SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period ended
July 4, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from
_____ to _____
Commission File 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)
None
(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding twelve months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No
As of July 31, 1999 there were issued and outstanding 4,790,674 shares of
the Registrant's Common Stock.
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PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
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STARMET CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
July 4, September 30,
1999 1998
------------------ ------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 27,000 $ 327,000
Restricted cash 238,000 238,000
Accounts receivable, net of allowances for doubtful accounts of
$270,000 at July 4, 1999 and $524,000 at September 30, 1998 3,400,000 6,020,000
Inventories 2,598,000 4,005,000
Other current assets 502,000 545,000
------------ ------------
Total current assets 6,765,000 11,135,000
------------ ------------
Property, Plant and Equipment 44,131,000 43,668,000
Less accumulated depreciation 27,206,000 25,731,000
------------ ------------
Net property, plant and equipment 16,925,000 17,937,000
------------ ------------
Non-current Inventories 1,500,000 1,500,000
Other Assets 1,854,000 1,861,000
------------ ------------
$ 27,044,000 $ 32,433,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long term obligations $ 6,624,000 $ 8,582,000
Accounts payable and accrued expenses 13,694,000 14,691,000
------------ ------------
Total current liabilities 20,318,000 23,273,000
Notes Payable to Shareholders 2,645,000 2,083,000
------------ ------------
Stockholders' Equity:
Common stock, par value $.10; 15,000,000 shares authorized;
4,790,674 issued and outstanding for July 4, 1999 and
September 30, 1998 479,000 479,000
Additional paid-in capital 14,067,000 14,067,000
Warrants issued 687,000 687,000
Accumulated deficit (11,152,000) (8,156,000)
------------ ------------
Total Stockholders' Equity 4,081,000 7,077,000
------------ ------------
$ 27,044,000 $ 32,433,000
============ ============
</TABLE>
2
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<TABLE>
<CAPTION>
STARMET CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------------- -------------------------------------
July 4, June 30, July 4, June 30,
1999 1998 1999 1998
--------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Net sales and contract revenues $ 5,638,000 $ 7,429,000 $ 18,976,000 $ 26,198,000
Cost of sales 4,154,000 6,812,000 15,329,000 21,337,000
------------- --------------- -------------- ---------------
Gross profit 1,484,000 617,000 3,647,000 4,861,000
Selling, general and
administrative 1,584,000 2,507,000 4,291,000 6,982,000
Research and development 337,000 411,000 1,112,000 977,000
------------- --------------- -------------- ---------------
Operating income (loss) (437,000) (2,301,000) (1,756,000) (3,098,000)
Other (income) expense 33,000 - 78,000 -
Interest expense 347,000 464,000 1,162,000 953,000
------------- --------------- -------------- ---------------
Loss before income taxes (817,000) (2,765,000) (2,996,000) (4,051,000)
Provision for income taxes - - - -
------------- --------------- -------------- ---------------
Net loss $ (817,000) $ (2,765,000) $ (2,996,000) $ (4,051,000)
============= =============== ============== ===============
Per Share Information:
Basic net loss per common share $ (0.17) $ (0.58) $ (0.63) $ (0.85)
============= =============== ============== ===============
Weighted average number of common
shares outstanding 4,791,000 4,791,000 4,791,000 4,788,000
============= =============== ============== ===============
Diluted net loss per common and
dilutive potential common shares
outstanding $ (0.17) $ (0.58) $ (0.63) $ (0.85)
============= =============== ============== ===============
Weighted average number of common
and dilutive potential common
shares outstanding 4,791,000 4,791,000 4,791,000 4,788,000
============= =============== ============== ===============
</TABLE>
3
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<TABLE>
<CAPTION>
STARMET CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
NINE MONTHS ENDED
-----------------------------------------------
July 4, June 30,
1999 1998
--------------------- ---------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,996,000) $ (4,051,000)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Depreciation and amortization 1,538,000 1,471,000
Changes in assets and liabilities, net:
(Increase) decrease in accounts receivable 2,620,000 (1,502,000)
(Increase) decrease in inventories 1,407,000 (594,000)
Increase (decrease) in accounts payable and accrued expenses (998,000) 2,585,000
(Increase) decrease in other assets 50,000 (496,000)
-------------- --------------
Net cash provided (used) by operating activities 1,621,000 (2,587,000)
-------------- --------------
Cash flows from investing activities:
Capital expenditures, net (463,000) (3,221,000)
-------------- --------------
Net cash used in investing activities (463,000) (3,221,000)
-------------- --------------
Cash flows from financing activities:
Principal payments under long-term obligations (224,000) (14,839,000)
Net proceeds (repayments) from bank debt (1,734,000) 19,974,000
Proceeds from stock issuance - 35,000
Proceeds from notes payable to shareholders and warrants 500,000 900,000
-------------- --------------
Net cash provided (used) by financing activities (1,458,000) 6,070,000
-------------- --------------
Net increase (decrease) in cash and equivalents:
Cash and equivalents at beginning of the period 565,000 268,000
Cash and equivalents at end of the period 265,000 530,000
-------------- --------------
$ (300,000) $ 262,000
============== ==============
Supplemental disclosures of cash flow information: Cash paid
during the period for:
Interest $ 664,000 $ 634,000
</TABLE>
4
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STARMET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements reflect all
normal and recurring adjustments that are, in the opinion of management,
necessary to present fairly the financial position of Starmet Corporation
and subsidiaries (the "Company") as of July 4, 1999 and the results of
their operations and cash flows for the nine months ended July 4, 1999 and
June 30, 1998. The unaudited consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in annual financial statements prepared in accordance with
generally accepted accounting principles have been omitted pursuant to
those rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading.
These financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Form 10-K for the
year ended September 30, 1998. Certain reclassifications have been made to
the prior year financial statements for consistent presentation with the
current year. Effective with the third quarter of fiscal 1999, the Company
has changed to a fiscal quarter end. However, the fiscal year will continue
to end on September 30.
The information furnished reflects all adjustments, which, in the opinion
of management, are necessary for a fair statement of results for the
interim periods. It should also be noted that results for the interim
periods are not necessarily indicative of the results expected for any
other interim period or the full year.
The significant accounting policies followed by the Company in preparing
its consolidated financial statements are set forth in Note (2) to such
financial statements included in Form 10-K for the year ended September 30,
1998.
2. Inventories
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
July 4, 1999 and September 30, 1998 consist of:
July 4, 1999 September 30, 1998
-------------- ------------------
Work-in progress $ 3,057,000 $ 3,900,000
Raw materials 564,000 1,067,000
Spare parts 476,000 538,000
------------- ------------
Total inventory 4,097,000 5,505,000
Less current inventory 2,597,000 4,005,000
------------- ------------
Non current inventory $ 1,500,000 $ 1,500,000
============= ============
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3. Loss Per Common Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (FAS 128).
FAS 128 replaced the previously reported primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary earning
per share, basic earnings per share excludes any dilutive effects of
options, warrants, and convertible securities. Diluted earnings per share
is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented,
and where necessary, restated to conform to the Statement 128 requirements.
Common share and common share dilutive potential disclosures are:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------- --------------------------
July 4, June 30, July 4, June 30,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding 4,791,000 4,791,000 4,791,000 4,788,000
Dilutive potential common shares - - - -
--------- --------- --------- ---------
Diluted common shares 4,791,000 4,791,000 4,791,000 4,788,000
--------- --------- --------- ---------
Options and warrants excluded from
diluted loss per common share as their
effect would be antidilutive 769,000 778,000 769,000 778,000
========= ========= ========= =========
</TABLE>
4. Debt
On October 15, 1998 the Company issued a 10% Subordinated Debenture in the
amount of $500,000 to a current shareholder. Warrants totaling 60,000
shares at an exercise price of $6.00 per share have also been issued in
connection with this Debenture.
On December 10, 1998 certain shareholders of the Company agreed to a
three-year extension to December 10, 2001 on 10% convertible debt in the
amount of $850,500. Warrants totaling 102,000 shares with an exercise price
of $6.00 per share have also been issued in connection with this extension.
The Company has recorded the estimated fair value of the warrants issued to
the shareholders, approximately $220,000, as a reduction of the related
debt and is amortizing this amount as interest expense over the remaining
life of the notes.
The Company is in default of the financial covenants under the bank
arrangement with its principal lender as a result of the Company's
inability to comply with certain requirements in the Secured Revolving Line
of Credit, including payment of $3,550,000 originally due on November 15,
1998. On June 23, 1999, the Company entered into an agreement with its
principal lender to forbear on all collection actions until February 15,
2000. The agreement also includes various extension periods if certain
conditions are met prior to February 15, 2000.
6
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5. Commitments and Contingencies
As in fiscal 1998, the Company continued to realize financial losses and
liquidity problems in the nine-month period ended July 4, 1999. The Company
continues to have a significant working capital deficiency of $13,553,000
at July 4, 1999 ($12,138,000 at September 30, 1998) and has restructured or
amended its debt agreements with its principal lender a number of times.
The Company has been served a complaint alleging breach of contract by one
of its principal vendors.
In addition, the Company has significant potential liabilities associated
with discontinued or suspended aspects of its business as discussed in its
Form 10-K at September 30, 1998, which it believes are the responsibility
of the U.S. Government. If these liabilities were to become the
responsibility of the Company, the Company would be required to consider
insolvency or similar reorganization proceedings to preserve its business
operations. In response to this situation, the Company is pursuing
alternative financing, arranging for vendor payment plans, and continuing
to restructure internally.
On February 5, 1999, the Company was served with a summons and complaint in
a common law diversity tort action filed in the United States District
Court for the Eastern District of Tennessee, entitled Orick v. Brush
Wellman, et al., 3:98-CV-652 (E.D. Tenn.), naming as defendants eight
corporations, including Starmet Corporation. The complaint also names the
United States of America as a defendant under the Federal Tort Claims Act.
The complaint alleges that the defendants failed to adequately warn the
plaintiff, an employee of a facility in Tennessee that processes beryllium
products, regarding the dangers of beryllium and beryllium manufacturing.
The complaint seeks $1 million in compensatory damages against the Company,
as well as punitive damages of $10 million. The Company believes that the
claims are without merit and intends to vigorously defend against the
claim. However, there can be no assurance that this litigation will
ultimately be resolved on terms that are favorable to the Company.
On February 17, 1999, the Company was served with a summons and complaint
in a breach of contract action filed in The Superior Court, County of
Middlesex, Commonwealth of Massachusetts, entitled Zhagrus Environmental,
Inc. et. al. v. Nuclear Metals, Inc. et. al., MCV99-01057, naming the
Company and its subsidiaries as defendants. The Company removed the case to
federal district court in Massachusetts on March 18, 1999, where it was
docketed as Civil Action No. 99-CV-10600-RGS. The complaint alleges, among
other things, that the defendants materially breached their agreement with
the plaintiff, Zhagrus Environmental Inc., entitled "Holding Basin
Remediation and Waste Disposal Agreement" dated May 8, 1997, and that
plaintiffs, Zhagrus and Envirocare of Utah, Inc., are entitled to a
judgment in the amount of at least $8,368,883 for services rendered
pursuant to such agreement. On June 18, 1999, the Company filed its answer
to the complaint denying liability, and asserted a counterclaim against the
plaintiffs alleging, among other things, breach of contract, breach of
implied covenant of good faith, deceit, and violation of Mass. Gen. Laws c.
93A. On July 7, 1999, the Company and plaintiffs agreed, pending resolution
of the lawsuit, to entry of an order placing certain limited restrictions
on the Company's ability to enter into significant transactions without
affording prior notice to the plaintiffs. Although the Company believes
that it has valid defenses to the claims alleged in this complaint, there
can be no assurance that this litigation will ultimately be resolved on
terms that are favorable to the Company. The Company has sought relief from
the Army for a portion of the amounts claimed by the plaintiffs, to the
extent that the Company is otherwise required to pay those amounts. Of the
$8,368,883, $3.5 million has been recorded as a liability.
7
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On February 24, 1999, the Company was served with a summons and complaint
in a common law diversity tort action filed in the United States District
Court for the Eastern District of Tennessee, entitled Jerry Lynn Hall &
Rose Mary Hall v. Brush Wellman, et al., 3:99-CV-110 (E.D. Tenn.), naming
as defendants fourteen corporations, including Starmet Corporation. The
complaint alleges that the defendants failed to adequately warn the
plaintiff, an employee of a facility in Tennessee that processes beryllium
products, regarding the dangers of beryllium and beryllium manufacturing.
The complaint seeks $6 million in compensatory damages against the Company,
as well as punitive damages of $10 million. The Company believes that the
claims are without merit and intends to vigorously defend against the
claim. However, there can be no assurance that this litigation will
ultimately be resolved on terms that are favorable to the Company.
As a result of the significant loss in fiscal 1998, continued losses in
fiscal 1999, and the status of the bank arrangements, management has been
forced to reassess its operating plan. The revised plan includes
significant reductions in personnel and various spending levels executed
during the first nine months of fiscal 1999. The Company's liquidity
constraints required the restructuring and extension of terms on all trade
payables.
See discussion of potential liabilities associated with discontinued or
suspended aspects of its depleted uranium business under Liquidity and
Capital Resources under Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations below.
6. Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes
standards for reporting and display of comprehensive income and its
components in a financial statement that is displayed with the same
prominence as other financial statements for periods beginning after
December 15, 1997. Comprehensive income, as defined, includes all changes
in equity during a period from non-owner sources. Examples of items to be
included in comprehensive income that are excluded from net income include
cumulative translation adjustments resulting from consolidation of foreign
subsidiaries' financial statements and unrealized gains and losses on
available-for-sale securities. Reclassification of financial statements for
earlier periods for comparative purposes is required. The Company has
adopted SFAS 130 beginning in its fiscal year 1999 and does not expect such
adoption to have an effect on its consolidated financial statements for
fiscal 1999 or prior years. During the nine months ended July 4, 1999,
there was no difference between total comprehensive loss and net loss.
Accordingly, no change in presentation on the face of the Statement of
Operations is required.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Third Quarter Fiscal 1999 Compared With Third Quarter Fiscal 1998
Net sales decreased by $1,791,000, or 24%, to $5,638,000 in the third
quarter of fiscal 1999, as compared to the third quarter of the fiscal
1998. Sales in the Depleted Uranium Penetrator segment decreased by
$845,000, or 69%. Sales in the Specialty Metal products segment decreased
by $376,000, or 11%. Sales in the Uranium Services and Recycle segment
decreased
8
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by $570,000, or 20%. The sales decrease in the Depleted Uranium Penetrator
segment was due to the reduction in both foreign and domestic procurement
and no revenue from the remediation of the holding basin at the Concord
facility pursuant to a U.S. Army contract in fiscal 1999. The Company
expects that no revenue will be derived from DU Penetrator operations after
the fourth quarter of fiscal 1999. The sales decrease in the Specialty
Metals product segment was due to a decreased level of activity on the
Comanche helicopter Beralcast prototype contract. The decrease in sales in
the Uranium Services and Recycle is due to reduced AVLIS feedstock
production orders, partially offset by the UF6 conversion contract with
United States Enrichment Corporation.
Gross profit in the third quarter increased by $867,000, or 141%, to
$1,484,000, as compared to
the third quarter of fiscal 1998. The increase in gross profit for the
quarter is attributable to reduced Holding Basin remediation costs expensed
in 1999 combined with improved product margins through reduced indirect
labor and manufacturing overhead. As a percentage of total revenue, gross
margin improved by 225% to 26% as compared to 8% for the third quarter of
fiscal 1998.
Selling, general and administrative expenses decreased by $923,000, or 37%,
to $1,584,000 in the third quarter of fiscal 1999, as compared to
$2,507,000 in the third quarter of fiscal 1998. The decrease in selling,
general and administrative expenses is primarily due to the termination of
sales office leases, reduction in administrative staff and various cost
containment measures. As a percentage of total revenue, these expenses are
28% as compared to 34% for the same period last year.
Interest expense decreased to $347,000 in the third quarter of fiscal 1999
from $464,000 in the third quarter of fiscal 1998. This decrease is
attributable to interest expense associated with reduced borrowings.
Nine Months Ended July 4, 1999 Compared With Nine Months Ended June 30,
1998
Net sales decreased by $7,222,000, or 28%, to $18,976,000 in the first nine
months of fiscal 1999 compared to the first nine months of fiscal 1998.
Sales in the Depleted Uranium Penetrator segment decreased by $7,298,000,
or 72%. Sales in the Specialty Metal products segment increased by
$595,000, or 6%. Sales in the Uranium Services and Recycle segment
decreased by $519,000, or 8%. The sales decrease in the Depleted Uranium
Penetrator segment was due to the reduction in foreign procurement and no
revenue from the remediation of the holding basin at the Concord facility
pursuant to a U.S. Army contract in fiscal 1999. The sales increase in the
Specialty Metals product segment was due to an increased demand for medical
shielding and medical powders offset by a decreased level of activity on
the Comanche helicopter Beralcast prototype contract. The decrease in sales
in the Uranium Services and Recycle segment is due to the reduced AVLIS
feedstock production only being partially offset by revenue from the UF6
conversion contract with United States Enrichment Corporation.
Gross profit in the first nine months of fiscal 1999 decreased by
$1,214,000, or 25%, to $3,647,000, as compared to the first nine months of
fiscal 1998. The decrease in gross profit resulted from reduced sales of
the AVLIS feedstock and Depleted Uranium Penetrators partially offset by
Specialty Metals margin improvement. As a percentage of total revenue,
gross profit margin was 19%, exactly the same as compared to the first nine
months of fiscal 1998. Had the
9
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Company not expensed Holding Basin remediation costs of $1,294,000, the
gross profit margin would have been 26% for the first nine months of fiscal
1999.
Selling, general and administrative expenses decreased by $2,691,000, or
39%, to $4,291,000 in the first nine months of fiscal 1999 compared to the
first nine months of fiscal 1998. The decrease in selling, general and
administrative expenses is primarily due to the termination of sales office
leases, reductions in administrative staff and various cost containment
measures. As a percentage of total revenue, selling, general and
administrative expenses are 23% as compared to 27% for the same period last
year.
Interest expense increased to $1,162,000 in the first nine months of fiscal
1999 from $953,000 in the same period of fiscal 1998. This increase is
attributable to interest expense associated with increased borrowings
during the first half of fiscal 1999.
Liquidity and Capital Resources
As in fiscal 1998, the Company continued to realize financial losses and
liquidity problems in the nine-month period ended July 4, 1999. The Company
continues to have a significant working capital deficiency of $13,553,000
at July 4, 1999 ($12,138,000 at September 30, 1998) and has restructured or
amended its debt agreements with its principal lender a number of times.
The Company has been served a complaint for breach of contract by one of
its principal vendors. In addition, the Company has significant potential
liabilities associated with discontinued or suspended aspects of its
business as discussed in its Form 10-K at September 30, 1998, which it
believes are the responsibility of the U.S. Government. If these
liabilities were to become the responsibility of the Company, the Company
would be required to consider insolvency or similar reorganization
proceedings to preserve its business operations. In response to this
situation, the Company is pursuing alternative financing, arranging for
vendor payment plans, and continuing to restructure internally.
At July 4, 1999, the end of the first nine months of fiscal 1999, the
Company had a working capital deficit of $13,553,000, a decrease in working
capital of $1,415,000 since the end of fiscal 1998. For the nine months
ended July 4, 1999, the Company's accounts receivable and inventories
decreased by $2,620,000 and $1,407,000, respectively, compared with
September 30, 1998 levels. Cash (less restricted cash) at July 4, 1999 was
$27,000. The current portion of long-term obligations decreased to
$6,624,000 from $8,582,000 as the cash generated from operations and the
proceeds from additional shareholder notes were used to pay down the
revolving line of credit. At the end of the first nine months of fiscal
1999 notes payable to shareholders, net of unamortized warrants, increased
to $2,645,000 from $2,083,000 as of September 30, 1998.
On October 15, 1998 the Company issued a 10% Subordinated Debenture in the
amount of $500,000 to a current shareholder. Warrants totaling 60,000
shares at an exercise price of $6.00 per share have also been issued in
connection with this Debenture.
On December 10, 1998 certain shareholders of the Company agreed to a
three-year extension to December 10, 2001 on the 10% convertible debt held
by them in the amount of $850,500. Payments of the related interest have
been extended to June 10, 1999. Warrants totaling 102,000 shares with an
exercise price of $6.00 per share have also been issued in connection with
this extension.
10
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The Company is in default of the financial covenants under the bank
arrangement with its principal lender. On June 23, 1999, the Company
entered into an agreement with its principal lender to forbear on all
collection actions until February 15, 2000. The agreement also includes
various extension periods if certain conditions are met prior February 15,
2000.
Management's plans with regard to the existing capital deficiency are to
adjust spending levels to appropriate amounts to ensure greater financial
stability while actively exploring additional capital generating
opportunities including, but not limited to, the sale and leaseback of
owned property, asset sales and joint ventures. The Company is also
managing payment plans with certain suppliers.
As a result of the significant loss in fiscal 1998 and the status of the
Company's bank arrangements, management has been forced to reassess its
operating plan. The revised plan includes significant reductions in
personnel and various spending levels executed during the first nine months
of fiscal 1999. The Company's liquidity constraints required the
restructuring and extension of terms on all trade payables.
In addition to write-offs that have been recorded during fiscal 1998, as
required by generally accepted accounting principles, the Company has
potential liabilities associated with discontinued or suspended aspects of
its depleted uranium business, including costs associated with site
remediation, decontamination and decommissioning of existing facilities,
cost overruns on existing contracts with the U.S. Army and Zhagrus. For
further discussion, see Part II - "Other Information", Item 1. -"Legal
Proceedings". These potential liabilities include a possible $5.0 million
cost associated with the additional treatment of waste under the Zhagrus
contract and decontamination and decommissioning costs of up to $14.6
million associated with its present facilities and equipment. The Company
has insufficient capital to cover these liabilities and no current
capability to finance such liabilities. Management believes that the U.S.
Government has a responsibility to pay, directly and indirectly, for a
substantial portion of these costs. The United States Army, in a Memorandum
of Decision dated September 13, 1996 (the "Memorandum of Decision")
pursuant to Public Law 85-804, agreed that it would fund a substantial
portion of the remediation costs for the Company's Concord holding basin
site. As a result of cost overruns in connection with the holding basin
remediation, the Company has requested additional remediation funds from
the Army; however, while the engineering change proposal is being reviewed
by the Army, there is presently no approved funding and no specific written
agreement from the U.S. Government to reimburse or fund these overrun
costs. No reserve for these potential liabilities has been taken on the
Company's financial statements. If these liabilities become the
responsibility of the Company, the Company would be forced to consider
insolvency or similar reorganization proceedings to preserve the Company's
business operations and the Company's business, financial condition and
results of operations would be materially and adversely affected.
Special Note Regarding Forward-Looking Statements
Certain statements in this Quarterly Report, including, without limitation,
those concerning (i) the Company's revised operating plan, (ii) the
possible effects on the Company of certain legal proceedings, and (iii) the
effects on the Company of changes in the businesses in which it operates or
in economic conditions generally involve known and unknown risks,
uncertainties
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and other factors which may cause the actual results, performance or
achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Factors that could cause such differences
include, but are not limited to, the effects of government regulation; the
need for additional financing to fund growth, continued and future
acceptance of the Company's products and services; and the presence of
competitors with greater technical, marketing and financial resources. 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.
Year 2000 Readiness Disclosure Statement
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. As a result, in
less than one year, computer systems and/or software used by many companies
may need to be upgraded to comply with such "Year 2000" or "Y2K"
requirements. Significant uncertainty exists in the software industry
concerning the potential effects associated with the 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 compliant and to
improve the Company's overall manufacturing, planning and inventory related
systems. In fiscal 1997, the Company invested approximately $250,000 for
Year 2000 compliance and will continue to make investments in its computer
systems and applications for that purpose. The Company believes that the
Company's computer systems are Year 2000 compliant. 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 materially affected.
See Part I - "Risk Factors--Year 2000 Compliance."
The Company formed a Y2K committee that reviewed the Y2K status of the
Company's vendors' software and systems used in its internal business
processes. It also will seek appropriate assurances of compliance from the
manufacturers of these products or, in the event that such assurances
cannot be obtained, intends to provide for modification or replacement of
all non-compliant products. Management has verified that its accounting
software is Year 2000 compliant.
The Company is in the process of contacting its critical suppliers and
major customers to determine whether the products obtained by it from such
vendors or sold by the customer to third parties are Y2K compliant. Its
suppliers and customers are under no contractual obligation to provide such
information to it. The Company intends to continue its efforts to monitor
the Y2K compliance of the Company suppliers and major customers.
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Based on the information available to date, the Company believes it will be
able to complete its Y2K compliance review and make necessary modifications
prior to the end of 1999. The Company is prioritizing its efforts to focus
on any Y2K discrepancies found that would impact its operations.
Nevertheless, particularly to the extent that the Company is relying on the
products of other vendors to resolve Y2K issues, there can be no assurances
that the Company will not experience delays in implementing such changes.
If key systems, or a significant number of systems were to fail as a result
of Y2K problems, or the Company were to experience a delay implementing Y2K
compliant software products, the Company could incur substantial costs and
disruption of its business, which could potentially have a material effect
on the Company's business and results of operations. In addition, as the
Company purchases many critical components from single or sole source
suppliers, failure of any such vendor to adequately address issues related
to the Y2K problem may have a material adverse effect on the Company's
business, financial conditions and results of operations.
To date the Company has not required a complete and separate budget for
investigating and remedying issues related to Y2K compliance, whether
involving its own products or the software or systems used in its internal
operations. Additionally, the Company has currently not developed a
contingency plan related to Y2K and presently has no plan to do so. There
can be no assurances that the Company's resources spent on investigating
and remedying Y2K compliance issues, or the lack of a contingency plan
related to Y2K, will not have a material adverse effect on the Company's
business, financial condition and results of operations.
Risk Factors
HISTORY OF LOSSES; RISK OF FUTURE LOSSES. The Company has experienced
significant financial difficulties and liquidity problems in the past year
due primarily to the sharp decline in sales of 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, and
amendments of, certain covenants and other provisions in its debt
instruments (including waivers and amendments under the Existing Credit
Facility in February, May, June, October and November of 1998 and June of
1999) additional borrowings and extensions of maturities under the Existing
Credit Facility, and additional equipment financing from another bank for
capital expenditures required at its South Carolina facility. Historically,
a substantial portion of the Company's revenue has 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. The Company expects
that no revenues will be derived from sales of penetrator defense munitions
after the fourth 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. In addition, the Company's accountants, in their report to the Board
of Directors and stockholders of the Company for fiscal 1995 and fiscal
1998, stated that there was substantial doubt at that time about the
Company's ability to continue as a going concern. There can be no assurance
that the Company will not continue to incur losses 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
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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 the key existing and emerging businesses and technologies, 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 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.
ENVIRONMENTAL, HEALTH AND REGULATORY MATTERS. Materials regularly processed
by the Company, including depleted uranium and beryllium, 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. Depleted uranium is a low-level
radioactive material, and the Company is subject to government licensing
and regulation. Depleted uranium in the 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.
The Company is subject to environmental laws that (i) govern activities or
operations that may have adverse environmental effects, such as discharges
to land, air and water, as well as handling and disposal practices for
solid, radioactive 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 CERCLA 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. In 1997, the Company's licenses
at its Concord and South Carolina facilities were renewed for a period of
five years subject to compliance with permitting conditions.
The presence and use in the Company's operations of materials with
hazardous characteristics subjects the Company to regulation and scrutiny
by various governmental agencies. Management believes that the Company is
presently in compliance in all material respects with existing federal,
state and local regulations and has no knowledge of any threatened
governmental action against the Company for violations of any such laws,
statutes or regulations, except as described below. However, the potential
effects of evolving legislation and regulations affecting the Company's
business cannot be predicted.
If it is determined that the Company is not in compliance with current
Environmental Laws, the Company could be ordered to curtail or cease its
operations and could be subject to fines and penalties. The amount of any
such fines and penalties could be material. In addition, the
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Company uses depleted uranium, beryllium and other hazardous substances. If
a release of such 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 and any such liability could
have a material adverse effect on the Company' business, results of
operations and financial condition.
The Company has made, and will 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 compliance costs could be material and any additional
expenditures related to compliance, if material, would have a material
adverse effect on the Company's business, results of operation and
financial condition. The Company cannot predict the impact that future
regulations will impose upon the Company's business.
In the process of manufacturing depleted uranium products, the Company
generates low-level radioactive waste materials that must be disposed of at
sites licensed by federal, state, and local governments. The operation of
these disposal sites is at the discretion of these regulatory entities,
which may at times result in temporary or long-term closures and limited
access.
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 to a
holding basin on its premises in Concord. The Company now uses a "closed
loop" process that it developed to discontinue such discharges. The Company
has removed a substantial quantity of hazardous materials from the holding
basin, and additional actions will be required to close the holding basin
as required by government regulations.
The Company has potential liabilities associated with discontinued or
suspended aspects of its depleted uranium business, including costs
associated with site remediation, decontamination and decommissioning of
existing facilities, cost overruns on existing contracts with the U.S. Army
and Zhagrus. These potential liabilities include a possible $5.0 million
cost associated with the additional treatment of waste under the Zhagrus
contract and decontamination and decommissioning costs of up to $14.6
million associated with its present facilities and equipment. The Company
has insufficient capital to cover these liabilities and no current
capability to finance such liabilities. Management, based on written advice
of legal counsel, believes that the U.S. Government has a responsibility to
pay, directly and indirectly, for a substantial portion of these costs. The
United States Army, in a Memorandum of Decision dated September 13, 1996
(the "Memorandum of Decision") pursuant to Public Law 85-804, agreed that
it would fund remediation of the Corporation's Concord holding basin site
as well as D&D related to that facility, based in part on the Army's
determination that the Corporation's activities are essential to the
national defense. However, while there are two contract modification
proposals being reviewed by the Army, there is presently no approved
funding and no specific written agreement from the U.S. Government to
reimburse or fund these costs. No reserve for these potential liabilities
has been taken on the Company's financial statements. If these liabilities
become the responsibility of the Company, the Company would be forced to
consider insolvency or similar proceedings to preserve the Company's
business operations and the Company's
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business, financial condition and results of operations would be materially
and adversely affected.
The Company is required to maintain certain licenses issued by the
Massachusetts Department of Public Health ("DPH") and South Carolina
Department of Health and Environmental Control ("DHEC") in order to possess
and process depleted uranium materials at its facilities in Massachusetts
and South Carolina. Under applicable licensing regulations pertaining to
Decommissioning and Decontamination ("D&D") at licensed sites, the Company
submitted to the Nuclear Regulatory Commission ("NRC") (the predecessor of
DPH, in this regard) and the applicable state agencies a Decommissioning
Funding Plan ("DFP") to provide for possible future decommissioning of its
facilities. The Concord facility DFP estimated cost is $11.7 million and
the South Carolina facility DFP estimate is $2.9 million. The Company is
required to provide financial assurance for such decommissioning pursuant
to applicable regulations. The Company's DFP's reflect its position that it
is obligated to provide financial assurance only with respect to the
portion of the materials which are attributable to the Company's commercial
production for parties other than the United States Government and that
this obligation has been satisfied by a letter of credit to each geographic
location's regulatory agency. However, the Company's letters of credit are
subject to the forbearance agreement with its principal lender, which
expires on February 15, 2000. The Company has notified the U.S. Army that
it is discontinuing penetrator production and that it will cease using
related government furnished equipment. Accordingly, the U.S. Army and the
Company are negotiating the removal of such equipment and the
decommissioning and decontamination of the affected portions of the
Company's facilities. The Company has submitted a proposal to the U.S. Army
requesting the modification and funding of an existing facilitization
contract, which, in addition to other work proposed therein, would provide
the Company with funding to cover some of the estimated D&D costs, which
are material. The Company is in the process of negotiating the contract
modification scope of work with the U.S. Army, but there is no assurance
that Army funding will be provided. If this funding is not provided, the
Company's business, results of operation and financial condition would be
materially and adversely affected.
Substantially all of the depleted uranium materials to which the DFP
requirements apply were processed by the Company for the United States
Government. The Company's DFP reflects its position that it should be
obligated to provide financial assurance only with respect to the portion
of the materials which are attributable to the Company's commercial
production for parties other than the United States Government.
The United States Army, in the Memorandum of Decision dated September 13,
1996 (the "Army Decision"), pursuant to Public Law 85-804, agreed to fund
certain costs associated with remediation of the Company's Concord holding
basin site as well as some of the costs of D&D related to that facility,
based in part on the Army's determination that the Company's activities are
essential to the national defense.
The United States Army has issued to the Company a fixed price contract for
remediation of the holding basin and the Company entered into a subcontract
with Zhagrus Environmental, Inc. ("Zhagrus") to perform this remediation.
The Company's contract with Zhagrus is based on a specified volume of waste
to be removed from the basin and delivered to the Envirocare radioactive
waste disposal site in Utah. The volume of the material removed exceeded
the specified level. Under the Zhagrus contract, the Company agreed to pay
an additional fee per
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cubic yard of excess material removed. In addition, Zhagrus has notified
the Company that Zhagrus has incurred additional costs in connection with
the disposal of the material from the holding basin as a result of the need
to treat the material to meet conditions for burial imposed by applicable
environmental regulations. Zhagrus has requested that the Company pay it
any additional costs incurred by Zhagrus as a result of such additional
services. On November 4, 1998, the Company received a written claim from
Zhagrus for excess costs of approximately $5.0 million. Zhagrus' claim is
the subject of litigation described in Part II - "Other Information", Item
1 - "Legal Proceedings". If these costs are not recovered from the U.S.
Army, the Company would have no means to finance these costs, and the
Company's business, results of operation and financial condition would be
materially and adversely affected. The cost of remediating the holding
basin at its Concord, Massachusetts facility will exceed the amounts
covered by the Company's fixed price contract with the U.S. Army (the "Army
Contract"), by at least $1.7 million which has been recorded as a liability
as of September 30, 1998. (The exact amount of the excess costs presently
is unknown, but the Company believes that the potential range of such costs
is between $1.7 million and $8.0 million, inclusive of the Zhagrus claim of
$5.0 million). The Company believes that all or a certain portion of such
excess costs may be recoverable pursuant to a contract modification.
Alternatively, the Company believes that all or a certain portion of such
costs, subject to confirmation by government auditors, are recoverable as
allowable overhead on future government contracts, which the Company
expects to be awarded. In December 1998, the Company submitted an
engineering change proposal to the U.S. Army seeking a contract
modification that would provide the Company with funding to cover such
estimated excess remediation costs. In February 1999, based on discussions
with the U.S. Army, the Company submitted a claim under P.L. 85-804
requesting payment of these excess costs. In June 1999, the U.S. Army
denied the latter request. In August 1999, the Company re-submitted the
engineering change proposal and is awaiting a response from the U.S. Army.
If these costs, potentially ranging from $1.7 to $8.0 million, are incurred
by the Company without reimbursement or funding from other sources,
including the U.S. Army, the Company's business, results of operation and
financial condition would be materially and adversely affected.
The Company has no assurance that the Army will accept responsibility for
the share of the estimated cost of D&D at its South Carolina facility which
directly resulted from production work under U.S. government contracts on
government supplied materials. However, management believes that the Army
is responsible for its estimated share of D&D. If these costs are not
recovered from the U.S. Army, the Company would have no means to finance
these costs, and the Company's business, results of operation and financial
condition would be materially and adversely affected.
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 67% and 78%
of the Company's net sales in the fiscal years ended September 30, 1998 and
September 30, 1997, respectively. Four of these customers (USEC, Royal
Ordnance, Primex Technologies, and Lockheed Martin) individually accounted
for greater than 10% of the Company's consolidated revenues in fiscal 1998.
The Company currently is contracting with Primex Technologies to provide DU
penetrators for the U.S. Army's ABRAMS Tank program through the fourth
quarter of fiscal 1999. The Company is currently under contract with
Lockheed Martin to provide Beralcast hardware for the Comanche helicopter
program. USEC is the sole customer for the Company's UF6 conversion and
AVLIS feedstock material. See "Risk Factors--Uncertainties Relating to USEC
and UF6 Conversion."
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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. USEC, a recently
privatized global energy company created by the U.S. Congress in 1992 to
operate the DOE's uranium enrichment program, is the only customer for the
Company's AVLIS feedstock material. Furthermore, in June 1999, USEC
announced they would abandon the AVLIS program. The Company also intends to
pursue opportunities with DOE for the conversion of its depleted UF6
stockpile. There can be no assurance that USEC and/or DOE will award
contracts to the Company for the conversion of depleted UF6 beyond that
which already has been awarded to Starmet. The Company currently has a
large stockpile of UF4 created by UF6 conversion. The estimated cost of
disposal of the UF4 is approximately $3.4 million and has been accrued as a
liability.
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 that 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 that
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 that are beyond the
Company's control. Contracts of public sector customers typically are
subject to procurement policies that 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. 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.
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
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such acceptance will be sustained for any significant period. In
particular, the Company's Beralcast materials, which are central to its
strategy, require market acceptance of value commensurate with the
generally higher cost versus alternative and current materials. 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 keep pace with technological
developments could have a material adverse effect on the Company's
business, results of operation and financial condition.
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 effect 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 that 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. 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 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 which was the plaintiff in a patent lawsuit against
the Company.
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
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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.
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 and prototype parts for
military and commercial aerospace applications. 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. Disk drive industry practice generally is to place only
short-term orders, accompanied by projections of demand for future
operations. 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.
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. Increased competition is likely to
result 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.
YEAR 2000 COMPLIANCE. The Company does not produce products that contain
software where Year 2000 compliance could be an issue. The Company has
licensed computer systems and software for its internal operations and
business processes where Year 2000 compliance could be an issue. The
Company has implemented a Year 2000 compliance program designed to ensure
that the Company's internal computer systems; business processes and
applications will function properly beyond 1999. The Company believes that
adequate resources have been
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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 the Company's 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, or the expenses or liabilities to which the Company
may become subject as a result of such problems, could have a material
adverse effect on the 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.
INTERNATIONAL SALES. In 1998, 1997 and 1996, international sales accounted
for approximately 18%, 25% and 28%, respectively, of the Company's net
sales. The Company anticipates that international sales will continue to
account for a significant percentage of its net sales. A significant
portion of the Company's net sales will therefore be subject to risks
associated with international sales, including unexpected changes in legal
and regulatory requirements, changes in tariff, exchange rates and other
barriers, political and economic instability, difficulties in account
receivable collection, potentially longer payment cycles, difficulties in
managing distributors or representatives, difficulties in protecting the
Company's intellectual property overseas, and potentially adverse tax
consequences.
LEGAL PROCEEDINGS. The Company is involved in various legal proceedings.
See Part II Item 1, "Legal Proceedings." An adverse judgment or settlement
under any of these proceedings could subject the Company to significant
liabilities and expenses (e.g., reasonable royalties, lost profits,
attorneys' fees and trebling of damages for willfulness).
RISKS RELATED TO PATENTED TECHNOLOGY. 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 operations 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. The Company believes that its products, patents and other
proprietary rights do not infringe upon the proprietary rights of third
parties.
RISKS RELATED TO MANAGEMENT OF PLANNED GROWTH. The Company's anticipated
growth could place a significant strain on its management, operations,
financial and
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other resources. The Company's ability to manage its growth will require it
to continue to invest in its operational, financial and management
information systems, procedures and controls and to attract, retain,
motivate and effectively manage its employees. The Company may experience
design and start-up difficulties, such as cost overruns, manufacturing and
operational difficulties and significant delays. Moreover, there can be no
assurance that the Company will realize the goals of the planned capital
expenditure program, such as reductions in product costs and enhanced
product quality. If the Company is successful in achieving its growth
plans, such growth is likely to place a significant burden on the Company's
operating and financial systems, resulting in increased responsibility for
senior management and other personnel within the Company. There can be no
assurance that the Company's existing management or any new members of
management will be able to augment or improve existing systems and controls
or implement new systems and controls in response to anticipated future
growth. The Company's failure to manage its growth could have a material
adverse effect on the Company's business, financial condition and results
of operation.
The Company may from time to time pursue selected teaming arrangements,
licenses, joint ventures and other cooperative relationships to increase
its production capacity or to complement or expand its existing businesses.
Any of these relationships may result in potentially dilutive issuances of
equity securities, the incurrence of additional debt, reductions of
existing cash balances, and charges to operations, any of which could have
a material adverse effect on the Company's business, results of operation
and financial condition. Selected teaming arrangements, licenses, joint
ventures and other cooperative relationships involve a number of risks that
could adversely affect the Company's operating results including the
diversion of management's attention, the entry into markets in which the
Company has little or no direct prior experience and the disruption of the
Company's business. No assurance can be given that any such relationship
will not materially and adversely affect the Company or that any such
relationship will enhance the Company's business.
INSUFFICIENT WORKING CAPITAL. The Company may not raise the capital funding
required according to its strategic plan (including equity, bank lines of
credit and/or bridge borrowings), and no person has committed to purchase
any Company securities or advance any borrowings. Even if funding is
received, substantial additional capital will be needed for the Company to
continue expanding its marketing efforts, to fund working capital and to
finance inventories and accounts receivable.
The Company will also need to expend additional funds in connection with,
but not limited to, manufacturing, sales and marketing activities, product
research and development, and personnel costs. Such plans will require
expenditures of capital. If capital resources of the Company prove to be
inadequate to fund such projects, because development costs greatly exceed
the budget, because anticipated revenues and financing are delayed or do
not occur, because expenses increase beyond expectations, or for any other
reason, it may be necessary for the Company to borrow funds or sell more of
its equity to raise working capital in the near future. There can be no
assurance that additional financing will be available, or available on the
terms that would be at all favorable to the Company. The Company will
require additional equity capital to finance its projected operations at
some point in the future. Additional equity financings will result in
dilution of stockholders' interests and may not be on terms favorable to
the Company or existing stockholders. If adequate funds are not available,
the Company may have to reduce substantially,
22
<PAGE>
or eliminate, certain aspects of its proposed activities, or otherwise
modify or curtail its operating plans.
POSSIBLE FUTURE LIABILITIES. The Company has potential liabilities and
costs associated with discontinued or suspended aspects of its business,
including costs associated with site remediation, decontamination and
decommissioning of existing facilities, and cost overruns on existing
contracts with the U.S. Army and Zhagrus Environmental, Inc. These
potential liabilities include a possible $5.0 million cost associated with
the additional treatment allegedly required under the Zhagrus contract and
decontamination and decommissioning costs of up to $14.6 million associated
with its present facilities and equipment. The Company has insufficient
capital to cover these liabilities and no current plan for financing such
liabilities. Management believes that the U.S. Government has a
responsibility to pay, directly and indirectly, for a substantial portion
of these costs. However, while there are two contract modification
proposals being reviewed by the Army, there is presently no approved
funding and no specific written agreement from the U.S. Government to
reimburse or fund these costs. No reserve for these potential liabilities
has been taken on the Company's financial statements. If these liabilities
become the responsibility of the Company, the Company would be forced to
consider insolvency or similar proceedings to preserve the Company's
business operations and the Company's business, financial condition and
results of operations would be materially and adversely affected.
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.
FLUCTUATION OF STOCK PRICE; ABSENCE OF ACTIVE TRADING. In recent periods
there has been relatively little trading in the Company's Common Stock and
the market price per share of the Company's Common Stock has fluctuated
significantly. Factors such as quarterly variations in the Company's result
of operations, changes in the company's industry and market conditions
generally, the presence of a limited number of market makers for the
Company's
23
<PAGE>
Common Stock, the lack of availability of institutional market research
concerning the Company, and limited and sporadic trading volume of the
Company's Common Stock can cause the market price of the Common Stock to
fluctuate significantly. In addition, future announcements concerning the
Company or its competitors, including quarterly results, innovations, new
product introductions, government regulations or proceedings, or litigation
may cause the market price of the Common Stock to fluctuate significantly.
Furthermore, the stock markets have experienced extreme price and volume
fluctuations during certain periods. These broad market fluctuations and
other factors may adversely affect the market price of the Company's Common
Stock for reasons unrelated to the Company's operating performance.
SUBSTANTIAL INFLUENCE OF PRINCIPAL STOCKHOLDERS. The Company believes that
certain control share acquisitions have occurred and that members of the
group which effected such control share acquisitions, namely WIAF Investors
Co., Charles Alpert, Joseph Alpert, Melvin B. Chrein M.D., Meryl J. Chrein
and Marshall J. Chrein (collectively, the "Investor Group"), as of March
31, 1999 were the beneficial owners of 2,769,871 shares of Common Stock
(assuming full conversion of debentures and exercise of all warrants held
by certain members of the Investor Group), or approximately 54% of the
Company's outstanding shares of Common Stock. As of July 31, 1999,
directors and executive officers of the Company beneficially own in the
aggregate 1,111,193 shares of Common Stock (assuming full conversion of
debentures and exercise of all currently exercisable options and warrants
held by certain directors and executive officers), or approximately 21% of
the shares entitled to vote. The Investor Group and/or the Company's
directors and executive officers could have substantial influence on
matters requiring approval of stockholders of the Company, including the
election of directors or the approval of significant corporate matters.
This concentration of ownership by existing stockholders may also have the
effect of delaying or preventing a change of control of the Company.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
24
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On February 17, 1999, the Company was served with a summons and complaint
in a breach of contract action filed in The Superior Court, County of
Middlesex, Commonwealth of Massachusetts, entitled Zhagrus Environmental,
Inc. et. al. V. Nuclear Metals, Inc. et. al., MCV99-01057, naming the
Company and its subsidiaries as defendants. The Company removed the case to
federal district court in Massachusetts on March 18, 1999, where it was
docketed as Civil Action No. 99-CV-10600-RGS. The complaint alleges, among
other things, that the defendants materially breached their agreement with
the plaintiff, Zhagrus Environmental Inc., entitled "Holding Basin
Remediation and Waste Disposal Agreement" dated May 8, 1997, and that
plaintiffs, Zhagrus and Envirocare of Utah, Inc., are entitled to a
judgment in the amount of at least $8,368,883 for services rendered
pursuant to such agreement. On June 18, 1999, the Company filed its answer
to the complaint denying liability, and asserted a counterclaim against the
plaintiffs alleging, among other things, breach of contract, breach of
implied covenant of good faith, deceit, and violation of Mass. Gen. Laws c.
93A. On July 7, 1999, the Company and plaintiffs agreed, pending resolution
of the lawsuit, to entry of an order placing certain limited restrictions
on the Company's ability to enter into significant transactions without
affording prior notice to the plaintiffs. Although the Company believes
that it has valid defenses to the claims alleged in this complaint, there
can be no assurance that this litigation will ultimately be resolved on
terms that are favorable to the Company. The Company has sought relief from
the Army for a portion of the amounts claimed by the plaintiffs, to the
extent that the Company is otherwise required to pay those amounts. Of the
$8,368,883, $3.5 million has been recorded as a liability.
Item 2. Changes in Securities and Use of Proceeds
On October 15, 1998 the Company issued a 10% Subordinated Debenture in the
amount of $500,000 to a current shareholder. Warrants, for the purchase of
up to 60,000 shares at an exercise price of $6.00 per share, were issued in
connection with the issuance of this Debenture.
On December 10, 1998 certain shareholders of the Company agreed to a
three-year extension to December 10, 2001 on the 10% convertible debt held
by them in the amount of $850,500. Payments of the related interest have
been extended to June 10, 1999. Warrants for the purchase of up to 102,000
shares with an exercise price of $6.00 per share were issued in connection
with this extension.
Item 3. DEFAULTS UPON SENIOR SECURITIES
The Company is in default of the financial covenants under the bank
arrangement with its principal lender as a result of the Company's
inability to comply with certain requirements in the Secured Revolving Line
of Credit including payment of $3,550,000 originally due on November 15,
1998. On June 23, 1999, the Company entered into an agreement with its
principal lender to
25
<PAGE>
forbear on all collection actions until February 15, 2000. The agreement
also includes various extension periods if certain conditions are met prior
to February 15, 2000.
Item 5. OTHER INFORMATION
Proposals of stockholders intended for inclusion in the proxy statement to
be furnished to all stockholders entitled to vote at the next annual
meeting of stockholders of the Company must be received at the Company's
principal executive offices not later than November 15, 1999. This deadline
provides for timely notice to the Company of matters that stockholders
otherwise desire to introduce at the next annual meeting of stockholders of
the Company on or about March 15, 2000. In order to curtail any controversy
as to the date on which the Company received a proposal, it is suggested
that proponents submit their proposals by Certified Mail, Return Receipt
Requested.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Not applicable.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended July 4,
1999.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
STARMET CORPORATION
Date: August 18, 1999 By: /s/ Robert E. Quinn
---------------------------------
Robert E. Quinn
President and Chief Executive Officer
Date: August 18, 1999 By: /s/ Gary W. Mattheson
----------------------------------
Gary W. Mattheson
Chief Financial Officer
27
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<PERIOD-START> OCT-01-1998
<PERIOD-END> JUL-04-1999
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