<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 September 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)
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
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 November 4, 1999:
Common Stock, par value $0.01 per share 13,275,943 shares
<PAGE>
GTS DURATEK, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
Part I Financial Information
- ------
<S> <C> <C>
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
as of September 30, 1999 and December 31, 1998............ 1
Consolidated Condensed Statements of Operations for the Three
and Nine Months Ended September 30, 1999 and 1998......... 2
Consolidated Condensed Statement of Changes in Stockholders'
Equity for the Nine Months Ended September 30, 1999....... 3
Consolidated Condensed Statements of Cash Flows for the
Nine Months Ended September 30, 1999 and 1998............. 4
Notes to Condensed Consolidated Financial Statements......... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 10
Item 3. Quantitative and Qualitative Information About
Market Risk.................................................. 13
Qualification Relating to Financial Information.............. 14
Part II Other Information
- -------
Item 1. Legal Proceedings............................................ 14
Item 5. Other Information............................................ 14
Item 6. Exhibits and Reports on Form 8-K............................. 15
Signatures................................................... 16
</TABLE>
<PAGE>
Part I Financial Information
- ------
Item 1. Financial Statements
GTS DURATEK, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
ASSETS (unaudited) *
<S> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 1,854,876 $ 5,944,274
Receivables, net.................................. 37,874,021 35,350,150
Other accounts receivable......................... 3,574,737 2,351,034
Costs and estimated earnings in excess of
billings on uncompleted contracts............... 9,130,432 4,254,591
Prepaid expenses and other current assets......... 6,019,292 3,676,937
Deferred income taxes............................. 1,006,066 1,006,066
------------ ------------
Total current assets............................ 59,459,424 52,583,052
Property, plant and equipment, net.................. 59,586,850 54,270,744
Investments in and advances to joint ventures, net.. 4,021,404 4,131,406
Goodwill and other intangible assets, net........... 25,525,952 13,658,521
Deferred charges and other assets, net.............. 1,703,150 804,933
Deferred income taxes............................... 3,085,976 3,085,976
------------ ------------
$153,382,756 $128,534,632
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings............................. $ 9,200,000 $ 10,947,148
Accounts payable.................................. 13,947,018 12,837,623
Accrued expenses and other current liabilities.... 12,724,120 5,856,300
Unearned revenues................................. 1,511,115 3,380,477
Waste processing and disposal liabilities......... 1,886,902 4,202,561
------------ ------------
Total current liabilities...................... 39,269,155 37,224,109
Convertible debenture............................... 12,261,336 11,821,582
Long-term debt...................................... 19,200,000 -
Facility and equipment decontamination
and decommissioning liabilities.................... 8,310,873 7,824,447
Other noncurrent liabilities........................ 1,392,452 1,363,822
------------ ------------
Total liabilities.............................. 80,433,816 58,233,960
------------ ------------
Redeemable preferred stock
(Liquidation value $16,320,000)................... 15,450,485 15,279,085
------------ ------------
Stockholders' equity:
Common stock...................................... 143,557 142,257
Capital in excess of par value.................... 72,842,124 72,513,024
Deficit........................................... (8,455,283) (14,742,524)
Treasury stock, at cost........................... (7,031,943) (2,891,170)
------------ ------------
Total stockholders' equity...................... 57,498,455 55,021,587
------------ ------------
$153,382,756 $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 Nine Months
Ended September 30, Ended September 30,
-------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------- ------------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Revenues.............................. $44,777,734 $39,390,989 $125,355,405 $115,432,142
Cost of revenues...................... 31,840,713 29,610,260 90,986,457 91,108,701
----------- ----------- ------------ ------------
Gross profit.......................... 12,937,021 9,780,729 34,368,948 24,323,441
Selling, general and
administrative expenses............. 7,052,540 6,361,906 20,296,110 18,933,824
----------- ----------- ------------ ------------
Income from operations................ 5,884,481 3,418,823 14,072,838 5,389,617
Interest expense, net................. (948,674) (207,840) (1,532,286) (463,240)
----------- ----------- ------------ ------------
Income before income taxes
and proportionate share
of loss of joint venture............ 4,935,807 3,210,983 12,540,552 4,926,377
Income taxes.......................... 1,974,323 1,240,044 4,971,005 1,867,500
----------- ----------- ------------ ------------
Income before proportionate
share of loss of joint venture...... 2,961,484 1,970,939 7,569,547 3,058,877
Proportionate share of loss of joint
venture............................. (50,000) (50,000) (150,000) (1,424,000)
----------- ----------- ------------ ------------
Income before cumulative effect
of change in accounting principle.... 2,911,484 1,920,939 7,419,547 1,634,877
Cumulative effect of change
in accounting principle.............. - - - (420,000)
----------- ----------- ------------ ------------
Net income and comprehensive income... 2,911,484 1,920,939 7,419,547 1,214,877
Preferred stock dividends and
charges for accretion................ 377,651 376,794 1,132,306 1,129,747
----------- ----------- ------------ ------------
Net income attributable to
common shareholders.................. $ 2,533,833 $ 1,544,145 $ 6,287,241 $ 85,130
=========== =========== ============ ============
Basic net income per share............ $0.19 $0.12 $0.47 $0.01
=========== =========== ============ ============
Diluted net income per share.......... $0.15 $0.09 $0.37 $0.07
=========== =========== ============ ============
Basic weighted average
common stock outstanding............. 13,183,653 13,223,594 13,449,605 12,995,053
=========== =========== ============ ============
Diluted weighted average common
stock and dilutive
securities outstanding.............. 20,208,566 20,838,002 20,493,780 14,234,122
=========== =========== ============ ============
</TABLE>
See notes to condensed consolidated financial statements
2
<PAGE>
GTS DURATEK, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Nine Months Ended September 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 - - - 7,419,547 - 7,419,547
Exercise of options and - -
warrants 130,000 1,300 329,100 330,400
Treasury stock purchases - - - - (4,140,773) (4,140,773)
Preferred dividends - - - (960,000) - (960,000)
Accretion of redeemable - - - -
preferred stock (172,306) (172,306)
---------- -------- ----------- ------------ ----------- -----------
Balance, September 30, 1999 14,355,750 $143,557 $72,842,124 $ (8,455,283) $(7,031,943) $57,498,455
========== ======== =========== ============ =========== ===========
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE>
GTS DURATEK, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
1999 1998
------------ -----------
<S> <C> <C>
Cash flows from operating activities: (Restated)
Net income............................................... $ 7,419,547 $ 1,214,877
Adjustments to reconcile net income to...................
net cash provided by (used in) operating activities:
Depreciation and amortization........................ 4,094,681 3,316,369
Accrued interest on convertible debenture............ 439,754 488,716
Proportionate share of loss of joint venture......... 150,000 1,424,000
Cumulative effect of change in accounting principle.. - 420,000
Changes in operating items, net of effects from
business acquired in 1999:
Receivables........................................ (1,547,574) 335,488
Cost in excess of billings......................... (4,875,841) 2,095,521
Prepaid expenses and other current assets.......... (2,142,355) (785,444)
Accounts payables, accrued expenses and
other current liabilities........................ 2,948,926 (69,515)
Unearned revenues.................................. (1,869,362) (6,260,068)
Waste processing and disposal liabilities.......... (2,315,659) (6,359,062)
Facility and equipment decontamination and
decommissioning liabilities....................... 486,426 425,917
------------ -----------
Net cash provided by (used in) operations.................. 2,788,543 (3,753,201)
------------ -----------
Cash flows from investing activities:......................
Additions to property, plant and equipment, net ......... (5,033,207) (6,131,511)
Advances to joint ventures............................... (39,998) (37,976)
Acquisition of Frank W. Hake Associates, LLC............. (13,156,698) -
Other.................................................... (7,607) 379,452
------------ -----------
Net cash used in investing activities................ (18,237,510) (5,790,035)
------------ -----------
Cash flows from financing activities:
Short-term borrowings (repayments), net.................. (1,747,148) 4,963,384
Borrowings under long-term debt.......................... 20,000,000 -
Repayments under long-term debt.......................... (1,060,280) -
Preferred stock dividends................................ (960,000) (960,000)
Proceeds from issuance of common stock................... 330,400 4,817,735
Repurchase of treasury shares............................ (4,140,773) (318,759)
Deferred financing costs................................. (1,062,630) -
Reduction of capital lease obligations................... - (102,861)
------------ -----------
Net cash provided by financing activities.............. 11,359,569 8,399,499
------------ -----------
Net decrease in cash and cash equivalents.................. (4,089,398) (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................. $ 1,854,876 $ 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>
September 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 13,183,653 and 13,223,594 for the three months ended
September 30, 1999 and 1998, respectively, and 13,449,605 and 12,995,053 for the
nine months ended September 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 20,208,566
and 20,838,002 for the three months ended September 30, 1999 and 1998,
respectively, and 20,493,780 and 14,234,122 for the nine months ended September
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.
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; and thermal desorption.
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>
As of and for the Three Months Ended September 30, 1999
---------------------------------------------------------------------
Unallocated
CWP GWP TS Items Consolidated
-------------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues from
external customers $21,825,738 $ 9,633,982 $13,318,014 $ - $ 44,777,734
Income from operations 4,322,363 846,316 715,802 - 5,884,481
Interest expense - - - (948,674) (948,674)
Depreciation and
amortization
expense 1,138,824 53,023 382,217 127,428 1,701,492
Proportionate share
of losses of joint
ventures - - - (50,000) (50,000)
Income tax expense - - - 1,974,323 1,974,323
Investments in and
advances to joint
ventures - - - 4,021,404 4,021,404
Capital expenditure
for additions to
long-lived assets 1,340,066 53,120 223,772 17,649 1,634,607
Total assets 92,715,853 23,047,118 20,691,310 16,928,475 153,382,756
</TABLE>
6
<PAGE>
GTS DURATEK, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
As of and for the Three Months Ended September 30, 1998
---------------------------------------------------------------------
Unallocated
CWP GWP TS Items Consolidated
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues from
external customers $16,278,500 $10,012,364 $13,100,125 $ - $ 39,390,989
Income from
operations 2,100,300 821,498 497,025 - 3,418,823
Interest expense - - - (207,840) (207,840)
Depreciation and
amortization
expense 534,768 73,280 61,897 - 669,945
Proportionate share
of losses of joint
ventures - - - (50,000) (50,000)
Income tax expense - - - 1,240,044 1,240,044
Investments in and
advances to joint
ventures - - - 4,976,502 4,976,502
Capital expenditure
for additions to
long-lived assets 359,602 220,018 1,475,470 27,241 2,082,331
Total assets 66,064,779 29,515,703 16,898,522 17,460,497 129,939,501
<CAPTION>
For the Nine Months Ended September 30, 1999
-----------------------------------------------------------------------
Unallocated
CWP GWP TS Items Consolidated
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues from
external customers $59,094,083 $27,692,161 $38,569,161 $ - $125,355,405
Income from operations 9,186,746 3,582,315 1,303,777 - 14,072,838
Interest income - - - - -
Interest expense - - - 1,532,286 1,532,286
Depreciation and
amortization
expense 3,231,413 153,212 582,628 127,428 4,094,681
Proportionate share
of losses of joint
ventures - - - (150,000) (150,000)
Income tax expense - - - 4,971,005 4,971,005
Investments in and
advances to joint
ventures - - - 4,021,404 4,021,404
Capital expenditure
for additions to
long-lived assets 4,125,142 63,500 254,554 590,011 5,033,207
Total assets 92,715,853 23,047,118 20,691,310 16,928,475 153,382,756
</TABLE>
7
<PAGE>
GTS DURATEK, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1998
-----------------------------------------------------------------------
Unallocated
CWP GWP TS Items Consolidated
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues from
external customers $53,136,251 $22,719,546 $39,576,345 $ - $115,432,142
Income (loss) from
operations 4,570,500 1,267,133 (448,016) - 5,389,617
Interest income - - - 173,300 173,300
Interest expense - - - (636,540) (636,540)
Depreciation and
amortization
expense 2,650,265 359,626 306,478 - 3,316,369
Proportionate share
of losses of joint
ventures - - - (1,424,000) (1,424,000)
Income tax expense - - - 1,867,500 1,867,500
Investments in and
advances to joint
ventures - - - 4,976,502 4,976,502
Capital expenditure
for additions to
long-lived assets 2,364,756 1,799,198 1,714,372 253,185 6,131,511
Total assets 66,064,779 29,515,703 16,898,522 17,460,497 129,939,501
</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 nine months ended September 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 September 30, 1998, the restatement
increased net income by $32,097. For the nine months ended September 30, 1998,
the restatement increased income before proportionate share of loss of joint
venture by $96,291, decreased income before cumulative effect of change in
accounting principles by $1,177,709 and decreased net income (loss) and net
income (loss) attributable to common shareholders by $1,597,733. In addition,
diluted net income (loss) per share was reduced by $0.05 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 certain liabilities. 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
The aquisition was effective as of June 30, 1999. 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>
<CAPTION>
<S> <C>
Cash paid $12,957,682
Liabilities assumed 4,638,281
Transaction costs 199,016
-----------
$17,794,979
===========
The aggregate purchase price was allocated to acquired assets based upon their estimated
fair values as follows:
Current Assets $ 2,261,682
Due from Hake - estimated post
closing adjustment 900,000
Property, plant and equipment 3,500,000
Goodwill and other intangible assets 11,033,297
Other assets 100,000
-----------
$17,794,979
===========
</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 nine month ended September 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 September 30, 1998, the restatement increased net income by
$32,097. For the nine months ended September 30, 1998, the restatement increased
income before proportionate share of loss of joint venture by $96,291, decreased
income before cumulative effect of change in accounting principles by $1,177,709
and decreased net income (loss) and net income (loss) attributable to common
shareholders by $1,597,733. In addition, diluted net income (loss) per share
was reduced by $0.05 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 certain liabilities. 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 September 30, 1998 as compared to Three Months Ended
September 30, 1999.
Revenues increased by $5.4 million, or 13.7%, from $39.4 million in 1998 as
compared to $44.8 million in 1999. The increase was primarily attributable to a
$4.3 million increase in commercial waste processing services at the Company's
Bear Creek low-level radioactive waste processing facility located in Oak Ridge,
Tennessee, a $1.3 million increase in revenues at the Company's DuraTherm
petrochemical waste treatment facility located in San Leon, Texas, and a
$600,000 increase in technical support services revenues. The increase was
partially offset by an $800,000 decrease in revenues in government waste
processing services. The increase in revenues at the Bear Creek facility was the
result of higher waste processing volumes from several decommissioning projects
as compared to the same period in 1998. The increase in revenues at the
DuraTherm facility was the result of higher waste processing volumes as compared
to the same period in 1998. The increase in revenues from technical support
services was the result of increased consulting services over the same period in
the prior year. The decrease in government waste processing services was
primarily the result of the type of work performed on the River Protection
Project contract awarded by BNFL to build and operate a pilot melter at the
Company's Columbia, Maryland headquarters during the 1998 period as compared to
the current period. The decrease is attributable to higher revenue from the
construction phase of the contract, which was performed in the prior year
period and completed in December 1998, as compared to the operations phase of
the contract being performed in the current period.
Gross profit increased by $3.1 million from $9.8 million in 1998 to $12.9
million in 1999. The Bear Creek facility, technical support services and the
DuraTherm facility accounted for increases in gross profit of $2.2 million,
$600,000 and $400,000, respectively. The increase was partially offset by a
decrease in gross profit from government waste processing of $100,000. 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 increase in gross profit from
technical support services was the result of performance on higher margin
consulting contracts. The decrease in gross profit in government waste
processing was the result of decreased revenues previously mentioned at
comparable gross margins. As a percentage of revenues, gross profit increased
from 24.8% in 1998 to 28.9% in 1999.
Selling, general and administrative expenses increased by $690,000 or 10.9%
from $6.4 million in 1998 to $7.1 million in 1999. As a percentage of revenues,
selling general and administrative expenses decreased from 16.2% in 1998 to
15.8% in 1999.
Interest expense, net increased by $741,000 from 1998 to 1999. The increase
was the result of increased borrowings required to fund working capital needs
and the acquisition of Hake.
Income taxes increased from $1.2 million in 1998 to $2.0 million in 1999.
The Company is accruing income taxes at full statutory rates.
11
<PAGE>
GTS DURATEK, INC. AND SUBSIDIARIES
Nine Months Ended September 30, 1998 as compared to Nine Months Ended September
30, 1999.
Revenues increased by $9.9 million, or 8.6%, from $115.4 million in 1998 to
$125.3 million in 1999. The increase was primarily attributable to a $6.0
million increase in government waste processing services revenues, $3.9 million
increase in revenues at the Company's DuraTherm petrochemical waste treatment
facility located in San Leon, Texas, and a $2.1 million 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 $2.1 million decrease in revenues in
technical support services. The increase in revenues from government waste
processing services was primarily the result of work performed on the River
Protection Project 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 primarily the result of higher waste processing
volumes attributable to several decommissioning projects 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 1999 as
compared to the same period in 1998.
Gross profit increased by $10.0 million from $24.3 million in 1998 to $34.3
million in 1999. The Bear Creek facility, government waste processing, the
DuraTherm facility, and technical support services accounted for increases in
gross profit of $4.0 million, $3.4 million, $1.6 million and $1.0 million
respectively. The increase in gross profit at the Bear Creek facility was
primarily the result of a change in the mix of waste processing services
performed. 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 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 on higher margin consulting services contracts as compared to the
same period in 1998. As a percentage of revenues, gross profit increased from
21.1% in 1998 to 27.4% in 1999.
Selling, general and administrative expenses increased by $1.4 million or
7.2 % from $18.9 million in 1998 to $20.3 million in 1999. As a percentage of
revenues, selling general and administrative expenses decreased from 16.4% in
1998 to 16.2% in 1999.
Interest expense, net increased by $1.1 million from 1998 to 1999. The
increase was the result of increased borrowings required to fund working capital
needs and the acquisition of Hake.
Income taxes increased by $3.1 million from 1998 to 1999. The Company's
effective tax rate was 37.9% in 1998 as compared to 39.6% 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%. At September 30, 1999, the Company had $9.2 million outstanding
under the revolving line of credit and $19.2 million outstanding under the
acquisition line of credit. 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.
12
<PAGE>
GTS DURATEK, INC. AND SUBSIDIARIES
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
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 are in place.
Customer and Supplier Systems - The Company has Completed formal
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 customers' and vendors' ability
to operate following January 1, 2000. The Company has established contingency
plans as necessary.
Costs Related to the Year 2000 Issue - To date the Company has incurred
$360,000 to remediate its Year 2000 issues and expects to incur an additional
$50,000 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 condtion and results of operations.
Item 3. Quantitative and Qualitative Information about Market Risk
The Company's major market risk is to changing interest rates. As of
September 30, 1999, the Company had floating rate long-term debt of $19.2
million and floating short-term rate debt of $9.2 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.
13
<PAGE>
GTS DURATEK, INC. AND SUBSIDIARIES
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.
Part II Other Information
- -------
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 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 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, and the duration of such projects; and the timing of outage support
projects and other large technical support services projects at its customers'
facilities.
14
<PAGE>
GTS DURATEK, INC. AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
--------
See accompanying Index to Exhibits
b. Reports
-------
Current Report of Form 8-K filed on July 13, 1999.
Amendment No. 1 to Current Report on Form 8-K filed on
September 13, 1999.
15
<PAGE>
GTS DURATEK, INC. AND SUBSIDIARIES
September 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: November 15, 1999 BY: /s/ Robert F. Shawver
----------------------------
Robert F. Shawver
Executive Vice President and
Chief Financial Officer
Dated: November 15, 1999 BY: /s/ Charles L. Standley
----------------------------
Charles L. Standley
Controller
16
<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 SEPTEMBER 30, 1999 (UNAUDITED) AND
THE CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 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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