<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
FORM 10-Q
/ X / Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934
For the Quarter Ended June 30, 1999
OR
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934
For the transition period from _____________ to _____________
Commission File Number 0-14292
GTS DURATEK, INC.
(Exact name of Registrant as specified in its charter)
Delaware 22-2476180
- -------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10100 Old Columbia Road, Columbia, Maryland 21046
- ------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (410) 312-5100
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 the past 90 days. Yes X No
----- -----
Number of shares outstanding of each of the issuer's classes of common stock as
of August 6, 1999:
Common Stock, par value $0.01 per share 13,408,204 shares
<PAGE>
GTS DURATEK, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Part I Financial Information
- ------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
as of June 30, 1999 and December 31, 1998.................... 1
Consolidated Condensed Statements of Operations for the Three
and Six Months Ended June 30, 1999 and 1998.................. 2
Consolidated Condensed Statement of Changes in Stockholders'
Equity for the Six Months Ended June 30, 1999................ 3
Consolidated Condensed Statements of Cash Flows for the
Six Months Ended June 30, 1999 and 1998...................... 4
Notes to Consolidated Financial Statements..................... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 9
Item 3. Quantitative and Qualitative Information About
Market Risk.................................................. 13
Qualification Relating to Financial Information................ 13
Part II Other Information
- -------
Item 1. Legal Proceedings.............................................. 15
Item 4. Submission of Matters to a Vote of Security Holders............ 15
Item 5. Other Information.............................................. 15
Item 6. Exhibits and Reports on Form 8-K............................... 16
Signatures..................................................... 17
</TABLE>
<PAGE>
Part I Financial Information
- ------
Item 1. Financial Statements
GTS DURATEK, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
ASSETS (unaudited) *
<S> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 1,638,932 $ 5,944,274
Receivables, net.................................. 35,550,619 35,350,150
Other accounts receivable......................... 2,313,475 2,351,034
Costs and estimated earnings in excess of
billings on uncompleted contracts............... 10,071,331 4,254,591
Prepaid expenses and other current assets......... 3,799,635 3,676,937
Deferred income taxes............................. 1,006,066 1,006,066
------------ ------------
Total current assets............................ 54,380,058 52,583,052
Property, plant and equipment, net.................. 59,208,819 54,270,744
Investments in and advances to joint ventures, net.. 4,071,404 4,131,406
Goodwill and other intangible assets, net........... 25,594,217 13,658,521
Deferred charges and other assets, net.............. 1,686,763 804,933
Deferred income taxes............................... 3,085,976 3,085,976
------------ ------------
$148,027,237 $128,534,632
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings............................. $ 4,859,016 $ 10,947,148
Accounts payable.................................. 13,584,373 12,837,623
Accrued expenses and other current liabilities.... 15,639,625 5,856,300
Unearned revenues................................. 299,987 3,380,477
Waste processing and disposal liabilities......... 690,871 4,202,561
------------ ------------
Total current liabilities....................... 35,073,872 37,224,109
Convertible debenture............................... 12,100,585 11,821,582
Long-term debt...................................... 19,657,727 -
Facility and equipment decontamination
and decommissioning liabilities.................... 8,184,594 7,824,447
Other noncurrent liabilities........................ 1,474,852 1,363,822
------------ ------------
Total liabilities............................... 76,491,630 58,233,960
------------ ------------
Redeemable preferred stock
(Liquidation value $16,320,000)................... 15,393,740 15,279,085
------------ ------------
Stockholders' equity:
Common stock...................................... 142,277 142,257
Capital in excess of par value.................... 72,520,004 72,513,024
Deficit........................................... (10,989,116) (14,742,524)
Treasury stock, at cost........................... (5,531,298) (2,891,170)
------------ ------------
Total stockholders' equity...................... 56,141,867 55,021,587
------------ ------------
$148,027,237 $128,534,632
============ ============
</TABLE>
* The Consolidated Condensed Balance Sheet as of December 31, 1998 has been
derived from the Company's audited Consolidated Balance Sheet as of that date.
See notes to condensed consolidated financial statements
1
<PAGE>
GTS DURATEK, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------------- -------------------------
1999 1998 1999 1998
----------- ---------- ----------- ----------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Revenues................................ $41,692,417 $38,810,201 $80,577,671 $76,041,153
Cost of revenues........................ 30,069,905 32,103,828 59,145,744 61,498,441
----------- ----------- ----------- -----------
Gross profit............................ 11,622,512 6,706,373 21,431,927 14,542,712
Selling, general and
administrative expenses............... 6,733,545 7,087,514 13,243,570 12,571,918
----------- ----------- ----------- -----------
Income (loss) from operations........... 4,888,967 (381,141) 8,188,357 1,970,794
Interest expense, net................... (298,790) (181,619) (583,612) (255,400)
----------- ----------- ----------- -----------
Income (loss) before income taxes
(benefit) and proportionate share
of loss of joint venture.............. 4,590,177 (562,760) 7,604,745 1,715,394
Income taxes (benefit).................. 1,836,073 (226,147) 2,996,682 627,456
----------- ----------- ----------- -----------
Income (loss) before proportionate
share of loss of joint venture........ 2,754,104 (336,613) 4,608,063 1,087,938
Proportionate share of loss of joint
venture............................... (50,000) (50,000) (100,000) (1,374,000)
----------- ----------- ----------- -----------
Income (loss) before cumulative effect
of change in accounting principle...... 2,704,104 (386,613) 4,508,063 (286,062)
Cumulative effect of change
in accounting principle................ - - - (420,000)
----------- ----------- ----------- -----------
Net income (loss) and
comprehensive income (loss)............ 2,704,104 (386,613) 4,508,063 (706,062)
Preferred stock dividends and
charges for accretion.................. 377,435 376,582 754,655 752,953
----------- ----------- ----------- -----------
Net income (loss) attributable to
common shareholders.................... $ 2,326,669 $ (763,195) $ 3,753,408 $(1,459,015)
=========== =========== =========== ===========
Basic net income (loss) per share....... $ 0.17 $ (0.06) $ .28 $ (0.12)
=========== =========== =========== ===========
Diluted net income (loss) per share..... $ 0.14 $ (0.06) $ .23 $ (0.12)
=========== =========== =========== ===========
Diluted weighted average
common stock outstanding............... 13,454,926 12,830,071 13,582,581 12,820,783
=========== =========== =========== ===========
Diluted weighted average common
stock and dilutive
securities outstanding................ 20,499,357 12,830,071 20,636,387 12,820,783
=========== =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements
2
<PAGE>
GTS DURATEK, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Six Months Ended June 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Capital in Total
------------ Excess of Treasury Stockholders'
Shares Amount Par Value Deficit Stock Equity
------ ------ ---------- ------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 14,225,750 $142,257 $72,513,024 $(14,742,524) $(2,891,170) $55,021,587
Net income 4,508,063 4,508,063
Exercise of options and
warrants 2,000 20 6,980 7,000
Treasury stock purchases (2,640,128) (2,640,128)
Preferred dividends (640,000) (640,000)
Accretion of redeemable
preferred stock (114,655) (114,655)
---------- -------- ----------- ------------ ----------- -----------
Balance, June 30, 1999 14,227,750 $142,277 $72,520,004 $(10,989,116) $(5,531,298) $56,141,867
========== ======== =========== ============ =========== ===========
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE>
GTS DURATEK, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------
1999 1998
------------ -----------
(Restated)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................ $ 4,508,063 $ (706,062)
Adjustments to reconcile net income (loss) to............
net cash provided by (used in) operating activities:
Depreciation and amortization........................ 2,393,189 2,646,424
Accrued interest on convertible debenture......... 279,003 325,304
Proportionate share of loss of joint venture......... 100,000 1,374,000
Cumulative effect of change in accounting principle.. - 420,000
Changes in operating items, net of effects from
business acquired in 1999:
Receivables........................................ 2,037,090 (5,260,119)
Cost in excess of billings......................... (5,816,740) 4,314,218
Prepaid expenses and other current assets.......... 77,303 (126,540)
Accounts payables, accrued expenses and
other current liabilities........................ 5,712,077 (642,632)
Unearned revenues.................................. (3,080,490) (4,848,154)
Waste processing and disposal liabilities.......... (3,511,690) (1,432,843)
Facility and equipment decontamination and
decommissioning liabilities....................... 360,147 459,604
------------ -----------
Net cash provided by (used in) operations.................. 3,057,952 (3,476,800)
------------ -----------
Cash flows from investing activities:
Additions to property, plant and equipment, net ......... (3,398,600) (4,049,180)
Advances to joint ventures............................... (40,002) (16,853)
Acquisition of Frank W. Hake Associates, LLC............. (13,156,698) -
Other.................................................... (289,922) 40,851
------------ -----------
Net cash used in investing activities................ (16,885,222) (4,025,182)
------------ -----------
Cash flows from financing activities:
Short-term borrowings (repayments), net.................. (6,088,132) 6,780,622
Borrowings under long-term debt.......................... 19,768,757 -
Preferred stock dividends................................ (640,000) (640,000)
Proceeds from issuance of common stock................... 7,000 243,427
Repurchase of treasury shares............................ (2,640,128) -
Deferred financing costs................................. (885,569) -
Reduction of capital lease obligations................... - (25,804)
------------ -----------
Net cash provided by financing activities.............. 9,521,928 6,358,245
------------ -----------
Net decrease in cash and cash equivalents.................. (4,305,342) (1,143,737)
Cash and cash equivalents at beginning of period........... 5,944,274 7,026,249
------------ -----------
Cash and cash equivalents at end of period................. $ 1,638,932 $ 5,882,512
============ ===========
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE>
GTS DURATEK, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
1. Principles of consolidation and basis of presentation
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly-owned except for DuraTherm, Inc.
which is 80% owned. All significant intercompany balances and transactions have
been eliminated in consolidation. Investments in subsidiaries and joint
ventures in which the Company does not have control or majority ownership are
accounted for under the equity method.
2. Inventories
Inventories, consisting of material, labor and overhead, are classified as
follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
<S> <C> <C>
Raw materials... $ 235,253 $ 202,087
Finished goods.. 1,106,479 1,068,889
---------- ----------
$1,341,732 $1,270,976
========== ==========
</TABLE>
3. Net income per share
Basic earnings per share (EPS) excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Weighted average shares used in
computing basic EPS were 13,454,926 and 12,830,071 for the three months ended
June 30, 1999 and 1998, respectively, and 13,582,581 and 12,820,783 for the six
months ended June 30, 1999 and 1998, respectively. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity.
Weighted average shares used in computing diluted EPS were 20,499,357 and
12,830,071 for the three months ended June 30, 1999 and 1998, respectively, and
20,636,387 and 12,820,783 for the six months ended June 30, 1999 and 1998,
respectively. The difference between basic and diluted weighted average shares
relates to the dilutive effect of stock options and warrants where the exercise
price is less than the average market value of the Company's common stock for
the year of calculation. Conversion of the Company's convertible debentures and
preferred stock is not assumed in the calculation of diluted EPS as the
conversion is anti-dilutive.
4. Segment reporting
The Company has three primary segments (i) commercial waste processing,
(ii) government waste processing and (iii) technical services. Below is a brief
description of each of the segments:
1. Commercial Waste Processing (CWP) The Company conducts its commercial
waste processing operations principally at its Bear Creek Operations
Facility located in Oak Ridge, Tennessee. The Company's waste treatment
technologies include: incineration; compaction; metal decontamination and
recycling; vitrification; steam reforming; thermal desorption; and ion
exchange. Commercial waste processing customers primarily include
commercial nuclear utilities and petrochemical companies.
2. Government Waste Processing (GWP) The Company provides on-site waste
processing services on large government projects for the DOE. The on-site
waste processing services provided by the Company on DOE projects include
program development, waste characterization, on-site waste treatment,
facility operation, packaging and shipping of residual waste, profiling and
manifesting the processed waste and selected technical support services.
5
<PAGE>
GTS DURATEK, INC. AND SUBSIDIARIES
3. Technical Services (TS) The Company's technical support services
encompass approximately 500 employees, consultants and technicians, some of
whom are full-time employees and the balance of whom are contract
employees, who support and complement the Company's commercial and
government waste processing operations and also provide highly specialized
technical support services for the Company's customers.
The Company's segment information is as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, 1999
------------------------------------------------------------------
Unallocated
CWP GWP TS Items Consolidated
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues from $19,699,951 $ 8,581,489 $13,410,977 $ - $ 41,692,417
external customers
Income from operations 2,836,823 1,848,599 203,545 - 4,888,967
Interest income - - - - -
Interest expense - - - (298,790) (298,790)
Depreciation and 1,402,400 50,095 100,205 - 1,552,700
amortization
expense
Proportionate share - - - (50,000) (50,000)
of losses of joint
ventures
Income tax expense - - - 1,836,073 1,836,073
Investments in and - - - 4,071,404 4,071,404
advances to joint
ventures
Capital expenditure 2,785,076 10,380 30,782 572,362 3,398,600
for additions to
long-lived assets
Total assets 87,586,962 19,623,670 21,283,071 19,533,534 148,027,237
</TABLE>
6
<PAGE>
GTS DURATEK, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three Months Ended June 30, 1998
--------------------------------------------------------------------
Unallocated
CWP GWP TS Items Consolidated
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues from $17,967,551 $ 6,905,982 $13,936,668 $ - $ 38,810,201
external customers
Income (loss) from 1,088,700 (451,800) (1,018,041) - (381,141)
operations
Interest income - - - 60,000 60,000
Interest expense - - - (241,619) (241,619)
Depreciation and 1,203,090 162,846 139,094 - 1,505,030
amortization
expense
Proportionate share - - - (50,000) (50,000)
of losses of joint
ventures
Income tax expense - - - (226,147) (226,147)
Investments in and - - - 5,005,378 5,005,378
advances to joint
ventures
Capital expenditure 2,005,154 1,579,180 238,902 225,944 4,049,180
for additions to
long-lived assets
Total assets 61,730,117 21,804,242 28,348,165 20,585,538 132,468,062
<CAPTION>
Six Months Ended June 30, 1999
--------------------------------------------------------------------
Unallocated
CWP GWP TS Items Consolidated
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues from $37,268,346 $18,058,178 $25,251,147 $ - $ 80,577,671
external customers
Income from operations 4,864,383 2,736,001 587,973 - 8,188,357
Interest income - - - - -
Interest expense - - - (583,612) (583,612)
Depreciation and 2,092,589 100,190 200,410 - 2,393,189
amortization
expense
Proportionate share - - - (100,000) (100,000)
of losses of joint
ventures
Income tax expense - - - 2,996,682 2,996,682
Investments in and - - - 4,071,404 4,071,404
advances to joint
ventures
Capital expenditure 2,785,076 10,380 30,782 572,362 3,398,600
for additions to
long-lived assets
Total assets 87,586,962 19,623,670 21,283,071 19,533,534 148,027,237
</TABLE>
7
<PAGE>
GTS DURATEK, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Six Months Ended June 30, 1998
--------------------------------------------------------------------
Unallocated
CWP GWP TS Items Consolidated
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues from $36,857,751 $12,707,182 $26,476,220 $ - $ 76,041,153
external customers
Income (loss) from 2,470,200 445,635 (945,041) - 1,970,794
operations
Interest income - - - 173,300 173,300
Interest expense - - - (428,700) (428,700)
Depreciation and 2,115,497 286,346 244,581 - 2,646,424
amortization
expense
Proportionate share - - - (1,374,000) (1,374,000)
of losses of joint
ventures
Income tax expense - - - 627,456 627,456
Investments in and - - - 5,005,378 5,005,378
advances to joint
ventures
Capital expenditure 2,005,154 1,579,180 238,902 225,944 4,049,180
for additions to
long-lived assets
Total assets 61,730,117 21,804,242 28,348,165 20,585,538 132,468,062
</TABLE>
5. Start-up costs
In the fourth quarter of 1998, the Company and its 45% owned subsidiary,
DuraChem, Inc. ("DuraChem") adopted the provisions of SOP 98-5 "Reporting on the
Costs of Start-Up Activities," which requires companies to expense start-up
expenses as incurred. The SOP requires that a company adopt the provisions
effective as of the first day of the year in the year of adoption. Accordingly,
the Company has restated the condensed consolidated statements of operations and
cash flows for the three and six months ended June 30, 1998. In connection with
the adoption, the Company recognized $1,274,000, its proportionate share of
DuraChem's adoption of the SOP, as proportionate share of loss of joint venture
and $420,000 as the cumulative effect of the Company's change in accounting
principle. Each amount is net of applicable income tax benefit. For the three
months ended June 30, 1998, the restatement increased net income by $32,097. For
the six months ended June 30, 1998, the restatement increased income before
proportionate share of loss of joint venture by $64,194, decreased income before
cumulative effect of change in accounting principles by $1,209,806 and decreased
net income (loss) and net income (loss) attributable to common shareholders by
$1,629,806. In addition, net income (loss) per share was reduced by $0.13 per
share.
6. Acquisition of Frank W. Hake Associates, L.L.C.
On June 30, 1999, the Company acquired 100% of the outstanding capital stock of
Frank W. Hake Associates, L.L.C. ("Hake") from HakeTenn, Inc., a Delaware
corporation and an affiliate of the Hake Group of Philadelphia, Pennsylvania,
and two individuals for $12.9 million in cash and the assumption of $500,000 of
indebtedness of Hake. The Company paid the cash portion of the purchase price
out of available cash, principally from its credit facility with its bank. Hake
is a specialist in the storage, transportation handling and processing of
radioactive waste emanating from nuclear power generation plants throughout the
United States. Hake also stores and services power generation equipment at
their licensed facility in Memphis, Tennessee.
8
<PAGE>
GTS DURATEK, INC. AND SUBSIDIARIES
As the acquisition was effective as of June 30, 1999, the Company's results of
operations for the six months ended June 30, 1999 do not include the results of
Hake. The Company has accounted for the transaction under the purchase method
of accounting. The aggregate purchase price of approximately $18 million, which
includes liabilities assumed and transaction costs, exceeded the fair value of
Hake's tangible assets by approximately $12.1 million. Such amount has been
allocated to intangible assets, principally goodwill, and is being amortized
over 30 years.
The aggregate purchase price for Hake was as follows:
<TABLE>
<S> <C>
Cash paid $12,957,682
Liabilities assumed 4,818,000
Transaction costs 199,016
-----------
$17,974,698
===========
</TABLE>
The aggregate purchase price was allocated to acquired assets based upon their
estimated fair values as follows:
<TABLE>
<S> <C>
Accounts receivable $ 2,200,000
Property, plant and equipment 3,500,000
Goodwill and other intangible assets 12,074,698
Other assets 200,000
-----------
$17,974,698
===========
</TABLE>
Revenues from Hake, on an annualized basis, are expected to be approximately $15
million.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
GTS DURATEK, INC. AND SUBSIDIARIES
Overview
GTS Duratek, Inc. (the "Company") derives substantially all of its revenues
from commercial and government waste processing operations, and from technical
support services to electric utilities, industrial facilities, commercial
businesses and government agencies. Commercial waste processing operations are
provided primarily at the Company's Bear Creek low-level radioactive waste
processing facility located in Oak Ridge, Tennessee. The Company also provides
on-site waste processing services on large government projects for the United
States Department of Energy ("DOE"). Technical support services are generally
provided pursuant to multi-year time and materials contracts. Revenues are
recognized as costs are incurred according to predetermined rates. The contract
costs primarily include direct labor, materials and the indirect costs related
to contract performance.
As of February 1999, the Company completed the contract to vitrify 660,000
gallons of mixed waste sludge at its M-Area processing plant located at the
DOE's Savannah River Site.
The Company's future operating results will be affected by, among other
things, the duration of commercial waste processing contracts and amount of
waste to be processed by the Company's commercial waste processing operations
pursuant to these contracts; the timing of new DOE waste treatment projects,
including those pursued jointly with BNFL and the duration of the Hanford and
Idaho Falls DOE projects.
In the fourth quarter of 1998, the Company and its 45% owned subsidiary,
DuraChem, Inc. ("DuraChem") adopted the provisions of SOP 98-5 "Reporting on the
Costs of Start-Up Activities," which requires companies to expense start-up
expenses as incurred. The SOP requires that a company adopt the provisions
effective as of the first day of the year in the year of adoption. Accordingly,
the Company has restated the condensed consolidated statements of operations and
cash flows for the three and six month ended June 30, 1998. In connection with
the adoption, the Company recognized $1,274,000, its proportionate share of
DuraChem's adoption of the SOP, as proportionate share of loss of joint venture
and $420,000 as the cumulative effect of the Company's change in accounting
principle. Each amount is net of applicable income tax benefit. For the three
months ended June 30, 1998, the restatement increased net income by $32,097. For
the six months ended June 30, 1998, the restatement increased income before
proportionate share of loss of joint venture by $64,194, decreased income before
cumulative effect of change in accounting principles by $1,209,806 and decreased
net income (loss) and net income (loss) attributable to common shareholders by
$1,629,806. In addition, net income (loss) per share was reduced by $0.13 per
share.
On June 30, 1999, the Company acquired 100% of the outstanding capital
stock of Frank W. Hake Associates, L.L.C. ("Hake") from HakeTenn, Inc., a
Delaware corporation and an affiliate of the Hake Group of Philadelphia,
Pennsylvania, and two individuals for $12.9 million in cash and the assumption
of $500,000 of indebtedness of Hake. Hake is a specialist in the storage,
transportation handling and processing of radioactive waste emanating from
nuclear power generation plants throughout the United States. Hake also stores
and services power generation equipment at their licensed facility in Memphis,
Tennessee.
The Company paid the cash portion of the purchase price out of
available cash, principally from its credit facility with its bank. Under this
facility, the Company has an acquisition line of credit to finance acquisitions
or stock repurchases providing for borrowings up to $20 million. Borrowings
under the line of credit bear interest at the LIBOR rate plus 2.25%.
10
<PAGE>
GTS DURATEK, INC. AND SUBSIDIARIES
Results of Operations
Three Months Ended June 30, 1998 as compared to Three Months Ended June 30,
1999.
Revenues increased by $2.9 million or 7.4% from $38.8 million in 1998 as
compared to $41.7 million in 1999. The increase was primarily attributable to a
$3.2 million increase in government waste processing services revenues, a $1.0
million increase in revenues at the Company's DuraTherm petrochemical waste
treatment facility located in San Leon, Texas, and a $700,000 increase in
revenues in commercial waste processing services at the Company's Bear Creek
low-level radioactive waste processing facility located in Oak Ridge, Tennessee.
The increase was partially offset by a $2.0 million decrease in technical
support services revenues. The increase in revenues from government waste
processing services was primarily the result of work performed on the Hanford
Tank Waste Remediation System contract awarded by BNFL to build and operate a
pilot melter at the Company's Columbia, Maryland headquarters. The increase in
revenues at the DuraTherm facility was the result of higher processing volumes
and higher average prices as compared to the same period in 1998. The increase
in revenues at the Bear Creek facility was the result of higher waste processing
volumes as compared to the same period in 1998. The decline in revenues from
technical support services was the result of less power plant outages being
scheduled in the second quarter of 1999 as compared to the same period in 1998.
Gross profit increased by $4.9 million from $6.7 million in 1998 to $11.6
million in 1999. Government waste processing, the Bear Creek facility, and the
DuraTherm facility accounted for increases in gross profit of $2.7 million, $2.1
million and $500,000, respectively. The increase was partially offset by a
decrease in gross profit from technical services of $400,000. The increase in
gross profit in government waste processing was the result of increased revenues
previously mentioned at comparable gross margins. The increase in gross profit
at the Bear Creek facility was the result of higher processing volumes and a
change in product mix. The increase in gross profit at the DuraTherm facility
was the result of higher processing volumes and performance on higher margin
contracts. The decrease in gross profit from technical support services was the
result of decreased revenues previously mentioned at comparable gross margins.
As a percentage of revenues, gross profit increased from 17.3% in 1998 to 27.9%
in 1999.
Selling, general and administrative expenses decreased by $400,000 or 5.0%
from $7.1 million in 1998 to $6.7 million in 1999. As a percentage of revenues,
selling general and administrative expenses decreased from 18.3% in 1998 to
16.2% in 1999.
Interest expense, net increased by $117,000 from 1998 to 1999. The increase
was the result of increased borrowings required to fund working capital needs.
Income taxes (benefit) increased from a benefit of $226,000 in 1998 to
expense of $1.8 million in 1999. The Company is accruing income taxes (benefit)
at full statutory rates.
Six Months Ended June 30, 1998 as compared to Six Months Ended June 30, 1999.
Revenues increased by $4.5 million or 6.0% from $76.0 million in 1998 to
$80.5 million in 1999. The increase was primarily attributable to a $6.8 million
increase in government waste processing services revenues and a $2.5 million
increase in revenues at the Company's DuraTherm petrochemical waste treatment
facility located in San Leon, Texas. The increase was partially offset by a $2.7
million decrease in revenues in technical support services revenues and a $2.1
million decrease in revenues in commercial waste processing services at the
Company's Bear Creek low-level radioactive waste processing facility located in
Oak Ridge, Tennessee. The increase in revenues from government waste processing
services was primarily the result of work performed on the Hanford Tank Waste
Remediation System contract awarded by BNFL to build and operate a pilot melter
at the Company's Columbia, Maryland headquarters. The increase in revenues at
the DuraTherm facility was the result of higher processing volumes and higher
average prices as compared to the same period in 1998. The decline in revenues
from technical support services was primarily the result of less power plant
outages being scheduled in the second quarter of
11
<PAGE>
GTS DURATEK, INC. AND SUBSIDIARIES
1999 as compared to the same period in 1998 and work performed during 1998 on a
large decontamination and decommissioning project. The decrease in revenues at
the Bear Creek facility was primarily the result of lower waste processing
volumes attributable to less power plant outages being scheduled in 1999 as
compared to the same period in 1998.
Gross profit increased by $6.9 million from $14.5 million in 1998 to $21.4
million in 1999. Government waste processing, the Bear Creek facility, the
DuraTherm facility and technical support services accounting for increases in
gross profit of $3.5 million , $1.8 million, $1.2 million and $400,000
respectively. The increase in gross profit in government waste processing was
the result of increased revenues previously mentioned at comparable gross
margins. The increase in gross profit at the Bear Creek facility was primarily
the result of a change in product mix. The increase in gross profit at the
DuraTherm facility was the result of higher processing volumes and performance
on higher margin contracts. The increase in gross profit from technical support
services was principally the result of performance of higher margin consulting
services contracts as compared to the same period in 1998. As a percentage of
revenues, gross profit increased from 19.1% in 1998 to 26.6% in 1999.
Selling, general and administrative expenses increased by $600,000 or 5.3%
from $12.6 million in 1998 to $13.2 million in 1999. As a percentage of
revenues, selling general and administrative expenses decreased from 16.5% in
1998 to 16.4% in 1999.
Interest expense, net increased by $328,000 from 1998 to 1999. The increase
was the result of increased borrowings required to fund working capital needs.
Income taxes increased by $2.4 million from 1998 to 1999. The Company's
effective tax rate was 36.5% in 1998 as compared to 39.4% in 1999.
Liquidity and capital resources
In February 1999, the Company obtained a $60 million bank credit facility
which includes (i) a $35 million revolving line of credit, based on eligible
accounts receivable as defined in the credit agreement, to fund working capital
requirements, (ii) a $20 million line of credit to finance acquisitions or stock
repurchases, and (iii) a $5 million line of credit to finance up to 75% of new
equipment purchases. Borrowings under the old credit facility were repaid from
this credit facility. Borrowings outstanding under the revolving line of credit
bear interest at either the bank's base rate, as defined, or at the LIBOR rate
plus 2.25%. The rate is subject to adjustment after June 30, 1999, depending
upon the Company's ratio of debt to operating income. At June 30, 1999, the
Company had $4.8 million outstanding under the revolving line of credit and
$19.7 million outstanding under the acquisition line of credit. Under this
credit facility, the Company's bank has also issued letters of credit in the
aggregate amount of $17.8 million to the State of Tennessee to provide for
security for SEG's obligation to clean and remediate the Bear Creek facility
upon its closure. The new credit facility has a five year term.
The Company believes cash flows from operations and, if necessary,
borrowings available under its credit facility will be sufficient to meet its
operating needs, including the quarterly preferred dividend requirement of
$320,000 for at least the next twelve months.
Information Systems and the Impact of the Year 2000 Issue
The Year 2000 issue results from a programming convention in which computer
programs use two digits rather than four to define the applicable year. The
inability of computer programs to recognize a year that begins with "20" could
result in system failures, miscalculations or errors causing disruptions of
operations or other business activities.
GTS Duratek has undertaken a program to address the Year 2000 issue with
respect to (i) the Company's information systems, (ii) the Company's non-
information systems, and (iii) certain systems for the Company's major customers
and suppliers. As described below, the Company's Year 2000 program includes (i)
assessment of the problem, (ii) development
12
<PAGE>
GTS DURATEK, INC. AND SUBSIDIARIES
of remedies, (iii) testing of such remedies and (iv) the preparation of
contingency plans to deal with the worst case scenarios.
Information Systems - The Company maintains information systems at each of
its operating divisions. Information systems at all of these locations have been
assessed. Information systems in Columbia, MD and Oak Ridge, TN have been
certified by the hardware and software manufacturers as Year 2000 compliant. The
Company has remediated information systems in San Leon, TX and Pittsburgh, PA.
The Company is monitoring software and hardware Year 2000 patches and
information as it relates to all current and future systems.
Non-Information Systems - The Company has completed its assessment of the
Year 2000 issue with respect to critical non-information systems. Remediation of
critical non-information systems has been completed. Programmable Logic
Controller (PLC) devices identified throughout the organization have been
prioritized. Replacement, remediation and contingency plans will be in place by
October 1999.
Customer and Supplier Systems - The Company has begun informal discussions
with major customers and suppliers with respect to the Year 2000 issue. The
Company currently has limited electronic interfaces with customers and vendors
and, accordingly, is focused on its customer's and vendor's ability to operate
following January 1, 2000. The Company intends to make formal inquiries of its
key customers and suppliers during 1999 to complete this assessment and
establish contingency plans as necessary.
Costs Related to the Year 2000 Issue - To date the Company has incurred
$260,000 to remediate its Year 2000 issues and expects to incur an additional
$150,000 to complete the remediation and testing of the PLC devices. Costs to
remediate the non-information systems are expected to be approximately $500,000.
Risk Related to the Year 2000 Issue - Although the Company's Year 2000
efforts are intended to minimize the adverse effects of the Year 2000 issue on
the Company's operations, the actual effects of the issue cannot be known until
the Year 2000. Failure of the Company and its major customers and suppliers to
appropriately remediate the Year 2000 issue could have a material adverse effect
on the Company's financial condition and results of operations.
13
<PAGE>
GTS DURATEK, INC. AND SUBSIDIARIES
Item 3. Quantitative and Qualitative Information about Market Risk
The Company's major market risk is to changing interest rates. As of June
30, 1999, the Company had floating rate long-term debt of $19.7 million and
floating short-term rate debt of $4.8 million. The long-term debt bears
interest at LIBOR plus 2.25%. The short-term debt bears interest at the bank's
base rate, as defined.
The Company has not purchased any interest rate derivative instruments but
may do so in the future. In addition, the Company does not have any foreign
currency or commodity risk.
Qualification Relating to Financial Information
The consolidated financial information included herein is unaudited, and
does not include all disclosures required under generally accepted accounting
principles because certain note information included in the Company's Annual
Report, filed on Form 10-K, has been omitted; however, such information reflects
all adjustments (consisting solely of normal recurring adjustments) which are,
in the opinion of management, necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods
presented. The results of the 1999 interim period are not necessarily
indicative of results to be expected for the entire year.
14
<PAGE>
Part II Other Information
- -------
GTS DURATEK, INC. AND SUBSIDIARIES
Item 1. Legal Proceedings
See the Company's annual report on Form 10-K for the year ended
December 31, 1998 for a discussion of legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on May 19, 1999
the following matters were voted upon:
a. Daniel A. D'Aniello, Earle C. Williams, J.A. Fred Brothers and
Dr. Francis J. Harvey were elected to serve as directors of the Company by the
convertible preferred stockholders for a one-year term. Admiral James D.
Watkins, George V. McGowan and Robert E. Prince were elected to serve as
directors for a one-year term by the common stockholders and convertible
preferred stockholders, voting together as a single class.
b. The proposal to approve an amendment to the Certificate of
Designations of the 8% Cumulative Convertible Redeemable Preferred Stock, par
value $.01 per share, to extend the mandatory redemption date from January 24,
2002 to February 5, 2004 was approved by the common stockholders and convertible
preferred stockholders, voting together as a single class, by a vote of
8,882,633 for and 543,479 against. The Annual Meeting of Stockholders was
adjourned with respect to the vote on this matter by the convertible preferred
stockholders, voting together as a separate class. The matter was subsequently
approved by the unanimous vote of the holders of the Convertible Preferred
Stock.
c. The proposal to reappoint KPMG LLP as the Company's independent
auditors for the year ending December 31, 1999 was adopted by a vote of
12,864,835 for and 53,728 against this proposal.
Item 5. Other Information
In response to the "safe harbor" provisions contained in the Private
Securities Litigation Reform Act of 1995, the Company is including in this
Quarterly Report on Form 10-Q the following cautionary statements which are
intended to identify certain important factors that could cause the Company's
actual results to differ materially from those projected in forward-looking
statements of the Company made by or on behalf of the Company. Many of these
factors have been discussed in prior filings with the Securities and Exchange
Commission.
The Company's future operating results are largely dependent upon the
Company's ability to manage its commercial waste processing operations,
including obtaining commercial waste processing contracts and processing waste
under such contracts in a timely and cost effective manner. In addition, the
Company's future operating results are dependent upon the timing and award of
contracts by the DOE for the cleanup of other waste sites administered by it.
The timing and award of such contracts by the DOE is directly related to the
response of governmental authorities to public concerns over the treatment and
disposal of radioactive, hazardous, mixed and other wastes. The lessening of
public concern in this area or other changes in the political environment could
adversely affect the availability and timing of government funding for the
cleanup of DOE and other sites containing radioactive and mixed wastes.
Additionally, revenues from technical support services have in the past and
continue to account for a substantial portion of the Company's revenues and the
loss of one or more technical support service contracts could adversely affect
the Company's future operating results.
The Company's future operating results may fluctuate due to factors such
as: the timing of new commercial waste processing contracts and duration of and
amount of waste to be processed pursuant to those contracts; the Company's
ability to integrate acquired
15
<PAGE>
GTS DURATEK, INC. AND SUBSIDIARIES
businesses, including the Company's most resent acquisition of Hake; the
acceptance and implementation of its waste treatment technologies in the
government and commercial sectors; the evaluation by the DOE and other customers
of the Company's technologies versus other competing technologies as well as
conventional storage and disposal alternatives; the timing of new waste
treatment projects, including those pursued jointly with BNFL, the duration of
such projects; and the timing of outage support projects and other large
technical support services projects at its customers' facilities.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
--------
See accompanying Index to Exhibits
b. Reports
-------
None.
16
<PAGE>
GTS DURATEK, INC. AND SUBSIDIARIES
June 30, 1999
SIGNATURES
----------
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.
GTS DURATEK, INC.
Dated: August 13, 1999 BY: /s/ Robert F. Shawver
----------------------------
Robert F. Shawver
Executive Vice President and
Chief Financial Officer
Dated: August 13, 1999 BY: /s/ Craig T. Bartlett
-----------------------------
Craig T. Bartlett
Treasurer
17
<PAGE>
Exhibits Index
3.1 Amended and Restated Certificate of Incorporation of the Registrant.
Incorporated herein by reference to Exhibit 3.1 of the Registrant's
Quarterly Report on From 10-Q for the quarter ended March 31, 1996. (File
No. 0-14292)
3.2 By-Laws of the Registrant. Incorporated herein by reference to Exhibit
3.3 of the Registrant's Form S-1 Registration Statement No. 33-2062.
4.1 Certificate of Designations of the 8% Cumulative Convertible Redeemable
Preferred Stock dated January 23, 1995. Incorporated herein by reference
to Exhibit 4.1 of the Registrants Form 8-K filed on February 1, 1995.
(File No. 0-14292)
4.2 Stock Purchase Agreement among Carlyle Partners II, L.P., Carlyle
International Partners II, L.P., Carlyle International Partners III, L.P.,
C/S International Partners, Carlyle-GTSD Partners, L.P., Carlyle-GTSD
Partners II, L.P. and GTS Duratek, Inc. and National Patent Development
Corporation dated as of January 24, 1995. Incorporated herein by
reference to Exhibit 4.2 of the Registrants Form 8-K filed on February 1,
1995. (File No. 0-14292)
4.3 Stockholders Agreement by and among GTS Duratek, Inc., Carlyle Partners
II, L.P., Carlyle International Partners II, L.P., Carlyle International
Partners III, L.P., C/S International Partners, Carlyle-GTSD Partners,
L.P., Carlyle-GTSD Partners II, L.P. and GTS Duratek, Inc. and National
Patent Development Corporation dated as of January 24, 1995. Incorporated
herein by reference to Exhibit 4.3 of the Registrants Form 8-K filed on
February 1, 1995. (File No. 0-14292)
4.4 Registration Rights Agreement by and among GTS Duratek, Inc., Carlyle
Partners II, L.P., Carlyle International Partners II, L.P., Carlyle
International Partners III, L.P., C/S International Partners, Carlyle-GTSD
Partners, L.P., Carlyle-GTSD Partners II, L.P.and GTS Duratek, Inc. and
National Patent Development Corporation dated as of January 24, 1995.
Incorporated herein by reference to Exhibit 4.4 of the Registrants Form 8-
K filed on February 1, 1995. (File No. 0-14292).
4.5 Convertible Debenture issued by GTS Duratek, Inc., General Technical
Services, Inc. and GTS Instrument Services Incorporated to BNFL Inc. dated
November 7, 1995. Incorporated herein by reference to Exhibit 10.20 of the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 1995 (File No. 0-14292).
10.1 1984 Duratek Corporation Stock Option Plan, as Amended. Incorporated
herein by reference to Exhibit 10.9 of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1990.
10.2 Asset Purchase Agreement dated August 20. 1990 between Chem-Nuclear
Systems, Inc. and Duratek Corporation. Incorporated herein by reference
to Exhibit 1 to the Registrant's Form 8-K filed on August 20, 1990. (File
No. 0-14292)
10.3 License Agreement dated as of August 17, 1992 between GTS Duratek, Inc.
and Dr. Theodore Aaron Litovitz and Dr. Pedro Buarque de Macedo.
Incorporated herein by reference to Exhibit 10.9 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1992. (File No.
0-14292)
E-1
<PAGE>
10.4 Stockholders' Agreement dated December 28, 1993 between GTS Duratek, Inc.
and Vitritek Holdings, L.L.C. Incorporated by reference to Exhibit 3 of
the Registrant's Form 8-K Current Report dated December 22, 1993. (File
No. 0-14292)
10.5 Agreement dated January 14, 1994 between GTS Duratek, Inc. and
Westinghouse Savannah River Company. Incorporated by reference to Exhibit
10.17 of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993. (File No. 0-14292)
10.6 Agreement dated September 15, 1994 between DuraChem Limited Partnership a
Maryland Limited Partnership, by and among CNSI Sub, Inc. and GTSD Sub,
Inc. as the General Partners, and Chemical Waste Management, Inc. and GTS
Duratek, Inc. as the Limited Partners. Incorporated herein by reference
to Exhibit 10-19 of the Registrants Annual Report on 10-K for the year
ended December 31, 1994 (File No. 0-14292)
10.7 Teaming Agreement by and between GTS Duratek, Inc. and BNFL Inc. dated
November 7, 1995. Incorporated herein by reference to Exhibit 10.20 of the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 1995 (File No. 0-14292).
10.8 Sublicense Agreement by and between GTS Duratek, Inc. and BNFL Inc. dated
November 7, 1995. Incorporated herein by reference to Exhibit 10.20 of the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 1995 (File No. 0-14292).
10.9 Stockholders' Agreement by and among Bird Environmental Gulf Coast, Inc.
GTS Duratek, Inc., GTSD Sub II, Inc., Jim S. Hogan, Mark B. Hogan, Barry
K. Hogan and Sam J. Lucas III dated November 29, 1995. Incorporated
herein by reference to Exhibit (c)(3) of the Registrant's Current Report
on Form 8-K filed on December 11, 1995 (File No. 0-14292).
10.10 Technology License Agreement by and among GTS Duratek, Inc., Bird
Environmental Gulf Coast, Inc. and Jim S. Hogan dated November 29, 1995.
Incorporated herein by reference to Exhibit (c)(4) of the Registrant's
Current Report on Form 8-K filed on December 11, 1995. (File No. 0-14292).
10.11 Stock Purchase Agreement by and between Westinghouse Electric Corporation
and GTS Duratek, Inc. dated as of April 8, 1997. Incorporated herein by
reference to Exhibit (c)(2) of Registrant's Current Report on Form 8-K
filed on April 18, 1997. (File No. 0-14292).
10.12 GTS Duratek, Inc. Executive Compensation Plan. Incorporated herein by
reference to Exhibit 10.19 of Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997 (File No. 0-14292).
10.13 Amended and Restated Credit Agreement as of February 1, 1999 between GTS
Duratek, Inc., GTS Duratek Bear Creek, Inc., GTS Duratek Colorado, Inc.,
Hittman Transport Services, Inc., GTS Instrument Services, Incorporated,
General Technical Services, Inc., Analytical Resources, Inc., GTSD Sub
III, Inc. and First Union National Bank, First Union Commercial
Corporation, Wachovia Bank, N.A. and National Bank of Canada. Incorporated
herein by reference to Exhibit (c)(2) of Registrant's Current Report on
Form 8-K filed on February 1, 1999. (File No. 0-14292).
E-2
<PAGE>
10.14 Amended and Restated Security Agreement as of February 1, 1999 between GTS
Duratek, Inc., GTS Duratek Bear Creek, Inc., GTS Duratek Colorado, Inc.,
Hittman Transport Services, Inc., GTS Instrument Services, Incorporated,
General Technical Services, Inc., Analytical Resources, Inc., GTSD Sub
III, Inc. and First Union National Bank, First Union Commercial
Corporation, Wachovia Bank, N.A. and National Bank of Canada. Incorporated
herein by reference to Exhibit (c)(2) of Registrant's Current Report on
Form 8-K filed on February 1, 1999. (File No. 0-14292).
10.15 Purchase and Sale Agreement between HakeTenn, Inc. George T. Hamilton and
Richard Wilson and GTS Duratek, Inc. dated as of June 30, 1999.
Incorporated herein by reference to Exhibit (c)(2) of Registrant's Current
Report on Form 8-K filed on July 13, 1999. (File No. 0-14292).
27.1 Financial Data Schedule. (filed herewith)
E-3
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<PAGE>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED BALANCE SHEET AS OF JUNE 30, 1999 (UNAUDITED) AND THE
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30,
1999 (UNAUDITED), OF GTS DURATEK, INC. AND SUBSIDIARIES AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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