<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of
----- the Securities Exchange Act of 1934 for the quarterly
period ended December 31, 1997
or
----- Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 for the transition
period from _____ to _____
Commission File No. 0-8836
------
Starmet Corporation
(Exact name of Registrant as specified in its charter)
Massachusetts 04-2506761
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2229 Main Street,
Concord, Massachusetts 01742
(Address of Principal Executive Offices) (Zip Code)
(978) 369-5410
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
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 twelve months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---------- ----------
As of February 13, 1998 there were issued and outstanding 4,786,344 shares of
the Registrant's Common Stock.
<PAGE>
STARMET CORPORATION AND SUBSIDIARIES
FORM 10-Q/A
for the quarterly period ended December 31, 1997
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information 2
Item 1. Financial Statements
Consolidated Balance Sheets:
December 31, 1997 and September 30, 1997 3
Consolidated Statements of Operations:
Three Months Ended December 31, 1997
and December 31, 1996 4
Consolidated Statements of Cash Flow:
Three Months Ended December 31, 1997
and December 31, 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II. Other Information 12
Item 1. Legal Proceedings 12
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES
</TABLE>
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
PREPARATION OF FINANCIAL STATEMENTS
The financial statements included herein have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission and are subject to year-end audit by independent public
accountants. 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. It is suggested that the financial statements be read in
conjunction with the financial statements and notes included in the Company's
most recent Annual Report on Form 10-K.
The information furnished reflects all adjustments, which, in the opinion
of management, are necessary for a fair statement of results for the interim
periods. It should also be noted that results for the interim periods are not
necessarily indicative of the results expected for any other interim period or
the full year.
2
<PAGE>
STARMET CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
1997 1997
------------- -------------
(as restated) (as restated)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents........................ $ 186,000 $ 195,000
Restricted Cash.................................. 73,000 73,000
Accounts receivable, net of allowances
for doubtful accounts of $421,000 at
December 31, 1997 and September 30, 1997....... 6,962,000 5,546,000
Inventories...................................... 5,409,000 5,239,000
Other current assets............................. 387,000 619,000
------------- -------------
Total current assets......................... 13,017,000 11,672,000
------------- -------------
Property, Plant and Equipment...................... 39,880,000 39,083,000
Less accumulated depreciation.................... 24,438,000 24,036,000
------------- -------------
Net property, plant and equipment................ 15,442,000 15,047,000
------------- -------------
Non-current Inventories............................ 5,851,000 5,851,000
Other assets....................................... 2,156,000 1,784,000
------------- -------------
$ 36,466,000 $ 34,354,000
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................ $ 4,814,000 $ 1,885,000
Accounts payable and accrued expenses............ 5,613,000 5,245,000
------------- -------------
Total current liabilities........................ 10,427,000 7,130,000
------------- -------------
------------- -------------
Long term obligations.............................. 387,000 430,000
------------- -------------
Notes payable to Shareholders'..................... 1,140,000 1,048,000
------------- -------------
Stockholders' equity:
Common stock, par value $.10; authorized-
15,000,000 shares; 4,784,244 issued and
outstanding for December 31, 1997
and September 30, 1997........................... 478,000 478,000
Additional paid-in capital......................... 14,033,000 14,033,000
Warrants issued.................................... 687,000 360,000
Retained earnings.................................. 9,314,000 10,875,000
------------- -------------
Total stockholders' equity....................... 24,512,000 25,746,000
------------- -------------
$ 36,466,000 $ 34,354,000
------------- -------------
------------- -------------
</TABLE>
3
<PAGE>
STARMET CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------
<S> <C> <C>
DECEMBER 31, DECEMBER 31,
1997 1996
------------- ------------
(as restated)
Net sales and contract revenues...................... $ 8,079,000 $7,271,000
------------- ------------
Cost and expenses
Cost of sales...................................... 7,101,000 5,360,000
Selling, general and administrative................ 2,247,000 1,188,000
Research and development........................... 158,000 247,000
------------- ------------
9,506,000 6,795,000
------------- ------------
Operating (loss) income.............................. (1,427,000) 476,000
Other income......................................... 1,000 9,000
Interest (expense), net.............................. (135,000) (55,000)
------------- ------------
Income before income taxes........................... (1,561,000) 430,000
Provision for income taxes........................... -- 11,000
------------- ------------
Net income (Loss).................................... $ (1,561,000) $ 419,000
------------- ------------
------------- ------------
Per Share Information
Basic income(loss) per common share.................. $ (0.33) $ 0.09
------------- ------------
------------- ------------
Weighed average shares outstanding................... 4,784,000 4,782,000
Diluted income per common share...................... (0.33) $ 0.09
------------- ------------
------------- ------------
Weighed average shares outstanding and
dilutive potential common shares................... 4,784,000 4,883,000
</TABLE>
4
<PAGE>
STARMET CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE PERIODS ENDED: (Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------
DECEMBER 31, DECEMBER 31,
1997 1996
------------- ------------
(as restated)
<S> <C> <C>
Cash flows from operating activities:
Net income (Loss)................................................ $ (1,561,000) $ 419,000
Adjustments to reconcile net income(loss)
to net cash provided (used) by operating
activities:
Depreciation and amortization................................ 435,000 384,000
Changes in assets and liabilities, net
(Increase) decrease in accounts receivable................. (1,416,000) (2,619,000)
(Increase) decrease in inventories......................... (170,000) 1,207,000
Increase (decrease) in accounts payable
and accrued expenses...................................... 368,000 (322,000)
(Increase) decrease in other assets........................ (140,000) 11,000
------------- ------------
Net cash used by operating activities.................... (2,484,000) (920,000)
------------- ------------
Cash flows from investing activities:
Capital expenditures, net........................................ (797,000) (406,000)
------------- ------------
Net cash used in investing activities............................ (797,000) (406,000)
------------- ------------
Cash flows from financing activities:
Principal payments under long-term obligations................... (43,000) (428,000)
Net Proceeds from bank debt...................................... 2,465,000 1,000,000
Proceeds from Notes Payable to Shareholders & Warrants........... 850,000 --
------------- ------------
Net cash provided by financing activities...................... 3,272,000 572,000
------------- ------------
Net increase (decrease) in cash and equivalents.................... (9,000) (754,000)
Cash and equivalents at beginning of the period.................. 268,000 1,301,000
------------- ------------
Cash and equivalents at end of the period........................ $ 259,000 $ 547,000
------------- ------------
------------- ------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest....................................................... $ 68,000 $ 14,000
Income taxes................................................... $ -- $ --
</TABLE>
5
<PAGE>
NOTES
1. The significant accounting policies followed by the Company in preparing
its consolidated financial statements are set forth in Note (2) to such
financial statements included in Form 10-K for the year ended September 30,
1997.
In August 1998, the Company restated its September 30, 1996 and September
30, 1997 consolidated financial statements. The restatement related to the
Company's accounting for inventory reserves. During the year ended September
30, 1996, the Company had provided approximately $3.3 million of reserves for
DU inventory, of which approximately $1.0 million of such reserves were
reversed into income during the year ended September 30, 1997, based upon
management's estimate of the future recoverability of DU inventory. After
further review, management of the Company has determined, based on
consideration of the applicable accounting literature and all of the relevant
information available at the time of the release of the Company's September
30, 1996 financial statements, that the reserves provided in 1996 should have
been lower by approximately $650,000 ($0.14 per diluted share) and the
reversal of approximately $1.0 million ($0.20 per diluted share) of such
reserves in 1997 should not have been recorded. In the future, inventory
reserves will not be reversed until the related inventory is sold or disposed
of. The following table summarizes the effects of the restatement on net
income (loss) and the related income (loss) per share amounts in the years
ended September 30, 1996 and 1997, and the three months ended December 31,
1996.
<TABLE>
<CAPTION>
Three Months Ended
1996 1997 December 31, 1996
------------------------ ------------------------ ------------------------
As Reported As Restated As Reported As Restated As Reported As Restated
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss)............ $(3,037,000) $(2,387,000) $1,482,000 $482,000 $509,000 $419,000
Income (loss) per share:
Basic...................... $ (0.64) $ (0.50) $ 0.31 $ 0.10 $ 0.11 $ 0.09
Diluted.................... $ (0.64) $ (0.50) $ 0.30 $ 0.10 $ 0.10 $ 0.09
</TABLE>
2. Inventories are stated at the lower of cost (first-in, first-out) or
market, and include labor, materials, and overheads for manufacturing and
engineering. The Company provides for inventory reserves by charges to cost
of sales when it is determined that such reserves are necessary for matters
such as excess and obsolete inventories. Increases in estimated reserve
requirements, based on relevant information, management's experience, and the
timing of expected inventory usage, are charged to cost of sales in the
period in which the increase is determined. Inventory reserves are not
reversed until the related inventory is sold or disposed of. Inventories at
December 31, 1997 and September 30, 1997 consist of:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1997
------------- -------------
(as restated) (as restated)
<S> <C> <C>
Work-in process.................................................................... $ 2,472,000 $ 2,511,000
Raw materials...................................................................... 8,111,000 7,921,000
Spare parts........................................................................ 677,000 658,000
------------ -----------
Total inventory.................................................................... $11,260,000 $11,090,000
------------ -----------
------------ -----------
Less current
inventory.............................................................
5,409,000 5,239,000
------------ -----------
------------ -----------
Non current inventory.............................................................. $ 5,851,000 $ 5,851,000
------------ -----------
------------ -----------
</TABLE>
As of December 31, 1997, approximately $5.8 million of the Company's
inventory, net of $3.2 million reserve, consisted of DU in various stages of
production. This amount consisted of $3.8 million value-added costs to
government owned material which is used for U.S. Military contracts and $2.0
million of material which the Company has acquired from other sources. During
fiscal 1995, the U.S. Army notified the Company that the Army would provide
the DU for production for the most recent penetrator contract.
Management strongly believes that the Army is responsible to compensate
the Company for the value-added costs of this material and that at a minimum
the Army would allow the Company to use this material for non-U.S. military
contracts at no additional cost to the Company. Management is pursuing
several Department of Energy programs that would require more DU inventory
over the next several years than the Company currently has on hand.
Management believes that the carrying cost of the inventory on hand will be
fully realizable through these possible programs or from its ongoing usage
for U.S. and foreign military procurements; however, it is uncertain how much
of the inventory balance will be utilized in fiscal 1998. At December 31,
1997, the Company had approximately $9 million of gross DU inventory or
approximately $5.8 million, net of reserves. Of this net amount the Company
expects to sell approximately $400,000 of DU inventory during the remainder
of fiscal 1998, approximately $1,900,000 during fiscal 1999 and the balance
thereafter.
3. Income per share of common stock
The Company has adopted SFAS No. 128, Earnings per Share, effective
December 15, 1997. Basic income per common share is computed by dividing net
income (loss) by the weighted average number of common shares outstanding
during the period. For diluted income per common share, the denominator also
includes dilutive outstanding stock options and warrants determined using the
treasury stock method.
Common share and common share dilutive potential disclosures are:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
(IN THOUSANDS) DECEMBER 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Weighted average common shares outstanding.............................................. 4,784,000 4,782,000
Dilutive potential common shares........................................................ -- 101,000
--------- ---------
Diluted common shares................................................................... 4,784,000 4,883,000
--------- ---------
Options and warrants excluded from diluted income per common share as their effect would
be
antidilutive....................................................................... 510,000 202,000
--------- ---------
--------- ---------
</TABLE>
6
<PAGE>
4. Debt
The Company entered into a First Amendment to Credit Agreement with its
lender dated December 9, 1997, which provides for an increase in the credit
facility to $8.05 million. On December 29, 1997, the Company entered into a
Second Amendment to the Credit Agreement which provides for the following;
(a) an increase in the total amount of credit available to the Company from
$8.05 million to $9.55 million consisting of a $6.0 million line of credit
and $3.55 million letters of credit; (b) the terms of repayment for the line
of credit have been revised so that $1.5 million is due July 1, 1998, $1.5
million is due October 1, 1998 and the balance, $3.0 million is due on
February 28, 1999; and (c) all previous events of noncompliance with the
Credit Agreement have been waived and certain financial covenants have been
amended.
In consideration of the Second Amendment to the Credit Agreement, the
Company issued to the lender a warrant to purchase 25,000 shares of its
common stock at the ten-day average of fair market value as of December 29,
1997. These warrants have a seven-year exercise period. These warrants have
been valued at approximately $327,000 and will be amortized as interest
expense over the period ending October 1, 1998. The Company also paid its
lender $15,000 upon execution of the Amendment.
The Company also issued convertible debt in the original principal amount
of $850,000 to certain shareholders on December 23, 1997. (See note 6 of the
notes to consolidated financial statements included in the Company's Annual
Report on Form 10-K for the year ended September 30, 1997 for details of the
Credit Agreement and subordinated debt issued to certain of the Company's
shareholders).
As of December 31, 1997 the Company was out of compliance with certain of
its financial covenants pursuant to its credit agreement. On February 23,
1998 the Company received from the bank a waiver for this event of
non-compliance.
5. Legal Proceedings
On December 9, 1997, Brush Wellman, Inc. ("Brush Wellman") filed a
patent infringement suit against the Company in the United States District
Court for the District of Massachusetts (the "District Court") alleging that
the Company is infringing on a patent (the "Patent") awarded to Brush Wellman
for the investment casting of beryllium aluminum alloys. Brush Wellman is
seeking an injunction against the Company's alleged patent infringement,
monetary damages (including treble damages) and attorney fees. On January 22,
1998, the Company filed in the U.S. Patent and Trademark Office (the "PTO")
a request for re-examination (the "Request") of the Patent. In the Request,
the Company contends, among other things, that there is sufficient "prior
art" in the field of investment castings and castings of beryllium aluminum
alloys teaching the claimed invention of the Patent such that the Patent
should not have issued. If the PTO grants the Request, it will undertake a
process of re-examination of the validity of the Brush Wellman patent that,
the Company anticipates, could last for at least one year and possibly
longer. Although the Company believes that the Request has merit, there can
be no assurance that the PTO will decide to re-examine the Patent. If the
Request were granted, there can be no assurance that the PTO would find the
Patent to be invalid. On January 27, 1998, the Company filed in the District
Court a motion to stay the court case pending the outcome of the
re-examination proceeding. If the District Court were to grant the motion to
stay, the court case would not proceed until the conclusion of the PTO's
re-examination of the Patent. Although the Company believes that its motion
to stay has merit, no assurance can be given that the District Court will
grant the motion.
Even though the Company has been advised by patent counsel that Brush
Wellman's claims are without merit, no assurance can be given as to the
ultimate outcome of the lawsuit. Even if the lawsuit was not to proceed to
trial, the litigation could result in substantial costs to the Company, and
an unfavorable settlement of the lawsuit could place the company at a
competitive disadvantage. An adverse judgment or settlement could subject the
Company to significant liabilities and expenses (e.g., reasonable royalties,
lost profits, attorneys' fees or trebling of damages for willfulness). An
adverse outcome also could cause the Company to incur substantial costs in
redesigning the investment casting process for its Beralcast products and
components. Moreover, there can be no assurance that redesign alternatives
would be available to the Company, and if available, that any redesign
alternative would not place the Company at a competitive disadvantage. In the
alternative, the Company could be required to license the disputed patent
rights from Brush Wellman or to cease using the patented technology. Any such
license, if required, may not be available on terms acceptable or favorable
to the Company, or at all. Any of these results could have a material adverse
effect on the Company's business, financial condition or results of
operations.
Even in the event of a successful outcome the Company may incur
significant legal expenses in its defense.
7
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
In August 1998, the Company restated its September 30, 1996 and
September 30, 1997 consolidated financial statements. The restatement
related to the Company's accounting for inventory reserves. During the year
ended September 30, 1996, the Company had provided approximately
$3.3 million of reserves for DU inventory of which approximately
$1.0 million of such reserves were reversed into income during the year
ended September 30, 1997, based upon management's estimate of the future
recoverability of DU inventory. After further review, management of the
Company has determined, based on consideration of the applicable accounting
literature and all of the relevant information available at the time of the
release of the Company's September 30, 1996 financial statements, that
the reserves provided in 1996 should have been lower by approximately
$650,000 ($0.14 per diluted share) and the reversal of approximately
$1.0 million ($0.20 per diluted share) of such reserves in 1997 should
not have been recorded. In the future, inventory reserves will not be
reversed until the related inventory is sold or disposed of. The following
table summarizes the effects of the restatement on net income (loss) and the
related income (loss) per share amounts in fiscal year 1996, 1997 and the
three months ended December 31, 1996.
<TABLE>
<CAPTION>
Three Months Ended
1996 1997 December 31, 1996
------------------------ ------------------------ ------------------------
As Reported As Restated As Reported As Restated As Reported As Restated
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss)............ $(3,037,000) $(2,387,000) $1,482,000 $482,000 $509,000 $419,000
Income (loss) per share:
Basic...................... $ (0.64) $ (0.50) $ 0.31 $ 0.10 $ 0.11 $ 0.09
Diluted.................... $ (0.64) $ (0.50) $ 0.30 $ 0.10 $ 0.10 $ 0.09
</TABLE>
The Company had established inventory reserves totaling approximately
$1.6 million at the end of fiscal 1995. During fiscal 1996, the Company
established additional inventory reserves of approximately $2.7 million
related to its DU inventory, which consisted of DU metal and UF. These
additional reserves were established based on management's evaluation of the
risks associated with the DU inventory, including risks associated with
excess and obsolete inventory, and had the effect of writing down
approximately 20% of the Company's DU metal inventory to zero and writing
down approximately 50% of the Company's UF inventory to zero. In conducting
this evaluation, management considered the type and quantity of inventory on
hand, historical sales volumes and expectations concerning the timing and
amounts of then anticipated sales of current and proposed products (based
upon longer than expected sales cycles for certain products). At September
30, 1996, the Company's utilization of DU inventory was uncertain. In
particular, the Company considered future use of DU inventory for munitions
contracts with the U.S. Army as unlikely. At that time, the Company was also
discussing with USEC the possibility, timing and volume of AVLIS feedstock
production, and was evaluating the potential use of DU inventory in other
proposed products and the timing of inventory usage with respect to such
products. Although the Company believed the long-term possibilities for DU
inventory usage were numerous, the uncertainties related to the usage of the
DU inventory were significant. Based on these uncertainties, management's
judgment and discussions between the Company and its independent public
accountants, inventory reserves were increased by such $2.7 million amount,
bringing the total inventory reserves at September 30, 1996 to approximately
$4.2 million. Of this amount, approximately $3.2 million was allocated to DU
inventory, with the balance allocated to various other inventories. As of
September 30, 1996, gross DU inventory was approximately $9.0 million and
consisted of approximately $4.3 million of DU metal and $4.7 million of UF.
As of September 30, 1996, DU inventory, net of reserves, was approximately
$5.8 million and consisted of approximately $3.5 million of DU metal and
approximately $2.3 million of UF.
During the first quarter of fiscal 1997, the Company used approximately $2.4
million of DU metal inventory principally in connection with a munitions
contract with a foreign customer and to a lesser extent in connection with an
AVLIS feedstock production contract. Revenues for the fiscal quarter ended
December 31, 1996, under these two contracts were approximately $3.7 million.
At December 31, 1997, the Company had approximately $9.0 million of gross DU
inventory or approximately $5.8 million, net of reserves and consisted of
approximately $3.5 million of DU metal inventory, net and approximately $2.3
million of UF inventory, net. Based on current discussions with customers,
the Company expects to sell approximately $400,000 of DU inventory during the
remainder of fiscal 1998, and approximately $1.9 million of DU inventory
during fiscal 1999. Subject to the uncertainties described above, the Company
expects to sell the balance of DU inventory, including DU inventory written
down to zero, thereafter. In the event that the Company sells DU inventory in
the future which has been written down to zero, the Company will generate
revenues with higher gross margins than if such inventory had not been
written down to zero. In the event that the actual usage, or the timing of
such usage, differs materially from the Company's current expectations, any
such differences could have a material adverse effect on the Company's
overall liquidity. In such event, the Company's liquidity, cash flows and
results of operations would be dependent upon the Company's other business
segments, particularly its Specialty Metal Products business segment.
FIRST QUARTER FISCAL 1998 COMPARED WITH FIRST QUARTER FISCAL 1997
Net sales increased by $808,000 or 11% to $8,079,000 in the first quarter
of fiscal 1998, as compared to the first quarter of the prior year. Sales in
the Depleted Uranium Penetrator segment increased by $1,303,000, or 38%.
Sales in the Specialty Metal Products segment increased by $440,000 or 18%.
Sales in the Uranium Services and Recycle segment decreased by $935,000 or
27%.
The sales increase in the Depleted Uranium Penetrator segment was due to
$2,025,000 in revenue recognized on the remediation of the holding basin at
the Company's Concord facility which is being remediated pursuant to a
government contract, with minimal gross margin. This increase was partially
offset by a reduction in foreign penetrator blanks sales. The sales increase
in the Specialty Metal Products segment was due primarily to increased
customer demand for medical powders. The sales decrease in the Uranium
Services and Recycle segment was due primarily to a delay in expected Atomic
Vapor Laser Isotope Separation (AVLIS) feedstock production orders which were
received in the first quarter of fiscal 1998 and which the Company expects
will result in revenue recognition beginning in the second quarter of fiscal
1998 with most of the revenue expected to be recognized in the third fiscal
quarter. To be prepared for this AVLIS production the workforce at Starmet CMI
was increased significantly during the first quarter.
The production equipment required for this AVLIS contract is in the
process of being refurbished and it is management's view that it will be fully
operational in order to meet its current production requirements in the
second quarter. However, in the event that start-up is delayed it could have
a materially adverse effect on results of operations and financial position.
Gross profit in the first quarter decreased by $933,000 or 49% to
$978,000, as compared to the first quarter of fiscal 1997. The decrease in
gross profit for the quarter is attributable in part to changes in product
mix. As a percentage of sales, gross profit was 12% as compared to 26% for
the first quarter of fiscal 1997.
Selling, general and administrative expenses increased by $1,059,000 or
89% as compared to the first quarter of fiscal 1997. This increase was
primarily attributable to increased administrative expenses at the Company's
Starmet CMI subsidiary in anticipation of AVLIS feedstock production
described above and from expenses associated with the reorganization of the
Corporation as a parent corporation with a number of wholly-owned
subsidiaries. As a percentage of sales, these expenses were 28% as compared
to 16% the same period a year earlier.
Other income decreased by $8,000 to $1,000 for the first quarter of
fiscal 1998.
Interest expense increased to $135,000 from $55,000 for the same period a
year earlier. This increase is primarily attributable to interest expense
associated with increased borrowings and the effect of the amortization of
the value associated with warrants issued in conjunction with shareholder
notes.
Income taxes in the first quarter of fiscal 1998 and 1997 were at an
effective rate of 0% and 2%, respectively. The Company has unrecognized net
operating loss carryforwards resulting in a minimal effective tax rate.
8
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the end of the first quarter of fiscal 1998, the
Company had working capital of $2,590,000, a decrease of $952,000 since the
end of fiscal 1997. At December 31, 1997, the Company's accounts receivable
and inventories increased by $1,416,000 and $170,000, respectively, compared
with September 30, 1997 levels. Cash (less restricted cash) at December 31,
1997 was $186,000. Current indebtedness increased to $4,814,000 from
$1,885,000 as a result of increased borrowings under the Company's bank line
of credit. At the end of the first quarter of fiscal 1998 notes payable
to shareholders increased to $1,932,000 from $1,048,000 as at September 30,
1997.
The Company entered into a First Amendment to Credit Agreement with its
lender dated December 9, 1997, which provides for an increase in the credit
facility to $8.05 million. On December 29, 1997, the Company entered into a
Second Amendment to the Credit Agreement which provides for the following;
(a) an increase in the total amount of credit available to the Company from
$8.05 million to $9.55 million consisting of a $6.0 million line of credit
and $3.55 million letters of credit; (b) the terms of repayment for the line
of credit have been revised so that $1.5 million is due July 1, 1998, $1.5
million is due October 1, 1998 and the balance, $3.0 million is due on
February 28, 1999; and (c) all previous events of noncompliance with the
Credit Agreement have been waived and certain financial covenants have been
amended.
In consideration of the Second Amendment to the Credit Agreement, the
Company issued to the lender a warrant to purchase 25,000 shares of its
common stock at the ten-day average of fair market value as of December 29,
1997. These warrants have a seven-year exercise period. These warrants have
been valued at approximately $327,000 and will be amortized as interest
expense over the period ending October 1, 1998. The Company also paid its
lender $15,000 upon execution of the Amendment.
The Company also issued convertible debt in the original principal amount
of $850,000 to certain shareholders on December 23, 1997. (See note 6 of the
notes to consolidated financial statements included in the Company's Annual
Report on Form 10-K for the year ended September 30, 1997 for details of the
Credit Agreement and subordinated debt issued to certain of the Company's
shareholders).
As of December 31, 1997 the Company was out of compliance with certain of
its financial covenants pursuant to its credit agreement. On February 23,
1998 the Company received a waiver for this event of non-compliance.
These increases in bank borrowings and borrowings from shareholders were
necessary to fund a number of expenses which were incurred in expectation of
future business and revenues from the Company's Beralcast business and its
Starmet CMI facility in Barnwell, South Carolina, which business and revenues
were not realized in the first quarter of fiscal 1998, partially resulting in
the Company's loss for such quarter.
9
<PAGE>
As at December 31, 1997, the Company had $4,349,000, exclusive of the
value of warrants, outstanding under its bank line of credit, with $1,651,000
available thereunder (after subtraction of $3,550,000 in letters of credit
issued thereunder). The Company believes that cash from operations together
with cash available under its line of credit will permit it to sustain
operations at current capacity levels in the near term. Capital spending is
expected to continue in support of facilities both in Concord, Massachusetts
and Barnwell, South Carolina. The Company anticipates that this will require
approximately $2,000,000 capital expenditures during fiscal 1998, inclusive
of approximately $797,000 spent as of December 31, 1997. The Company expects
to fund the balance of currently planned capital expenditures for fiscal 1998
through $1,000,000 in additional long-term borrowing expected to be available
in the second quarter from another bank and the remainder through cash from
operations. In addition, the Company believes that in order to obtain and
perform orders for large scale commercial production of its Beralcast
products, it will be necessary for it to significantly increase capital
expenditures to expand its commercial Beralcast manufacturing capabilities to
meet anticipated customer demand through fixed asset additions, including
furnaces, automated production equipment and facility upgrades. As of
February 20, 1998 the Company had $5,580,000 outstanding under it's line of
credit, $3,550,000 outstanding in letters of credit and $420,000 available.
The Company currently is using its Beralcast technology to develop, among
other things, prototypes and pre-production quantities of disk drive arm sets
and prototypes of golf club heads. These products currently are in the
development stage and have not been brought to market and there can be no
assurance that significant commercial business will develop as anticipated by
the Company or that the Company's products will gain acceptance in commercial
markets. While the Company believes that there are additional commercial
applications for its Beralcast alloys, there can be no assurances that any of
its products or services will be successful or produce revenue for the
Company. The markets for these products are subject to change and volatility
due to a number of factors and there can be no assurance that factors
relative to general economic conditions or particular industries will not
materially adversely affect orders for the Company's products. Failure of the
Company's Beralcast products to achieve or sustain broad market acceptance
on a timely basis could have a material adverse effect on the Company's
business, result of operations and financial condition. Additionally, while
certain disk drive manufacturers have provided estimates to the Company of
future demand, the Company believes the practice in this industry and other
industries which the Company expects to serve is to place orders for one
quarter only, accompanied by projections of demand for future operations.
Accordingly, if funding becomes available for capital expenditures to
increase-manufacturing capacity, the Company expects to commit to the cost of
expanding its production capacity without firm orders for products.
The Company currently lacks the capital resources to fund such additional
capital expenditures and intends to seek funding for such capital
expenditures through equity or debt financings, borrowings from shareholders,
joint ventures,
10
<PAGE>
strategic relationships with customers or other manufacturers, fees from
technology licensing, or a combination of the foregoing. In recent years the
Company has funded cash shortfalls from operations through its bank line of
credit and borrowings or investments by stockholders. The Company believes
that, while these sources of capital may be available for certain additional
capital requirements, if it is successful in obtaining orders for large
volume commercial production of Beralcast products, funding from additional
sources in material amounts will be required. There can be no assurance that
such funds will be available on a timely basis or that any such funds will be
sufficient to support the Company's business strategy or that, if additional
financing is available, it will be available in amounts and on terms
satisfactory to the Company, if at all. In particular, in recent periods
there has been relatively little trading in the Company's Common Stock and
the market price per share of the Company's Common Stock has fluctuated
significantly. This may make it difficult for the Company to effect a private
or public equity financing or, if such financing can be affected, it may
adversely impact the terms of such financing and the market for the Company's
Common Stock and result in dilution to current stockholders. Additional debt
financing would add to the financial risks of increased leverage.
The financial covenants and other restrictions contained in agreements
relating to the Company's current bank indebtedness require the Company to
meet certain financial tests and, among other things, prohibit or restrict,
under certain circumstances, the Company from paying cash dividends, making
capital expenditures above $2,000,000, acquiring or disposing of assets, or
borrowing additional funds. A waiver of such covenants would be required in
order to permit planned capital expenditures.
SUBSEQUENT EVENT
In addition to the matters described above, the Company is subject to certain
environmental matters and legal proceedings which could have a material
adverse effect on the Company's business, results of operations and
financial condition. For a discussion of these matters see Part I, Item 1
"Business--Update Relative to Concord Site Remediation Status" and Part I,
Item 3 "Update Relative to Legal Proceedings" of the Company's Form 10-K/A for
the fiscal year ended September 30, 1997.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report, including, without limitation,
those concerning (i) the Company's Beralcast business and expansion plans,
(ii) the possible effects on the Company of certain legal proceedings, (iii)
the effects on the Company of changes in the businesses in which it operates
or in economic conditions generally, (iv) the Company's backlog and the
expected timing of orders and revenue recognition, and (v) the Company's
expectations concerning required additional financings to permit expansion,
contain certain forward-looking statements concerning the Company's
operations, economic performance and financial condition. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements
of the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Factors that could cause such differences include, but are not
limited to, those discussed in Exhibit 99 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended March 31, 1997. The words
"believe," "expect," "anticipate," "intend" and "plan" and similar
expressions identify forward-looking statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as
of the date the statement was made.
11
<PAGE>
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
On December 9, 1997, Brush Wellman, Inc. ("Brush Wellman") filed a
patent infringement suit against the Company in the United States District
Court for the District of Massachusetts (the "District Court") alleging that
the Company is infringing on a patent (the "Patent") awarded to Brush Wellman
for the investment casting of beryllium aluminum alloys. Brush Wellman is
seeking an injunction against the Company's alleged patent infringement,
monetary damages (including treble damages) and attorney fees. On January 22,
1998, the Company filed in the U.S. Patent and Trademark Office (the "PTO")
a request for re-examination (the "Request") of the Patent. In the Request,
the Company contends, among other things, that there is sufficient "prior
art" in the field of investment castings and castings of beryllium aluminum
alloys teaching the claimed invention of the Patent such that the Patent
should not have issued. If the PTO grants the Request, it will undertake a
process of re-examination of the validity of the Brush Wellman patent that,
the Company anticipates, could last for at least one year and possibly
longer. Although the Company believes that the Request has merit, there can
be no assurance that the PTO will decide to re-examine the Patent. If the
Request were granted, there can be no assurance that the PTO would find the
Patent to be invalid. On January 27, 1998, the Company filed in the District
Court a motion to stay the court case pending the outcome of the
re-examination proceeding. If the District Court were to grant the motion to
stay, the court case would not proceed until the conclusion of the PTO's
re-examination of the Patent. Although the Company believes that its motion
to stay has merit, no assurance can be given that the District Court will
grant the motion.
Even though the Company has been advised by patent counsel that Brush
Wellman's claims are without merit, no assurance can be given as to the
ultimate outcome of the lawsuit. Even if the lawsuit was not to proceed to
trial, the litigation could result in substantial costs to the Company, and
an unfavorable settlement of the lawsuit could place the company at a
competitive disadvantage. An adverse judgment or settlement could subject the
Company to significant liabilities and expenses (e.g., reasonable royalties,
lost profits, attorneys' fees or trebling of damages for willfulness). An
adverse outcome also could cause the Company to incur substantial costs in
redesigning the investment casting process for its Beralcast products and
components. Moreover, there can be no assurance that redesign alternatives
would be available to the Company, and if available, that any redesign
alternative would not place the Company at a competitive disadvantage. In the
alternative, the Company could be required to license the disputed patent
rights from Brush Wellman or to cease using the patented technology. Any such
license, if required, may not be available on terms acceptable or favorable
to the Company, or at all. Any of these results could have a material adverse
effect on the Company's business, financial condition or results of
operations.
Even in the event of a successful outcome the Company may incur
significant legal expenses in its defense.
12
<PAGE>
Item 5. Other Information
On February 9, 1998, the Company announced that a customer of its
wholly-owned subsidiary, Starmet CMI, exercised options for approximately
four million dollars of work to be performed at the Company's Barnwell, South
Carolina facility during fiscal 1998. Substantial costs in preparation for
performance of this contract were incurred during the Company's first fiscal
quarter, but revenue is not expected to be recognized from work on this
contract before the Company's second fiscal quarter, with most of the revenue
expected to be recognized in the Company's third fiscal quarter. All of the
contract work is expected to be completed and taken into revenue in fiscal
year 1998. The contract involves work by the Company to convert depleted and
natural uranium hexaflouride into metal for use as feedstock in nuclear
reactors.
On February 13, 1998, the Company announced that its wholly-owned
subsidiary Starmet CMI, has been awarded a contract add-on valued at
approximately $1.1 million as part of its existing contract with Rocky
Mountain Remediation Services to convert and stabilize depleted uranium metal
into oxide using DUCRETE -Trademark- technology. This brings the total contract
value to approximately $2.2 million.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 10MM: Operating Agreement for Trio Star LLC dated December
31, 1997 by and among Advanced Products Labs, Inc.,
R-Cubed Composites, Inc. and Starmet Comcast LLC.*
Exhibit 27: Financial Data Schedule
(b) Reports on Form 8-K:
On October 16, 1997, the Company filed a current report on Form 8-K
reporting, under Item 5-Other Events, that on September 29, 1997, the
Company's Stockholders approved a plan of reorganization of the Company.
On December 17, 1997, the Company filed a current report on Form 8-K
reporting, under Item 5-Other Events, that on December 9, 1997, Brush Wellman
had filed a patent infringement suit against the Company. See hereinabove
under Item 1--Legal Proceedings.
- ----------
* Previously filed.
13
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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.
STARMET CORPORATION
By: /s/ Robert E. Quinn
-------------------------
Robert E. Quinn,
President and Chief Executive
Officer
Date: August 11, 1998
-----------------------
By: /s/ James M. Spiezio
--------------------------
James M. Spiezio
Vie President, Finance
(Chief Financial Officer
and Chief Accounting Officer)
Date: August 11, 1998
----------------------
14
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