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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1998.
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______ to ______.
Commission File Number
0-23781
ATG INC.
(Exact name of registrant as specified in its charter)
California 94-2657762
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
47375 Fremont Boulevard
Fremont, California 94538
(Address of principal executive offices)
(510) 490-3008
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days:
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at October 31, 1998
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Common stock, no par value 13,846,909
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ATG INC.
INTRODUCTION
ATG Inc. hereby amends the following section of the September 30, 1998 Form 10-Q
to add to Item 2, Management's Discussion and Analysis of Financial Condition
and Results of Operations, the section entitled "Year 2000 Impact."
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION Page
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Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations............................................... 3
SIGNATURE..................................................................... 11
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ATG INC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements that involve known
and unknown risks and uncertainties which may cause the Company's actual results
in future periods to differ materially from those indicated herein as a result
of certain factors, including those set forth under "Certain Business
Considerations." The Company undertakes no obligation to publicly release
updates or revisions to these statements.
The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and the notes thereto included in
Item 1 of this Quarterly Report and the audited consolidated financial
statements and notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in the Company's
Registration Statement on Form S-1 (Commission File No. 333-46107).
General
The Company is a radioactive and hazardous waste management company that offers
comprehensive treatment solutions for LLRW, LLMW and other waste generated by
the DOD, DOE and commercial entities such as nuclear power plants, medical
facilities and research institutions. The Company principally derives its
revenue from the waste treatment operations of its Fixed Facilities Group and
the on-site remediation services of its Field Engineering Group. 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 received and 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.
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 Company's SAFGLAS thermal treatment 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.
The Company increasingly pursues multi-year and longer term contracts as a
method of achieving more predictable revenue, more consistent utilization of
equipment and
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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.
Results of Operations
Revenue and Net Income. Revenue for the third quarter of fiscal 1998 was $9.0
million, up 104% from the $4.4 million recorded in the comparable quarter in the
prior year. The Company recorded net income of $1.5 million, or $0.11 per
share, in the third quarter of fiscal 1998, compared to net income of $692,000,
or $0.06 per share, in the third quarter of fiscal 1997. For the nine months
ended September 30, 1998, revenue was $21.3 million, up 98% from $10.8 million
for the same period in 1997. The Company recorded a net income of $3.1 million,
or $0.23 per share, for the nine months ended September 30, 1998, compared to a
net loss of $498,000, or $0.04 per share, for the same period in 1997.
The increase in revenue is principally attributable to the increasing commercial
utilization of the Company's SAFGLAS thermal treatment system. The SAFGLAS
system began treating customer waste streams in late 1997 and there has been a
steady increase in the volume being processed. At the end of 1997, the Company
had general service agreements in place with only 4 nuclear power reactors, a
key target customer base for the SAFGLAS technology. There are currently
general service agreements in place to service over 50 nuclear power reactors.
In addition to the increase in waste for thermal treatment utilizing SAFGLAS,
these same customers are sending the Company increasing volumes of waste to be
treated through non-thermal means.
Gross Profit. Gross profit for the third quarter of fiscal 1998 was $4.2
million or 46.8% of revenue, compared to $2.6 million or 59.5% of revenue in the
comparable quarter in 1997. Gross profit for the nine months ended September
30, 1998, was $10.5 million or 49.4% of revenue, compared to $5.5 million or
51.4% of revenue for the comparable period in 1997.
The decrease in the gross profit percentage from year to year is related to the
varying mixes of business during these periods. In 1997 the Company entered
into two technology transfer agreements that provided for the transfer of rights
to the processes and technology of the Company on an exclusive basis in selected
Asian territories. Total revenue of approximately $2 million was derived from
these transfer agreements which increased the gross profit percentage
substantially for the nine months ended September 30, 1998. The fixed
facilities operations generally have a larger percentage of fixed costs versus
variable costs, so increases in utilization favorably impact gross profit. The
SAFGLAS treatment system is part of fixed facilities and thus margins have
improved with the growth in revenue discussed above.
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Sales, General and Administrative Expenses. Sales, general and administrative
expenses for the third quarter of fiscal 1998 were $1.8 million or 19.7% of
revenue, compared to $1.9 million or 44% of revenue for the comparable period in
1997. Such expenses for the nine months ended September 30, 1998, were $5.5
million or 26 % of revenue, compared to $5.1 million or 47.3% of revenue for the
comparable period in 1997. The increases in spending from year to year reflect
the growth in the Company's operations, addition of sales personnel to market
and sell SAFGLAS services and the increased costs of being a public company.
The overall decrease in sales, general and administrative expenses as a
percentage of revenue is attributable to the Company's effort to maintain a
level of such costs that does not increase at the same rate as revenue.
Provision for Income Taxes. In 1998, the Company is providing for income taxes
at a combined Federal and State rate of approximately 40%. In prior years the
Company realized the benefit of net operating loss carryforwards. All net
operating loss carryforwards were fully recognized by the end of 1997.
Liquidity and Capital Resources
During the quarter ended June 30, 1998, the Company completed its initial public
offering with the sale of 2,185,000 shares of common stock. The net proceeds of
the offering were approximately $15.7 million. Approximately $4.0 million of
the proceeds were used to pay off bank lines of credit.
Total cash and cash equivalents were $6.9 million at September 30, 1998, an
increase of $4.3 million from December 31, 1997. The working capital of the
Company was approximately $14.2 million at September 30, 1998, an increase of
$15.0 million from December 31, 1997. The increases are attributable to the
proceeds of the initial public offering and cash flow from operations.
Significant outlays of cash have been needed to acquire property and equipment
and to secure or expand regulatory licenses, permits and approvals, primarily
for the Company's fixed facilities operations in Richland, Washington. Property
and equipment acquisitions totaled $1.4 million and $4.3 million for the three
months and nine months ended September 30, 1998, respectively. The Company
anticipates that continued expansion of its Richland LLRW facilities will be
financed from the net proceeds of the initial public offering or through debt
financing. The Company further anticipates spending in excess of $15 million to
construct a mixed waste treatment facility beginning in 1999. The Company has
already invested approximately $3 million in the design and permitting of this
facility. The Company has applied for an industrial development bond in the
State of Washington to finance this construction.
During the quarter ended June 30, 1998, the Company negotiated an expansion of
its bank credit facility. The new credit facility provides a line of credit of
$8.0 million and a letter of credit facility of $1.0 million. Borrowings, when
made, bear interest at the prime rate, currently 8.5%. There were no
outstanding borrowings as of September 30, 1998.
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The Company believes that its current cash and cash equivalents, together with
its credit facility 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 and it will require equity or debt financing to construct its mixed waste
facility. There can be no assurance that such additional financing will be
available or, if available, that such financing can be obtained on terms
satisfactory to the Company.
Year 2000 Impact
The Year 2000 (Y2K) computer issue relates to computer software that utilizes a
two-digit field versus a four-digit field for the calendar year identification.
Unless corrected, some computer programs and the systems that are dependent upon
these programs may be unable to function after December 31, 1999. An
uncorrected condition could interfere with the conduct of the Company's business
and could subject the Company to potentially significant legal liabilities,
although the Company currently has no reason to believe that these consequences
are likely to ensue.
The Company is not highly dependent on internal computer systems, and does not,
as a general matter, interact electronically with its customers or suppliers.
The Company has been reviewing and is continuing to review and update its
existing software programs and interfaces for Y2K compliance. Substantially all
of the Company's software is provided by third party suppliers and the Company
has been upgrading to Y2K compliant versions of this software. The final
upgrades are currently expected to be implemented by March 1999 and undergo
testing thereafter. The Company believes that as a result of these measures,
its systems will be Y2K compliant by the year 2000. If there continue to be
deficiencies after testing, the Company believes it will be able to conduct its
business without significant interruption using already compliant systems.
The Company has been surveying and is continuing to survey its major service
providers as to their Y2K readiness. Responses to date indicate substantial
compliance by such providers with ongoing programs in effect.
The cost associated with upgrading internal systems to more current versions of
vendor supplied software have not been material to date. The Company believes
that it is unlikely to experience a material adverse impact on its financial
condition or results of operations due to Y2K compliance issues. Since the
Company's Y2K updating is still ongoing, the full range of potential
complications and the full potential impact of the Y2K issue on the Company's
business, operations and financial condition is not known at this time.
Certain Business Considerations
The Company's business is subject to the following risks and uncertainties, in
addition to those described elsewhere.
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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. There is
no assurance as to the successful outcome of any pending application by the
Company for any such license, permit or approval, and the Company's existing
licenses, permits and approvals are subject to revocation or modification under
a variety of circumstances. Failure to obtain timely, or to comply with the
conditions of, applicable licenses, permits or approvals could adversely affect
the Company's business, financial condition and results of operations. As its
business expands and as it introduces new technologies, the Company will be
required to obtain additional operating licenses, permits or approvals. It may
be required to obtain additional operating licenses, permits or approvals if new
environmental legislation or regulations are enacted or promulgated or existing
legislation or regulations are amended, re-interpreted or enforced differently
than in the past. Any new requirements which raise compliance standards may
require the Company to modify its waste treatment technologies to conform to
more stringent regulatory requirements. There can be no assurance that the
Company will be able to continue to comply with all of the environmental and
other regulatory requirements applicable to its business.
No Assurance of Successful Development, Commercialization or Acceptance of
Technologies
The Company is in the process of developing, refining and implementing its
technologies for the treatment of LLRW, LLMW and other wastes. The Company's
future growth will be dependent in part upon the acceptance and implementation
of these technologies, particularly its recently developed vitrification
technologies for the thermal treatment of LLRW and LLMW. 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.
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Dependence on Environmental Laws and Regulations
A substantial portion of the Company's revenue is generated as a result of
requirements arising under federal and state laws, regulations and programs
related to protection of the environment. Environmental laws and regulations
are, and will continue to be, a principal factor affecting demand for the
services offered by the Company. The level of enforcement activities by
federal, state and local environmental protection agencies and changes in such
laws and regulations also affect the demand for such services. If the
requirements of compliance with environmental laws and regulations were to be
modified in the future, particularly those relating to the transportation,
treatment, storage or disposal of LLRW, LLMW or other wastes, the demand for the
Company's services, and its business, financial condition and results of
operations, could be materially adversely affected.
Dependence on Federal Government; Limits on Government Spending; Government
Contracting
The Company expects that the percentage of its revenue attributable to federal
government contracts will continue to be substantial for the foreseeable future.
The Company's government contracts generally are subject to cancellation, delay
or modification at the sole option of the government at any time, to annual
funding limitations and public sector budget constraints and, in many cases, to
actual delivery orders being released.
The Company is dependent on government appropriations to fund many of its
contracts. Efforts to reduce the federal budget deficit could adversely affect
the availability and timing of government funding for the clean-up of DOE, DOD
and other federal government sites. The failure by the government to fund
future restoration of such sites could have an adverse effect on the Company's
business, financial condition and results of operations. 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.
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
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future government contract projects for a significant period of time. The fines
and penalties which could result from noncompliance with applicable standards
and regulations, or the Company's suspension or disqualification, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Need for Additional Capital
The Company believes that it will need additional capital in order to implement
its long-term 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. If
the Company is not successful in raising such additional capital, it will need
to curtail or scale back its planned expansion, which could adversely affect the
Company's business, financial condition and results of operations.
Seasonality and Fluctuation in Quarterly Results
The Company's revenue is dependent on its contract backlog and the timing and
performance requirements of each contract. Revenue in the first and second
quarters has historically been lower than in the third and fourth quarters, as
the Company's customers have tended to ship waste during the months in which
transportation is less likely to be adversely affected by weather conditions.
The Company's revenue is also affected by the timing of its clients' planned
remediation activities and need for waste treatment services, which generally
increase during the third and fourth quarters. Due to this variation in demand,
the Company's quarterly results fluctuate. Accordingly, specific quarterly or
interim results should not be considered indicative of results to be expected
for any future quarter or for the full year. Due to the foregoing factors, it
is possible that in future quarters, the Company's operating results will not
meet the expectations of securities analysts and investors. In such event, the
price of the Common Stock could be materially adversely affected.
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.
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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.
Competition
In general, the market for radioactive and hazardous waste management services
is highly competitive. The Company faces competition in its principal current
and planned business lines from both established domestic companies and foreign
companies attempting to introduce European waste treatment technologies into the
United States. Many of the Company's competitors have greater financial,
managerial, technical and marketing resources than the Company. To the extent
that competitors possess or develop superior or more cost-effective waste
treatment solutions or field service capabilities, or otherwise possess or
acquire competitive advantages compared to the Company, the Company's ability to
compete effectively could be materially adversely affected. Any increase in the
number of licensed commercial LLRW treatment facilities or disposal sites in the
United States or any decrease in the treatment or disposal fees charged by such
facilities or sites could increase the competition faced by the Company or
reduce the competitive advantage of certain of the Company's treatment
technologies.
International Expansion
A key component of the Company's long-term 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
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within which the Company operates or will operate will not change. Any such
change could have a material adverse effect on the Company's business, financial
condition and results of operations.
Dependence on Key Personnel
The Company's future success depends on its continuing ability to attract,
retain and motivate highly qualified managerial, technical and marketing
personnel. The Company is highly dependent upon the continuing contributions
of its key managerial, technical and marketing personnel. The Company's
employees may voluntarily terminate their employment with the Company at any
time, and competition for qualified technical personnel, in particular, is
intense. The loss of the services of any of the Company's managerial, technical
or marketing personnel could materially adversely affect the Company's business,
financial condition and results of operations.
Focus on Larger Projects
The Company increasingly pursues large, multi-year contracts as a method of
achieving more predictable revenue, more consistent utilization of equipment and
personnel, and greater leverage of sales and marketing costs. These larger
projects impose significant risks if actual costs are higher than those
estimated at the time of bid. A loss on one or more of such larger contracts
could have a material adverse effect on the business, financial condition and
results of operations of the Company. In addition, failure to obtain, or delay
in obtaining, targeted large, multi-year contracts could result in significantly
less revenue to the Company than anticipated.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ATG INC.
Date: February 12, 1999 By: /s/ Steven J. Guerrettaz
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Steven J. Guerrettaz
Vice President - Chief Financial Officer
(Principal Financial and Chief
Accounting Officer)
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