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 January 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 January 31, 2000 there were issued and outstanding 4,800,674 shares of the
Registrant's Common Stock.
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
STARMET CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
January 2, September 30,
2000 1999
------------ -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 19,000 $ 14,000
Restricted cash 238,000 238,000
Accounts receivable, net of allowances for doubtful
accounts of $200,000 at January 2, 2000 and
September 30, 1999 2,887,000 3,535,000
Inventories 2,471,000 2,426,000
Other current assets 449,000 415,000
------------ ------------
Total current assets 6,064,000 6,628,000
------------ ------------
Property, Plant and Equipment: 43,949,000 43,756,000
Less accumulated depreciation 28,130,000 27,645,000
------------ ------------
Net property, plant and equipment 15,819,000 16,111,000
------------ ------------
Noncurrent Inventory 1,222,000 1,309,000
Other Assets 1,808,000 1,808,000
------------ ------------
$ 24,913,000 $ 25,856,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of longterm obligations $ 8,326,000 $ 8,752,000
Accounts payable 5,949,000 6,084,000
Accrued payroll and related costs 624,000 670,000
Other accrued expenses 3,643,000 4,255,000
------------ ------------
Total current liabilities 18,542,000 19,761,000
Notes Payable to Shareholders 1,395,000 1,375,000
------------ ------------
Stockholders' Equity:
Common stock, par value $.10; 15,000,000 shares
authorized; 4,800,674 issued and outstanding at
January 2, 2000 and 4,790,674 issued and
outstanding at September 30, 1999 480,000 479,000
Additional paidin capital 14,871,000 14,839,000
Accumulated deficit (10,375,000) (10,598,000)
------------ ------------
Total Stockholders' Equity 4,976,000 4,720,000
------------ ------------
$ 24,913,000 $ 25,856,000
============ ============
</TABLE>
2
<PAGE>
STARMET CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED
---------------------------
January 2, December 31,
2000 1998
----------- -----------
Net sales and contract revenues $ 5,635,000 $ 7,419,000
Cost of sales 4,052,000 5,372,000
----------- -----------
Gross profit 1,583,000 2,047,000
Selling, general and administrative 999,000 1,280,000
Research and development 88,000 433,000
----------- -----------
Operating income 496,000 334,000
Other expense 14,000 26,000
Interest expense 259,000 395,000
----------- -----------
Net income (loss) $ 223,000 $ (87,000)
=========== ===========
Per Share Information:
Basic net income (loss) per common share $ 0.05 $ (0.02)
=========== ===========
Weighted average number of common shares
outstanding 4,794,000 4,791,000
=========== ===========
Diluted net income (loss) per common and dilutive
potential common shares outstanding
$ 0.04 $ (0.02)
=========== ===========
Weighted average number of common and dilutive
potential common shares outstanding 5,954,000 4,791,000
=========== ===========
3
<PAGE>
<TABLE>
<CAPTION>
STARMET CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
THREE MONTHS ENDED
--------------------------------
January 2, December 31,
2000 1998
----------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 223,000 $ (87,000)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization 505,000 511,000
Changes in assets and liabilities, net:
(Increase) decrease in accounts receivable 649,000 222,000
(Increase) decrease in inventories 42,000 481,000
Increase (decrease) in accounts payable and
accrued expenses (792,000) (1,105,000)
(Increase) decrease in other assets (35,000) 45,000
----------- -----------
Net cash provided by operating activities 592,000 67,000
----------- -----------
Cash flows from investing activities:
Capital expenditures, net (193,000) (282,000)
----------- -----------
Net cash used in investing activities (193,000) (282,000)
----------- -----------
Cash flows from financing activities:
Principal payments under long-term obligations (55,000) (66,000)
Net repayments of bank debt (371,000) (457,000)
Proceeds from stock issuance 33,000 --
Proceeds from notes payable to shareholders and
warrants -- 500,000
----------- -----------
Net cash used in financing activities (393,000) (23,000)
----------- -----------
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 258,000 327,000
----------- -----------
$ 6,000 $ (238,000)
=========== ===========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 245,000 $ 209,000
</TABLE>
4
<PAGE>
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 January 2, 2000 and the results of their operations and
cash flows for the three months ended January 2, 2000 and December 31, 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, 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 January 2, 2000 and September
30, 1999 consist of:
January 2, 2000 September 30, 1999
----------------- ------------------
Raw Materials $1,103,000 $1,324,000
Work-in progress 1,901,000 2,040,000
Finished Goods 689,000 371,000
---------- ----------
Total inventory 3,693,000 3,735,000
Less current inventory 2,471,000 2,426,000
---------- ----------
Non current inventory $1,222,000 $1,309,000
========== ==========
5
<PAGE>
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 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:
Three Months Ended
------------------------------
January 2, December 31,
2000 1998
------------ ------------
Weighted average common shares outstanding 4,794,000 4,791,000
Dilutive potential common shares 1,160,000 --
--------- ---------
Diluted common shares 5,954,000 4,791,000
--------- ---------
Options and warrants excluded from diluted
loss per common share as their effect
would be antidilutive -- 769,000
========= =========
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. The agreement also includes various extension
periods if certain conditions are met prior to August 15, 2000 which could
extend the final maturity to June 10, 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 were 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
6
<PAGE>
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.
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 August 15,
2000. The Company has notified the U.S. Army that it is discontinuing penetrator
production and that it will cease using related government furnished equipment.
Accordingly, the U.S. Army and the Company are negotiating the removal of such
equipment and the decommissioning and decontamination of the affected portions
of the Company's facilities. The Company has submitted a proposal to the U.S.
Army requesting the modification and funding of an existing facilitization
contract, which, in addition to other work proposed therein, would provide the
Company with funding to cover some of the estimated D&D costs, which are
material. The Company is in the process of negotiating the contract modification
scope of work with the U.S. Army, but there is no assurance that Army funding
will be provided. If this funding is not provided, the Company's business,
results of operations and financial condition would be materially and adversely
affected.
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
7
<PAGE>
specified level. Under the Zhagrus contract, the Company agreed to pay an
additional fee per cubic yard of excess material removed dependant 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. 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 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 contested Zhagrus claim of $5.0 million). The
Company believes that all or a certain portion of such excess costs may be
recoverable pursuant to a contract modification. Alternatively, the Company
believes that all or a certain portion of such costs, subject to confirmation by
government auditors, are recoverable as allowable overhead on future government
contracts, which the Company expects to be awarded. In December 1998, the
Company submitted an engineering change proposal to the U.S. Army seeking a
contract modification that would provide the Company with funding to cover such
estimated excess remediation costs. In February 1999, based on discussions with
the U.S. Army, the Company submitted a claim under P.L. 85-804 requesting
payment of these excess costs. In June 1999, the U.S. Army denied the latter
request. In August 1999, the Company re-submitted the engineering change
proposal and is awaiting a response from the U.S. Army. If these costs,
potentially ranging from $1.7 to $8.0 million, are incurred by the Company
without reimbursement or funding from other sources, including the U.S. Army,
the Company's business, results of operations 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, 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.
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
8
<PAGE>
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 receivership 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.
Legal Proceedings
The Company is named as a Potentially Responsible Party ("PRP") in regard to the
Maxey Flats, Kentucky, Superfund Site. This site was used until 1977 as a
licensed and approved low-level radioactive waste disposal site. A committee of
PRPs, including the Company, has submitted a remedial investigation and
feasibility study report to the Environmental Protection Agency. The agreement
signed by the settling parties in July 1995 outlines the responsibilities of all
PRPs and states that the PRPs will undertake the initial remedial phase ("IRP")
of the site remediation at an estimated cost of $60 million. Based upon the
percentage of responsibility allocated to the Company, its remaining liability
at this site is expected to be approximately $70,000 over 8 years.
On February 5, 1999, the Company was served with a summons and complaint in a
common law diversity tort action filed in the United States District Court for
the Eastern District of Tennessee, entitled Orick v. Brush Wellman, et al.,
3:98-CV-652 (E.D. Tenn.), naming as defendants eight corporations, including
Starmet Corporation. The complaint also names the United States of America as a
defendant under the Federal Tort Claims Act. The complaint alleges that the
defendants failed to adequately warn the plaintiff, an employee of a facility in
Tennessee that processes beryllium products, regarding the dangers of beryllium
and beryllium manufacturing. The complaint seeks $1 million in compensatory
damages against the Company, as well as punitive damages of $10 million. The
Company believes that the claims are without merit and intends to vigorously
defend against the claim. However, there can be no assurance that this
litigation will ultimately be resolved on terms that are favorable to the
Company.
On February 17, 1999, the Company was served with a summons and complaint in a
breach of contract action filed in The Superior Court, County of Middlesex,
Commonwealth of Massachusetts, entitled Zhagrus Environmental, Inc. et. al. v.
Nuclear Metals, Inc. et. al., MCV99-01057, naming the Company and its
subsidiaries as defendants. The Company removed the case to federal district
court in Massachusetts on March 18, 1999, where it was docketed as Civil Action
No. 99-CV-10600-RGS. The complaint alleges, among other things, that the
defendants materially breached their agreement with the plaintiff, Zhagrus
Environmental Inc., entitled "Holding Basin Remediation and Waste Disposal
Agreement" dated May 8, 1997, and that plaintiffs, Zhagrus and Envirocare of
Utah, Inc., are entitled to a judgment in the amount of at least $8,368,883 for
services rendered pursuant to such agreement. On June 18, 1999, the Company
filed its answer to the complaint denying liability, and asserted a counterclaim
against
9
<PAGE>
the plaintiffs alleging, among other things, breach of contract, breach of
implied covenant of good faith, deceit, and violation of Mass. Gen. Laws c. 93A.
On July 7, 1999, the Company and plaintiffs agreed, pending resolution of the
lawsuit, to entry of an order placing certain limited restrictions on the
Company's ability to enter into significant transactions without affording prior
notice to the plaintiffs. Although the Company believes that it has valid
defenses to the claims alleged in this complaint, there can be no assurance that
this litigation will ultimately be resolved on terms that are favorable to the
Company. The Company has sought relief from the Army for a portion of the
amounts claimed by the plaintiffs, to the extent that the Company is otherwise
required to pay those amounts. Of the $8,368,883, $3.5 million has been recorded
as a liability. The Company believes there are material issues of fact relating
to the amount of this liability ($3.5 million) which are the subject of the
Zhagrus litigation.
On February 24, 1999, the Company was served with a summons and complaint in a
common law diversity tort action filed in the United States District Court for
the Eastern District of Tennessee, entitled Jerry Lynn Hall & Rose Mary Hall v.
Brush Wellman, et al., 3:99-CV-110 (E.D. Tenn.), naming as defendants fourteen
corporations, including Starmet Corporation. The complaint alleges that the
defendants failed to adequately warn the plaintiff, an employee of a facility in
Tennessee that processes beryllium products, regarding the dangers of beryllium
and beryllium manufacturing. The complaint seeks $6 million in compensatory
damages against the Company, as well as punitive damages of $10 million. The
Company believes that the claims are without merit and intends to vigorously
defend against the claim. However, there can be no assurance that this
litigation will ultimately be resolved on terms that are favorable to the
Company.
On December 13, 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 Jesse McDonald v. Brush Wellman, et
al., 3:99-CV-642 (E.D. Tenn.), naming as defendants thirteen corporations,
including Starmet Corporation. The complaint alleges that the defendants failed
to adequately warn the plaintiff, an employee of a facility in Tennessee that
processes beryllium products, regarding the dangers of beryllium and beryllium
manufacturing. The complaint seeks $5 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 December 20, 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 John Langley v. Brush Wellman, et
al., 3:99-CV-655 (E.D. Tenn.), naming as defendants thirteen corporations,
including Starmet Corporation. The complaint alleges that the defendants failed
to adequately warn the plaintiff, an employee of a facility in Tennessee that
processes beryllium products, regarding the dangers of beryllium and beryllium
manufacturing. The complaint seeks $6 million in compensatory damages against
the Company, as well as punitive damages of $10 million. The Company believes
that the claims are without merit and intends to vigorously defend against the
claim. However, there can be no assurance that this litigation will ultimately
be resolved on terms that are favorable to the Company.
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
10
<PAGE>
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
First Quarter Fiscal 2000 Compared With First Quarter Fiscal 1999
Net sales decreased by $1,784,000, or 24%, to $5,635,000 in the first quarter of
fiscal 2000, as compared to the first quarter of the fiscal 1999. Sales in the
Specialty Metal products segment decreased by $2,298,000, or 66%. Sales in the
Composite Materials products segment decreased by $237,000, or 24%. Sales in the
Uranium Services and Recycle segment increased by $1,121,000, or 77%. The sales
decrease in the Specialty Metal products segment was due primarily to the
cessation of both foreign and domestic penetrator production. The Company
expects that no revenue will be derived from DU penetrator operations after the
fourth quarter of fiscal 1999. The sales decrease in the Composite Materials
product segment was due to a decreased level of activity on the Comanche
helicopter Beralcast(R) prototype contract which was partially offset by
increased commercial orders primarily for the semiconductor manufacturing
industry. The increase in sales in the Uranium Services and Recycle segment is
due to increased production on the UF6 conversion contract with United States
Enrichment Corporation and increased counterweight refurbishment services as the
Robins Air Force Base contract began in the third quarter of fiscal 1999 and
will continue for the next four years.
Gross profit in the first quarter decreased by $464,000, or 23%, to $1,583,000,
as compared to the first quarter of fiscal 1999. The decrease in gross profit
for the quarter is attributable to the reduced sales levels. As a percentage of
total revenue, gross margin improved slightly to 28.1%as compared to 27.6% for
the first quarter of fiscal 1999. The improvement is primarily attributable to
reduced indirect labor and manufacturing overhead, partially offset by certain
research and development costs, discussed below, which are now appropriately
charged to cost of sales.
Selling, general and administrative expenses decreased by $281,000, or 22%, to
$999,000 in the first quarter of fiscal 2000, as compared to $1,280,000 in the
first 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 efforts on fluorine mining were appropriately charged to cost of
sales on the UF6 conversion contract in the first quarter of fiscal 2000.
Interest expense decreased to $259,000 in the first quarter of fiscal 2000 from
$395,000 in the first quarter 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
11
<PAGE>
amended its debt agreements with its principal lender a number of times. The
Company has been served a complaint for breach of contract by one of its
principal vendors. In addition, the Company has significant potential
liabilities associated with discontinued or suspended aspects of its business
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 vendor payment plans, and continuing
to restructure internally.
At January 2, 2000, the Company had a working capital deficit of $12,478,000, an
increase in working capital of $655,000 from a deficiency of $13,133,000 at the
end of fiscal 1999. For the three months ended January 2, 2000, the Company's
accounts receivable and inventories decreased by $648,000 and $42,000,
respectively, compared with September 30, 1999 levels. The current portion of
long-term obligations decreased by $426,000 to $8,326,000 from $8,752,000 as the
revolving line of credit was paid down by $371,000 utilizing the cash generated
from operations.
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 is also managing payment
plans with certain suppliers.
The Company has potential liabilities associated with discontinued or suspended
aspects of its depleted uranium business, including costs associated with site
remediation, decontamination and decommissioning of existing facilities, cost
overruns on existing contracts with the U.S. Army and Zhagrus. For further
discussion, see Part 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 States Army, in
a Memorandum of Decision dated September 13, 1996 (the "Memorandum of Decision")
pursuant to Public Law 85-804, agreed that it would fund a substantial portion
of the remediation costs for the Company's Concord holding basin site. As a
result of cost overruns in connection with the holding basin remediation, the
Company has requested additional remediation funds from the Army; however, while
the engineering change proposal is being reviewed by the Army, there is
presently no approved funding and no specific written agreement from the U.S.
Government to reimburse or fund these overrun costs. No reserve for these
potential liabilities has been taken on the Company's financial statements. If
these liabilities become the responsibility of the Company, the Company would be
forced to consider receivership 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.
12
<PAGE>
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 January
2, 2000.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
13
<PAGE>
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".
Item 2. Changes in Securities and Use of Proceeds
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 were 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. In
issuing the warrants, the Company relied upon the exemption from registration
provided in Section 4 (2) of the Securities Act of 1933.
Item 3. DEFAULTS UPON SENIOR SECURITIES
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. The
agreement also includes various extension periods if certain conditions are met
prior to August 15, 2000 which could extend the final maturity to June 10, 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 January 2,
2000.
14
<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: February 16, 2000 By: /s/ Robert E. Quinn
Robert E. Quinn
President and Chief Executive Officer
Date: February 16, 2000 By: /s/ Gary W. Mattheson
Gary W. Mattheson
Chief Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited financial statements of Starmet Corporation at and for the period
ended January 2, 2000 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> JAN-02-2000
<CASH> 257,000
<SECURITIES> 0
<RECEIVABLES> 3,087,000
<ALLOWANCES> 200,000
<INVENTORY> 2,471,000
<CURRENT-ASSETS> 6,064,000
<PP&E> 43,949,000
<DEPRECIATION> 28,130,000
<TOTAL-ASSETS> 24,913,000
<CURRENT-LIABILITIES> 18,542,000
<BONDS> 0
0
0
<COMMON> 480,000
<OTHER-SE> 4,496,000
<TOTAL-LIABILITY-AND-EQUITY> 24,913,000
<SALES> 5,635,000
<TOTAL-REVENUES> 5,635,000
<CGS> 4,052,000
<TOTAL-COSTS> 5,139,000
<OTHER-EXPENSES> 14,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 259,000
<INCOME-PRETAX> 223,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 223,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 223,000
<EPS-BASIC> 0.05
<EPS-DILUTED> 0.04
</TABLE>
