| Before making an investment decision, you should carefully consider the risk factors set forth below as well as other information we include or incorporate by reference in this annual report and the additional information in the other reports we file with the US Securities and Exchange Commission (“SEC”) |
| 15 ______________________________________________________________________ Risks Relating to the Pending Merger with EnergySolutions We are subject to business uncertainties and contractual restrictions while the merger with EnergySolutions is pending |
| Uncertainty about the effect of the pending merger with EnergySolutions on our employees and our current and prospective customers may have an adverse effect on us |
| These uncertainties may impair our ability to retain and motivate key personnel until the merger is completed, and could cause customers and others that deal with us to defer decisions regarding business relationships with us or other decisions concerning us, or to seek to change existing business relationships with us |
| If key employees depart because of uncertainty about their future roles with EnergySolutions, our ability to continue to execute our business and strategic plans could be adversely affected |
| In addition, the Merger Agreement generally restricts us, until the merger occurs, from taking actions outside of the ordinary course of business, including making acquisitions, without the consent of EnergySolutions |
| These restrictions could adversely affect our ability to pursue key aspects of our growth plans prior to the completion of the merger |
| Failure to complete the merger with EnergySolutions could negatively affect our stock price and our future business and financial prospects |
| There is no assurance that EnergySolutions and Duratek will receive the necessary regulatory approvals or satisfy the other conditions to the completion of the merger |
| If the merger is not completed for any reason, we will be subject to several risks, including the following: · The current market price of our Common Stock may reflect a market assumption that the merger is likely to occur, and a failure to complete the merger would likely result in a decline in the market price of our Common Stock; · Many costs relating to the merger (such as legal, accounting, and a portion of our financial advisory fees) are payable by us whether or not the merger is completed; · Efforts required under the Merger Agreement and other preclosing activities and obligations require substantial commitments of time and resources by our management and employees, which could limit the time and effort available to pursue other business activities that may be important to our operations; and · We would continue to face the risks that we currently face as an independent company in executing our growth and strategic plans, as further described herein |
| If the merger is not completed, the risks described above may occur and materially adversely affect our business, financial results, financial condition, and stock price |
| The Merger Agreement limits our ability to pursue alternatives to this merger |
| Under the Merger Agreement, we are generally precluded from encouraging or participating in any discussions that could lead to an alternative transaction to this merger |
| Similarly, our Board of Directors is restricted in its ability to withdraw or modify its recommendation that our stockholders approve the Merger Agreement |
| In certain circumstances, our Board of Directors may be permitted to terminate the Merger Agreement and pursue a proposal that it deems to be superior |
| In those circumstances, we would be required to pay EnergySolutions a termination fee of approximately dlra8dtta6 million |
| If our stockholders approve the Merger Agreement at a stockholders’ meeting currently expected to be held in the second quarter of 2006, we no longer have a right to terminate the Merger Agreement to accept an alternative transaction |
| The effect of these provisions could be to discourage or prevent a party interested in a possible acquisition of our company from pursuing an offer to acquire us |
| 16 ______________________________________________________________________ Credit and Business Risks The documents governing our indebtedness restrict our ability and the ability of our subsidiaries to engage in some business transactions |
| We have entered into a secured credit facility (the “Credit Facility”) providing for an aggregate commitment of dlra145 million which consists of a five-year dlra30 million revolving line of credit to fund working capital and general corporate requirements and a six-year dlra115 million term loan |
| As of December 31, 2005, the outstanding balance was dlra69 million |
| The credit agreement governing the Credit Facility restricts our ability and the ability of our subsidiaries to, among other things, engage in the following actions: · incur or guarantee additional indebtedness; · declare or pay dividends on and redeem or repurchase capital stock; · transfer assets or make loans between us and some of our subsidiaries; · make investments; · incur or permit to exist liens; · enter into transactions with affiliates; · make material changes in the nature or conduct of our business; · complete the merger with EnergySolutions, although we received a consent from the lender to exclude the Merger Agreement; · merge or consolidate with, acquire substantially all of the stock or assets of any other companies; · make capital expenditures; and · transfer or sell assets |
| The Credit Facility also contains other covenants that are typical for credit facilities of this size, type and tenor, such as requirements that we meet specified financial ratios and financial condition tests |
| Our ability to make additional borrowings under the Credit Facility depends upon satisfaction of these covenants |
| Our ability to meet these covenants and requirements may be affected by events beyond our control |
| Our failure to comply with obligations under the Credit Facility could result in an event of default under the facility |
| A default, if not cured or waived, could permit acceleration of our indebtedness |
| If our indebtedness is accelerated, we cannot be certain that we will have funds available to pay the accelerated indebtedness or that we will have the ability to refinance the accelerated indebtedness on terms favorable to us or at all |
| Our business and operating results could result in a reduction of elimination of previously reported profits by our inability to accurately estimate the overall risks, revenue, or costs on a contract |
| We generally enter into four principal types of contracts with our clients: firm fixed-price, fixed-unit-rate, time-and-materials, and cost-plus award or incentive fee |
| Under our firm fixed-price and fixed-unit-rate contracts, we receive a fixed price regardless of the actual costs we incur and, consequently, we are exposed to a number of risks |
| These risks include underestimation of costs, problems with new technologies, unforeseen costs or difficulties, delays beyond our control and economic and other changes that may occur during the contract period |
| Under our time-and-materials contracts, we are paid for labor and costs incurred at negotiated contractual rates |
| Profitability on these contracts is driven by the extent of utilization of our billable personnel and cost control |
| Under our cost-plus award or incentive fee contracts, some of which are subject to contract ceiling amounts, we are reimbursed for allowable costs and fees, 17 ______________________________________________________________________ which may be fixed or performance-based |
| If our costs exceed the contract ceiling or are not allowable under the provisions of the contract or any applicable regulations, we may not be able to obtain reimbursement for all such costs |
| Under our incentive fee contracts, we are awarded fees assuming that certain contract commitments are met, including schedule, budget, and safety |
| If any of these commitments are not met, we could have a reduction in expected revenues |
| Accounting for a contract requires judgment relative to assessing the contract’s estimated risks, revenue, and costs, and on making judgments on other technical issues |
| Due to the size and nature of many of our contracts, the estimation of overall risks, revenue and costs at completion is complicated and subject to many variables |
| Changes in underlying assumptions, circumstances, or estimates may also adversely affect future period financial performance |
| A portion of our revenues is recognized using a proportional performance method |
| Generally, the proportional performance method that we utilize result in the recognition of contract revenues and earnings ratably, based on the proportion of completion to total estimated contract completion, or on estimated physical completion or units of production |
| We believe that our estimates are reasonably dependable but estimates are by their nature uncertain |
| Revisions in revenues, costs, and profit estimates, or measurements in the extent of progress toward completion are changes in accounting estimates accounted for in the period of change (cumulative catch-up method) |
| Such revisions could occur at any time and the effects could be material |
| A change order is included in total estimated contract revenue when revenue is probable, which generally occurs upon acceptance in writing by the customer |
| Until then, no revenue or profit is recognized |
| Due to uncertainties inherent in the estimation process, it is possible that actual completion calculations may vary from estimates, and it is possible that such variances could be material to our operating results |
| Our quarterly operating results may fluctuate significantly, which could have a negative effect on the price of our Common Stock |
| Our quarterly revenue, expenses, and operating results may fluctuate significantly because of a number of factors, including: · the impact that the timing of nuclear power plant outages have on the shipments of waste (outages typically occur in the spring and fall); · unanticipated changes in contract performance that may affect profitability, particularly with contracts that have funding limits; · the timing of resolutions on change orders, requests for equitable adjustments (“REAs”), and other contract adjustments; · the seasonality of the spending cycle of our public sector clients, notably the Federal government, and the spending patterns of our commercial sector clients; · employee staff levels and utilization rates; · the number and significance of client engagements commenced and completed during a quarter; · the ability of our clients to terminate engagements without penalties; · delays incurred in connection with an engagement; · the size and scope of engagements; · the timing of expenses incurred in connection with the Merger Agreement or for other corporate initiatives; 18 ______________________________________________________________________ · changes in the prices of services offered by our competitors; · changes in accounting rules; and · general economic or political conditions |
| Variations in any of these factors could cause significant fluctuations in our operating results from quarter to quarter and could result in net losses |
| If we have to write-off a significant amount of intangible assets, our earnings will be negatively impacted |
| Goodwill is included on our balance sheet and is a significant asset, comprising dlra72dtta1 million at December 31, 2005 |
| If our goodwill were to be significantly impaired, a write-down or write-off would be required |
| The write-off would negatively impact our earnings; however, it would not impact our cash flows |
| We may encounter difficulties in pursuing our growth objectives |
| In order to increase our revenues and to replace revenues from projects that will be completed, such as the decommissioning of the Big Rock Point Nuclear Power Plant in 2006, the Fernald Environmental Management Closure Project contract set to be completed in 2007, and the few current US commercial nuclear power plant decommissioning projects that are nearing completion, we must be successful in winning and performing new business mandates in our federal business and commercial sectors |
| Additionally, the trend within the domestic nuclear power industry for plant life extension and license renewal affects the demand for services to commercial customers |
| Due to these risks, period-to-period comparisons have been adversely affected in the past and may continue to be affected in the future |
| Although the Department of Energy has indicated that a number of new contracts will be awarded in 2006 and 2007, governmental awards are frequently delayed |
| Additionally, we cannot predict whether we will be successful in obtaining new federal services business awards |
| In some instances, we may choose to bid as the lead of a prime contractor team |
| In the past, we have operated mainly as a subcontractor or in a minority position on the prime contractor team |
| We expect to be bidding against organizations that have substantially greater resources and experience in being the leading prime contractor for these kinds of projects |
| In addition, our success in being awarded prime and subcontracts is subject to competitive pressures, including pressures from new entrants into these markets and from enterprises who benefit from various recent DOE preferences for small business enterprises as prime contractors and sub-contractors |
| In light of these uncertainties for new business awards in our commercial and federal services business units, our growth plan anticipates pursuing new opportunities for providing services with respect to low-level radioactive waste and high-level wastes at DOE sites in the United States and foreign sites and, potentially further in the future, spent nuclear fuel and uranium mill tailings |
| In many of these potential opportunities, we may not have experience comparable to our current and past experience in our federal and commercial businesses |
| Thus, we may be subject to a range of risks in obtaining and performing these types of businesses, including the risks associated with conducting business overseas, the adequacy and experience of management, and the adequacy of operational resources and technical capabilities needed to perform these mandates successfully |
| We cannot predict whether we will be successful in obtaining or performing any new business initiatives in these new business areas |
| Government Contracting Risks The US government can audit and disallow claims for compensation under our government contracts, and can terminate those contracts without cause |
| Our government contracts, which are primarily with the DOE and DoD, are, and are expected to continue to be, a significant part of our business |
| We derived approximately 47prca of our consolidated 19 ______________________________________________________________________ revenues in 2005 and 43prca of our consolidated revenues in 2004 from contracts funded by the DOE The Federal Services work that we performed for customers that represented greater than 10prca of the Federal Services segment’s revenues were with prime contractors Bechtel Corporation and Fluor Corporation |
| Allowable costs under government contracts are subject to audit by the US government |
| To the extent that these audits result in determinations that costs claimed as reimbursable are not allowable costs or were not allocated in accordance with Federal government regulations, we could be required to reimburse the US government for amounts previously received |
| In addition, if we were to lose and not replace our revenues generated by one or more of the US government contracts, our businesses, financial condition, results of operations, and cash flows could be adversely affected |
| We have a number of contracts and subcontracts with agencies of the US government, principally for environmental remediation, restoration, and operations work, that extend beyond one year and for which additional government funding has not yet been appropriated |
| We cannot be certain that the US government will appropriate such funds |
| All contracts with agencies of the US government and some commercial contracts are subject to unilateral termination at the option of the customer |
| In the event of a termination, we would not receive projected revenues or profits associated with the terminated portion of those contracts; however, all costs incurred prior to termination are recoverable in accordance with Federal Acquisition Regulations |
| In addition, government contracts are subject to specific procurement regulations, contract provisions, and a variety of other socioeconomic requirements relating to the formation, administration, performance, and accounting of these contracts |
| Many of these contracts include express or implied certifications of compliance with applicable laws and contract provisions |
| As a result of our government contracting, claims for civil or criminal fraud may be brought by the government for violations of these regulations, requirements, or statutes |
| We may also be subject to qui tam litigation brought by private individuals on behalf of the government under the Federal Civil False Claims Act, which could include claims for up to treble damages |
| Further, if we fail to comply with any of these regulations, requirements, or statutes, our existing government contracts could be terminated, we could be suspended from government contracting or subcontracting, including federally funded projects at the state level, and our ability to participate in foreign projects funded by the United States could be adversely affected |
| If one or more of our government contracts are terminated for any reason, or if we are suspended from government work, we could suffer a significant reduction in expected revenues |
| Most of our government contracts are awarded through a regulated competitive bidding process |
| The inability to complete existing government contracts or win new government contracts over an extended period could harm our operations and adversely affect our future revenues |
| Most of our government contracts are awarded through a regulated competitive bidding process |
| Some government contracts are awarded to multiple competitors, which increases overall competition and pricing pressure and may require us to make sustained post-award efforts to realize revenues under these government contracts |
| In addition, government clients can generally terminate or modify their contracts at their convenience |
| Moreover, even if we are qualified to work on a new government contract, we might not be awarded the contract because of existing government policies designed to protect small businesses and underrepresented minority contractors |
| The inability to complete existing government contracts or win new government contracts over an extended period could harm our operations and adversely affect our future revenues |
| If our partners fail to perform their contractual obligations on a project, we could be exposed to legal liability, loss of reputation and profit reduction or loss on the project |
| We perform projects jointly with outside partners, entering into subcontracts, joint ventures, and other contractual arrangements so that we can jointly bid and perform on particular projects |
| Success on 20 ______________________________________________________________________ these joint projects depends in large part on whether our partners fulfill their contractual obligations satisfactorily |
| If any of our partners fail to satisfactorily perform their contractual obligations as a result of financial or other difficulties, we may be required to make additional investments and provide additional services in order to make up for our partner’s shortfall |
| If we are unable to adequately address our partner’s performance issues, then our client could terminate the joint project, exposing us to legal liability, loss of reputation, and reduced profit or loss on the project |
| Our future success will likely depend, in part, on the success of our existing collaborative relationships |
| Collaborative arrangements involve risks that the participating parties may disagree on business decisions and strategies resulting in potential delays, additional costs, and risks of litigation |
| Our inability to successfully maintain existing collaborative relationships or enter into new collaborative arrangements could have a material adverse effect on our results of operations |
| Regulatory Risks Our services expose us to significant risks of liability and our insurance policies may not provide adequate coverage |
| When we perform our services, our personnel and equipment may be exposed to radioactive and hazardous materials and conditions |
| Although we are committed to a policy of operating safely and prudently, we may be subject to liability claims by employees, customers, and third parties as a result of such exposures |
| In addition, we may be subject to fines, penalties, or other liabilities arising under environmental or safety laws |
| To date, we have been able to obtain liability insurance for the operation of our business |
| However, there can be no assurance that our existing liability insurance is adequate or that it will be able to be maintained or that all possible claims that may be asserted against us will be covered by insurance |
| A partially or completely uninsured claim, if successful and of sufficient magnitude, could have a material adverse effect on our results of operations and financial condition |
| Expiration of the Price-Anderson Act’s indemnification authority could have adverse consequences on our Federal and Commercial business units |
| Our Federal and Commercial units provide services to the nuclear industry |
| The Price-Anderson Act promotes the nuclear industry by offering broad indemnification to commercial nuclear power plant operators and DOE contractors for liabilities arising out of nuclear incidents at power plants licensed by the NRC and at DOE nuclear facilities |
| That indemnification protects not only the NRC licensee or DOE prime contractor, but also others like us who may be doing work under contract or subcontract for a licensed power plant or under a DOE prime contract |
| While the Price-Anderson Act’s indemnification provisions are broad and generally assumed to be comprehensive, there has been no occasion for a determination whether they apply to all nuclear liabilities that might be incurred by a radioactive materials cleanup contractor |
| It was recently extended to December 31, 2025 for DOE contractors |
| We operate in a highly regulated industry requiring our customers and us to have and comply with federal, state, and local government permits and approvals |
| We and our customers operate in a highly regulated environment |
| Facilities utilizing our technologies are required to have federal, state, and local government permits and approvals |
| Any of these permits or approvals may be subject to denial, revocation, or modification under various circumstances |
| Failure to obtain or comply with the conditions of permits or approvals or with environmental and safety laws may adversely affect our operations and may subject us to penalties and other sanctions |
| In addition to regulatory requirements, environmental laws impose joint and several liabilities for the cleanup of contamination upon the current and former owners and operators of contaminated property and on any party who arranges for the disposal or treatment of hazardous substances at a facility that is or becomes contaminated |
| Such liability is imposed without regard to fault and regardless of knowledge or 21 ______________________________________________________________________ compliance with environmental requirements |
| There can be no assurance that we will not face such liability in the future |
| In addition, if new environmental legislation or regulations are enacted or existing legislation or regulations are amended or are interpreted or enforced differently, we or our customers may be required to obtain additional operating permits or approvals |
| Changes in environmental requirements also may require us to change or improve our waste management technologies and services and incur additional expenses |
| There can be no assurance that we will be able to meet all of the applicable regulatory requirements |
| Changes in existing environmental laws, regulations, and programs could reduce demand for our environmental services, which could cause our revenues to decline |
| A significant amount of our waste management business is generated either directly or indirectly as a result of existing Federal and state laws, regulations, and programs related to pollution and environmental protection |
| Federal, state, and local environmental legislation and regulations require substantial expenditures and impose liabilities for noncompliance |
| Accordingly, a relaxation or repeal of these laws and regulations, or changes in governmental policies regarding the funding, implementation, or enforcement of these programs, could result in a decline in demand for environmental services that may have a material adverse effect on our revenue |
| Adequate bonding is necessary for us to successfully win new work awards on some types of contracts |
| In line with industry practice, we are often required to provide performance and surety bonds to customers under fixed-price contracts |
| These bonds indemnify the customer should we fail to perform our obligations under the contract |
| If a bond is required for a particular project and we are unable to obtain an appropriate bond, we cannot pursue that project |
| We have a bonding facility but, as is typically the case, the issuance of bonds under that facility is at the surety’s sole discretion |
| Moreover, due to events that affect the insurance and bonding markets generally, bonding may be more difficult to obtain in the future or may only be available at significant additional cost |
| There can be no assurance that bonds will continue to be available to us on reasonable terms |
| Our inability to obtain adequate bonding and, as a result, to bid on new work could have a material adverse effect on our businesses, financial condition, results of operations, and cash flows |
| Competition Risks We face increasing competition in the provision of waste treatment technologies and services |
| The waste management technologies and services industry is characterized by several large companies and numerous small companies |
| Any of these companies may possess or develop technologies superior to our technologies |
| In addition, we compete with companies offering waste management technologies, storage, and disposal management alternatives |
| In our services business, our competitors range from major national and regional environmental service and consulting firms with large environmental remediation staffs to small local firms |
| To the extent that our competitors offer more cost-effective management technology alternatives or offer comparable services at lower prices, our ability to compete effectively could be adversely affected |
| 22 ______________________________________________________________________ Our success depends on attracting and retaining qualified personnel in a competitive environment |
| We are dependent upon our ability to attract and retain highly qualified managerial and business development personnel, skilled technical specialists, and experts in a wide range of scientific, engineering, and health and safety fields |
| Competition for key personnel is intense |
| We cannot be certain that we will retain our key managerial, business development, and technical personnel or that we will attract or assimilate key personnel in the future |
| Failure to retain or attract such personnel could materially adversely affect our businesses, financial position, results of operations, and cash flows |
| We are also highly dependent upon the technical expertise and management experience of our senior management |
| The loss of the services of any of these individuals could have a material adverse effect on our results of operations and financial condition |
| Certain members of our senior management are subject to employment agreements, which end in June 2006 and November 2006, with automatic one-year extensions unless terminated with proper notice before the end date |
| There have been no notices of termination and there are no “key man” life insurance policies on any members of senior management or any other personnel |
| Other Risks Our Stockholder Rights Plan and provisions of Delaware law could inhibit a change in control |
| We are subject to various restrictions and other requirements that may have the effect of delaying, deterring, or preventing a change in control of us, such as: · our Stockholder Rights Plan; and · Section 203 of the Delaware General Corporation Law |
| On December 16, 2003, our board of directors approved a Stockholder Rights Plan |
| Under this plan, each share of our Common Stock is accompanied by a right that entitles the holder of that share, upon the occurrence of specified events that may be intended to effect a change in control, to purchase one one-thousandth of a share of Series B Junior Participating Preferred Stock at an exercise price of dlra58dtta00 |
| In the event the rights become exercisable, the rights plan allows for our stockholders to acquire our stock or the stock of the surviving corporation, whether or not we are the surviving corporation, having a value twice that of the exercise price of the rights |
| On February 6, 2006, our board of directors approved an amendment to the Stockholder Rights Plan that exempted the proposed EnergySolutions merger as a transaction that would trigger the exercise of the rights accompanying our Common Stock |
| We are also subject to Section 203 of the Delaware General Corporation Law, which generally limits the ability of major stockholders to engage in specified transactions with us that may be intended to effect a change in control |
| The value of our Common Stock could continue to be volatile |
| Our Common Stock has experienced substantial price volatility |
| In addition, the stock market has experienced extreme price and volume fluctuations that have affected the market price of many companies and that have often been unrelated to the operating performance of these companies |
| The overall market and the price of our Common Stock may continue to fluctuate greatly |
| The trading price of our Common Stock may be significantly affected by various factors, including: · quarter-to-quarter variations in our financial results, including revenue, profits, and other measures of financial performance or financial condition; · announcements of new contracts or technological development; · announcements by us or our competitors of significant acquisitions; 23 ______________________________________________________________________ · resolution of threatened or pending litigation; · status of our collaborative arrangements or those of competitors; · changes in investors’ and analysts’ perceptions of our business or any of our competitors’ businesses; · investors’ and analysts’ assessments of reports prepared or conclusions reached by third parties; · changes in environmental legislation; · patent or proprietary rights developments; · broader market fluctuations; · status of the Merger Agreement for the acquisition of Duratek by EnergySolutions and transactions related thereto; and · general economic or political conditions |
| Additionally, volatility or a lack of positive performance in our stock price may adversely affect our ability to retain key employees, many of whom are granted stock options, the value of which are dependent on the performance of our stock price |