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 2, 2000
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, 2000 there were issued and outstanding 4,800,674 shares of the
Registrant's Common Stock.
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PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
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STARMET CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
July 2, September 30,
2000 1999
------------ -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 5,000 $ 14,000
Restricted cash 238,000 238,000
Accounts receivable, net of allowances for doubtful
accounts of $150,000 at July 2, 2000 and
$200,000 at September 30, 1999 3,350,000 3,535,000
Inventories 2,352,000 2,426,000
Other current assets 837,000 415,000
------------ ------------
Total current assets 6,782,000 6,628,000
------------ ------------
Property, Plant and Equipment 44,549,000 43,756,000
Less accumulated depreciation 29,104,000 27,645,000
------------ ------------
Net property, plant and equipment 15,445,000 16,111,000
------------ ------------
Non-current Inventory 1,089,000 1,309,000
Other Assets 1,808,000 1,808,000
------------ ------------
Total Assets $ 25,124,000 $ 25,856,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit $ 6,144,000 $ 6,190,000
Notes payable 997,000 1,139,000
Current portion of long-term obligations 606,000 1,423,000
Accounts payable 6,247,000 6,084,000
Accrued payroll and related costs 595,000 670,000
Other accrued expenses 3,537,000 4,255,000
------------ ------------
Total current liabilities 18,126,000 19,761,000
Notes Payable to Shareholders 2,301,000 1,375,000
------------ ------------
Total Liabilities 20,427,000 21,136,000
Stockholders' Equity:
Common stock, par value $.10; 15,000,000 shares
authorized; 4,800,674 issued and outstanding at
July 2, 2000 and 4,790,674 issued and outstanding
at September 30, 1999 480,000 479,000
Additional paid-in capital 14,871,000 14,839,000
Accumulated deficit (10,654,000) (10,598,000)
------------ ------------
Total Stockholders' Equity 4,697,000 4,720,000
------------ ------------
$ 25,124,000 $ 25,856,000
============ ============
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STARMET CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------------- ----------------------------------
July 2, July 4, July 2, July 4,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales and contract revenues $ 5,118,000 $ 5,638,000 $ 16,426,000 $ 18,976,000
Cost of sales 4,020,000 4,154,000 12,227,000 15,329,000
------------ ------------ ------------ ------------
Gross profit 1,098,000 1,484,000 4,199,000 3,647,000
Selling, general and
administrative 950,000 1,584,000 2,985,000 4,291,000
Research and development 165,000 337,000 402,000 1,112,000
------------ ------------ ------------ ------------
Operating income (loss) (17,000) (437,000) 812,000 (1,756,000)
Other expense 20,000 33,000 61,000 78,000
Interest expense 273,000 347,000 807,000 1,162,000
------------ ------------ ------------ ------------
Net income (loss) $ (310,000) $ (817,000) $ (56,000) $ (2,996,000)
============ ============ ============ ============
Per Share Information:
Basic net income (loss) per
common and common equivalent
share $ (0.06) $ (0.17) $ (0.01) $ (0.63)
============ ============ ============ ============
Weighted average number of
common and common equivalent
shares outstanding 4,801,000 4,791,000 4,798,000 4,791,000
============ ============ ============ ============
Diluted net income (loss) per
common and diluted potential
common shares outstanding $ (0.06) $ (0.17) $ (0.01) $ (0.63)
============ ============ ============ ============
Weighted average number of
common and dilutive potential
common shares outstanding 4,801,000 4,791,000 4,798,000 4,791,000
============ ============ ============ ============
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STARMET CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
NINE MONTHS ENDED
--------------------------------
July 2, July 4,
2000 1999
------------ ------------
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Cash flows from operating activities:
Net income (loss) $ (56,000) $(2,996,000)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 1,517,000 1,538,000
Changes in assets and liabilities, net:
(Increase) decrease in accounts receivable 185,000 2,620,000
(Increase) decrease in inventories 295,000 1,407,000
Increase (decrease) in accounts payable and
accrued expenses (630,000) (998,000)
Increase) decrease in other assets (422,000) 50,000
----------- -----------
Net cash provided by operating activities 889,000 1,621,000
----------- -----------
Cash flows from investing activities:
Capital expenditures, net (793,000) (463,000)
----------- -----------
Net cash used in investing activities (793,000) (463,000)
----------- -----------
Cash flows from financing activities:
Principal payments under long-term obligations (92,000) (224,000)
Net repayments of bank debt (46,000) (1,734,000)
Proceeds from stock issuance 33,000 --
Proceeds from notes payable to shareholders and
warrants -- 500,000
----------- -----------
Net cash used in financing activities (105,000) (1,458,000)
----------- -----------
Net increase (decrease) in cash and equivalents:
Cash and equivalents at beginning of the period 252,000 565,000
Cash and equivalents at end of the period 243,000 265,000
----------- -----------
$ (9,000) $ (300,000)
=========== ===========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 590,000 $ 664,000
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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 2, 2000 and the results of their operations for the
three and nine months ended July 2, 2000 and July 4, 1999 and cash flows for the
nine months ended July 2, 2000 and July 4, 1999. 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, 1999. 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 (3) to such financial
statements included in Form 10-K for the year ended September 30, 1999.
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 2, 2000 and September 30,
1999 consist of:
July 2, 2000 September 30, 1999
------------ ------------------
Raw Materials $1,547,000 $1,324,000
Work-in progress 1,552,000 2,040,000
Finished Goods 342,000 371,000
---------- ----------
Total inventory 3,441,000 3,735,000
Less current inventory 2,352,000 2,426,000
---------- ----------
Non current inventory $1,089,000 1,309,000
========== ==========
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3. Income (Loss) Per Common Share
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). SFAS
128 replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings 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:
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Three Months Ended Nine Months Ended
-------------------------- --------------------------
July 2, July 4, July 2, July 4,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 4,801,000 4,791,000 4,798,000 4,791,000
Dilutive potential common shares -- -- -- --
--------- --------- --------- ---------
Diluted common shares 4,801,000 4,791,000 4,798,000 4,791,000
--------- --------- --------- ---------
Options and warrants excluded from diluted loss
per common share as their effect would be
antidilutive 981,000 769,000 859,000 769,000
========= ========= ========= =========
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4. Debt
The Company has a secured revolving line of credit with a bank that has been
amended a number of times. The Company is technically in default of certain
financial covenants under the bank arrangement with its principal lender.
However, on June 23, 1999, the Company entered into an agreement with its
principal lender to forbear on all collection actions until February 15, 2000.
On November 12, 1999, the Company entered into an agreement to further extend
the maturity to August 15, 2000. On August 4, 2000, the Company entered into an
agreement to further extend the maturity to April 15, 2001.
On December 31, 1999, the original maturity date of certain debentures due to
shareholders, certain shareholders of the Company agreed to a three-year
extension to December 31, 2002 on the 10% convertible debt in the amount of
$900,000. In consideration for extending the maturity date of the debentures,
the interest rate was increased to 14% and the holders will be issued three-year
warrants to purchase an aggregate of 108,000 shares of common stock at an
exercise price of $3.875 per share, subject to anti-dilution adjustments.
5. Commitments and Contingencies
Waste Disposal
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
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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. Concord Site Remediation and Decommissioning
Planning Requirements
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. 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'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 agreement with its principal lender, which expires on April 15,
2001.
The United States Army, in a 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. Additionally, the Company is currently performing on a U.S. Army
facilities contract that obligates the Army to restore those facilities used in
the production of penetrators once the Company ceases DU penetrator production.
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 cubic yard of excess material removed dependent upon certain actions by
Zhagrus. 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 below. 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
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re-submitted the engineering change proposal and is awaiting a response from the
U.S. Army. If these costs are not recovered from the U.S. Army and the Company
is held responsible for these costs, 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 July 2, 2000. The exact amount of the excess costs presently is unknown, but
the Company believes that the potential range of such costs is between $18
million and $20 million, inclusive of the contested Zhagrus claim of $5.0
million. The Company believes that all or a substantial portion of such excess
costs will be recovered pursuant to an amended P.L. 85-804 claim and a contract
modification.
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 contested $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, based upon written advice of consultants and counsel, 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 the Army
Decision, 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
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.
The Company has notified the U.S. Army that it discontinued penetrator
production and ceased using related government-furnished equipment. The Company
and the U.S. Army Secretariat have been in continuous dialog and fact finding
for several months on a "global" remedy for the environmental issues at the
Company's Concord site. The global issues involve the settlement of the Zhagrus
litigation for excess holding basin costs, future holding basin costs to
complete the remediation, and decontamination of the buildings used for U.S.
Army penetrator production until September, 1999 following the U.S. Army's
removal of government-furnished equipment. The Company has negotiated a contract
with the U.S. Army to support their efforts to remove government-furnished
equipment beginning in September, 2000. In August, 2000, the Company will submit
an amended P.L. 85-804 claim directly to the Secretary of the Army requesting
payment of all past and future costs related to the remediation of the holding
basin which have not been previously funded, but there is no assurance that Army
funding will be provided. If this funding is not provided, the Company's
business, results of operations and financial condition would be materially and
adversely affected.
On July 20, 2000, the Massachusetts Department of Environmental Protection
issued a Notice of
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Responsibility ("NOR") to the U.S. Army making them a Potentially Responsible
Party ("PRP") at the Company's Concord property. The NOR also contained a
request for information from the U.S. Army outlining their role as an operator
and/or arranger for the holding basin contamination at the Company's Concord
site. On July 27, 2000, the United States Environmental Protection Agency
("EPA") issued a notice of its intent to list the Company's Concord site on the
National Priorities List ("NPL") also known as the Superfund list. The Company
and the public have 60 days to respond to the final Hazard Ranking System
package. While the primary purpose of the NPL is to inform local communities of
the growing problem of inactive hazardous waste sites around the country most
urgently in need of cleanup, once a site is listed on the NPL, the ramifications
are significant and substantive. The effect of having a site listed typically
include, but are not limited to, having the site involved in extensive and
prolonged litigation; reducing the ability to transfer the property because it
is less desirable; possible loss in fair market value because of the extensive
work, time and expense for removal or remedial action (often for 8 to 14 years);
and it may become more difficult to refinance the property. The Company's
Concord site is not inactive, the community is very much aware of the site
conditions and there are now two identified PRP's, the Company and the U.S.
Army. EPA's policy is to require the PRP's to perform response actions and to
fund the cleanup rather than being financed by the Superfund program.
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, based upon examination of
relevant contracts, the actions of the Army with respect to D&D of facilities of
other contractors, and discussions with counsel, 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 operations and financial condition would be materially and
adversely affected.
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 (the "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
restrictions on the Company's ability to enter into significant transactions
without affording prior notice to the plaintiffs. 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, and has
established a reserve of $3.4 million in connection with this litigation. The
plaintiffs filed
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motions for partial summary judgement on the portion of the claim relating to
the balance due of $3.4 million on the material removed from the holding basin
including amounts in excess of the contractual maximum and for dismissal of the
Company's counterclaim. The Company's opposition to these motions was heard on
May 11, 2000. On July 10, 2000, the Court granted the plaintiffs' motion for
partial summary judgement. On July 14, 2000, the Court allowed the plaintiff's
motion to dismiss the Company's counterclaim without prejudice to the Company's
right to their affirmative defenses. On July 20, 2000, the plaintiff filed a
motion to amend the partial summary judgement to include pre-judgement interest.
The Court has not yet ruled on this motion. The Company believes there are
material issues of fact relating to the remaining $5.0 million of the claim.
Should the plaintiff execute on the partial summary judgement, 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.
In August, 2000, the Company will submit an amended P.L. 85-804 claim directly
to the Secretary of the Army requesting payment of all past and future costs
related to the remediation of the holding basin which have not been previously
funded. This revised claim will include all Zhagrus excess holding basin costs
including the $5.0 million cost associated with the additional treatment of
waste under the Zhagrus contract. There is no assurance that Army funding will
be provided.
The Company is involved in various other legal proceedings that have arisen in
the ordinary course of business. Management believes the outcome of such legal
proceedings will not have a material adverse impact on the Company's financial
position or results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Third Quarter Fiscal 2000 Compared With Third Quarter Fiscal 1999
Net sales decreased by $520,000, or 9%, to $5,118,000 in the third quarter of
fiscal 2000, as compared to the third quarter of fiscal 1999. Sales in the
Specialty Metal products segment decreased by $462,000, or 23%. Sales in the
Composite Materials products segment increased by $132,000, or 22%. Sales in the
Powders segment increased by $38,000. Sales in the Uranium Services and Recycle
segment decreased by $228,000, or 13%. The sales decrease in the Specialty Metal
products segment was due primarily to the cessation of foreign penetrator
production and the cancellation of the AVLIS program in June, 1999 by U.S.
Enrichment Corporation ("USEC"). No revenue will be derived from DU penetrator
operations after the fourth quarter of fiscal 1999. The sales increase in the
Composite Materials product segment was due to an increased level of commercial
orders primarily for the semiconductor manufacturing industry. The sales
increase in the Powders segment was due to an increased demand for specialty
powders. The decrease in sales in the Uranium Services and Recycle segment was
due to decreased production output on the UF6 conversion contract with USEC
partially offset by increased counterweight refurbishment services for the
Robins Air Force Base contract that began during the third quarter of fiscal
1999 and will continue for the next three years.
Sales of metal matrix composite materials from the Company's Composite Materials
segment continue to have the greatest potential for dynamic growth. Prototype
orders, led by the requirements of a prominent manufacturer of semiconductor
assembly equipment, have become
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production orders. Four new production prototype parts for the next generation
of semiconductor assembly equipment are scheduled for production in the first
quarter of 2001. New commercial customers are incorporating Beralcast(R) into
their future production requirements as they initiate prototype orders. The
Company is also pursuing other commercial applications that use copper beryllium
alloys, a material developed decades ago and widely used today. Starmet
continues to aggressively pursue other revenue enhancement opportunities in data
storage, medical, space, defense and military applications where Beralcast(R)
provides a technological and cost advantage.
Gross profit in the third quarter decreased by $386,000 to $1,098,000, as
compared to the third quarter of fiscal 1999 primarily due to decreased sales.
As a percentage of total revenue, gross margin dropped to 21% as compared to 26%
for the third quarter of fiscal 1999. The margin deterioration is primarily due
to sales dropping below our $5.6 million breakeven point and our high fixed
manufacturing cost base as a percentage of revenues.
Selling, general and administrative expenses decreased by $634,000, or 40%, to
$950,000 in the third quarter of fiscal 2000, as compared to the third quarter
of fiscal 1999. The decrease in selling, general and administrative expenses is
primarily due to the full impact of reductions in administrative staff and
various cost containment measures implemented throughout fiscal 1999. Research
and development costs declined as the Phase II development and SBIR grant
efforts on fluorine mining were charged to cost of sales in the third quarter of
fiscal 2000.
Interest expense decreased to $273,000 in the third quarter of fiscal 2000 from
$347,000 in the third quarter of fiscal 1999. This decrease is primarily
attributable to interest expense associated with reduced borrowings under the
Company's revolving line of credit.
Nine Months Ended July 2, 2000 Compared With Nine Months Ended July 4, 1999
Net sales decreased by $2,550,000, or 13%, to $16,426,000 in the first nine
months of fiscal 2000 compared to the first nine months of fiscal 1999. Sales in
the Specialty Metal products segment decreased by $3,963,000, or 49%. Sales in
the Composite Materials products segment increased by $283,000, or 14%. Sales in
the Powders segment decreased by $483,000, or 12%. Sales in the Uranium Services
and Recycle segment increased by $1,607,000, or 34%. The sales decrease in the
Specialty Metal products segment was due primarily to the cessation of both
foreign and domestic penetrator production and the cancellation of the AVLIS
program in June, 1999 by USEC. The sales increase in the Composite Materials
products segment was due to an increased level of commercial orders primarily
for the semiconductor manufacturing industry offset by a decreased level of
activity on the Comanche helicopter prototype contract. The sales decrease in
the Powders segment was due to a decreased demand for medical powders. The
increase in sales in the Uranium Services and Recycle segment is primarily due
to increased production on the UF6 conversion contract with USEC and increased
counterweight refurbishment services from the Robins Air Force Base contract.
Gross profit in the first nine months of fiscal 2000 increased by $552,000, or
15%, to $4,199,000, as compared to the first nine months of fiscal 1999. During
1999, certain non-recurring holding basin costs totaling $973,000 were expensed
to cost of sales because of the uncertainty that the U.S. Army would fund them
under a contract adjustment. As a percentage of total revenue, gross margin
increased to 26% as compared to 24% for the first nine months of fiscal 1999
excluding the impact of the $973,000 of holding basin costs. The gross margin
improvement resulted from
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reduced direct and indirect overhead costs.
Selling, general and administrative expenses decreased by $1,306,000, or 30% to
$2,985,000 in the first nine months of fiscal 2000 compared to the first nine
months of fiscal 1999. The decrease in selling, general and administrative
expenses is primarily due to the full impact of reductions in administrative
staff and various cost containment measures implemented throughout fiscal 1999.
Research and development costs declined as the Phase II development and SBIR
grant efforts on fluorine mining were appropriately charged to cost of sales in
the first nine months of fiscal 2000.
Interest expense decreased to $807,000 in the first nine months of fiscal 2000
from $1,162,000 in the first nine months of fiscal 1999. This decrease is
primarily attributable to interest expense associated with reduced borrowings
under the Company's revolving line of credit.
Liquidity
The Company continues to have a significant working capital deficiency and has
restructured or amended its debt agreements with its principal lender a number
of times. In addition, the Company has significant potential liabilities
associated with discontinued or suspended aspects of its business 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 continues to
explore all additional capital generating opportunities.
At July 2, 2000, the Company had a working capital deficit of $11,344,000, an
increase in working capital of $1,789,000 from a deficiency of $13,133,000 at
the end of fiscal 1999. For the nine months ended July 2, 2000, the Company's
accounts receivable and inventories declined by $185,000 and $295,000,
respectively, when compared with September 30, 1999 levels. The current portion
of debt decreased by $1,005,000 to $7,747,000 from $8,752,000 as the revolving
line of credit and mortgage debt were paid down by utilizing cash generated from
operations and $900,000 of shareholder debentures were reclassified to long term
debt reflecting the three year extension as described in Note 4.
Management's plans with regard to the existing working capital deficiency are to
continue 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 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 and cost
overruns on existing contracts with the U.S. Army and Zhagrus. For further
discussion, see Part I, Note 5 - "Commitments and Contingencies". These
potential liabilities include a contested $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
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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, 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 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.
Impact of Year 2000
The Company has completed all software modifications and computer systems
upgrades considered by management to be required to address potential problems
relating to Year 2000 date processing. Management believes that the Company's
principal vendors have also completed any required modifications and upgrades.
The Company has experienced no problems to date related to the Year 2000. The
Company invested approximately $250,000 for Year 2000 compliance through July 2,
2000.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material changes to the legal proceedings as discussed in the
Company's Form 10-K for the year ended September 30, 1999; "Part I - Item 3 -
Legal Proceedings" other than as described below.
The plaintiffs in Zhagrus Environmental, Inc. et. al. v. Nuclear Metals, Inc.
et.al. filed motions for partial summary judgement on the portion of the claim
relating to the balance due (approximately $3.5 million) on the material removed
from the Holding Basin including amounts in excess of the contractual maximum
and for dismissal of the Company's counterclaim. The Company's opposition to
these motions was heard on May 11, 2000. On July 10, 2000, the Court granted the
plaintiffs' motion for partial summary judgement. On July 14, 2000, the Court
allowed the plaintiff's motion to dismiss the Company's counterclaim without
prejudice to the Company's right to their affirmative defenses. On July 20,
2000, the plaintiff filed a motion to amend the partial summary judgement to
include pre-judgement interest. The Court has not yet ruled on this motion. The
Company believes there are material issues of fact relating to the remaining
$5.0 million of the claim. Should the plaintiff execute on the partial summary
judgement, 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.
On July 20, 2000, the Massachusetts Department of Environmental Protection
issued a Notice of Responsibility ("NOR") to the U.S. Army making them a
Potentially Responsible Party ("PRP") at the Company's Concord property. The NOR
also contained a request for information from the U.S. Army outlining their role
as an operator and/or arranger for the holding basin contamination at the
Company's Concord site. On July 27, 2000, the United States Environmental
Protection Agency ("EPA") issued a notice of its intent to list the Company's
Concord site on the National Priorities List ("NPL") also known as the Superfund
list. The Company and the public have 60 days to respond to the final Hazard
Ranking System package. While the primary purpose of the NPL is to inform local
communities of the growing problem of inactive hazardous waste sites around the
country most urgently in need of cleanup, once a site is listed on the NPL, the
ramifications are significant and substantive. The effect of having a site
listed typically include, but are not limited to, having the site involved in
extensive and prolonged litigation; reducing the ability to transfer the
property because it is less desirable; possible loss in fair market value
because of the extensive work, time and expense for removal or remedial action
(often for 8 to 14 years); and it may become more difficult to refinance the
property. The Company's Concord site is not inactive, the community is very much
aware of the site conditions and there are now two identified PRP's, the Company
and the U.S. Army. EPA's policy is to require the PRP's to perform response
actions and to fund the cleanup rather than being financed by the Superfund
program.
Item 3. DEFAULTS UPON SENIOR SECURITIES
The Company is technically in default of certain financial covenants under the
bank arrangement
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with its principal lender. However, on June 23, 1999, the Company entered into
an agreement with its principal lender to forbear on all collection actions
until February 15, 2000. On November 12, 1999, the Company entered into an
agreement to further extend the maturity to August 15, 2000. On August 4, 2000,
the Company entered into an agreement to further extend the maturity to April
15, 2001.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule (included in electronic copy only)
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended July 2,
2000.
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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 16, 2000 By: /s/ Robert E. Quinn
Robert E. Quinn
President and Chief Executive Officer
Date: August 16, 2000 By: /s/ Gary W. Mattheson
Gary W. Mattheson
Chief Financial Officer
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