................. $4,086
======
</TABLE>
10. COMMITMENTS AND CONTINGENCIES:
The Company retained the services of a former shareholder, who is also a
current director, as a technical consultant, for the ten year period beginning
August 1, 1992, for an annual fee of $60.
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.
F-12
<PAGE>
ATG INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(all dollar amounts in thousands, except per share data)
--------
11. STOCK BASED COMPENSATION PLANS:
Stock Options
The Company has issued non-qualified stock options to employees and
consultants. The following option activity occurred in the three years ended
December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS GRANTED AND OUTSTANDING
-------------------------------
WEIGHTED
AVERAGE
EXERCISE
EXERCISE PRICE PER
SHARES PRICE SHARE
--------- ----------- ---------
<S> <C> <C> <C>
Balance, January 1, 1995........................ 100,000 $0.10 $0.10
Options granted................................. 295,000 $0.10-$7.50 $3.11
--------- ----------- -----
Balance, December 31, 1995...................... 395,000 $0.10-$7.50 $2.34
Options granted................................. 51,000 $0.10 $0.10
--------- ----------- -----
Balance, December 31, 1996...................... 446,000 $0.10-$7.50 $2.09
Options granted................................. 554,000 $1.00-$5.00 $2.10
--------- ----------- -----
Balance, December 31, 1997...................... 1,000,000 $0.10-$7.50 $2.09
========= =========== =====
</TABLE>
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 $117 has been amortized during the year ended
December 31, 1997, and is included in the statement of operations within the
caption "Stock-based compensation expense".
The Company did not grant any options during the three month period ended
March 31, 1998 (unaudited).
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 of
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.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------- -------
<S> <C> <C>
Net income................................................... $ 508 $ 1,018
Accretion on mandatorily redeemable preferred stock.......... (1,288) (1,469)
------- -------
Net (loss) available to common shareholders.................. $ (780) $ (451)
Net (loss)--FAS 123 adjusted ................................ $ (780) $ (593)
Earnings per share--as reported
Basic and diluted............................................ $ (0.10) $ (0.06)
Earnings per share--FAS 123 adjusted
Basic and diluted............................................ $ (0.10) $ (0.08)
</TABLE>
F-13
<PAGE>
ATG INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(all dollar amounts in thousands, except per share data)
--------
The fair value of each option grant for the Plan is estimated on the date of
the grant using the Black-Scholes option-pricing model with weighted average
risk free interest rates of 6.47% and 6.16% at December 31, 1996 and 1997,
respectively, and an expected life of 5 years, no dividends and 0% volatility
in all periods.
The following table summarizes the stock options outstanding at December 31,
1997:
<TABLE>
<CAPTION>
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
-------- ----------- ----------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$0.10 316,000 -- $0.10 221,492 $0.10 $0.10
$1.00 403,500 -- $1.00 47,435 $1.00 $2.00
$5.00 180,500 -- $5.00 30,000 $5.00 $5.00
$7.50 100,000 -- $7.50 -- $7.50 $0.10
</TABLE>
Restricted Stock
During 1992, 1993 and 1994, the Company agreed to issue at no cost a total
of 1,013,475 common shares to its majority shareholder and president. The
agreement required that the shareholder/president remain employed by the
Company through December 31, 1996. Deferred compensation expense represents
the difference between the issue price of the restricted stock and the deemed
fair value of the shares for financial statement purposes. Deferred
compensation was amortized over the employment period during which the shares
were restricted. Compensation expense of $169 was recognized in both 1995 and
1996.
12. 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, under the following terms
and conditions:
Upon the written request of the holders of the Preferred Stock, but not
before the fifth anniversary of the issue date (third anniversary in the case
of the ATG Richland Series B Preferred Stock), the issuing corporation is
required to redeem the Preferred Stock held by holders thereof requesting such
redemption. The redemption price is $6.67 for ATG Series A Preferred Stock and
ATG Richland Series A Preferred Stock and $8.00 for ATG Richland Series B
Preferred Stock. The dividends accrete based on the effective interest method.
In the event of liquidation, dissolution or winding up of the issuing
corporation, the holders of Preferred Stock are entitled to a distribution in
preference to holders of Common Stock of the issuing corporation, equivalent
to the issue price plus a premium equal to 10% interest from the date of the
issue. If funds are insufficient for full payment of these amounts, the entire
assets and funds of the issuing corporation legally available are distributed
ratably among the holders of Preferred Stock. Certain property and equipment
has been provided as collateral for the Company's Series A Preferred Stock
issued in 1994.
Any dividends declared by the issuing corporation are to be distributed pari
passu among all holders of its Preferred Stock and all holders of its Common
Stock in proportion to the number of shares of Common Stock which would be
held by each such holder if all classes of Preferred Stock were converted into
Common Stock at the then effective conversion price.
F-14
<PAGE>
ATG INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(all dollar amounts in thousands, except per share data)
--------
Except as otherwise required by law and as to certain matters set forth in
the issuing corporation's articles of incorporation as requiring the prior
affirmative vote or written consent of the holders of not less than a majority
of the outstanding shares of Preferred Stock, the Preferred Stock is non-
voting.
The shares of each series of Preferred Stock are automatically converted
under defined circumstances into shares of the Company's Common Stock at
specified conversion ratios upon the occurrence of an initial public offering
of such Common Stock.
13. INCOME TAXES:
The components of income tax expense (benefit) are approximately as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Current
Federal.................................................... $ -- $ -- $(383)
State...................................................... 2 2 158
Deferred:
Federal.................................................... -- -- 214
State...................................................... -- -- (34)
----- ----- -----
Total.................................................... $ 2 $ 2 $ (45)
===== ===== =====
</TABLE>
The Company's effective tax rate differs from the U.S. federal statutory tax
rate, as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Income tax provision at statutory rate.................... 34.0% 34.0% 34.0 %
State taxes, net of federal tax effect.................... 0.8 0.1 1.6
Non-deductible items...................................... -- 0.5 3.2
Net operating loss benefit................................ (32.5) (29.5) (48.3)
Other..................................................... -- (4.8) 4.9
----- ----- -----
Effective tax rate........................................ 2.3% 0.3% (4.6)%
===== ===== =====
</TABLE>
Components of the deferred income tax balance are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1996 1997
----- ----- ----
<S> <C> <C> <C>
Deferred tax assets
Net operating loss carryforwards.......................... $ 741 $ 569 $308
Accrued expenses.......................................... 25 34 245
Tax credits............................................... 100 100 120
Other..................................................... 14 17 24
----- ----- ----
Deferred tax assets..................................... $ 880 $ 720 $697
===== ===== ====
Deferred tax liabilities
Depreciation and amortization............................. $ 348 $ 310 $467
===== ===== ====
Valuation allowance......................................... (532) (410) --
----- ----- ----
Net deferred tax asset...................................... $ -- $ -- $230
===== ===== ====
</TABLE>
F-15
<PAGE>
ATG INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(all dollar amounts in thousands, except per share data)
--------
Although realization of the deferred tax assets is not assured, the Company
believes that all deferred tax assets will be realized.
As of December 31, 1997, the Company had Federal net operating loss
carryforwards (NOLs) of approximately $905,231 available to offset future
taxable income. These NOLs expire in the years 2009 through 2011. NOL's may be
limited pursuant to the limitation rules of Internal Revenue Code Section 382.
The change in valuation allowance was a net decrease of $410 for the year
ended December 31, 1997.
The Company has used an effective income tax rate of 41% for the three month
period ended March 31, 1998.
F-16
<PAGE>
ATG INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(all dollar amounts in thousands, except per share data)
--------
14. EARNINGS PER SHARE (EPS) DISCLOSURES:
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:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, MARCH 31 (UNAUDITED),
----------------------------------- ---------------------------------
1997 1998
1995 1996 1997 PRO FORMA 1997 1998 PRO FORMA
------ ------ ------ ----------- --------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Numerator--Basic and
Diluted EPS
Net income (loss)..... $ 66 $ 508 $1,018 $1,018 $ (266) $ 670 $ 670
Accretion on
mandatorily
redeemable preferred
stock................ (836) (1,288) (1,469) (1,469) (446) (265) (265)
------ ------ ------ ------ --------- -------- ---------
Net income (loss)
available to common
shareholders......... $ (770) $ (780) $ (451) (451) $ (712) $ 405 405
====== ====== ====== ========= ========
Reversal of accretion
on mandatorily
redeemable preferred
stock................ 1,469 265
------ ---------
Pro forma net income
available to common
shareholders......... $1,018 $ 670
====== =========
Denominator--Basic EPS
Common shares
outstanding.......... 7,439 7,532 7,532 7,532 7,532 7,532 7,532
Conversion of
mandatorily
redeemable preferred
stock................ -- -- -- 3,984 -- -- 3,984
Common equivalent
shares pursuant to
Staff Accounting
Bulletin No. 98...... -- -- -- -- -- -- --
------ ------ ------ ------ --------- -------- ---------
7,439 7,532 7,532 11,516 7,532 7,532 11,516
------ ------ ------ ------ --------- -------- ---------
Basic earnings (loss)
per share.............. $(0.10) $(0.10) $(0.06) $ 0.09 $ (0.09) $ 0.05 $ 0.06
====== ====== ====== ====== ========= ======== =========
Denominator--Diluted EPS
Denominator--Basic EPS.. 7,439 7,532 7,532 11,516 7,532 7,532 11,516
Effect of Dilutive
Securities
Common stock options.. -- -- -- 768 -- 768 768
------ ------ ------ ------ --------- -------- ---------
7,439 7,532 7,532 12,284 7,532 8,300 12,284
------ ------ ------ ------ --------- -------- ---------
Diluted earnings (loss)
per share.............. $(0.10) $(0.10) $(0.06) $ 0.08 $ (0.09) $ 0.05 $ 0.05
====== ====== ====== ====== ========= ======== =========
</TABLE>
15. 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.
F-17
<PAGE>
ATG INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(all dollar amounts in thousands, except per share data)
--------
16. SUBSEQUENT EVENTS:
In February 1998, the Company's Board of Directors ("the Board") authorized
the filing of a registration statement with the Securities and Exchange
Commission for the Company's initial public offering (the "Offering") of its
common stock. The Company and preferred shareholders agreed that all
outstanding shares of ATG Series A Preferred Stock and ATG Richland Series A
and Series B Preferred Stock automatically convert into 3,983,595 shares of
common stock of the Company upon completion of the Offering, assuming the
Offering gross proceeds are not less than $12,000 and the Offering is
completed on or prior to June 30, 1998. Such conversion is reflected in the
unaudited pro forma shareholders equity at December 31, 1997 in the
accompanying consolidated balance sheet. The underwriters of the public
Offering have been granted warrants, exercisable for a period of four years
beginning one year from the Offering date, to purchase up to 170,000 shares of
common stock at an exercise price per share equal to 120% of the initial
offering price to the public.
In February 1998, the Board approved the Company's Employee Stock Purchase
Plan ("the Purchase Plan") covering an aggregate of 200,000 shares of common
stock. The Purchase Plan is intended to qualify as an employee stock purchase
plan within the meaning of Section 423 of the Internal Revenue Code of 1986.
Under the Purchase Plan, the Board may authorize participation by eligible
employees of the Company, including officers, in periodic offerings following
the adoption of the Purchase Plan.
In February 1998, the Board adopted the Company's 1998 Stock Ownership
Incentive Plan (the "Incentive Plan"). The Incentive Plan authorizes the award
of stock options, shares of restricted stock and performance units (which may
be paid in cash or shares of Common Stock). The Incentive Plan reserves for
issuance an aggregate of 500,000 shares of Common Stock, no more than 250,000
shares of which may be issued in the form of shares of restricted stock. The
Incentive Plan is intended to advance the interests of the Company by
encouraging the Company's employees who contribute to the Company's long-term
success and development to acquire and retain an ownership interest in the
Company. To date, no awards have been made under the Incentive Plan.
Stock options granted pursuant to the Incentive Plan may either be incentive
stock options ("ISOs") intended to qualify under Section 422 of the Internal
Revenue Code of 1986, as amended, or stock options not intended to so qualify.
In February 1998, the Board adopted the Company's 1998 Non-Employee
Directors' Stock Option Plan (the "Directors' Plan") to provide for the
automatic grant of options to purchase shares of Common Stock to non-employee
directors of the Company. The Directors' Plan is administered by the Board. To
date, no options have been granted under the Directors' Plan.
The maximum number of shares of Common Stock that may be issued pursuant to
options granted under the Directors' Plan is 200,000. Pursuant to the terms of
the Directors' Plan, each person serving as a director of the Company who is
not an employee of the Company (a "Non-Employee Director") shall automatically
be granted an option to purchase 20,000 shares of Common Stock upon the later
of the date such person first becomes a Non-Employee Director or the date of
the effectiveness of the initial public offering of the Common Stock, with
5,000 of such shares vesting immediately and the balance vesting in three
equal installments on the three succeeding anniversaries of the grant date.
In February 1998, the revolving credit facility described in Note 7 was
amended such that the Company may borrow up to the lesser of 90% of eligible
accounts receivable or $5,000. In addition, the credit facility
F-18
<PAGE>
ATG INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
(all dollar amounts in thousands, except per share data)
--------
includes a provision for borrowings under a letter of credit facility in a
principal amount not to exceed $2,000. Certain of the covenants described in
Note 7 were also amended. As of March 31, 1998, the Company has also entered
into additional lease agreements for capital equipment purchases of
approximately $900.
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 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 result of these suits.
In June 1997, as a result of the aforementioned incident, the Company's
contract with the U.S. Army was terminated due to an alleged default.
Subsequent to the default termination, the U.S. Army has demanded the Company
pay alleged "reprocurement" costs of $945. The Company has tendered the U.S.
Army claim to its insurance carrier and believes that all costs and liability,
if any, associated with the claim should be covered by its comprehensive
general liability insurance policy.
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 subcontractor, it could have a
material adverse effect on the Company's financial condition and results of
operations.
F-19
<PAGE>
INSIDE BACK COVER OF PROSPECTUS:
[LOGO OF ATG]
The Company's Field Engineering Group provides on-site services to government
and commercial clients nationwide.
[Picture of decontamination and decommissioning of corrosion laboratory]
Decontamination & Decommissioning
[Picture of aerial view of 45 acre waste treatment facility]
45 Acre Treatment Facility in Richland, WA
[Picture of coastal environmental remedial action]
Remedial Action
[Picture of underground tank being removed]
Environmental Restoration
<PAGE>
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NO DEALER, SALESMAN OR ANY PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED BY THIS PROSPECTUS OR ANY
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES IN ANY JU-
RISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICI-
TATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
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TABLE OF CONTENTS
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PAGE
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<S> <C>
Forward-Looking Statements................................................ 2
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 12
Dividend Policy........................................................... 12
Dilution.................................................................. 13
Capitalization............................................................ 14
Selected Consolidated Financial Data...................................... 15
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 16
Business.................................................................. 22
Management................................................................ 37
Certain Transactions...................................................... 44
Principal Shareholders.................................................... 45
Description of Capital Stock.............................................. 46
Shares Eligible for Future Sale........................................... 49
Underwriting.............................................................. 50
Legal Matters............................................................. 52
Experts................................................................... 52
Additional Information.................................................... 52
Glossary.................................................................. 53
Index to Consolidated Financial Statements................................ F-1
</TABLE>
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UNTIL JUNE 1, 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE SECURITIES, WHETHER OR NOT PARTICIPATING IN THE
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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1,900,000 SHARES
[LOGO OF ALLIED TECHNOLOGIES GROUP APPEARS HERE]
COMMON STOCK
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PROSPECTUS
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VAN KASPER & COMPANY
MAY 7, 1998
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