<PAGE>
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 March 31, 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 April 30, 1999 there were issued and outstanding 4,790,674 shares of the
Registrant's Common Stock.
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STARMET CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 1999 SEPTEMBER 30, 1998
(UNAUDITED)
----------------------- -----------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 66,000 $ 327,000
Restricted cash 238,000 238,000
Accounts receivable, net of allowances for doubtful
accounts of $271,000 at March 31, 1999 and $524,000 at September
30, 1998 3,959,000 6,020,000
Inventories 3,125,000 4,005,000
Other current assets 531,000 545,000
--------------------- -----------------------
Total current assets 7,919,000 11,135,000
--------------------- -----------------------
Property, Plant and Equipment 44,286,000 43,668,000
Less accumulated depreciation 26,706,000 25,731,000
--------------------- -----------------------
Net property, plant and equipment 17,580,000 17,937,000
--------------------- -----------------------
Non-current Inventories 1,500,000 1,500,000
Other Assets 1,854,000 1,861,000
--------------------- -----------------------
$28,853,000 $ 32,433,000
--------------------- -----------------------
--------------------- -----------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long term obligations $ 7,525,000 $ 8,582,000
Accounts payable and accrued expenses 13,811,000 14,691,000
--------------------- -----------------------
Total current liabilities 21,336,000 21,645,000
Notes Payable to Shareholders, Net of Unamortized Warrants
2,619,000 2,083,000
--------------------- -----------------------
Stockholders' Equity:
Common stock, par value $.10; 15,000,000 shares authorized;
4,790,674 issued and outstanding for March 31, 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
Retained deficit (10,335,000) (8,156,000)
--------------------- -----------------------
Total Stockholders' Equity 4,898,000 7,181,000
--------------------- -----------------------
$28,853,000 $ 31,240,000
--------------------- -----------------------
--------------------- -----------------------
</TABLE>
2
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STARMET CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------------------- --------------------------------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1999 1998 1999 1998
------------------ ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Net sales and contract revenues $ 5,919,000 $10,690,000 $13,338,000 $ 18,769,000
Cost of sales 5,803,000 7,425,000 11,175,000 14,526,000
------------------ ----------------- ----------------- ------------------
Gross profit 116,000 3,265,000 2,163,000 4,243,000
Selling, general and administrative
1,427,000 2,228,000 2,708,000 4,475,000
Research and development 342,000 409,000 775,000 567,000
------------------ ----------------- ----------------- ------------------
Operating income (loss) (1,653,000) 628,000 (1,320,000) (799,000)
Other (income) expense 18,000 - 44,000 -
Interest expense 421,000 356,000 815,000 489,000
------------------ ----------------- ----------------- ------------------
Loss before income taxes (2,092,000) 272,000 (2,179,000) (1,288,000)
Provision for income taxes - - - -
------------------ ----------------- ----------------- ------------------
Net loss $ (2,092,000) $ 272,000 $ (2,179,000) $ (1,288,000)
------------------ ----------------- ----------------- ------------------
------------------ ----------------- ----------------- ------------------
PER SHARE INFORMATION:
Basic net loss per common and common
equivalent share $ (0.44) $ 0.06 $ (0.45) $ (0.27)
------------------ ----------------- ----------------- ------------------
------------------ ----------------- ----------------- ------------------
Weighed average number of common and
common equivalent shares outstanding 4,791,000 4,787,000 4,791,000 4,787,000
------------------ ----------------- ----------------- ------------------
------------------ ----------------- ----------------- ------------------
Diluted net loss per common and diluted
potential common shares outstanding
$ (0.44) $ 0.05 $ (0.45) $ (0.27)
------------------ ----------------- ----------------- ------------------
------------------ ----------------- ----------------- ------------------
Weighed average number of common and
dilutive potential common shares 4,791,000
outstanding 4,791,000 5,103,000 4,787,000
------------------ ----------------- ----------------- ------------------
------------------ ----------------- ----------------- ------------------
</TABLE>
3
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STARMET CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------------------------------
MARCH 31, 1999 MARCH 31,
1998
---------------------- -----------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,179,000) $ (1,288,000)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Depreciation and amortization 1,043,000 999,000
Changes in assets and liabilities, net:
(Increase) decrease in accounts receivable 2,061,000 (2,197,000)
(Increase) decrease in inventories 880,000 (45,000)
Increase (decrease) in accounts payable and accrued
expenses (880,000) 762,000
(Increase) decrease in other assets 20,000 (16,000)
---------------------- -----------------------
Net cash provided (used) by operating activities 945,000 (1,785,000)
---------------------- -----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (617,000) (2,349,000)
---------------------- -----------------------
Net cash used in investing activities (617,000) (2,349,000)
---------------------- -----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under long-term obligations (150,000) (9,934,000)
Net proceeds (repayments) from bank debt (939,000) 13,220,000
Proceeds from notes payable to shareholders and warrants
500,000 900,000
---------------------- -----------------------
Net cash provided (used) by financing activities (589,000) 4,186,000
---------------------- -----------------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS:
Cash and equivalents at beginning of the period 565,000 195,000
Cash and equivalents at end of the period 304,000 247,000
---------------------- -----------------------
$ (261,000) $ 52,000
---------------------- -----------------------
---------------------- -----------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period
for:
Interest $ 388,000 $ 158,000
Income taxes $ -- $ --
</TABLE>
4
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STARMET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. 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 March 31, 1999 and the results of
their operations and cash flows for the six months ended March 31, 1999 and
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.
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 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
March 31, 1998 and September 30, 1998 consist of:
<TABLE>
<CAPTION>
MARCH 31, 1999 SEPTEMBER 30, 1998
------------------------------ ---------------------------------
<S> <C> <C>
Work-in progress $ 2,714,000 $ 2,865,000
Raw materials 1,443,000 1,984,000
Spare parts 468,000 656,000
------------------------------ ---------------------------------
Total inventory 4,625,000 5,505,000
Less current inventory 3,125,000 4,005,000
------------------------------ ---------------------------------
Non current inventory $ 1,500,000 $ 1,500,000
------------------------------ ---------------------------------
------------------------------ ---------------------------------
</TABLE>
6
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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 SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------------------------ ------------------------------------
1999 1998 1999 1998
---------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 4,791,000 4,787,000 4,791,000 4,787,000
Dilutive potential common shares - 316,000 -- --
---------------- -------------- --------------- ----------------
Diluted common shares 4,791,000 5,103,000 4,791,000 4,784,000
---------------- -------------- --------------- ----------------
Options and warrants excluded from diluted
loss per common share as their effect would
be antidilutive 769,000 - 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 as
part 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 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 as part of this extension.
The Company has recorded the estimated relative 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
life of the notes.
The Company was in default of its financial covenants under its 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 February 22, 1999, the Company entered into an agreement with its
principal lender to forbear on all collection actions until May 28, 1999.
In connection with the agreement, the Company agreed to arrange for
separate financing for $3,550,000 by May 15, 1999. The Company is not in
compliance with the terms of the February 22, 1999 agreement. Current
negotiations are expected to be completed during May 1999 to revise and
extend the forbearance agreement.
5. Commitments and Contingencies
As in fiscal 1998, the Company continued to realize financial losses and
liquidity problems in the six month period ended March 31, 1999. The
Company continues to have a significant working
7
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capital deficiency of $13,417,000 at March 31, 1999 ($12,138,000 at
September 30, 1998) and has restructured or amended its debt agreements
with its principal lender a number of times in the past year. 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 process 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 complaint alleges, among
other things, that the defendants materially breached their agreement with
the plaintiff entitled "Holding Basin Remediation and Waste Disposal
Agreement" dated May 8, 1997, and that plaintiffs are entitled to a
judgment in the amount of at least $8,368,883 for services rendered
pursuant to such agreement. The Company believes that it has valid defenses
to the claims alleged in this complaint and that it will not ultimately be
caused to pay the amount sought therein. However, there can be no assurance
that this litigation will ultimately be resolved on terms that are
favorable to the Company. On February 22, 1999, the Company and Zhagrus
Environmental, Inc. agreed to a thirty-day Stand-Still Agreement pending
further resolution of this matter. The Company agreed, among other things,
that during the thirty day Stand-Still Agreement period that it would not
(a) increase its current credit arrangement with its current lender or (b)
extend a security interest to any new lender. Of the $8,368,883, $3.5
million has been recorded as a liability by the Company and the remaining
balance is under evaluation during the thirty-day period.
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 process 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
8
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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 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 and second quarters of
fiscal 1999. The Company's liquidity constraints require 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. During
the six months ended March 31, 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
SECOND QUARTER FISCAL 1999 COMPARED WITH SECOND QUARTER FISCAL 1998
Net sales decreased by $4,771,000, or 45%, to $5,919,000 in the second
quarter of fiscal 1999, as compared to the second quarter of the fiscal 1998.
Sales in the Depleted Uranium Penetrator segment decreased by $3,310,000, or
80%. Sales in the Specialty Metal products segment decreased by $275,000, or 8%.
Sales in the Uranium Services and Recycle segment decreased by $1,186,000, or
40%. 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 third 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 that were partially offset by the UF6 conversion contract with
United States Enrichment Corporation.
9
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Gross profit in the second quarter decreased by $3,149,000, or 96%, to
$116,000, as compared to the second quarter of fiscal 1998. The decrease in
gross profit for the quarter is attributable in part to $973,000 of Holding
Basin remediation costs expensed in 1999 combined with changes in product mix
and timing issues in further reducing fixed costs.
Selling, general and administrative expenses decreased by $801,000, or
36%, to $1,427,000 in the second quarter of fiscal 1999, as compared to the
second 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 24% as compared to 21% for
the same period last year.
Interest expense increased to $421,000 in the second quarter of fiscal
1999 from $356,000 in the second quarter of fiscal 1998. This increase is
attributable to interest expense associated with increased borrowings.
SIX MONTHS ENDED MARCH 31, 1999 COMPARED WITH SIX MONTHS ENDED MARCH 31, 1998
Net sales decreased by $5,431,000, or 29%, to $13,338,000 in the first
six months of fiscal 1999 compared to the first six months of fiscal 1998. Sales
in the Depleted Uranium Penetrator segment decreased by $6,448,000, or 75%.
Sales in the Specialty Metal products segment increased by $966,000, or 15%.
Sales in the Uranium Services and Recycle segment increased by $51,000, or 1%.
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
increase in sales in the Uranium Services and Recycle is due to the UF6
conversion contract with United States Enrichment Corporation offset by reduced
AVLIS feedstock production orders.
Gross profit in the first six months of fiscal 1999 decreased by
$2,080,000, or 49%, to $2,163,000, as compared to the first six months of fiscal
1998. The decrease in gross profit for the period is attributable in part to
$973,000 of holding basin remediation costs expensed in 1999 combined with
changes in product mix. As a percentage of total revenue, gross profit margin
was 16% compared to 23% for the first six months of fiscal 1998. Had we not
expensed the holding basin remediation costs, the gross profit margin would have
been 24%.
Selling, general and administrative expenses decreased by $1,767,000, or
39%, to $2,708,000 in the first six months of fiscal 1999 compared to the first
six 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, these expenses are 20% as compared to 24% for the same period
last year.
Interest expense increased to $815,000 in the first half of fiscal 1999
from $489,000 in the first half of fiscal 1998. This increase is attributable to
interest expense associated with increased borrowings.
LIQUIDITY AND CAPITAL RESOURCES
As in fiscal 1998, the Company continued to realize financial losses and
liquidity problems in
10
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the six month period ended March 31, 1999. The Company continues to have a
significant working capital deficiency of $13,417,000 at March 31, 1999
($12,138,000 at September 30, 1998) and has restructured or amended its debt
agreements with its principal lender a number of times in the past year. 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 March 31, 1999, the end of the first six months of fiscal 1999, the
Company had a working capital deficit of $13,417,000, a decrease in working
capital of $2,907,000 since the end of fiscal 1998. For the six months ended
March 31, 1999, the Company's accounts receivable and inventories decreased by
$2,061,000 and $880,000, respectively, compared with September 30, 1998 levels.
Cash (less restricted cash) at March 31, 1999 was $66,000. The current portion
of long term obligations decreased to $7,525,000 from $8,582,000. At the end of
the first half of fiscal 1999 notes payable to shareholders, net of unamortized
warrants, increased to $2,619,000 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 as part 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 totaling 102,000 shares with an exercise
price of $6.00 per share have also been issued as part of this extension.
The Company was in default of its financial covenants under its bank
arrangement with its principal lender. On February 22, 1999, the Company entered
into an agreement with its principal lender to forebear on all collection
actions until May 28, 1999 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.
Management's plans with regard to the existing capital deficiency are to
adjust spending levels to appropriate amounts to ensure greater financial
stability and to actively pursue additional subordinate secured debt and
partnering relations with target customers. 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 and second quarters of
fiscal 1999. The Company's liquidity constraints require 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
11
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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 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 capability to finance such liabilities.
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 contract modification 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 reorganization 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 and
other factors which may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Factors
that could cause such differences include, but are not limited to, those
discussed in Exhibit 99 to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1998. 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
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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, will
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.
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 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. 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) additional borrowings and extensions of
maturities under the Existing Credit Facility, and
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additional equipment financing from another bank for capital expenditures
required at its South Carolina facility. Historically, a substantial portion of
the Company's revenues 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 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. 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 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.
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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 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 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 of financing such liabilities; however,
management believes that the U.S. Government has a responsibility for these
costs. The United States
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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 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 May 28, 1999. 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 Starmet 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.
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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, and the Company is obligated to pay an additional fee per 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 has not provided sufficient information for the Company to
make an appropriate determination of liability. There can be no 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 request or pursuant
to an additional application for relief under Public Law 85-804. 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. The Company 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 second quarter
of fiscal 1999. The Company is currently under several contracts 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 Item 7,"Risk
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Factors--Uncertainties Relating to USEC and UF6 Conversion." 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, there can be no assurance that USEC will
not abandon the AVLIS program or reduce resources directed to the program or
that the Company will continue to receive contracts from USEC. 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 as of September
30, 1998. See Item 1, "Business--UF6 Conversion."
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 such acceptance will be sustained for
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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 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
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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. See Item
1, "Business--Sources of Raw Materials."
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 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
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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). 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.
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. 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.
21
<PAGE>
RISKS RELATED TO MANAGEMENT OF PLANNED GROWTH. The Company's anticipated
growth could place a significant strain on its management, operations, financial
and 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 produce 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 in
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, or eliminate,
certain aspects of its proposed activities, or otherwise modify or curtail its
operating plans.
22
<PAGE>
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,
based on the 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. 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 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
to fluctuate significantly. In addition, future announcements concerning the
Company or its competitors, including quarterly results,
23
<PAGE>
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 March 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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 process 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 complaint alleges, among other things, that the
defendants materially breached their agreement with the plaintiff entitled
"Holding Basin Remediation and Waste Disposal Agreement" dated May 8, 1997, and
that plaintiffs are entitled to a
24
<PAGE>
judgment in the amount of at least $8,368,883 for services rendered pursuant to
such agreement. The Company believes that it has valid defenses to the claims
alleged in this complaint and that it will not ultimately be caused to pay the
amount sought therein. However, there can be no assurance that this litigation
will ultimately be resolved on terms that are favorable to the Company. On
February 22, 1999, the Company and Zhagrus Environmental, Inc. agreed to a
thirty day Stand-Still Agreement pending further resolution of this matter.
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 process 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.
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 was in default of its financial covenants under its 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 February
22, 1999, the Company entered into an agreement with its principal lender to
forbear on all collection actions until May 28, 1999. The Company is not in
compliance with the terms of the February 22, 1999 agreement. Current
negotiations are expected to be competed during May 1999 to revise and extend
the forbearance agreement.
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. The deadline for providing
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
25
<PAGE>
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 March 31,
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: May 14, 1999
---------------------------------
By: /s/ Robert E. Quinn
Robert E. Quinn
President, Chief Executive Officer and
Chief Financial Officer
Date: May 14, 1999
----------------------------------
By: /s/ Gary W. Mattheson
Gary W. Mattheson
Controller and Chief Accounting Officer
27
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