<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 March 31, 1998
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 and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
As of May 7, 1998, there were issued and outstanding 4,790,674 shares of the
Registrant's Common Stock.
<PAGE>
STARMET CORPORATION
FORM 10-Q/A
for the quarterly period ended March 31, 1998
<TABLE>
<CAPTION>
INDEX Page
----- ----
<S> <C>
Part I. Financial Information 2
Item 1. Financial Statements
Consolidated Balance Sheets:
March 31, 1998 and September 30, 1997 2
Consolidated Statements of Operations:
Three Months and Six Months Ended March 31, 1998
and March 31, 1997 4
Consolidated Statements of Cash Flow:
Six Months Ended March 31, 1998
and March 31, 1997 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Part II. Other Information 16
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
</TABLE>
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STARMET CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, March 31,
1997 1998
------------- -------------
(as restated) (as restated)
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $195,000 $247,000
Restricted cash............................................... 73,000 73,000
Accounts receivable, net of allowances for doubtful accounts
of $421,000 as of September 30, 1997 and March 31, 1998....... 5,546,000 7,743,000
Inventories................................................... 5,239,000 5,284,000
Other current assets.......................................... 619,000 261,000
------------- -----------
Total current assets........................................ 11,672,000 13,608,000
------------- -----------
Property, plant and equipment:
Land.......................................................... 2,124,000 2,124,000
Buildings..................................................... 17,656,000 17,779,000
Machinery, equipment, and fixtures............................ 18,472,000 19,380,000
Construction-in-progress...................................... 831,000 2,149,000
------------- -----------
Total property, plant and equipment......................... 39,083,000 41,432,000
Less: accumulated depreciation............................. 24,036,000 24,860,000
------------- -----------
Net property, plant and equipment........................... 15,047,000 16,572,000
Non-current inventory.......................................... 5,851,000 5,851,000
Other assets................................................... 1,784,000 2,159,000
------------- -----------
$34,354,000 $38,190,000
------------- -----------
------------- -----------
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
September 30, March 31,
1997 1998
------------- ------------
(as restated) (as restated)
(unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations and notes payable to
stockholders................................................... $1,885,000 $5,888,000
Accounts payable............................................... 3,123,000 3,648,000
Accrued payroll and related costs.............................. 1,215,000 1,154,000
Accrued waste disposal......................................... 404,000 677,000
Other accrued expenses......................................... 503,000 514,000
------------- -----------
Total current liabilities.................................... 7,130,000 11,881,000
------------- -----------
Long-term obligations........................................... 430,000 336,000
------------- -----------
Notes payable to stockholders................................... 1,048,000 1,165,000
------------- -----------
Commitments and Contingencies (Note 5)
Stockholders' equity:
Common stock, par value $0.10; authorized--15,000,000 shares;
issued and outstanding as of September 30, 1997 and March
31,1998; 4,784,244 and 4,790,274, respectively................. 478,000 479,000
Additional paid-in capital..................................... 14,033,000 14,055,000
Warrants issued................................................ 360,000 687,000
Retained earnings.............................................. 10,875,000 9,587,000
------------- -----------
Total stockholders' equity................................... 25,746,000 24,808,000
------------- -----------
$34,354,000 $38,190,000
------------- -----------
------------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
STARMET CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
------------------------ -------------------
1997 1998 1997 1998
------ ----- ----- -----
(as restated) (as restated)
<S> <C> <C> <C> <C>
Net sales and contract revenues................ $5,342,000 $10,690,000 $12,613,000 $18,769,000
Cost of sales.................................. 3,520,000 7,425,000 8,642,000 14,526,000
Selling, general and administrative expenses... 1,848,000 2,228,000 3,273,000 4,475,000
Research and development expenses.............. 451,000 409,000 699,000 567,000
---------- ------------ ------------ -----------
5,819,000 10,062,000 12,614,000 19,568,000
---------- ------------ ------------ -----------
Operating income (loss)........................ (477,000) 628,000 (1,000) (799,000)
Interest and other income (expense), net....... 2,000 -- 11,000 --
Interest expense............................... (64,000) (356,000) (119,000) (489,000)
---------- ------------ ------------ -----------
Income (loss) before income taxes.............. (539,000) 272,000 (109,000) (1,288,000)
Provision (benefit) for income taxes........... 2,000 -- 13,000 --
---------- ------------ ------------ -----------
Net income (loss).............................. $(541,000) $272,000 $(122,000) $(1,288,000)
---------- ------------ ------------ -----------
---------- ------------ ------------ -----------
Per share information (1):
Basic net income (loss) per common share....... $(0.11) $0.06 $(0.03) $(0.27)
---------- ------------ ------------ -----------
---------- ------------ ------------ -----------
Weighted average number of common shares
outstanding.................................... 4,782,000 4,787,000 4,782,000 4,787,000
---------- ------------ ------------ -----------
---------- ------------ ------------ -----------
Diluted net income (loss) per common and dilutive
potential common shares outstanding............ $(0.11) $0.05 $(0.03) $(0.27)
---------- ------------ ------------ -----------
---------- ------------ ------------ -----------
Weighed average number of common and dilutive
potential common shares outstanding............ 4,782,000 5,103,000 4,782,000 4,787,000
---------- ------------ ------------ -----------
---------- ------------ ------------ -----------
</TABLE>
- ----------
(1) Adjusted to reflect the two-for-one stock dividend issued on April 7, 1997.
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
STARMET CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
-------------------
1997 1998
---- ----
(as restated)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................. $ (122,000) $ (1,288,000)
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization .................... 751,000 999,000
Changes in assets and liabilities, net:
Decrease (increase) in accounts receivable ....... 511,000 (2,197,000)
Decrease (increase) in inventories ............... 1,086,000 (45,000)
(Decrease) increase in accounts payable and
accrued expenses ............................... (2,650,000) 762,000
Decrease (increase) in other assets .............. (83,000) (17,000)
Other ............................................ (1,000) 1,000
-------------- --------------
Net cash provided (used) by
operating activities ............................ (508,000) (1,785,000)
-------------- --------------
Cash flows from investing activities:
Capital expenditures, net ......................... (785,000) (2,349,000)
Proceeds from sale of property, plant &
equipment ........................................ 12,000 --
-------------- --------------
Net cash used by investing activities ........... (773,000) (2,349,000)
-------------- --------------
Cash flows from financing activities:
Principal payments under long-term
obligations ........................................ (1,994,000) (9,934,000)
Proceeds from bank borrowings .................... 2,422,000 13,220,000
Proceeds from notes payable to stockholders and
warrants ........................................ -- 900,000
-------------- --------------
Net cash provided by financing activities ........ 428,000 4,186,000
-------------- --------------
Net increase (decrease) in cash and cash equivalents (853,000) 52,000
Cash and cash equivalents at beginning of period .. 1,051,000 195,000
-------------- --------------
Cash and cash equivalents at end of period ........ $ 198,000 $ 247,000
-------------- --------------
-------------- --------------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
March 31,
-------------------
1997 1998
---- ----
<S> <C> <C>
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest, net of amounts capitalized .............. $ 46,000 $ 158,000
Income taxes ...................................... $ -- $ --
Non-cash investing & financing activities:
Capital lease obligations ......................... $ 6,000 $ 7,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
STARMET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying unaudited financial statements of the Company have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
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 may differ from those estimates and
assumptions.
In the opinion of management, the accompanying financial statements include
all adjustments (consisting only of normal recurring items) necessary for a fair
presentation of the results of operations and financial position of the Company
for the periods and the date presented. Operating results for the three and six
months ended March 31, 1998, are not necessarily indicative of the results that
may be expected for the full fiscal year or for any future period.
The accompanying financial statements should be read in conjunction with the
audited financial statements of the Company for the fiscal year ended September
30, 1997 and the notes thereto contained in the Company's Annual Report on Form
10-K for the fiscal 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, the three months ended March 31, 1997 and
the six months ended March 31, 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
1996 1997 MARCH 31, 1997 MARCH 31, 1997
------------------------ ------------------------ ------------------------- ------------------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED AS REPORTED AS RESTATED AS REPORTED AS RESTATED
------------ ----------- ----------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income (loss)........ $(3,037,000) $(2,387,000) $1,482,000 $482,000 $109,000 $(541,000) $618,000 $(122,000)
Income (loss) per share:
Basic.................. $ (0.64) $ (0.50) $ 0.31 $ 0.10 $ 0.02 $ (0.11) $ 0.13 $ (0.03)
Diluted................ $ (0.64) $ (0.50) $ 0.30 $ 0.10 $ 0.02 $ (0.11) $ 0.13 $ (0.03)
</TABLE>
2. 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 the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1997.
Certain amounts previously reported in the consolidated financial statements
have been reclassified to conform to the 1998 presentation.
7
<PAGE>
STARMET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. 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
September 30, 1997 and March 31, 1998 consist of:
<TABLE>
<CAPTION>
At September 30, 1997 At March 31, 1998
--------------------- -----------------
(as restated) (as restated)
<S> <C> <C>
Work-in process............... $2,511,000 $2,288,000
Raw materials................. 7,921,000 8,188,000
Spare parts................... 658,000 659,000
----------- -----------
$11,090,000 $11,135,000
Total inventory............... ----------- -----------
----------- -----------
Less current inventory........ 5,239,000 5,284,000
----------- -----------
----------- -----------
Non-current inventory......... 5,851,000 5,851,000
----------- -----------
----------- -----------
</TABLE>
As of March 31, 1998, 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 March 31, 1998, 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.
4. Income per share of common stock
The Company has adopted SFAS No. 128, Earnings per Share, effective December
15, 1997. SFAS No. 128 replaces primary earnings per share with "basic earnings
per common share." Basic earnings per common share is computed by dividing net
income by the weighted average number of shares of common stock outstanding
during the year. No dilution for any potentially dilutive securities is
included. In addition, SFAS No. 128 replaces fully diluted earnings per common
share with "diluted earnings per common share." Dilution for options and
warrants under SFAS No. 128 is computed using the average share price of the
Company's common stock for the period. In loss periods, potentially dilutive
securities are excluded as they would be anti-dilutive. All previously reported
amounts for EPS have been restated to conform with SFAS 128.
8
<PAGE>
STARMET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Common share and common share dilutive potential disclosures are:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
------------------ ------------------
1997 1998 1997 1998
---- ---- ---- ----
(as restated) (as restated)
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Weighed average common shares
outstanding............................. 4,782,000 4,787,000 4,782,000 4,787,000
Dilutive potential common shares........ -- 316,000 -- --
Diluted common shares................... 4,782,000 5,103,000 4,782,000 4,787,000
Options and warrants excluded from
diluted income per common share as
their effect would be antidilutive...... 457,000 -- 457,000 778,000
</TABLE>
5. Commitments and Contingencies
a. 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 "Massachusetts District Court") alleging that
the Company is infringing on a process patent (the "Brush Wellman 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 March 28, 1998 the U.S. Patent and Trademark Office (the "PTO") granted
the Company's request (filed January 22, 1998) for re-examination (the
"Request") of the Brush Wellman Patent. In the Request, the Company contended,
among other things, that there was sufficient "prior art" in the field of
investment castings and castings of beryllium aluminum alloys such that the
Brush Wellman Patent should not have been issued. In granting the Request, the
patent examiner agreed that the Company's cited examples of prior art raised
substantial new issues of patentability which were not decided in the prior
examination which led to granting the Brush Wellman Patent. The PTO will
undertake a process of reexamination of the validity of the Brush Wellman Patent
that, the Company anticipates, could last for an extended period. There can be
no assurance that the PTO will find the Brush Wellman Patent to be invalid. On
January 27, 1998, the Company filed in the Massachusetts District Court a motion
to stay the court case pending the outcome of the re-examination proceeding. If
the Massachusetts 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
Brush Wellman Patent. Although the Company believes that its motion to stay has
merit, no assurance can be given that the Massachusetts District court will
grant the motion.
Even though the Company has been advised by patent counsel, Iandiorio &
Teska, that Brush Wellman's claims are without merit because the Brush
Wellman Patent is invalid as a matter of law due to "prior art" and due to
the Company's sales of investment cast beryllium aluminum products more than
one year prior to the Brush Wellman Patent application, no assurance can be
given as to the ultimate outcome of the lawsuit. Even if the lawsuit were not
to proceed to trial, the litigation could result in substantial costs to the
Company, and 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 and 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. 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 and results of
operations. Even in the event of a successful outcome, the Company may incur
significant legal expenses in its defense.
b. Environmental Matters
For a number of years, ending in 1985, the Company deposited spent acid
and associated depleted uranium waste and other residual materials by
neutralizing them with lime and discharging the neutralized mixture into a
holding basin on its premises in Concord, Massachusetts. Substantially all of
these waste materials were the by-product of work performed for the U.S.
Army. On September 13, 1996, the Army Contract Adjustment Board ("ACAB")
decided, among other things, that the costs to clean up the holding basin
materials would be funded by the Army and that the Army would be obligated to
provide transportation and disposal of the holding basin material pursuant to
a supplement to an existing contract with the Company. In a Supplemental
Memorandum of Decision dated March 5, 1997, ACAB decided to pay the Company
to transport and dispose of the holding basin material. Pursuant to ACAB's
decision, the Company contracted with the U.S. Army to remove and dispose of
the material from the holding basin and then subcontracted with Zhagrus
Environmental, Inc. ("Zhagrus") to perform such work under a contract dated
May 8, 1997. Zhagrus arranged for disposal of the holding basin materials at
a disposal site operated by its parent corporation, Envirocare of Utah, Inc.
("Envirocare"). On May 11, 1998, the Company was notified by Zhagrus that
Zhagrus will incur additional costs in connection with the disposal of the
material from the holding basin as a result of the need for additional work
which must be performed by Envirocare to treat the holding basin material in
order for it to meet the conditions for burial imposed by regulations
applicable to Envirocare's license issued by the State of Utah. Zhagrus has
requested that the Company pay it to the extent of any additional costs which
may be incurred by Envirocare as a result of such additional services which
may be rendered. The Company has requested that Zhagrus provide it with
further information in order to permit the Company to determine whether it
has any liability to Zhagrus under the subcontract and to calculate the
amount, if any, that the Company may be required to pay to Zhagrus under the
subcontract. The Company intends to request a contract price modification for
allowance of any such additional costs under its contract with the U.S. Army,
although there can be no assurance of the timing and amount, if any, of any
recovery of such costs from the U.S. Army. The Company has notified Zhagrus
of its proposed course of action without admitting that the Company has any
liability to Zhagrus or Envirocare for the amount of any such additional
costs which may be incurred by Zhagrus under the subcontract. The Company has
not yet been provided with sufficient information concerning the nature and
extent of any additional work which may be required to allow proper burial by
Envirocare. Accordingly, the Company is unable to determine whether it is
obligated to Zhagrus under the terms of its subcontract or the potential
amount involved. Accordingly, the amount of any additional costs could be
material. In the event that the Company became liable to Zhagrus for any
material amount which is not authorized to be paid by the U.S. Army, such
liability could have a material adverse effect on the Company's business,
results of operations and financial condition.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
The following table sets forth certain items in the consolidated statements
of income as a percentage of net sales and contract revenues for the three month
and six month periods ended March 31, 1998.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31 March 31
-------- --------
1997 1998 1997 1998
---- ---- ---- ----
(as restated) (as restated)
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales and contract revenues 100% 100% 100% 100%
Costs and expenses:
Cost of sales.................................... 66 69 69 77
Selling, general and administrative expenses..... 35 21 26 24
Research and development expenses................ 8 4 6 3
Operating income (loss)........................... (9) 6 -- (4)
Interest expense.................................. 1 3 1 3
Net income (loss)................................. (10) 3 (1) (7)
</TABLE>
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, the three months ended March 31, 1997 and for the six months
ended March 31, 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
1996 1997 MARCH 31, 1997 MARCH 31, 1997
------------------------ ------------------------ ------------------------- ------------------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED AS REPORTED AS RESTATED AS REPORTED AS RESTATED
------------ ----------- ----------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income (loss)........ $(3,037,000) $(2,387,000) $1,482,000 $482,000 $109,000 $(541,000) $618,000 $(122,000)
Income (loss) per share:
Basic.................. $ (0.64) $ (0.50) $ 0.31 $ 0.10 $ 0.02 $ (0.11) $ 0.13 $ (0.03)
Diluted................ $ (0.64) $ (0.50) $ 0.30 $ 0.10 $ 0.02 $ (0.11) $ 0.13 $ (0.03)
</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(4). 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(4) 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 Atomic
Vapor Laser Isotope Separation ("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 $11.9 million and consisted of
approximately $7.2 million of DU metal and $4.7 million of UF(4). As of
September 30, 1996, DU inventory, net of reserves, was approximately $8.7
million and consisted of approximately $6.4 million of DU metal and
approximately $2.3 million of UF(4).
During the first six months of fiscal 1997, the Company used
approximately $2.6 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 related to a
munitions contract with a foreign customer and an AVLIS feedstock production
contract for fiscal 1997 were $5.4 million and $3.9 million, respectively, as
compared to $3.1 million and $1.3 million, respectively, for fiscal 1996.
Revenues during the first six months of fiscal 1997 under these two contracts
was approximately $4.7 million. At March 31, 1998, 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(4) inventory, net.
Based on current discussions with customers, the Company presently 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 of any DU inventory, or the timing
of such usage, differs materially from the Company's current expectations,
any such differences could have a material adverse effect on results of
operations of the Company's South Carolina facility and accordingly, 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.
Three Months Ended March 31, 1998 Compared With Three Months Ended March 31,
1997
Net sales increased by $5,348,000 or 100% to $10,690,000 in the second
quarter of fiscal year ending September 30, 1998 ("fiscal 1998") compared to the
second quarter of fiscal year ended September 30, 1997 ("fiscal 1997"). Sales in
the Uranium Services and Recycle segment increased by $2,681,000 or 928%. Sales
in the Specialty Metal Products segment increased by $486,000 or 16 %. Sales in
the Depleted Uranium Penetrator segment increased by $2,181,000 or 112%.
The sales increase in the Uranium Services and Recycle segment was due
primarily to AVLIS feedstock production orders which were completed in the
second quarter of fiscal 1998. To be prepared for anticipated AVLIS
production, the workforce at Starmet CMI Corporation was increased
significantly during the second quarter of fiscal 1998. The sales increase in
the Specialty Metal Products segment was due primarily to increased sales of
Beralcast products and medical powders. The sales increase in the Depleted
Uranium Penetrator segment
10
<PAGE>
was due in part to a $400,000 increase in the production volume of Depleted
Uranium penetrators pursuant to a production contract with the U.S.
government, under which production is scheduled through the second quarter of
fiscal 1999. Due to anticipated reduced U.S. government procurement plans,
the Company expects that no revenues will be derived from Depleted Uranium
penetrator operations after the second quarter of fiscal 1999. Also within
the Depleted Uranium Penetrators segment, the Company reported a $1,781,000
increase in revenue recognized in the second quarter of fiscal 1998 compared
to the second quarter of fiscal 1997 on the remediation of the holding basin
at the Company's Concord, Massachusetts facility pursuant to a U.S. Army
contract, which revenue generates nominal gross margin.
Gross profit in the second quarter of fiscal 1998 increased by $1,443,000
to $3,265,000 or 79% from $1,822,000 in the second quarter of fiscal 1997.
Within the Specialty Metal Products segment, gross profit increased by
$1,042,000, including a gross profit increase on Beralcast products of
$911,000 from $(803,000) in the second quarter of fiscal 1997 to $108,000 in
the second quarter of fiscal 1998, principally due to increased sales volumes
and the absence in the second quarter of fiscal 1998 of certain Beralcast
production start-up costs incurred in the second quarter of fiscal 1997. Also
contributing to the gross profit increase within this segment were gross
profit increases in commercial DU and powder products partially offset by a
gross profit decrease associated with other Special Metal Products sales.
Gross profit within the Uranium Services and Recycle segment in the second
quarter of fiscal 1998 decreased by $596,000 from gross profit in the second
quarter of fiscal 1997. This decrease was partially offset by gross profit on
AVLIS feedstock, which increased by $738,000 principally due to increased
sales volumes, partially offset by reduced gross margin on counterweight
business. Gross profit within the Depleted Uranium Penetrators segment
decreased by $303,000 due primarily to reduced volumes of penetrators and
blanks partially offset by increased sales of other products within this
segment. Absent from gross profit in the second quarter of fiscal 1998 was a
reduction of a reserve for waste disposal in the amount of $670,000. As a
percentage of sales, gross profit was 31% for the second quarter of fiscal
1998 compared to 34% for the second quarter of fiscal 1997.
Selling, general and administrative expenses increased by $380,000 or 21%
in the second quarter of fiscal 1998 compared to the second quarter of fiscal
1997. Of this increase, $197,000 related to an increase in sales and
administrative personnel at its Concord, Massachusetts facility to support
the Company's sales growth. The balance of the increase, $183,000, related
primarily to an increase in sales and administrative personnel at the
Company's South Carolina facility to support sales growth of the AVLIS
feedstock program and remediation contracts for customers. As a percentage of
sales, these expenses were 21% in the second quarter of fiscal 1998 compared
to 35% in the second quarter of fiscal 1997.
Interest expense increased to $356,000 in the second quarter of fiscal 1998
from $64,000 for the second quarter of fiscal 1997. This increase was primarily
attributable to interest expense associated with increased borrowings under the
Company's line of credit and shareholder notes, as well
11
<PAGE>
as the increase in the amortization of warrants issued in connection with an
amendment to the Company's line of credit and the issuance of certain
shareholder notes.
Income taxes in the second 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.
Six Months Ended March 31, 1998 Compared With Six Months Ended March 31, 1997
Net sales increased by $6,156,000 or 49% to $18,769,000 in the first six
months of fiscal 1998 compared to the first six months of fiscal 1997. Sales in
the Uranium Services and Recycle industry segment increased by $1,746,000 or
104%. Sales in the Specialty Metal Products segment increased by $925,000 or
17%. Sales in the Depleted Uranium Penetrator segment increased by $3,485,000 or
65%.
The sales increase in the Uranium Services and Recycle segment was due
primarily to AVLIS feedstock production orders which were completed in the
second quarter of fiscal 1998. To be prepared for anticipated AVLIS
production, the workforce at Starmet CMI Corporation was increased
significantly during the first six months of fiscal 1998. The sales increase
in the Specialty Metal Products segment was due primarily to increased
production volume of Beralcast products and medical powders. The sales
increase in the Depleted Uranium Penetrator segment was due to a $3,806,000
increase in revenue recognized on the remediation of the holding basin at the
Company's Concord facility pursuant to a U.S. Army contract, which revenue
generates nominal gross margin. That increase was partially offset by a
$321,000 decrease in sales of Depleted Uranium penetrators and blanks. Due to
anticipated reduced U.S. government procurement plans, the Company expects
that no revenues will be derived from the Depleted Uranium penetrator
operations after the second quarter of fiscal 1999.
Gross profit in the first six months of fiscal 1998 increased by
$272,000 to $4,243,000 or 7% from $3,971,000 in the first six months of
fiscal 1997. Within the Specialty Metal Products segment, gross profit
increased by $1,386,000, including a gross profit increase on Beralcast
products of $1,031,000 from $(1,379,000) in the first six months of fiscal
1997 to $(348,000) in the first six months of fiscal 1998, principally due to
increased sales volumes and the absence in the second quarter of fiscal 1998
of certain Beralcast production start-up costs incurred in the second quarter
of fiscal 1997. Also contributing to the gross profit increase within this
segment were gross profit increases in commercial DU and powder products,
partially offset by a gross profit decrease associated with other Specialty
Metal Products sales. Gross profit within the Uranium Services and Recycle
segment in the first six months of fiscal 1998 decreased by $138,000 over the
comparable period of fiscal 1997. This decrease was largely attributable to
the absence in the first six months of fiscal 1998 of a reserve reduction for
waste disposal of $670,000. The first six months of fiscal 1998 also included
a $982,000 decrease in gross profit within the Depleted Uranium Penetrator
segment due primarily to reduced volumes of penetrators and blanks partially
offset by increased sales, of other products within this segment. As a
percentage of
12
<PAGE>
sales, gross profit was 22% for the first six months of fiscal 1998 compared to
31% for the first six months of fiscal 1997.
Selling, general and administrative expenses increased by $1,202,000 or
37% in the first six months of fiscal 1998 compared to the first six months
of fiscal 1997. Of this increase, $719,000 related to an increase in sales
and administrative personnel at its Concord, Massachusetts facility to
support the Company's sales growth. The balance of the increase,
approximately $483,000, related to an increase in sales and administrative
personnel at the Company's South Carolina facility to support sales growth of
the AVLIS feedstock program and remediation contracts for customers. As a
percentage of sales, these expenses were 24% in the first six months of
fiscal 1998 compared to 26% in the first six months of fiscal 1997.
Interest expense increased to $489,000 in the first six months of fiscal
1998 from $119,000 for the first six months of fiscal 1997. This increase was
primarily attributable to interest expense associated with increased borrowings
under the Company's line of credit and shareholder notes, as well as the
increase in the amortization of warrants issued in connection with an amendment
to the Company's line of credit and the issuance of certain shareholder notes.
Income taxes during the first six months 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.
Liquidity and Capital Resources
Net cash used by operating activities in the six months ending March 31,
1997 and 1998 was $508,000 and $1,785,000, respectively. Differences in cash
flows from operating activities were primarily related to significant changes
in accounts receivable, inventories and accounts payable. The Company used
net cash of $773,000 and $2,349,000 for periods ending March 31, 1997 and
1998, respectively, primarily to fund investing activities largely related to
capital expenditures made in anticipation of future commercial business. Net
cash provided by financing activities for periods ending March 31, 1997 and
1998 was $428,000 and $4,186,000, respectively and resulted primarily from
increases in bank borrowings and borrowings from stockholders. As a result of
the foregoing, net cash decreased in the period ended March 31, 1997 by
$853,000 and increased in the period ended March 31, 1998 by $52,000.
At March 31, 1998, the end of the second quarter of fiscal 1998, the
Company had working capital of $1,727,000, a decrease of $2,815,000 since the
end of fiscal 1997. At March 31, 1998, the Company's accounts receivable and
inventories increased by $2,197,000 and $45,000, respectively, compared to
September 30, 1997 levels. Cash (less restricted cash) at March 31, 1998 was
$247,000. Current indebtedness increased to $11,881,000 from $7,130,000 as a
result of increased borrowings under the Company's bank line of credit and
increased borrowings from shareholders. As of March 31, 1998, the Company had
$5,113,000, exclusive of the value of warrants, outstanding under its bank
line of credit, with $887,000 available for borrowing thereunder (after
subtraction of $3,550,000 in letters of credit issued thereunder). As of
March 31, 1998, notes payable to shareholders increased to $2,250,000 from
13
<PAGE>
$1,350,000 as at September 30, 1997, excluding the unamortized discount. As
of May 14, 1998, the Company had $5,114,000 outstanding under its line of
credit, $3,550,000 outstanding in letters of credit and $886,000 available
for borrowing thereunder.
The Company's subsidiary, Starmet CMI Corporation, has a term loan
obligation in the amount of $370,000 to Palmetto Federal Savings and Loan
Association of South Carolina ("Palmetto"). As of March 31, 1998 the
outstanding balance on this term loan obligation was approximately $323,000.
On March 20, 1998, Starmet CMI Corporation entered into a second loan with
Palmetto and the Lower Savannah Regional Development Corporation in the
aggregate principal amount of $995,000, which bears interest at a rate of 10%
and matures in ten and one-half years with a rate adjustment at the end of
five and one-half years. As of March 31, 1998 nothing had been drawn on the
second loan. As of May 15, 1998, the Company had drawn $500,000 against the
second loan. Both the first and second loans are guaranteed by the Company
and secured by mortgages on CMI's South Carolina property. The second loan
will be used to expand CMI's manufacturing capabilities at its South Carolina
facility.
As of March 31, 1998 the Company was out of compliance with the capital
expenditure financial covenant under its credit agreement which prohibits the
Company from making capital expenditures above $2,000,000 annually. On May 15,
1998 the Company received a waiver for this event of non-compliance and
compliance with the capital expenditure financial covenant for the remainder
of fiscal 1998.
These increases in bank borrowings and borrowings from shareholders were
necessary to fund a number of expenses, including expansion of Beralcast and
AVLIS feedstock manufacturing capabilities, 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 fully realized in the second quarter of fiscal
1998. The Company invested approximately $2,349,000 on capital expenditures
in the first six months of fiscal 1998 to expand its commercial Beralcast and
AVLIS manufacturing capabilities. The Company purchased production equipment
and upgraded its facilities with these capital expenditures. 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.
The Company also has plans to invest approximately an additional
$9,698,000 in the last six months of fiscal 1998 and approximately an
additional $75,000,000 over the next four years primarily to continue to
expand its commercial Beralcast manufacturing capabilities through fixed
asset additions including the purchase of production equipment and facility
upgrades. The Company's ability to fund such capital expenditure plans will
depend upon the availability of substantial funding in addition to its
current capital resources. On April 8, 1998, the Company filed a Registration
Statement on Form S-1 with the Securities and Exchange Commission registering
an offering of $80 million of its Common Stock, a portion of which may be
sold by selling shareholders. If such offering is completed, the Company
expects to use the net proceeds to the Company of the offering to complete
currently planned capital expenditures, as well as for general corporate
purposes including the repayment of certain indebtedness. There can be no
assurance that the offering will proceed and be completed as planned.
14
<PAGE>
Environmental Matters
For a number of years, ending in 1985, the Company deposited spent acid
and associated depleted uranium waste and other residual materials by
neutralizing them with lime and discharging the neutralized mixture into a
holding basin on its premises in Concord, Massachusetts. Substantially all of
these waste materials were the by-product of work performed for the U.S.
Army. On September 13, 1996, the Army Contract Adjustment Board ("ACAB")
decided, among other things, that the costs to clean up the holding basin
materials would be funded by the Army and that the Army would be obligated to
provide transportation and disposal of the holding basin material pursuant to
a supplement to an existing contract with the Company. In a Supplemental
Memorandum of Decision dated March 5, 1997, ACAB decided to pay the Company
to transport and dispose of the holding basin material. Pursuant to ACAB's
decision, the Company contracted with the U.S. Army to remove and dispose of
the material from the holding basin and then subcontracted with Zhagrus
Environmental, Inc. ("Zhagrus") to perform such work under a contract dated
May 8, 1997. Zhagrus arranged for disposal of the holding basin materials at
a disposal site operated by its parent corporation, Envirocare of Utah, Inc.
("Envirocare"). On May 11, 1998, the Company was notified by Zhagrus that
Zhagrus will incur additional costs in connection with the disposal of the
material from the holding basin as a result of the need for additional work
which must be performed by Envirocare to treat the holding basin material in
order for it to meet the conditions for burial imposed by regulations
applicable to Envirocare's license issued by the State of Utah. Zhagrus has
requested that the Company pay it to the extent of any additional costs which
may be incurred by Envirocare as a result of such additional services which
may be rendered. The Company has requested that Zhagrus provide it with
further information in order to permit the Company to determine whether it
has any liability to Zhagrus under the subcontract and to calculate the
amount, if any, that the Company may be required to pay to Zhagrus under the
subcontract. The Company intends to request a contract price modification for
allowance of any such additional costs under its contract with the U.S. Army,
although there can be no assurance of the timing and amount, if any, of any
recovery of such costs from the U.S. Army. The Company has notified Zhagrus
of its proposed course of action without admitting that the Company has any
liability to Zhagrus or Envirocare for the amount of any such additional
costs which may be incurred by Zhagrus under the subcontract. The Company has
not yet been provided with sufficient information concerning the nature and
extent of any additional work which may be required to allow proper burial by
Envirocare. Accordingly, the Company is unable to determine whether it is
obligated to Zhagrus under the terms of its subcontract or the potential
amount involved. Accordingly, the amount of any additional costs could be
material. In the event that the Company became liable to Zhagrus for any
material amount which is not authorized to be paid by the U.S. Army, such
liability could have a material adverse effect on the Company's business,
results of operations and financial condition.
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.
Impact of Year 2000 Issue
The Company is in the process of updating its accounting and information
systems to ensure that its computer systems are Year 2000 complaint and to
improve the Company's overall manufacturing, planning and inventory related
systems. In fiscal 1997, the Company invested approximately $250,000 to ensure
that the Company is Year 2000 compliant and will continue to make investments in
its computer systems and applications to ensure that the Company is Year 2000
compliant. The Company believes that the Company's computer system is Year 2000
compliant. In addition, the Company maintains a year 2000 expert on its staff.
The financial impact to the Company of its Year 2000 compliance programs has not
been and is not anticipated to be material to its financial position or results
of operations in any given year. While the Company does not believe it will
suffer any major effects from the Year 2000 issue, it is possible that such
effects could materially impact future financial results, or cause reported
financial information not to be necessarily indicative of future operating
results or future financial condition. In addition, if any of the Company's
significant customers or suppliers do not successfully and timely achieve
Year 2000 compliance, the Company's business could be adversely affected.
Special Note Regarding Forward-Looking Statements
Certain statements in this Quarterly Report, including, without limitation,
those concerning (i) the Company's new business and expansion plans, (ii) the
effects on the Company of certain legal proceedings and environmental matters,
(iii) the effects on the Company of changes in the business in which it operates
or in economic conditions generally, (iv) the Company's expectations concerning
required additional financings to permit expansion, including the currently
proposed public offering, contain 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 of the Company 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 this Quarterly Report. 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.
15
<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 "Massachusetts District Court") alleging that
the Company is infringing on a process patent (the "Brush Wellman 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 March 28, 1998 the U.S. Patent and Trademark Office (the "PTO") granted
the Company's request (filed January 22, 1998) for re-examination (the
"Request") of the Brush Wellman Patent. In the Request, the Company contended,
among other things, that there was sufficient "prior art" in the field of
investment castings and castings of beryllium aluminum alloys such that the
Brush Wellman Patent should not have been issued. In granting the Request, the
patent examiner agreed that the Company's cited examples of prior art raised
substantial new issues of patentability which were not decided in the prior
examination which led to granting the Brush Wellman Patent. The PTO will
undertake a process of reexamination of the validity of the Brush Wellman Patent
that, the Company anticipates, could last for an extended period. There can be
no assurance that the PTO will find the Brush Wellman Patent to be invalid. On
January 27, 1998, the Company filed in the Massachusetts District Court a motion
to stay the court case pending the outcome of the re-examination proceeding. If
the Massachusetts 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
Brush Wellman Patent. Although the Company believes that its motion to stay has
merit, no assurance can be given that the Massachusetts District court will
grant the motion.
Even though the Company has been advised by patent counsel, Iandiorio &
Teska, that Brush Wellman's claims are without merit because the Brush Wellman
Patent is invalid as a matter of law due to "prior art" and due to the Company's
sales of investment cast beryllium aluminum products more than one year prior to
the Brush Wellman Patent application, no assurance can be given as to the
ultimate outcome of the lawsuit. Even if the lawsuit were not to proceed to
trial, the litigation could result in substantial costs to the Company, and
unfavorable settlement of the lawsuit could place the Company at a competitive
disadvantage. An adverse judgment or settlement could subject the
16
<PAGE>
Company to significant liabilities and expenses (e.g., reasonable royalties,
lost profits, attorneys' fees and 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. 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 and results of operations. Even in the event of a successful
outcome, the Company may incur significant legal expenses in its defense.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders of the Company held on March 18, 1998,
shareholders acted affirmatively to elect nominees for directors proposed by
management. Each director is to serve until the next Annual Meeting of
Stockholders and thereafter until his or her successor is elected and qualified.
<TABLE>
<CAPTION>
Name Votes "For" Votes "Withheld"
---- ----------- ----------------
<S> <C> <C>
George J. Matthews 2,568,912 4,240
Robert E. Quinn 2,568,952 4,200
Wilson B. Tuffin 2,568,912 4,240
Kenneth A. Smith 2,568,952 4,200
Frank H. Brenton 2,568,912 4,240
William J. Shea 2,568,952 4,200
</TABLE>
Shareholders also approved the 1998 Stock Plan. A total of 1,526,841 votes
were cast in favor of the proposal, 1,034,153 votes were cast against, and there
were 12,158 abstentions.
17
<PAGE>
Shareholders also voted to ratify the action of the Board of Directors in
selecting Arthur Andersen LLP as auditors of the Company. A total of 2,570,350
votes were cast in favor of the proposal, 2,502 votes were cast against, and
there were 300 abstentions.
Item 5. Other Information
For a number of years, ending in 1985, the Company deposited spent acid
and associated depleted uranium waste and other residual materials by
neutralizing them with lime and discharging the neutralized mixture into a
holding basin on its premises in Concord, Massachusetts. Substantially all of
these waste materials were the by-product of work performed for the U.S.
Army. On September 13, 1996, the Army Contract Adjustment Board ("ACAB")
decided, among other things, that the costs to clean up the holding basin
materials would be funded by the Army and that the Army would be obligated to
provide transportation and disposal of the holding basin material pursuant to
a supplement to an existing contract with the Company. In a Supplemental
Memorandum of Decision dated March 5, 1997, ACAB decided to pay the Company
to transport and dispose of the holding basin material. Pursuant to ACAB's
decision, the Company contracted with the U.S. Army to remove and dispose of
the material from the holding basin and then subcontracted with Zhagrus
Environmental, Inc. ("Zhagrus") to perform such work under a contract dated
May 8, 1997. Zhagrus arranged for disposal of the holding basin materials at
a disposal site operated by its parent corporation, Envirocare of Utah, Inc.
("Envirocare"). On May 11, 1998, the Company was notified by Zhagrus that
Zhagrus will incur additional costs in connection with the disposal of the
material from the holding basin as a result of the need for additional work
which must be performed by Envirocare to treat the holding basin material in
order for it to meet the conditions for burial imposed by regulations
applicable to Envirocare's license issued by the State of Utah. Zhagrus has
requested that the Company pay it to the extent of any additional costs which
may be incurred by Envirocare as a result of such additional services which
may be rendered. The Company has requested that Zhagrus provide it with
further information in order to permit the Company to determine whether it
has any liability to Zhagrus under the subcontract and to calculate the
amount, if any, that the Company may be required to pay to Zhagrus under the
subcontract. The Company intends to request a contract price modification for
allowance of any such additional costs under its contract with the U.S. Army,
although there can be no assurance of the timing and amount, if any, of any
recovery of such costs from the U.S. Army. The Company has notified Zhagrus
of its proposed course of action without admitting that the Company has any
liability to Zhagrus or Envirocare for the amount of any such additional
costs which may be incurred by Zhagrus under the subcontract. The Company has
not yet been provided with sufficient information concerning the nature and
extent of any additional work which may be required to allow proper burial by
Envirocare. Accordingly, the Company is unable to determine whether it is
obligated to Zhagrus under the terms of its subcontract or the potential
amount involved. Accordingly, the amount of any additional costs could be
material. In the event that the Company became liable to Zhagrus for any
material amount which is not authorized to be paid by the U.S. Army, such
liability could have a material adverse effect on the Company's business,
results of operations and financial condition.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 10(a)*: Holding Basin Remediation and Waste Disposal Agreement
dated as of May 8, 1997, by and between the Company and
Zhagrus Environmental, Inc.**
Exhibit 27: Financial Data Schedule
Exhibit 99: "Safe Harbor" Statement under the Private Securities
Litigation Reform Act of 1995
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended
March 31, 1998.
-------------
* Indicates that portions of the exhibit have been omitted pursuant to a request
for confidential treatment and such material has been filed separately with
the Securities and Exchange Commission.
** Previously filed.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
STARMET CORPORATION
Date: August 11, 1998 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
Vice President, Finance and Administration
(Chief Financial Officer and Chief Accounting
Officer)
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> MAR-31-1998
<CASH> 320,000
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<PAGE>
"SAFE HARBOR" STATEMENT UNDER PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
Forward-looking statements made by or on behalf of the Company
represent the Company's reasonable judgement on the future and are subject to
risks and uncertainties. Actual results may differ materially from those
projected in the forward-looking statements. Such risks and uncertainties
include, among others:
History of Losses; Risk of Future Losses
The Company has experienced significant financial difficulties and
liquidity problems in recent years due primarily to the sharp decline in
sales of depleted uranium ("DU") penetrators and a lack of orders for certain
other DU products. As a result, the Company has had to seek financing from
stockholders, waivers of non-compliance with certain covenants in its debt
instruments (including waivers under its current bank line of credit in
February and May of 1998) and additional borrowings under its current bank
line of credit. Historically, a substantial portion of the Company's revenues
have been derived from the sale of products for defense munitions and tank
armor programs; however, revenues from these applications have declined
sharply in recent years due primarily to the general decline in defense
spending. In fiscal 1997, the Company derived 37% of its revenues from the
sale of products for defense munitions and tank armor. The Company expects
that no revenues will be derived from sales of penetrator defense munitions
after the second quarter of fiscal 1999, and only limited revenue will be
derived from sales of billets for conversion into tank armor thereafter. The
Company incurred operating losses in four of its last five fiscal years and
during the first six months of fiscal 1998. In addition, the Company's
accountants, in their report to the Board of Directors and stockholders of
the Company for fiscal 1995, stated that there was substantial doubt at that
time about the Company's ability to continue as a going concern. Although the
Company was profitable in fiscal 1997, reserve reversals and other
non-recurring income items accounted for the profitability. Excluding these
items, the Company would have reported a net loss in fiscal 1997. There can
be no assurance that the Company will not continue to incur losses for the
remainder of fiscal 1998 or in subsequent fiscal periods.
The Company expects to expend substantial resources on commercial
growth opportunities, in many cases before it can be certain of market
acceptance of its current and planned products and services. The Company's
ability to realize the objectives of its business strategy and to achieve its
plans for commercial growth and profitability are subject to a number of
business, industry, economic and other factors, many of which are beyond the
control of the Company, such as the Company's ability to successfully market its
products and services, particularly in new applications for its materials and
technologies, the Company's ability to manage planned expansion and large-scale
commercial production of new products, customer demand, competition in the
industries which the Company serves and general economic conditions. The failure
of the Company to realize the objectives of its business strategy, in
particular, the full-scale commercialization of Beralcast disk drive arm sets,
would have a material adverse effect on the Company's business, financial
condition and results of operations. Ongoing losses would hinder the Company's
ability to respond effectively to market conditions, to make capital
expenditures and to take advantage of business
1
<PAGE>
opportunities, the failure to perform any of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
Pending Beralcast Patent Litigation
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 "Massachusetts District Court") alleging
that the Company is infringing on a process patent (the "Brush Wellman 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 March 28, 1998 the U.S. Patent and Trademark Office (the "PTO") granted
the Company's request (filed January 22, 1998) for re-examination (the
"Request") of the Brush Wellman Patent. In the Request, the Company contended,
among other things, that there was sufficient "prior art" in the field of
investment castings and castings of beryllium aluminum alloys such that the
Brush Wellman Patent should not have been issued. In granting the Request, the
patent examiner agreed that the Company's cited examples of prior art raised
substantial new issues of patentability which were not decided in the prior
examination which led to granting the Brush Wellman Patent. The PTO will
undertake a process of re-examination of the validity of the Brush Wellman
Patent that, the Company anticipates, could last for an extended period. There
can be no assurance that the PTO will find the Brush Wellman Patent to be
invalid. On January 27, 1998, the Company filed in the Massachusetts District
Court a motion to stay the court case pending the outcome of the re-examination
proceeding. If the Massachusetts 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 Brush Wellman Patent. Although the Company believes that
its motion to stay has merit, no assurance can be given that the Massachusetts
District Court will grant the motion.
Even though the Company has been advised by its patent counsel,
Iandiorio & Teska, that Brush Wellman's claims are without merit because the
Brush Wellman Patent is invalid as a matter of law due to "prior art" and due
to the Company's sales of investment cast beryllium aluminum products more
than one year prior to the Brush Wellman Patent application, no assurance can
be given as to the ultimate outcome of the lawsuit. Even if the lawsuit were
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 and 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. 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
2
<PAGE>
material adverse effect on the Company's business, financial condition and
results of operations. Even in the event of a successful outcome, the Company
may incur significant legal expenses in its defense.
Patents and Other Intellectual Property
The Company's success depends in substantial part on its proprietary
technology, in particular, Beralcast, the Company's family of beryllium aluminum
alloys. Although the Company protects and intends to continue to protect its
intellectual property rights through patents, copyrights, trade secrets, license
agreements and other measures, there can be no assurance that the Company will
be able to protect its technology adequately or that competitors will not be
able to develop similar technology independently. In addition, the laws of
certain foreign countries in which the Company's products may be licensed do not
protect the Company's products and intellectual property rights to the same
extent as the laws of the United States. If the Company were unable to maintain
the proprietary nature of its intellectual property with respect to its
significant current or proposed products, the Company's business, financial
condition and results of operation could be materially adversely affected. There
can be no assurance that the Company will be able to obtain patent protection
for products or processes discovered using the Company's technologies.
Furthermore, there can be no assurance that any patents issued to the Company
will not be challenged, invalidated, narrowed or circumvented, or that the
rights granted thereunder will provide significant proprietary protection or
competitive advantages to the Company. Although the Company believes that its
products, patents and other proprietary rights do not infringe upon the
proprietary rights of third parties, as discussed above, the Company has been
sued by Brush Wellman with respect to the process of investment casting of
beryllium aluminum alloys, and there can be no assurance that other third
parties will not assert other infringement claims against the Company.
Competition
The Company faces significant competition from established companies
in certain of its product lines. In addition, the Company's Beralcast alloys
and other products face competition from alternative or competing materials,
products and technologies, some of which are better established than those of
the Company. Many of the Company's current and potential competitors have
significantly greater financial, technical, marketing, purchasing and other
resources than the Company, and, as a result, may be able to respond more
quickly to new or emerging technologies or standards and to changes in
customer requirements, devote greater resources to the development, promotion
and sale of products, or deliver competitive products at lower prices.
Current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase
the ability of their products to address the needs of the Company's
prospective customers. Accordingly, it is possible that new competitors or
alliances among competitors may emerge and rapidly acquire significant market
share. Increased competition is likely to result
3
<PAGE>
in price reductions, reduced operating margins and loss of market share, any of
which could have a material adverse effect on the Company's business, results of
operation and financial condition. Although the Company believes that it has
certain technological and other advantages over its competitors, realizing and
maintaining these advantages will require continued investment in manufacturing
capacity, research and development, sales and marketing, and customer service
and support. There can be no assurance that the Company will have sufficient
resources to continue to make such investments or that the Company will be
successful in maintaining such advantages. The Company believes that its ability
to compete successfully depends on a number of factors both within and outside
of its control, including price, product quality, success in developing and
introducing new products, and general market and economic conditions. There can
be no assurance that the Company will be able to compete as to these or other
factors or that competitive pressures faced by the Company will not materially
adversely affect its business, results of operation and financial condition.
Risks Related to New Product Introductions, Rapid Technological Change and
Industry Conditions
The success of new product introductions is dependent on several
factors, including timely completion and introduction of new products, quality
of new products, market acceptance and timeliness of market acceptance,
production efficiency, costs, competition, the availability of substitute
products and customer service. Although the Company attempts to determine the
specific needs of new markets, there can be no assurance that the identified
markets will in fact materialize or that the Company's products designed for
these markets will achieve any significant degree of market acceptance or that
any such acceptance will be sustained for any significant period. In particular,
the Company's Beralcast materials, which are central to its strategy, are
generally more expensive than other materials currently employed in the markets
in which the Company intends to compete. There can be no assurance that the
performance characteristics of Beralcast alloys will outweigh the greater
expense of Beralcast compared to competing materials. The Company's Beralcast
products and components 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 these 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. Failure of new products to achieve or sustain market
acceptance could have a material adverse effect on the Company's business,
results of operation and financial condition. New product introductions will
also require substantial expenditures, and there can be no assurance that
constraints on the Company's financial resources will not adversely affect its
ability to develop and market new products. In addition, the anticipated
commercial markets for the Company's principal new products are characterized by
rapid technological change, changing customer needs, frequent new product
introduction, evolving industry standards and short product lifecycles. Failure
to successfully
4
<PAGE>
keep pace with technological developments could have a material
adverse effect on the Company's business, results of operation and financial
condition.
The Company plans to focus its efforts on sales of its specialty metal
products to the commercial markets and military aerospace industries. The
Company currently is developing, among other things, prototypes and
pre-production quantities of disk drive arm sets, prototype parts for military
and commercial aerospace applications and prototypes of premium golf club
products. The market for computer storage devices historically has grown rapidly
but at varying rates, and there can be no assurance that this market will
continue to grow at historical rates. The markets for aerospace products and
sporting goods have fluctuated historically. 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. While certain
disk drive manufacturers have provided estimates of future demand, industry
practice generally is to place only short-term orders, accompanied by
projections of demand for future operations. Accordingly, the Company expects to
commit to the cost of expanding its production capacity without firm orders for
products. Failure of markets for the Company's products to develop, cancellation
of orders or deferrals of scheduled delivery dates all could materially
adversely affect the Company's business, results of operation and financial
condition.
Availability and Cost of Beryllium and Other Raw Materials
Raw materials used by the Company include a number of metals and
minerals used to produce the alloys included in its products and castings,
including beryllium, titanium, aluminum, nickel, cobalt, chromium and
molybdenum, among others. Prices of these materials can be volatile due to a
number of factors beyond the control of the Company, including domestic and
international economic conditions and competition. This volatility could
significantly affect the availability and prices of raw materials used by the
Company. There can be no assurance that the Company will be able to pass price
fluctuations through to customers, and price moves may adversely affect sales,
operating margins and net income. Depending upon certain market conditions, the
Company may engage in forward purchases of some of these materials. However, the
Company ordinarily does not attempt to hedge the price risk of its raw materials
and has no long-term, fixed price contracts or arrangements for the raw
materials it purchases. Commercial deposits of certain metals, such as
beryllium, cobalt, nickel, titanium, chromium and molybdenum, that are required
for the alloys used in the Company's precision castings and specialty metal
powders, are found in only a few parts of the world. The availability and prices
of these metals may be influenced by private or governmental cartels, changes in
world politics, unstable governments in exporting nations and inflation. In
particular, the Company currently purchases beryllium, a metal which is used to
form its Beralcast alloys, principally from a producer-supplier located in
Kazakhstan and from multiple distributors located in Estonia, Kazakhstan,
Sweden, the United States, China and Russia. The Company also purchases scrap
beryllium from domestic and foreign distributors. The only three producers of
beryllium worldwide are located in Kazakhstan, the United States and China. For
competitive reasons, the Company does not procure significant
5
<PAGE>
quantities of beryllium raw materials from Brush Wellman, the sole U.S. producer
of beryllium, which is the Company's principal competitor for beryllium aluminum
products and the plaintiff in the pending patent lawsuit. The Company believes
that a sufficient supply of beryllium remains available for its current demand.
However, if its Beralcast products receive broad commercial acceptance, the
Company's demand for beryllium will increase. The cost of beryllium could
increase as a result of the Company's increased demand, and supplies of
beryllium could also be affected. Although the Company has not experienced
shortages of raw materials in the past, there can be no assurance that such
shortages will not occur in the future. Any substantial increase in raw material
prices or a continued interruption in supply of raw materials, in particular of
beryllium from the Company's producer-supplier located in Kazakhstan, could have
a material adverse effect on the Company's business, results of operation and
financial condition.
Environmental, Health and Regulatory Matters
The Company is subject to comprehensive and changing federal, state,
local and international laws, regulations and ordinances (together,
"Environmental Laws") that (i) govern activities or operations that may have
adverse environmental effects, such as discharges to air and water, as well as
handling and disposal practices for solid and hazardous wastes, and (ii) impose
liability for the costs of cleaning up, and certain damages resulting from,
sites of past spills, disposals or other releases of hazardous substances and
materials, including liability under the Comprehensive Environmental Response
Compensation and Liability Act of 1980 ("CERCLA," the federal "Superfund"
statute), and similar state statutes for the investigation and remediation of
environmental contamination at properties owned and/or operated by it and at
off-site locations where it has arranged for the disposal of hazardous
substances. Furthermore, depleted uranium, a material regularly processed by the
Company, is a low-level radioactive material, and the Company is subject to
governmental licensing and regulation.
If it is determined that the Company is not in compliance with current
Environmental Laws, the Company could be subject to fines and penalties. The
amount of any such fines and penalties could be material. In addition, the
Company uses depleted uranium, beryllium and other hazardous substances, and as
is the case with manufacturers in general, if a release of hazardous substances
occurs on or from the Company's properties or from an off-site disposal
facility, the Company may be held liable and may be required to pay the cost of
remedying the condition. The amount of any such liability could be material.
The Company has made, and expects to continue to make, expenditures to
comply with current and future Environmental Laws. The Company anticipates that
it could incur additional capital and operating costs in the future to comply
with existing Environmental Laws and new requirements arising from new or
amended statutes and regulations. In addition, because the applicable regulatory
agencies have not yet promulgated final standards for some existing
environmental programs, the Company cannot at this time reasonably estimate the
cost for compliance with these additional requirements. The amount of any such
6
<PAGE>
compliance costs could be material. The Company cannot predict the impact that
future regulations will impose upon the Company's business.
The Company is required to maintain certain licenses to possess and
process depleted uranium materials at its facilities in Concord and South
Carolina, respectively. Under applicable licensing regulations pertaining to
decommissioning and disposal of certain hazardous materials ("D&D") at
licensed sites, the Company has submitted to the relevant regulatory agencies
for each of its facilities a Decommissioning Funding Plan ("DFP") to provide
for possible future decommissioning of its facilities. The Company is also
required to provide financial assurance for such decommissioning pursuant to
applicable regulations. The Company has satisfied these requirements through
a combination of letters of credit and certain assurances from the U.S.
government, subject to government funding appropriations. Although it
believes that the U.S. government will fund all eventual D&D costs, the
Company has not requested, and has not received, any specific written
assurance that the U.S. government will accept responsibility for the D&D
costs at the Company's South Carolina facility. In the event that U.S.
government funding of D&D at any site is unavailable for any reason, the
Company could be required to pay for such D&D costs, which could have a
material adverse effect on the Company's business, result of operations and
financial condition.
The Company is currently remediating the holding basin site at its
Concord facility and may incur costs in excess of its fixed price contract
with the United States Army for remediation of the holding basin. The Company
was notified by Zhagrus Environmental, Inc., a subcontractor performing the
remediation work, that Zhagrus will incur additional costs in connection with
the disposal of the material from the holding basin and has requested that
the Company pay it to the extent of any such additional costs. The amount of
any additional costs could be material. In the event that the Company became
liable to Zhagrus for any material amount which is not authorized to be paid
by the U.S. Army, such liability could have a material adverse effect on the
Company's business, results of operations and financial condition.
DU and beryllium, materials regularly processed by the Company, have
characteristics considered to be health or safety hazards by various federal,
state and local regulatory agencies. The processing of these materials requires
a high level of safety consciousness, personnel monitoring devices and special
equipment. DU in a finely divided state, such as grinding dust or machine
turnings, is combustible at room temperature and requires special handling for
safe operations and disposal of process wastes. Airborne beryllium in respirable
form, such as powder, dusts or mists generated in some manufacturing processes
can represent a hazard to the lungs in certain susceptible individuals.
Processing this material requires use of extensive ventilation and dust
collecting systems. All of these operations are performed under strict
environmental and health safety controls consistent with the Occupational Safety
and Health Administration ("OSHA") and the Environmental Protection Agency
("EPA") regulations for pure beryllium. There can be no assurance that the
Company will be able to control all health and safety problems. The Company may
be held liable and may be required to pay the costs of remedying any such
problems. The amount of any such liability and costs could be material.
Dependence on Sales to Public Sector and Government Contractors
The Company derives, and plans to continue to derive, substantial
revenues from public sector customers or contractors for such customers,
including the United States military. There are significant risks inherent in
sales to such customers which may cause material fluctuations in the Company's
operating results. For each contract with a public sector customer, the Company
typically is subject to a protracted procurement process which includes sealed
competitive bids, systems demonstrations and the integration of Company and
third-party products. The process also can include political influences, award
protests initiated by unsuccessful bidders and changes in budgets or
appropriations which are beyond the Company's control. Contracts of public
sector customers typically are subject to procurement policies which may be
onerous and may include profit limitations and rights on the part of the
government to terminate for convenience. Sales to the United States Department
of Defense (the "DOD") are subject to a number of significant uncertainties,
including timing and availability of funding, unforeseen changes in the timing
and quantity of government orders and the competitive nature of government
contracting generally. Furthermore, the DOD has been reducing total
expenditures, and there can be no assurance that funding will not be reduced in
the future. A significant loss of sales to the U.S.
7
<PAGE>
government or contractors for the U.S. government could have a material adverse
effect on the Company's business, results of operation and financial condition.
The Company is directly and indirectly subject to various rules,
regulations and orders applicable to government contractors. Violation of
applicable government rules and regulations could result in civil liability, in
cancellation or suspension of existing contracts or in ineligibility for future
contracts or subcontracts funded in whole or in part with federal funds.
Similarly, changes in the regulations or other requirements relating to parts
manufactured by the Company could materially adversely effect the Company.
Concentration of Customers
A substantial portion of the Company's business currently is
conducted with a relatively small number of large customers. The Company's
ten largest customers accounted for approximately 78% and 83% of the
Company's net sales in the fiscal years ended September 30, 1997 and
September 30, 1996, respectively, and three of which individually accounted
for greater than 10% of the Company's consolidated revenues in fiscal 1997
and 1996. While the Company's planned expansion into new commercial markets
may result in a substantial portion of its revenues being derived from new
customers, the dominance of a few companies in certain of these targeted
markets is likely to continue to result in a substantial portion of the
Company's revenues being derived from a small number of significant
customers. The loss of one of its key customers or any significant portion of
orders from any such customers could have a material adverse effect on the
Company's business, results of operation and financial condition. In
addition, the Company also could be materially adversely affected by any
substantial work stoppage or interruption of production at any of its major
customers or if one or more of its key customers were to reduce or cease
conducting operations.
Uncertainties Relating to USEC and UF6 Conversion
United States Enrichment Corporation ("USEC"), a government-owned
global energy company created by the U.S. Congress in 1992 to operate the U.S.
Department of Energy's (DoE") uranium enrichment program, is the only customer
for the Company's AVLIS feedstock material. USEC is in the process of
privatizing, and the Company is unable to predict the impact of the
privatization process and resulting change of ownership on the Company's
business. There can be no assurance that USEC, or any successor to USEC as a
result of privatization or otherwise, will not abandon the AVLIS program or
reduce resources directed to the program or that the Company will continue to
receive contracts from USEC. In addition, USEC's privatization process may delay
the awarding of contracts to the Company. There can be no assurance that USEC,
or any successor to as a result of privatization or otherwise, will provide the
Company with business which is sufficient to sustain the profitability of the
Company's South Carolina facility. Failure of the Company to be awarded such
contracts could have a material adverse effect on the Company's business,
results of operation and financial condition. Furthermore, following
privatization, USEC will own all the new depleted uranium hexaflouride ("UF6")
produced by its enrichment plants and will not be allowed to store depleted UF6
as has been done by DoE, thereby necessitating that
8
<PAGE>
USEC develop a method for disposing of depleted UF6. The Company also intends to
pursue opportunities with DoE for the conversion of its depleted UF6 stockpile.
Although the Company owns and operates the only production facility in North
America capable of converting natural UF6 into uranium tetraflouride ("UF4"),
there can be no assurance that USEC or DoE will award contracts to the Company
for the conversion of depleted UF6.
Dependence on Key Personnel
The Company's performance depends to a significant extent upon a number
of senior management and technical personnel. The loss of the services of one or
more key employees could have a material adverse effect on the Company. The
Company does not maintain key person life insurance on any of its employees. The
Company's future financial results will depend in large part on its ability to
continue to attract and retain highly skilled, technical, managerial and
marketing personnel and the ability of its officers and key employees to manage
growth successfully, to implement appropriate management information systems and
controls, and to continue successful development of new products and services
and enhancements to existing products and services. Competition for such
personnel is intense and there can be no assurance that the Company will
continue to be successful in attracting and retaining the personnel required to
successfully develop new and enhanced products.
Risk of Business Interruption
The Company's specialty metal products (including Beralcast) business
is concentrated at its Concord facility and its advanced recycling technologies
and uranium services business is concentrated at its South Carolina facility.
Any prolonged disruption at any of the Company's production facilities due to
equipment failure, destruction of or material damage to such facility, labor
difficulties, or other reasons, could have a material adverse effect on the
Company's business, results of operations and financial condition. Although the
Company maintains property and business interruption insurance to protect
against any such disruptions (other than for labor-related disruptions), there
can be no assurance that the proceeds from such insurance would be adequate to
compensate the Company for losses, including the loss of customers, incurred
during the period of any such disruption or thereafter.
Year 2000 Compliance
The Company has implemented a Year 2000 compliance program designed to
ensure that the Company's computer systems and applications will function
properly beyond 1999. The Company believes that adequate resources have been
allocated for this purpose and expects the Company's Year 2000 date conversion
programs to be completed on a timely basis. The Company does not expect to incur
significant expenditures to address this issue. However, there can be no
assurance that the Company will identify all Year 2000 problems in its computer
and other systems in advance of their occurrence or that the Company will be
able to successfully remedy any problems that are discovered. The expenses of
the Company's efforts to address such problems, could have a material adverse
effect on the
9
<PAGE>
Company's business, results of operations and financial condition. In addition,
the revenue stream and financial stability of existing customers may be
adversely impacted by Year 2000 problems, which could cause fluctuations in the
Company's revenues and operating profitability. In addition, if any of the
Company's significant customers or suppliers do not successfully and timely
achieve Year 2000 compliance, the Company's business could be materially
affected.
Effects of Massachusetts Control Share Acquisition Act
The Company is subject to Chapter 110D of the Massachusetts General
Laws which governs "control share acquisitions," which are certain acquisitions
of beneficial ownership of shares which raise the voting power of the acquiring
person (which can be a group of persons or entities sharing beneficial
ownership) above any one of three thresholds: one-fifth, one-third or one-half
of the total voting power. Each time one of these thresholds is crossed, all
shares acquired by the person making the control share acquisition within the
period beginning 90 days before and ending 90 days after such threshold is
crossed ("Affected Shares") obtain voting rights only (i) upon authorization by
a majority of the stockholders other than the holder of the Affected Shares,
officers of the Company and directors of the Company who also are employees of
the Company or (ii) when disposed of in non-control share acquisitions. Chapter
110D may have the effect of delaying or preventing a change of control of the
Company at a premium price. In addition, because the number of shares of Common
Stock currently entitled to vote is substantially less than the total number of
outstanding shares of Common Stock, holders of shares of Common Stock purchased
in transactions which are not control share acquisitions, and which occur at a
time when there are Affected Shares outstanding, will obtain voting rights which
are disproportionate to the number of shares held as a percentage of all
outstanding shares (including Affected Shares), which may facilitate the
acquisition of shareholding which may permit the exercise of a controlling
influence on the management or policies of the Company.
