10-Q 1 d10q.txt FORM 10-Q 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 quarterly period ended March 31, 2001. [_] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ______ to ______. Commission File Number 0-23781 ATG INC. (Exact name of registrant as specified in its charter) California 94-2657762 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 47375 Fremont Boulevard Fremont, California 94538 (Address of principal executive offices) (510) 490-3008 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days: Yes X No ____ ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Class Outstanding at April 27, 2001 ----- ----------------------------- Common stock, no par value 17,014,746 1 ATG INC. This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The actual results of ATG Inc. (the "Company") could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Certain Business Considerations" in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in, or incorporated by reference into, this report on Form 10-Q and other documents and reports previously filed or hereafter filed by the Company from time to time with the Securities and Exchange Commission. TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page ---- Item 1. Financial Statements.................................................... 3 Condensed Consolidated Balance Sheets................................... 3 Condensed Consolidated Statements of Operations......................... 4 Condensed Consolidated Statements of Cash Flows......................... 5 Notes to Condensed Consolidated Financial Statements.................... 6 Item 2. Management's Discussion And Analysis Of Financial Condition And Results Of Operations................................................... 14 Item 3. Quantitative and Qualitative Disclosures about Market Risk.............. 27 PART II OTHER INFORMATION Item 1. Legal Proceedings....................................................... 27 Item 2. Changes In Securities And Use Of Proceeds............................... 28 Item 3. Defaults Upon Senior Securities......................................... 28 Item 4. Submission Of Matters To A Vote Of Security Holders..................... 28 Item 5. Other Information....................................................... 28 Item 6. Exhibits and Reports on Form 8-K........................................ 29 SIGNATURE............................................................... 30
2 PART I FINANCIAL INFORMATION Item 1. Financial Statements ATG INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
March 31, December 31, 2001 2000 ------------ ------------- (Unaudited) ASSETS ------ Current assets: Cash and cash equivalents $ 272 $ 351 Accounts receivable, net 17,533 18,666 Prepayments and other 5,739 5,315 --------- --------- Total current assets 23,544 24,332 Property and equipment, net 92,309 90,109 Restricted cash 452 452 Other assets 5,390 5,408 --------- --------- Total assets $ 121,695 $ 120,301 ========= ========= LIABILITIES ----------- Current liabilities: Short-term borrowings $ 25,374 $ 25,374 Current portion of long-term debt and capital leases 5,191 5,159 Accounts payable 20,143 16,160 Accrued liabilities 13,329 12,878 --------- --------- Total current liabilities 64,037 59,571 Long-term debt and capitalized leases, net 33,407 34,413 --------- --------- Total liabilities 97,444 93,984 --------- --------- Commitments and contingencies (Note 4 and 6) SHAREHOLDERS' EQUITY -------------------- Common stock 47,324 47,308 Accumulated deficit (23,073) (20,991) --------- --------- Total shareholders' equity 24,251 26,317 --------- --------- Total liabilities and shareholders' equity $ 121,695 $ 120,301 ========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 ATG INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited) Three Months Ended March 31, -------------------- 2001 2000 -------- -------- Revenue $ 9,774 $ 11,103 Cost of revenue 6,233 6,687 -------- -------- Gross profit 3,541 4,416 Sales, general and administrative expenses 5,120 3,877 Stock-based compensation expense - 30 -------- -------- Operating income/(loss) (1,579) 509 Other income 420 - Net interest income (expense) (923) (499) -------- -------- Income/(loss) before provision for taxes (2,082) 10 Provision for income taxes - 4 -------- -------- Net income/(loss) $ (2,082) $ 6 ======== ======== Net income/(loss) per share Basic $ (0.12) $ 0.00 Fully diluted $ (0.12) $ 0.00 Weighted average shares Basic 17,332 14,091 Fully diluted 17,332 15,032 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 ATG INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Three Months Ended ------------------------------ March 31, March 31, 2001 2000 ------------ ------------- Cash flows from operating activities: Net income/(loss) $ (2,082) $ 6 Adjustments to reconcile net income with cash flow from operations: Depreciation and amortization 647 610 Compensation expense for shares issued and options granted - 30 Gain from sale of property (420) -- Change in current assets and liabilities: Accounts receivable 1,133 2,017 Prepayment and other current assets (424) (100) Accounts payable and accrued liabilities 4,854 (4,087) --------- --------- Net cash used in operating activities 3,708 (1,524) --------- --------- Cash flows from investing activities: Property and equipment acquisitions (2,819) (7,761) Resticted cash - 6,428 Other assets (10) (2) --------- --------- Net cash used in investing activities (2,829) (1,335) --------- --------- Cash flows from financing activities: Borrowing from related party - 960 Repayment of long-term debt and capital leases (974) (420) Short-term borrowing - (1) Proceeds from issuance of common stock 16 2 --------- --------- Net cash provided by financing activities (958) 541 --------- --------- Decrease in cash and cash equivalents (79) (2,318) Cash and cash equivalents, beginning of period 351 2,776 --------- --------- Cash and cash equivalents, end of period $ 272 $ 458 ========= ========= Supplemental cash flow information: Income taxes paid $ - $ 65 ========= ========= Interest paid, net of capitalized interest $ 924 $ 613 ========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 ATG INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2000 (Unaudited) 1. Business of the Company ATG Inc. (the "Company" or "ATG") provides technical personnel and specialized services and products primarily to the U.S. government and the nuclear power industry. Services principally consist of compaction, reduction, decontamination, vitrification and disposal of low-level nuclear waste, dewatering and thermal treatment of ion exchange resins, decontamination, stabilization and volume reduction of low-level mixed waste, site remediation and construction projects. The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The condensed consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000 and the Audited Consolidated Financial Statements included therein. The unaudited condensed consolidated financial statements included herein reflect all adjustments (which include only normal, recurring adjustments) which in the opinion of management are necessary for a fair statement of the results for the three months ended March 31, 2001 and 2000. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. The results for the three months ended March 31, 2001 are not necessarily indicative of the results for the full fiscal year. Liquidity and Going Concern Considerations The accompanying unaudited financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 5, the Company is in default of certain provisions related to the Company's credit facility. The default allows the bank consortium to demand repayment of the outstanding balance. The Company has 6 incurred a substantial operating loss during 2000 and for the three months ended March 31, 2001, and had negative working capital of $35,239 at December 31, 2000 and $40,493 at March 31, 2001. The Company requires additional capital to meet its obligations and accomplish the Company's business plan, which raises substantial doubt about its ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. 2. Net Income/(Loss) Per Share Basic net income/(loss) per share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted net income/(loss) per share is computed giving effect to all dilutive potential common shares that were outstanding during the period. Dilutive potential common shares consist of the incremental common shares issuable upon the exercise of stock options, warrants, and penalty shares for all periods. A reconciliation of the numerator and denominator of basic and diluted net income/(loss) per share is provided as follows (in thousands, except per share data):
Three Months Ended March 31, --------------------------- 2001 2000 ---- ---- Numerator - Basic and Diluted Income per share Net income/(loss) $ (2,082) $ 6 ========= ======= Denominator - Basic Common shares outstanding 17,332 14,091 --------- ------- Basic net income /(loss) per share $ (0.12) $ 0.00 ========= ======= Denominator - Diluted Denominator - Basic 17,332 14,091 Common stock options, warrants, and penalty shares - 941 --------- ------- 17,332 15,032 --------- ------- Diluted net income/(loss) per share $ (0.12) $ 0.00 ========= =======
Diluted net loss per share for the three months ended March 31, 2001 and 2000, excludes options and warrants to acquire 1,607,000 shares and 576,000 shares, respectively, of stock which were anti-dilutive. In addition, under agreements with certain shareholders of the Company related to the private placement common stock issuance of June 2000, ATG is currently required to issue a total of 582,725 shares and maybe required to issue a maximum of 3,109,932 additional common shares all of which have been excluded from the computation of diluted earnings per share as their effect would be anti-dilutive. 7 3. Business Segments The Company manages its operations within two business segments: waste processing, conducted by its Fixed Facilities Group (FFG); and field services, conducted by its Field Engineering Group (FEG). FFG processes customer waste utilizing the Company's thermal and non-thermal technologies. FEG performs remediation, construction and various engineering services for customers under long-term contracts. The Company segregates revenue and gross profit by business segment. Selling, general and administrative expenses are not allocated to the business segments. Segment Information
(dollars in millions) --------------------- Three months ended March 31, 2001 FFG FEG Other Total --- --- ----- ----- Revenue...................................... $ 7.6 $ 2.2 $ -- $ 9.8 Gross Profit................................. 3.3 0.2 -- 3.5 Sales, general & administrative expenses..... 5.1 Stock-based compensation..................... -- Other income................................. 0.4 Interest expense, net........................ (0.9) Provision for income taxes................... -- ------- Net income.................................. $ (2.1) ======= Segment assets............................... 95.2 0.7 3.5 $ 99.4 Expenditures for long-lived assets........... 2.8 -- -- $ 2.8 =======
Three months ended March 31, 2000 FFG FEG Other Total --- --- ----- ----- Revenue....................................... $ 8.6 $ 2.5 $ -- $ 11.1 Gross Profit.................................. 3.9 0.5 -- 4.4 Sales, general & administrative expenses...... 3.9 Stock-based compensation...................... -- Interest expense, net......................... (0.5) Provision for income taxes.................... -- ------- Net income................................... $ 0.0 ======= Segment assets................................ 88.8 0.7 3.5 $ 93.0 Expenditures for long-lived assets............ 7.8 -- -- $ 7.8 =======
4. Commitments and Contingencies In June 1992, ATG entered into a contract with the U.S. Army under which ATG acted as the prime contractor to "surface clear" expended ordnance from a firing range at Fort Irwin, California. In March 1997, a piece of ordnance exploded on the premises of a scrap metal dealer in Fontana, California. An employee of the scrap dealer died in the accident. Although the scrap dealer had purchased expended ordnance and other military scrap metal from a number of military facilities, including Fort Irwin, the scrap dealer indicated 8 that the ordnance which exploded was purchased from Fort Irwin. The U.S. Army contended that a subcontractor to ATG on the Fort Irwin contract had improperly certified ordnance cleared from the Fort Irwin firing range as free of hazardous and explosive material prior to the sale of ordnance to the scrap dealer. As a result, the U.S. Army terminated the Fort Irwin contract for default, and demanded repayment from ATG of alleged reprocurement costs totaling $945,000. ATG believes it fully complied with the terms of the Fort Irwin contract and applicable laws and regulations and challenged the default termination in an action against the U.S. Army filed in the Court of Federal Claims in July 1997. In July 1998, the U.S. Army and ATG settled the matter. The termination for default was rescinded and ATG agreed to no longer bid on surface-clearing work at active U.S. Army firing ranges. In connection with the accident, in March 1998 a wrongful death civil action was filed in San Bernardino County Superior Court against the subcontractor, a supervisory employee of the subcontractor, the owners of the premises occupied by the scrap dealer, and ATG, seeking damages in excess of $8 million, including exemplary damages of $5 million. A second action was filed at the same time in San Bernardino County Superior Court against the same defendants by three other persons alleging physical injuries and emotional distress caused by the accident. The parties in the second action are seeking general damages subject to proof estimated to be in the amount of $200,000. A third action was also filed in San Bernardino County Superior Court against the same defendants by the property owner where the accident occurred asserting business interruption and property damage caused by the accident in the amount of $1,200,000. ATG has tendered the defense of each of these actions to its insurance carrier, which is presently handling the matters for ATG, and we intend to vigorously contest all of the claims asserted in these actions. We believe that we acted properly with respect to the Fort Irwin contract, and that we should not be liable for the injuries caused by the accident. We also intend to seek indemnification from the subcontractor for the full amount of any costs, damages and liabilities which we may incur in connection with or as a result of these lawsuits. The subcontractor has advised ATG that the subcontractor's comprehensive general liability insurance policy covers the claims asserted against the subcontractor, and that the policy coverage limit is $7 million per occurrence. Although we believe that all of the claims asserted against ATG are without legal merit, the outcome of these lawsuits is uncertain. Any judgment of liability against ATG, especially to the extent damages exceed or are not covered by insurance or are not recoverable by ATG from the subcontractor, could have a material adverse effect on our business, financial condition and results of operations. In addition to the contingency disclosed above, from time to time we are a party to litigation or administrative proceedings relating to claims arising from our operations in the normal course of business. Management, on the advice of counsel, believes it remote that the ultimate resolution of litigation currently pending against ATG, either individually or in the aggregate, will have a material adverse effect on our business, financial condition or results of operations. 5. Liquidity and Going Concern Considerations 9 Operating results in the quarter ended March 31, 2001 were adversely affected by the delay in capacity expansion at its low-level radioactive waste thermal processing facility originally planned to be completed in the quarter ended March 31, 2000 and rescheduled for completion in 2001 due to restrictions imposed by lenders and operational issues. Cash flow in the three months ended March 31, 2001 and 2000 and well as fiscal year 2000 was negatively affected by the Company's inability to collect field services trade accounts as projected. As a result of the aforementioned factors, the Company is in default of certain financial ratio covenant provisions (debt service to tangible net worth, debt service coverage ratio, and quick ratio) and the mandatory repayment of $5.75 million at June 30, 2000 related to the Company's credit facility at December 31, 2000 and each measurement period within the year 2000, and at March 31, 2001. ATG failed to make interest payments in the last quarter of 2000 of amounts totaling $765,443 and failed to make interest payments in the first quarter of 2001 of amounts totaling $715,634. In addition, ATG failed to make fee payments of $60,035 in the last quarter of 2000 and failed to make a letter of credit fee payment in the first quarter of 2001 in the amount of $218,640. ATG also was unable to pay a $1,500,000 short-term loan from an individual lender dated August 11, 2000 which was originally due on October 5, 2000 and was subsequently extended to December 15, 2000. ATG is seeking to obtain an extension of the December 15, 2000 due date, but to date has not obtained this extension. The occurrence of an event of default permits the lenders of the credit facility to accelerate the maturity of borrowings already made and may prohibit ATG from making additional borrowings under the facility. While the lenders have allowed ATG to draw under the facility and have not notified ATG of their intention to accelerate repayment, management believes that ATG will not be able, on a prospective basis, to comply with the financial covenants in the agreements governing the credit facility without significant accommodations from the lending syndicate. The aforementioned raises substantial doubt regarding ATG's ability to continue as a going concern. The accompanying financial statements have been prepared assuming that the company will continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. ATG is reviewing alternative forms of financing in order to comply with the credit facility agreement. Management is reviewing the company's business plan with financial advisors and lenders with the objective of seeking appropriate accommodations and to ascertain what actions can be taken to enhance liquidity and generate cash to assist in paying the company's debt service. The company is also evaluating potential changes in its capital structure and additional financial resources. In June 2000 the company raised approximately $5.1 million in additional equity through the sale of common stock, and $1.5 million in short-term debt during August 2000. 10 The company's ability to meet its obligations in the normal course of business is dependent upon, among other items, its ability to collect trade accounts receivable, primarily field services trade accounts receivable, competitively price services with the market at a profit, successfully bring on line its mixed waste processing facility, add capacity to its low-level radioactive waste thermal processing facility, return to profitable operations, obtain additional financing and/or restructure the current debt agreement, and obtain waivers of debt covenant violations. 6. Contingencies, Risks, and Uncertainties Environmental Permits The Company operates its fixed facilities under regulations of, and permits issued by, various state and federal agencies. The Company, typically, is in the process of seeking new permits, renewals and/or expansion permits. There can be no assurance of the successful outcome of any permitting efforts. The permitting process is subject to regulatory approval, time delays, local opposition and potentially stricter governmental regulation. In the event a permit is not granted, facility construction programs could be delayed, changed, or abandoned and could result in substantial losses which would have a material adverse effect on the Company's consolidated financial position. The Company reviews the status of permitting projects on a periodic basis to assess realizability of related asset values. As of March 31, 2001, management believes that assets which could currently be affected by permitting efforts are recoverable at their recorded values. Department of Energy -- Hanford In connection with the Company's contract with the Department of Energy's Hanford Reservation (DOE Hanford), DOE Hanford by US federal law, was required to commence non-thermal treatment of the DOE Hanford low-level mixed waste stored in Richland, Washington by September 30, 1999, and thermal treatment of this waste by December 31, 2000. ATG, which the Department of Energy contracted with to process this waste, commenced non-thermal treatment of the waste by December 1999 and thermal treatment by December 2000. Although ATG's contract also required that ATG obtain all licenses, permits and approvals for, and place our treatment facility for low-level mixed waste in operation by November 10, 2000, ATG did not meet this deadline due to the lack of completion of the demonstration testing of our Richland facility. The Department of Energy has been notified of the 2001 schedule for completion of demonstration testing and ATG's violation of the November 10, 2000 deadline. To date, the Department of Energy has not notified ATG of any corrective actions nor has ATG obtained a waiver of this violation. Governmental Regulation ATG may not be able to comply with all of the environmental and other regulatory requirements applicable to ATG's business, which could prevent ATG from operating the business according to the business plan. If ATG fails to timely obtain, or to comply with 11 the conditions of applicable federal, state and local governmental licenses, permits or approvals for the Company's waste treatment facilities and services, ATG could be prevented from operating the facilities and providing services, resulting in a significant loss of revenue. ATG is required to complete thermal demonstration testing to receive approval to become fully operational at the ATG processing facility for low-level mixed waste in Richland, Washington. ATG is scheduled to conduct demonstration testing in 2001. The cost to complete this testing is approximately $2 million. ATG currently does not have the funds to complete demonstration testing. ATG must acquire the $2 million from additional equity or debt financing or from a government funded research and development program at the Department of Energy. Currently, the regulatory authorities are allowing ATG to process contracted waste streams as ATG prepares for demonstration testing. The regulatory agencies allow up to 720 hours, or with an extension, up to 1440 hours, of waste stream processing prior to demonstration testing. After completion of these 720 hours, or 1440 hours if an extension has been granted, ATG will no longer be able to process contracted waste streams at our Richland facility without successful completion of demonstration testing. ATG is targeting three months or approximately until June 2001, to complete the initial 720 hours, and may request an extension for an additional 720 hours from the regulatory agencies. To date, ATG has processed approximately 310 hours of contracted waste streams. Once thermal demonstration testing of the Richland facility has commenced, if the thermal processing systems do not meet governmental standards, this would delay or prevent this facility from becoming operational for thermal decontamination of mixed waste, resulting in a loss of significant revenue potential at this facility. In addition, licenses, permits and approvals for ATG's existing operational facilities and services are subject to revocation or modification under a variety of circumstances. As our business expands and as ATG introduces new technologies, ATG will be required to obtain additional operating licenses, permits or approvals. ATG may also be required to obtain additional operating licenses, permits or approvals if new environmental legislation or regulations are enacted or existing legislation or regulations are amended, reinterpreted or enforced differently than in the past. Any new governmental requirements that raise compliance standards may require us to modify our waste treatment technologies to conform to more stringent regulatory requirements. ATG may not be able to continue to comply with all of the environmental and other regulatory requirements applicable to ATG's business. Company facilities may be shut down due to equipment failure or failure to comply with government regulations, which could significantly reduce our revenues. If any of the Company's principal waste treatment systems were to be shut down for any appreciable period of time, because of either equipment breakdown or regulatory action in response to an alleged safety or other violation of the terms of the licenses under which we operate, our revenues could be significantly reduced. A shutdown of operating facilities will result in the loss of revenues and possibly other future potential revenues from future contracts if the Company was not able to bid for contracts successfully because the waste treatment systems at the Company's fixed facilities did not perform consistently in conformance with safety and other requirements. ATG's fixed facilities are subject to frequent routine 12 inspections by the regulatory authorities issuing the licenses. The SAFGLAS system was shut down from September 5 to September 28, 1999 due to an equipment failure, resulting in business interruption losses and property damage of $2.7 million, of which to date only $829,000 has been reimbursed by insurance. ATG has experienced other shutdowns of our facilities for short periods of time in the past. Dependence on Large Customers A loss on one or more of the Company's larger contracts could significantly reduce the Company's revenues. If ATG is unable to accurately calculate or integrate the cost of performing a large, multi-year contract in its contract bid and the costs are understated significantly, ATG would likely incur a loss which would significantly reduce the Company's revenues. ATG increasingly pursues large, governmental and private sector, multi-year contracts as a method of achieving more predictable revenue, more consistent utilization of equipment and personnel, and greater leverage of sales and marketing costs. The government contracts in particular are usually awarded as a result of a competitive bidding process requiring ATG to estimate and accurately predict its cost of performance. These large contracts impose significant risks if actual costs are higher than those estimated by ATG at the time of bid. 7. Subsequent Events Contract Modification. ATG has obtained a letter agreement for a contract modification of its low-level mixed waste thermal processing contract with the Department of Energy for the funding of approximately $2 million to complete demonstration testing of its thermal processing facility. The modification is to include five milestone achievements that will allow ATG to receive periodic payments at the completion of each milestone. During April 2001, ATG completed the first two milestones and received payments totaling $990,000. ATG is expecting to meet milestones three and four during June 2001. Settlement of Claims and Modification of Contract Agreements. During May 2001, ATG reached agreements with two federal government customers and insurance company in the settlement of contract claims, modification of customer payment terms and a business interruption insurance claim in the aggregate amount of $8.0 million. The agreements are with two federal customers to settle contract modification requests by ATG in the amount of $6.05 million. Of the $6.05 million, approximately $2.0 million represents advances on waste that has been received and is to be processed at a later date. The company has also accepted a $1.94 million insurance settlement offer for its business interruption as a result of the September 1999 SAFGLAS unscheduled shut-down. Under the term of the agreements, the company agrees not to disclose the terms of the settlement agreements nor the individual customers. Other than the advances on waste to be processed, substantially all of the aforementioned items have been recognized in the financial statements as of December 31, 2000 and March 31, 2001 in accordance with generally accepted accounting principles and have been included in the balance sheet caption "Accounts receivable, net", except the insurance claim that is included in the balance sheet caption "Prepayments and other." 13 ATG INC. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion contains forward-looking statements that involve known and unknown risks and uncertainties which may cause the Company's actual results in future periods to differ materially from those indicated herein as a result of certain factors, including those set forth under "Factors Affecting Future Operation Results." The Company undertakes no obligation to publicly release updates or revisions to these statements. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report and the audited consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's 2000 Annual Report on Form 10-K. General ATG is a radioactive and hazardous waste management company that offers comprehensive treatment solutions for low-level radioactive waste, low-level mixed waste, and other waste generated by the U.S. Department of Defense, the U.S. Department of Energy and commercial entities including, nuclear power plants, medical facilities and research institutions. ATG principally derives its revenue from the waste treatment operations of its Fixed Facilities Group and the on-site remediation services of its Field Engineering Group. ATG currently focuses a significant portion of its business on SAFGLAS(TM) vitrification of low-level radioactive waste and on its business interests in Tennessee for treating ion exchange resins and on processing of low-level mixed waste. During the quarter ended June 30, 1999, ATG's permit application for its low-level mixed waste processing facility in Richland, Washington was granted, and in the quarter ended September 30, 1999, we began construction of this processing facility. ATG commenced non-thermal processing and thermal processing of low-level mixed waste at this facility in late December 1999 and late December 2000, respectively. ATG has historically relied upon the integration of proven technologies with ATG's know-how and processes, and has not incurred significant levels of research and development spending. Most of the research and development activities conducted to date have related to the design and construction of our fixed operating facilities, particularly in connection with the SAFGLAS(TM) system. We anticipate that our research and development efforts will continue to be moderate and that the costs associated with future research and development will not be material to our results of operations. ATG increasingly pursues multi-year and longer term contracts as a method of achieving more predictable revenue, more consistent utilization of equipment and personnel, and greater leverage of sales and marketing costs. ATG currently focuses on large, multi-year 14 site-specific and term contracts in the areas of treatment of low-level radioactive waste and low-level mixed waste, environmental restoration and D&D. In recent years we have been awarded a number of large government term contracts which, in most cases, require several years to complete. These government term contracts are subject to cancellation, delay or modification at the sole option of the government at any time, to annual funding limitations and public sector budget constraints and, in many cases, to actual delivery orders being released. These projects, which may create an opportunity for ATG to realize margins higher than on other types of contracts, also impose heightened risks of loss if, for example, actual costs are higher than those estimated at the time of bid. A loss on one or more of these larger contracts could have a material adverse effect on our financial condition and results of operations. In addition, failure to obtain, or delay in obtaining, targeted large, multi-year contracts could result in significantly less revenue to ATG than anticipated. Results of Operations Revenue and Net Income/(Loss). Revenue for the first quarter of fiscal 2001 was $9.8 million, a decrease of 12% from the $11.1 million recorded in the comparable quarter in the prior year. ATG recorded a net loss of $2.1 million or $0.12 per share, in the first quarter of fiscal 2001, compared to net income of $6,000, or $0.00 per share fully diluted, in the first quarter of fiscal 2000. The decrease in revenue is principally attributable to a shortfall in spent ion exchange resin receipts at our facility in Oak Ridge, Tennessee. ATG's transition to the non-thermal resin decontamination process has continued through the first quarter of fiscal 2001 and is anticipated to be completed during the second quarter of fiscal 2001. In addition, revenue and gross margin during the first quarter was negatively impacted by LLRW thermal production capacity constraints at ATG's Richland, Washington processing facilities. The production capacity constraints were due to the inability of acquiring the second bulk processing unit (BPU) that was scheduled for installation during the fourth quarter of 2000. ATG anticipates that the unit will be installed during the second quarter of 2001. ATG's negative revenue impacts were partially offset by increased production from the Richland, Washington mixed waste processing facilities. ATG during the first quarter of 2001 began the production ramp-up of its new thermal treatment processing facility. Gross Profit. Gross profit for the first quarter of fiscal 2001 was $3.5 million or 36% of revenue, compared to $4.4 million or 40% of revenue in the comparable quarter in 2000. The gross profit percentage may change from year to year and is related to the varying mixes of business during these periods. Overall gross profit on waste processing services was approximately 44% in the first quarter of 2001 compared to 46% in the first quarter of 2000. The percentage decrease is due to the decreased utilization of the Tennessee fixed facilities and the LLRW thermal production capacity constraints at the Richland, Washington facilities 15 as discussed previously under the section entitled "Revenue and Net Income/(Loss)." The negative gross profit impact was partially offset by the Richland, Washington mixed waste thermal treatment processing facility ramp-up as discussed previously under the section entitled "Revenue and Net Income/(Loss)." The fixed facilities operations generally have a larger percentage of fixed costs versus variable costs that result in increases in utilization favorably impacting gross profit while decreases in utilization unfavorably impact gross profit. The overall cost of revenue for waste processing services for the first quarter of 2001 was $4.3 million compared to $4.7 million for the first quarter of 2000. The decrease in costs is primarily attributable to the Tennessee plant consolidation and workforce reduction that resulted in a decrease in costs for labor, supplies, utilities, maintenance, and waste disposal expenditures. Overall gross profit on field service projects was approximately 9% in the first quarter of 2001 compared to 20% in the first quarter of 2000. The principal reason for the difference is the mix of projects and stage of completion. The overall cost of revenue for field service projects for the first quarter of 2001 and the comparable period of 2000 was $2.0 million. The percentage increase in costs is primarily attributable to an increase in costs for material and equipment rental. Sales, General and Administrative Expenses. Sales, general and administrative expenses for the first quarter of fiscal 2001 were $5.1 million or 52% of revenue, compared to $3.9 million or 35% of revenue for the comparable period in 2000. The increase in spending from year to year is principally due to an increase in infrastructure at our Richland facility and includes general and administrative expense increases primarily attributable to labor, supplies, utilities, equipment rental, and depreciation. The increased infrastructure is required for ATG to meet its contractual obligations regarding the start-up of its mixed waste processing operations. In addition, the overall increase in sales, general and administrative expenses as a percentage of revenue was impacted by decreased utilization of the Tennessee fixed facilities and the Richland, Washington LLRW thermal processing facilities as discussed previously under the section entitled "Revenue and Net Income/(Loss)." Other Income. During the second quarter of fiscal 2000, we completed the sale and leaseback of our corporate offices in Fremont, California, resulting in a pre-tax gain of $1.7 million. The gain is being recognized in equal increments of $420,000 each over the next four quarters beginning in the second quarter of fiscal 2000. The final quarter of installment gain was recorded during the first quarter of 2001. Provision for Income Taxes. ATG provides for income taxes during interim periods at an estimated combined federal and state annual rate to be expected for the full year. ATG does not anticipate a tax benefit for the first quarter of 2001. ATG does not expect an income tax expense for 2001 since it is expected that net operating loss carry forwards from 2000 will offset any income tax expense. Based on events known at March 31, 2000, ATG used an effective tax rate of 40%. During 2000, ATG determined that its cumulative net operating losses incurred exceeded the amount of tax carryback available. Due to the uncertainty of future recoverability, ATG recorded a full valuation allowance against its deferred tax assets. ATG has provided a full valuation against its deferred tax assets until such time as evidence shows it is more likely than not that the deferred tax assets are recoverable. Liquidity and Capital Resources 16 Total cash and cash equivalents were $272,000 at March 31, 2001, a decrease of $79,000 from December 31, 2000. The working capital of the Company was approximately a negative $40.5 million at March 31, 2001, a decrease of $5.3 million from December 31, 2000. The decrease in working capital is partially due to the reclassification of $23.75 million of long-term debt to short-term borrowing due to loan covenant violations. See discussion of our credit facility below. Significant outlays of cash have been needed to acquire property and equipment and to secure or expand regulatory licenses, permits and approvals, primarily for improvements to the Company's LLRW facility and refinements of the LLMW facility in Richland, Washington and for improvements to its fixed facilities in Oak Ridge, Tennessee. Property and equipment acquisitions totaled $2.8 million for the three months ended March 31, 2001. Subsequent Events ATG has obtained a letter agreement for a contract modification of its low-level mixed waste thermal processing contract with the Department of Energy for the funding of approximately $2 million to complete demonstration testing of its thermal processing facility. The modification is to include five milestone achievements that will allow ATG to receive periodic payments at the completion of each milestone. During April 2001, ATG completed the first two milestones and received payments totaling $990,000. ATG is expecting to meet milestones three and four during June 2001. During May 2001, ATG reached agreements with two federal government customers and an insurance company in the settlement of contract claims, modification of customer payment terms and a business interruption insurance claim in the aggregate amount of $8.0 million. The agreements are with two federal customers to settle contract modification requests by ATG in the amount of $6.05 million. Of the $6.05 million, approximately $2.0 million represents advances on waste that has been received and is to be processed at a later date. The company has also accepted a $1.94 million insurance settlement offer for its business interruption as a result of the September 1999 SAFGLAS unscheduled shut-down. Under the term of the agreements, the company agrees not to disclose the terms of the settlement agreements nor the individual customers. Credit Facility In November 1999, ATG completed an agreement with a consortium of banks for a credit facility in the amount of $45 million. The credit facility includes a letter of credit in support of tax-exempt Solid Waste Revenue Bonds in the aggregate face amount of $26.5 million. The bonds were issued during November 1999, and bear interest at a floating rate (3.65% at March 31, 2001), based upon prevailing market conditions, which is redetermined every seven days. The bonds are due October 31, 2014 and may be prepaid at any time without penalty. The proceeds are to be applied exclusively for the construction of low-level mixed waste facility in Richland, Washington. The credit facility also includes a five year revolving working capital line of credit, due October 2004, in the amount of $18 million, including a letter of credit facility of $5 million. Borrowings, when made, bear a variable interest rate based on financial ratio criteria. The credit facility is collateralized by accounts receivable, inventory and equipment. The credit facility agreement requires ATG to comply with a number of covenants, including capital asset acquisition limits, limits on additional debt, minimum levels of tangible net worth, dividend payment restrictions and maintenance of financial ratios. At December 31, 1999, ATG was in violation of some of these financial ratio covenants. ATG obtained a permanent waiver, subsequent to year- end, in respect of these violations as of December 31, 1999. In connection with the waiver, the banks agreed to revise and lower some of the financial ratio covenants that ATG failed to meet as of December 31, 1999, and substitute new covenants, for which ATG was in compliance for the original violated covenants and revise and lower some of the financial covenants for each of the quarterly periods in the year ended December 31, 2000, and increase the borrowings available to ATG by $6 million, for a total of $24 million, through June 30, 2000. The 17 borrowing limit subsequent to June 30, 2000 is $18 million. In addition, the interest rate applied to the working capital facility was revised. At March 31, 2000 ATG was in violation of the revised financial ratios under the credit facility. Pursuant to a forbearance and consent agreement dated as of June 1, 2000, the lenders agreed to forbear in the exercise of any of their rights or remedies with respect to March 31, 2000 covenant defaults through June 30, 2000. At June 30, 2000 ATG was in violation of the revised financial ratios under the credit facility. Furthermore, at June 30, 2000, ATG failed to make a required payment of principal in the approximate amount of $5,750,000 as a mandatory paydown under the revolving credit facility, so as to bring total borrowings under that facility to the $18 million limit. ATG currently has borrowings of $23.75 million and is paying interest at the default rate of 11.25%. ATG has requested that the banks grant a forbearance in respect of the violations described above beyond June 30, 2000. As one of the conditions to granting a forbearance, the banks requested that ATG deposit into a segregated account the amount of $1,500,000 to finance the completion and demonstration testing of the company's new low-level mixed waste facility in Richland, Washington. The mixed waste thermal facility is presently in commercial operation and is operating at a lower level of production during the testing phase of operations. Consequently, on August 11, 2000, ATG obtained a short-term loan in the amount of $1,500,000 bearing a maturity date of October 5, 2000 from an individual lender. The loan bears interest at a rate of 12% per annum. The proceeds were used to fund certain facility expenditures through December 31, 2000. ATG estimates that it will be required to spend $2,000,000 to complete its demonstration testing and receive its permits. ATG was unable to repay the loan on its stated maturity date and subsequently obtained an extension until December 15, 2000. ATG is seeking to obtain an extension to the December 15, 2000 due date, but to date has not obtained this extension. ATG anticipates that it will need to obtain additional financing or obtain another extension on the due date in order to repay the loan. ATG failed to make interest payments in the last quarter of 2000 of amounts totaling $765,443 and failed to make interest payments in the first quarter of 2001 of amounts totaling $715,634. In addition, ATG failed to make fee payments of $60,035 in the last quarter of 2000 and failed to make a letter of credit fee payment in the first quarter of 2001 in the amount of $218,640. ATG will not be able, without obtaining concessions from the banks or new financing, to make the mandatory principal paydown of approximately $5,750,000, $765,443 interest owing for the last quarter of 2000, $715,634 interest owing for the first quarter of 2001, $60,035 fee owing for the last quarter of 2000, and the $218,640 letter of credit fee owing for the first quarter of 2001 under the credit facility, or to comply with the current financial covenants set forth in the agreements governing the credit facility. As of May 11, 2001, the banks have not granted a forbearance in respect of the violations of the credit agreement beyond June 30, 2000. The lenders could elect at any time to enforce their rights and remedies under the credit agreement. The banks' remedies could include a demand for repayment of all outstanding loans, which raises substantial doubt 18 about the ability of the company to continue as a going concern if it cannot obtain additional cash to repay or restructure the debt. ATG is continuing to negotiate with the lenders to modify the financial covenants and the time frame for the mandatory paydown. ATG is seeking alternative forms of financing in order to make the mandatory paydown. ATG is also reviewing its business plan with its financial advisors and lenders with the objective of seeking appropriate accommodations and to ascertain what actions can be taken to enhance liquidity and thereby generate cash to assist in paying the company's debt service. ATG is also evaluating potential changes in its capital structure and additional financial resources. If ATG is unable to service its indebtedness, we may be required to alter our business plans, seek to restructure or refinance our indebtedness or seek additional equity capital. We will not have sufficient cash generated from operations to meet our working capital requirements for the next twelve months unless we are able to negotiate accommodations from our lenders or refinance our current level of indebtedness and obtain additional debt or equity. The accompanying financial statements have been prepared assuming that ATG will continue as a going concern. As discussed in the Note 5 to the unaudited condensed financial statements, ATG is in default of certain provisions related to our credit facility. The default allows the bank consortium to demand repayment of the outstanding balance. ATG has incurred a substantial operating loss during 2000 and the first quarter of 2001 and has negative working capital of $40.5 million at March 31, 2001. ATG requires additional capital to meet its obligations and accomplish our business plan, which raises substantial doubt about ATG's ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. Factors Affecting Future Operating Results ATG's business is subject to the following risks and uncertainties, in addition to those described elsewhere. Credit Facility Default We are in default under one of our credit facilities; as a result, our lenders could at any time elect to accelerate repayment of all amounts owed under the credit facilities. ATG is in violation of a requirement under one of its credit facilities to make a mandatory paydown of approximately $5,750,000 by June 30, 2000, is late in paying interest amounts in the last quarter of 2000 totaling $765,443, late in paying interest amounts in the first quarter of 2001 totaling $715,634, late in paying fee amounts in the last quarter of 2000 totaling $60,035, and late in paying a letter of credit fee amount in the first quarter of 2001 totaling $218,640 due under its credit facilities, and is in violation of financial covenants in the credit facility agreements. ATG also was unable to pay a $1,500,000 short-term loan from an individual lender that was originally due on October 5, 2000 and was subsequently extended to December 15, 2000. ATG is seeking to obtain an extension of the December 15, 2000 due date, but to date has not obtained this extension. ATG will not be able, without obtaining concessions from its banks or obtaining new financing, to make the mandatory $5,750,000 paydown, to bring its 19 interest payments current, to comply with current financial covenants in the credit facility agreements or to repay its $1,500,000 loan. At any time ATG's lenders could elect to enforce their rights and remedies under the credit facilities agreements to accelerate repayment of all amounts owed. ATG does not have the funds to repay all its loans if the lenders accelerate repayment. We may not be able to continue as a going concern if our lenders elect to accelerate the payment of indebtedness under our credit facilities. Since we do not currently have sufficient funds to repay all of our indebtedness under our credit facilities, we may not be able to continue as a going concern if our lenders elect to accelerate payment under the credit facilities. In that case, we would likely become insolvent and subject to voluntary or involuntary bankruptcy proceedings, and the value of our equity securities would likely be significantly diminished. The report of our independent auditors appearing in our Annual Report on Form 10-K for the year ended December 31, 2000 and the Audited Consolidated Financial Statements included therein includes a "going concern" qualification. Capital Requirements If we cannot raise additional capital, we may not be able to implement and complete testing of our Richland, Washington mixed waste facility, pay-off our debts, meet our business expenses, or otherwise implement our business plan. We believe that ATG will need additional financing for working capital and capital expenditure requirements in order to implement its long-term business plan. If we are not successful in raising additional working capital we may not be able to implement and complete thermal demonstration testing of our Richland, Washington mixed waste facility which is currently scheduled for testing in 2001 and to make mandatory paydowns and payoffs of loans currently due or which will be due in 2001. Our working capital deficit as of March 31, 2001 is $40.5 million, a decrease of $5.3 million from working capital deficit of $35.2 million at December 31, 2000. If we are not successful in raising additional capital, we may need to curtail or scale back our planned operation of this facility. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." Profitability We have experienced a downward trend in our revenue and net income for fiscal 2000 and during the first quarter of 2001. To date, we have experienced a downward trend in revenue and net income for the first quarter of fiscal 2001 compared to the comparable period in 2000, and those trends will continue if we cannot generate significant additional revenues in our Oak Ridge, Tennessee and Richland, Washington facilities. ATG recorded revenue of $41.7 million and a net loss of $25.5 million for the fiscal year ended December 31, 2000, compared to revenue of $60.7 million and net income of $5.2 million for 1999. The decrease in revenue and net income was principally due to a major shortfall in receipts from spent ion exchange resin at our Oak Ridge facility, a consolidation of our operations and workforce reduction at our Oak Ridge facility in the second quarter of fiscal 2000, the transition of our thermal waste processing system at our Oak Ridge facility to a more cost effective non-thermal resin decontamination process which commenced in the second quarter of fiscal 2000, and the plant write-off and 20 abandonment expenses at our Oak Ridge facility in the fourth quarter of 2000. As a result of the restructuring of the Oak Ridge facility, ATG recorded a $500,000 inventory write-down charge to cost of revenue and a $1.9 million restructuring charge in the second quarter of fiscal 2000. During the fourth quarter of 2000, the Company completed a review of the Tennessee fixed facilities concerning the utilization of a modified Q-CEP thermal treatment system for the processing of specialty niche waste streams. Due to the prohibitive cost and the unknown prospect of success related to the proposed system modification, the Company formally abandoned the Q-CEP thermal treatment system during the fourth quarter of 2000 and recorded a non-cash asset impairment charge of $14.1 million. In addition, the Company recorded non-cash charges regarding the $1.4 million write-down of goodwill from its acquisition of the Q-CEP assets, a $307,000 maintenance supply inventory write-down that was charged to cost of revenue, and an $828,000 write-down of other assets. Furthermore, a charge of $1.2 million was recorded for processing and disposal of secondary waste associated with the shutdown of the Q-CEP facility, of which $1.0 million remains at December 31, 2000. The Q-CEP thermal treatment process was utilized for the treatment of ion exchange resins from nuclear power plants. The company is continuing the pursuit of its non-thermal resin decontamination technology for the treatment of ion exchange resins. Additionally, ATG has completed construction and is processing low level mixed waste streams as we prepare for demonstration testing in 2001 of our new thermal mixed waste facility in Richland, Washington. In the absence of significant revenue generation at these facilities, ATG will continue to experience this downward trend in revenue and net income for the foreseeable future. Dilution The book value and earnings per share of our common stock may be diluted significantly and the price of our common stock may also decline because of our current and future obligations to issue additional shares of common stock to the shareholders purchasing newly issued shares in June 2000. During June and July 2000, ATG completed a $5.5 million private placement of 2.75 million shares of common stock at $2 per share. In addition, ATG issued 192,500 warrants at an exercise price of $2.75 per share in connection with the private placement. ATG received a total of approximately $5.1 million in net proceeds from this private placement. Under agreements with the aforementioned shareholders, ATG is currently required to issue a total of 582,725 shares and may be required to issue up to a maximum of 1,059,300 shares of common stock to the selling shareholders without payment of additional consideration. ATG may also be required to issue up to a maximum of 2,050,632 additional shares of common stock to three of the selling shareholders pursuant to the terms of an agreement with these three selling shareholders should the average closing price of ATG's stock for the 30 trading days prior to November 1, 2001 be less than $2.00 per share. The issuance of these additional shares, including the shares that may be issued should ATG's stock fall below $2.00 for the 30 trading days prior to November 1, 2001, will have a dilutive effect. ATG may further be required to issue up to a total of 1,530,000 shares of common stock upon the exercise of outstanding warrants and options, which on December 31, 2000 had a weighted average exercise price of $4.03 per share. Additionally, because of existing defaults on our credit facility and the need to complete demonstration testing at a cost of approximately $2 million, we will likely be required to 21 raise significant additional financing in the near future through the sale of equity securities, which could have a further dilutive effect. Technology We may not be able to comply with all of the environmental and other regulatory requirements applicable to our business, which could prevent us from operating our business according to our business plan. If we fail to timely obtain, or to comply with the conditions of applicable federal, state and local governmental licenses, permits or approvals for our waste treatment facilities and services, we could be prevented from operating our facilities and providing services, resulting in a significant loss of revenue. We are required to complete our thermal demonstration testing to receive approval to become fully operational at our processing facility for low-level mixed waste in Richland, Washington. We are scheduled to conduct demonstration testing in 2001. The cost to complete this testing is approximately $2 million. ATG currently does not have the funds to complete demonstration testing. ATG must acquire the $2 million from additional equity or debt financing or from a government funded research and development program at the Department of Energy. Currently, the regulatory authorities are allowing ATG to process contracted waste streams as we prepare for demonstration testing. The regulatory agencies allow up to 720 hours, or with an extension, up to 1440 hours, of waste stream processing prior to demonstration testing. After completion of these 720 hours, or 1440 hours if an extension has been granted, ATG will no longer be able to process contracted waste streams at our Richland facility without successful completion of demonstration testing. ATG is targeting three months or approximately until June 2001, to complete the initial 720 hours, and may request an extension for an additional 720 hours from the regulatory agencies. To date, ATG has processed approximately 310 hours of contracted waste streams. Once thermal demonstration testing of the Richland facility has commenced, if our thermal processing systems do not meet governmental standards, this would delay or prevent this facility from becoming operational for thermal decontamination of mixed waste, resulting in a loss of significant revenue potential at this facility. In addition, licenses, permits and approvals for our existing, operational facilities and services are subject to revocation or modification under a variety of circumstances. As our business expands and as we introduce new technologies, we will be required to obtain additional operating licenses, permits or approvals. We may also be required to obtain additional operating licenses, permits or approvals if new environmental legislation or regulations are enacted or existing legislation or regulations are amended, reinterpreted or enforced differently than in the past. Any new governmental requirements that raise compliance standards may require us to modify our waste treatment technologies to conform to more stringent regulatory requirements. We may not be able to continue to comply with all of the environmental and other regulatory requirements applicable to our business. We may not be able to grow our business if we cannot develop commercially viable technologies for treatment of wastes in a manner which is responsive to our clients' requirements. Our future growth is dependent upon our ability to implement our technologies for the treatment of low-level radioactive waste, low-level mixed waste and other waste, particularly our vitrification technologies and technologies for treatment of ion exchange resin waste streams, in a manner which makes them commercially viable 22 and responsive to our clients' requirements. Our technologies for treatment of waste compete with other technologies, as well as with more traditional treatment, storage and disposal alternatives. Our success depends on our ability to convince our clients that our vitrification and related technologies are at least as cost-effective as other waste treatment or waste disposal methods. Furthermore, our ability to comply with the terms of our contracts will affect whether clients will continue to utilize our technologies. For example, our contract for treatment of low-level mixed waste with the Department of Energy's Hanford Reservation requires us to obtain all of the required licenses, permits and approvals for, and to build and place in operation, our treatment facility for low-level mixed waste by November 10, 2000. Before ATG can acquire all required licenses, permits and approvals for the facility and place this facility in permanent operation, it must complete demonstration testing of the facility. Demonstration testing is scheduled to be completed in 2001. The Department of Energy has been notified of the schedule for completion of demonstration testing and ATG's violation of the November 10, 2000 deadline. To date, the Department of Energy has not notified ATG of any corrective actions nor has ATG obtained a waiver of this violation. On March 15, 2001, ATG received $1.9 million from the Department of Energy under the Hanford contract. Approximately 42% of the $1.9 million was for previously processed waste and 58%, or $1.1 million, was for on-site receipt of waste for future thermal processing. If ATG fails to process this waste, it would be obligated to return the $1.1 million. Additionally, should ATG be unable to process future waste received by the Department of Energy under the Hanford contract, or otherwise fail to satisfy the terms of the Hanford contract, ATG could suffer material losses. Change in Environmental/Laws and Enforcement A substantial relaxation of the requirements of compliance with environmental laws or a substantial reduction of enforcement activities by governmental agencies would reduce the demand for our services. In excess of 90% of our revenues are generated as a result of requirements arising under federal and state laws, regulations and programs related to protection of the environment. If the requirements of compliance with environmental laws and regulations were substantially relaxed in the future or were less vigorously enforced, particularly those relating to the transportation, treatment, storage or disposal of low-level radioactive waste, low-level mixed waste, or other wastes, the demand for our services would decrease, and our revenues would be significantly reduced. Government Spending The cancellation or modification of our government contracts or a reduction in government funding could significantly reduce our revenues. Our government contracts are generally subject to cancellation or modification at the sole option of the government at any time, to annual funding limitations and public sector budget constraints and, in many cases, to actual delivery orders being released. Any cancellation or modification of our federal government contracts could result in a significant reduction in our revenues. Efforts to reduce the federal budget deficit and reduce government appropriations could adversely affect the availability and timing of government funding for the cleanup of Department of Energy, Department of Defense and other federal government sites resulting in cancellations, modifications or reductions in the government contracts for the restoration of clean-up sites with ATG, and a consequential reduction in ATG's revenues. 23 The percentage of ATG's revenues attributable to federal government contracts for the fiscal years ending 1998, 1999 and 2000 are 55%, 27%, and 30% respectively. Failure to Comply with Contract Provisions We are subject to fines and penalties if we fail to comply with the requirements of government contracts. As a provider of services to federal and other government agencies, we must comply with government contracting requirements which are complex, highly technical and subject to varying interpretations. If we fail to comply with governmental contracting requirements, the government could impose on us fines and penalties for failure to follow procurement integrity and bidding rules and employing improper billing practices or otherwise failing to follow prescribed cost accounting standards, including disqualification from future government contract projects for a significant period of time. We have been, and expect to be in the future, the subject of audits, and may in the future be subject to investigations, by government agencies regarding our compliance with government contracting requirements. Fluctuations in Quarterly Results Fluctuations in quarterly results due to seasonal factors may cause our operating results to fail to meet analysts' and investors' expectations, which could cause the price of our common stock to decline. Our revenue is dependent on our contract backlog and the timing and performance requirements of each contract. Our revenue is also affected by the timing of our clients' planned remediation activities and need for waste treatment services, which generally increase during the third and fourth quarters based largely on weather conditions. Due to this variation in demand and resulting fluctuation in quarterly results, future quarterly operating results may not meet the expectations of securities analysts and investors which could result in the decline in the price of our stock. Management of Business Growth If we fail to manage our growth effectively, our financial, operational and managerial resources may be inadequate. Our rapid growth has placed, and any future growth may place, significant demands on our financial resources and to a lesser extent, our operational and managerial resources which could impact the timing and operation of waste treatment facilities. We have had and continue to have substantial working capital deficits as a result of the strain on our financial resources due to our rapid revenue growth, losses from operations, lack of operating capital, and substantial uncollected trade accounts receivable. These working capital deficits may impact the timing and our ability to successfully implement the operation of our waste treatment facilities in Richland, Washington and Oak Ridge, Tennessee. Our growth has increased significantly since 1994, when we experienced a significant increase in the number and size of contracts awarded. In December 1998, we acquired new business lines that contributed to increased growth in 1999. Also in 1999, we began construction of our new Richland, Washington facility for processing of low- level mixed waste that is anticipated to contribute to increased growth in 2001 and beyond. In the second quarter of fiscal 2000 at our Oak Ridge, Tennessee facility, we discontinued our Q-CEP thermal process for decontaminating resin and are replacing it with a more cost effective non-thermal resin decontamination process which has a greater long-term commercial viability. Facilities Shutdown Our facilities may be shut down due to equipment failure or failure to comply with government regulations, which could significantly reduce our revenues. If any of our principal waste treatment systems were to be shut down for any appreciable period of 24 time, because of either equipment breakdown or regulatory action in response to an alleged safety or other violation of the terms of the licenses under which we operate, our revenues could be significantly reduced. Not only could we lose revenues from shut downs, but we could also lose potential revenues from future contracts if we could not bid for contracts successfully because the waste treatment systems at our fixed facilities did not perform consistently in conformance with safety and other requirements. Our fixed facilities are subject to frequent routine inspections by the regulatory authorities issuing the licenses. Our SAFGLAS(TM) system was shut down from September 5 to September 28, 1999 due to an equipment failure, resulting in business interruption losses and property damage of $2.7 million, of which to date only $829,000 has been reimbursed by insurance. We have experienced other shutdowns of our facilities for short periods of time in the past. Competition We face competition from companies with greater resources and potentially more cost-effective waste treatment solutions. Any increase in the number of licensed commercial treatment facilities or disposal sites for low-level radioactive waste or low-level mixed waste in the United States, or any decrease in the treatment or disposal fees charged by the facilities or sites, could reduce the competitive advantage of ATG's treatment technologies. The market for radioactive and hazardous waste management services is highly competitive and we face competition in our current and planned business lines from both established domestic companies and foreign companies attempting to introduce European waste treatment technologies into the United States. Expansion into Foreign Markets Risks associated with foreign markets could impede our planned expansion into the Pacific Rim. A key component of our long-term business plan is to expand our business into select Pacific Rim markets, which requires that we or our strategic alliance partners be able to market our technologies or services successfully in foreign markets. However, our expansion into the Pacific Rim region could be delayed or prevented by various risks which are inherent in foreign operations, including general economic conditions in each country, varying regulations applicable to our business, seasonal reductions in business activities, fluctuations in foreign currencies or the U.S. dollar, expropriation, nationalization, war, insurrection, terrorism and other political risks, the overlap of different tax structures, risks of increases in taxes, tariffs and other governmental fees and involuntary renegotiation of contracts with foreign governments. Loss on Commercial Contracts A loss on one or more of our larger contracts could significantly reduce our revenues. If ATG is unable to accurately calculate or integrate the cost of performing a large, multi-year contract in its contract bid and the costs are understated significantly, ATG would likely incur a loss which would significantly reduce our revenues. ATG increasingly pursues large, governmental and private sector, multi-year contracts as a method of achieving more predictable revenue, more consistent utilization of equipment and personnel, and greater leverage of sales and marketing costs. The government contracts in particular are usually awarded as a result of a competitive bidding process requiring ATG to estimate and accurately predict its cost of performance. These large contracts impose significant risks if actual costs are higher than those estimated by ATG at the time of bid. 25 Litigation If we were to lose any of three pending civil actions against us, including a wrongful death action, we might become subject to a potentially large damage award. ATG is a defendant in a pending wrongful death civil action seeking damages in excess of $8 million, including exemplary damages of $5 million, for the death of an employee of a scrap metal dealer who died as a result of an exploding piece of ordnance. The action alleges that ATG's sub-contractor supplied the ordnance to the scrap dealer. A second lawsuit seeking damages of $200,000 was filed by three other persons alleging physical injuries and emotional distress caused by the accident. A third lawsuit seeking damages of $1,200,000 was filed by the property owner where the explosion occurred alleging business interruption and property damage. ATG is a named defendant in the second and third actions as well. NASDAQ Listing If we fail to maintain a Nasdaq listing for our common stock, it will become more difficult for owners of our common stock to dispose of their shares. Our common stock is presently traded on the Nasdaq National Market. If we fail to maintain our listing for our common stock, and no other exclusion from the definition of "penny stock" under the Exchange Act of 1934 is available, then any broker engaging in a transaction in our securities would be required to provide any customer with a risk disclosure document and the compensation of the broker-dealer in the transaction and monthly account statements showing the market values of ATG's securities held in the customer's accounts. If brokers become subject to the "penny stock" rules when engaging in transactions in our securities, they may become less willing to engage in the offer and sale of our securities. This, in turn, may make it more difficult for owners of our common stock to dispose of their shares. 26 Item 3. Quantitative and Qualitative Disclosures about Market Risk There had been no change to the disclosures made in the Company's 2000 Form 10-K. PART II OTHER INFORMATION Item 1. Legal Proceedings In June 1992, ATG entered into a contract with the U.S. Army under which ATG acted as the prime contractor to "surface clear" expended ordnance from a firing range at Fort Irwin, California. In March 1997, a piece of ordnance exploded on the premises of a scrap metal dealer in Fontana, California. An employee of the scrap dealer died in the accident. Although the scrap dealer had purchased expended ordnance and other military scrap metal from a number of military facilities, including Fort Irwin, the scrap dealer indicated that the ordnance which exploded was purchased from Fort Irwin. The U.S. Army contended that a subcontractor to ATG on the Fort Irwin contract had improperly certified ordnance cleared from the Fort Irwin firing range as free of hazardous and explosive material prior to the sale of ordnance to the scrap dealer. As a result, the U.S. Army terminated the Fort Irwin contract for default, and demanded repayment from ATG of alleged reprocurement costs totaling $945,000. ATG believes it fully complied with the terms of the Fort Irwin contract and applicable laws and regulations and challenged the default termination in an action against the U.S. Army filed in the Court of Federal Claims in July 1997. In July 1998, the U.S. Army and ATG settled the matter. The termination for default was rescinded and ATG agreed to no longer bid on surface-clearing work at active U.S. Army firing ranges. In connection with the accident, in March 1998 a wrongful death civil action was filed in San Bernardino County Superior Court against the subcontractor, a supervisory employee of the subcontractor, the owners of the premises occupied by the scrap dealer, and ATG, seeking damages in excess of $8 million, including exemplary damages of $5 million. A second action was filed at the same time in San Bernardino County Superior Court against the same defendants by three other persons alleging physical injuries and emotional distress caused by the accident. The parties in the second action are seeking general damages subject to proof estimated to be in the amount of $200,000. A third action was also filed in San Bernardino County Superior Court against the same defendants by the property owner where the accident occurred asserting business interruption and property damage caused by the accident in the amount of $1,200,000. ATG has tendered the defense of each of these actions to its insurance carrier, which is presently handling the matters for ATG, and we intend to vigorously contest all of the 27 claims asserted in these actions. We believe that we acted properly with respect to the Fort Irwin contract, and that we should not be liable for the injuries caused by the accident. We also intend to seek indemnification from the subcontractor for the full amount of any costs, damages and liabilities which we may incur in connection with or as a result of these lawsuits. The subcontractor has advised ATG that the subcontractor's comprehensive general liability insurance policy covers the claims asserted against the subcontractor, and that the policy coverage limit is $7 million per occurrence. Although we believe that all of the claims asserted against ATG are without legal merit, the outcome of these lawsuits is uncertain. Any judgment of liability against ATG, especially to the extent damages exceed or are not covered by insurance or are not recoverable by ATG from the subcontractor, could have a material adverse effect on our business, financial condition and results of operations. In addition to the contingency disclosed above, from time to time we are a party to litigation or administrative proceedings relating to claims arising from our operations in the normal course of business. Management, on the advice of counsel, believes that the ultimate resolution of litigation currently pending against ATG is remote, either individually or in the aggregate, to have a material adverse effect on our business, financial condition or results of operations. Item 2. Changes in Securities and Use of Proceeds Not applicable. Item 3. Defaults Upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Not applicable Item 5. Other Information None. 28 Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 2.1 Final bankruptcy court bid dated November 13, 1998** 2.2 Form of letter agreement dated December 1, 1998, among the purchasers and the Trustee** 3.1 Articles of Incorporation of the Company * 3.2 Bylaws of the Company * 3.3 Certificate of Amendment of Articles of Incorporation * 4.1 Specimen Common Stock Certificate * 10.43 Credit and reimbursement agreement, dated November 1, 1999, among ATG Inc., Sanwa Bank California and Keybank National Association *** 10.44 Loan agreement , dated November 1, 1999, between Port of Benton Economic Development Corporation and ATG Inc. *** 10.52 Employment agreement dated October 27, 2000 as amended and restated on February 8, 2001 between ATG Inc. and Vik Mani. (b) Reports on Form 8-K None. __________ (*) Incorporated by reference to exhibits filed with the Registrant's Registration Statement on Form S-1 (No. 333-46107) which became effective May 6, 1998. (**) Incorporated by reference to exhibits filed with the Registrant's Form 8-K dated December 1, 1998. (***) Incorporated by reference to exhibits filed with the Registrant's Form 8-K dated February 22, 2000. 29 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ATG INC. Date: May 18, 2001 By: /s/ DENNIS WILLIAMSON --------------------- Dennis Williamson Controller and Acting Chief Financial Officer (Principal Financial and Accounting Officer) 30