<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
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 number 0-21042
-------
Molten Metal Technology, Inc.
-----------------------------
(Exact name of registrant as specified in its charter)
Delaware 52-1659959
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400-2 Totten Pond Road
Waltham, MA 02154
----------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 487-9700
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 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 par value 23,602,980
- ---------------------------- ----------------------------
Class Outstanding at June 30, 1997
<PAGE> 2
MOLTEN METAL TECHNOLOGY, INC.
INDEX
PAGE NO.
--------
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
Consolidated Balance Sheet - June 30, 1997 and
December 31, 1996 3
Consolidated Statement of Operations for the
quarters ended June 30, 1997 and 1996 and for
the six months ended June 30, 1997 and 1996 4
Consolidated Statement of Cash Flows for the six
months ended June 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 11-18
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 19
Item 2. Changes in Securities *
Item 3. Defaults Upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders *
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 20
- ----------
* No information provided due to the inapplicability of item.
2
<PAGE> 3
MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,408,046 $ 19,679,104
Short-term investments 36,147,185 109,388,659
Accounts receivable, net of allowance for
doubtful accounts of $150,000 at June 30, 1997 4,434,221 2,573,306
Unbilled accounts receivable 783,057 --
Accounts receivable from affiliates -- 5,525,491
Unbilled accounts receivable from affiliates 783,937 798,980
Other receivables 6,291,667 --
Prepaid expenses and other current assets 6,204,300 6,300,727
------------- ------------
Total current assets 63,052,413 144,266,267
Restricted cash 1,798,220 2,592,925
Fixed assets, net 150,265,646 103,553,945
Intangible assets, net 18,539,779 16,363,201
Long-term receivable 19,000,000 --
Other assets 8,403,182 5,968,911
------------- ------------
$ 261,059,240 $272,745,249
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,792,949 $ 1,884,486
Accounts payable 13,895,425 19,273,058
Accrued expenses 19,164,219 6,082,746
Accrued interest 2,107,391 2,161,297
Deferred revenue 3,218,769 1,647,472
Deferred income from affiliate -- 4,586,870
------------- ------------
Total current liabilities 40,178,753 35,635,929
------------- ------------
Long-term debt 202,750,000 164,753,334
------------- ------------
Due to related parties 1,385,889 1,385,889
------------- ------------
Deferred income from affiliate 2,383,918 2,437,500
------------- ------------
Accumulated losses of affiliate in
excess of investment -- 5,020,765
------------- ------------
Stockholders' equity:
Preferred stock, $.01 par value, 3,000 shares
authorized, no shares issued or outstanding -- --
Common stock, $.01 par value, 100,000,000 shares
authorized; 23,713,380 shares issued and
23,602,980 outstanding at June 30, 1997 and
23,643,707 shares issued and 23,603,707
outstanding at December 31, 1996 237,134 236,437
Additional paid-in capital 163,545,308 163,124,587
Valuation allowance for short-term investments 33,128 (86,653)
Accumulated deficit (147,159,078) (97,820,411)
------------- ------------
16,656,492 65,453,960
Less: Treasury stock, 110,400 shares at
June 30, 1997 and 40,000 shares at
December 31, 1996, at cost (1,251,319) (482,504)
Less: Deferred compensation (1,044,493) (1,459,624)
------------- ------------
Total stockholders' equity 14,360,680 63,511,832
------------- ------------
$ 261,059,240 $272,745,249
============= ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
1997 1996 1997 1996
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenue:
Waste services $ 5,093,368 $ -- $ 9,038,330 $ --
Equipment sales 485,663 -- 1,193,024 --
Research and development ("R&D") 318,750 3,785,488 518,750 5,043,297
Construction, R&D and consulting
from affiliates 663,039 10,318,596 783,937 27,684,332
Technology transfer and success fees
from affiliate -- 3,750,000 -- 7,500,000
------------ ----------- ------------ -----------
6,560,820 17,854,084 11,534,041 40,227,629
------------ ----------- ------------ -----------
Operating expenses:
Cost of revenue - Waste services 9,971,873 -- 17,463,543 --
Cost of revenue - Equipment sales 337,133 -- 592,287 --
Cost of revenue - R&D 181,789 3,724,952 287,669 4,903,283
Cost of revenue - construction, R&D,
consulting, technology transfer
and success fees from affiliates 552,245 10,669,969 658,804 25,814,910
R&D 6,416,452 4,618,838 15,547,991 9,327,001
Selling, general and
administrative ("SG&A") 7,723,670 2,210,886 14,663,727 4,629,218
------------ ----------- ------------ -----------
25,183,162 21,224,645 49,214,021 44,674,412
Equity income (loss) from affiliate (6,062,612) 2,306,724 (9,740,565) 2,676,036
------------ ----------- ------------ -----------
Loss from operations (24,684,954) (1,063,837) (47,420,545) (1,770,747)
Other income (expense):
Interest income 909,380 2,230,649 2,480,617 3,585,378
Interest expense (2,089,765) (1,675,308) (4,398,739) (2,107,699)
------------ ----------- ------------ -----------
Net income (loss) $(25,865,339) $ (508,496) $(49,338,667) $ (293,068)
============ =========== ============ ===========
Net income (loss) per share $ (1.10) $ (0.02) $ (2.09) $ (0.01)
============ =========== ============ ===========
Weighted average common and common
equivalent shares outstanding 23,600,212 23,336,091 23,591,090 23,098,323
============ =========== ============ ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(49,338,667) $ (293,068)
------------ ------------
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
(net of assets acquired from VECTRA):
Depreciation and amortization 5,770,975 2,750,868
Equity loss (income) from affiliate 9,740,565 (2,676,036)
Compensation expense related to restricted stock
and common stock options 415,131 120,903
Increase in accounts receivable (2,149,464) (3,014,234)
Decrease (increase) in accounts receivable from affiliate 5,540,534 (10,623,612)
Decrease (increase) in prepaid expenses and
other current assets 1,027,004 (3,283,467)
Increase in other assets (489,958) (411,846)
Decrease in accounts payable (7,070,863) (2,353,347)
Increase in accrued expenses 1,627,091 1,275,106
Increase (decrease) in accrued interest (53,906) 1,317,699
Increase (decrease) in deferred revenue 1,571,297 (3,500,001)
Increase (decrease) in deferred income
from affiliate (206,145) 2,144,875
------------ ------------
Net cash provided by (used in) operating activities (33,616,406) (18,546,160)
------------ ------------
Cash flows from investing activities:
Expenditures for fixed assets (37,969,438) (13,251,320)
Purchase of intangible assets (539,294) (1,055,031)
Cash paid for acquisition of VECTRA assets (3,950,559) --
Cash investments in affiliates (9,180,521) --
Cash received from M4 restructuring 271,468 --
Redemption of short-term investments, net 73,361,255 (50,480,958)
Decrease in restricted cash 794,705 1,670,583
------------ ------------
Net cash provided by investing activities 22,787,616 (63,116,726)
------------ ------------
Cash flows from financing activities:
Proceeds from issuances of common stock 421,418 2,459,358
Purchase of treasury stock (768,815) --
Net proceeds from issuance of long-term debt -- 139,338,826
Payments to related parties -- (88,697)
Principal repayments of long-term debt (94,871) (95,592)
Net cash provided by (used in) financing activities (442,268) 141,613,895
------------ ------------
Increase (decrease) in cash and cash equivalents (11,271,058) 59,951,009
Cash and cash equivalents at beginning of period 19,679,104 6,644,856
------------ ------------
Cash and cash equivalents at end of period $ 8,408,046 $ 66,595,865
============ ============
Additional disclosure of non-cash investing and
financing activities:
Issuance of common stock in exchange for
investment in affiliate $ -- $ 9,770,587
============ ============
</TABLE>
As a result of the restructuring of M4 and the consolidation of M4 with the
Company for financial reporting purposes, the Company assumed liabilities of
$51,147,612 and obtained assets of $45,133,064 which consisted primarily of
receivables from LMC and fixed and intangible assets.
In conjunction with the restructuring, the Company offset deferred income of
$4,434,307 against fixed assets obtained from M4.
See notes to consolidated financial statements.
5
<PAGE> 6
MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
Molten Metal Technology, Inc. (the "Company" or "MMT") is an environmental
technology company engaged in the commercialization and continued development of
its proprietary processing technology, Catalytic Extraction Processing ("CEP").
The core of CEP is a molten metal bath into which feedstocks and selected
chemicals can be introduced. The catalytic and solvent effects of the molten
metal bath causes feedstocks to break down into their constituent elements and
dissolve in the molten metal. The addition of various selected chemicals to the
molten metal bath allows feedstocks to reform and be recovered as different
materials which generally can be re-used as a raw material by the feedstock
generator or can be sold to other users.
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Net loss per share is determined by dividing net loss by the weighted average
number of common shares outstanding during the period. Common share equivalents,
which consist of common stock that may be issuable upon exercise of outstanding
stock options and warrants, have been excluded from the weighted average number
of common shares since their effect is anti-dilutive. The effect of the assumed
conversion of the Company's 5 1/2% Convertible Subordinated Notes Due 2006 was
anti-dilutive for the periods presented.
In February 1997, Financial Accounting Standards No. 128 "Earnings Per Share"
("FAS 128") was issued by the Financial Accounting Standards Board. FAS 128
specifies modifications to the calculation of earnings per share from that
currently used by the Company. Under FAS 128, "basic earnings per share" will be
calculated based upon the weighted average number of common shares actually
outstanding, and "diluted earnings per share" will be calculated based upon the
weighted average number of common shares outstanding and other potential common
shares (stock options, warrants and convertible debt) if they are dilutive. FAS
128 is effective for the Company's fourth quarter of 1997 and will be adopted at
that time. Had the Company determined earnings per share in accordance with FAS
128, basic earnings (loss) per share and diluted earnings (loss) per share for
the periods ended June 30, 1997 and 1996 would not have been materially
different from the net income (loss) per share reported by the Company.
Certain reclassifications have been made for consistent presentation. The
reclassifications have no effect on the net loss for the periods ended June 30,
1996.
6
<PAGE> 7
The information furnished is unaudited and reflects all adjustments (consisting
of only normal recurring adjustments) which, in the opinion of management, are
necessary for a fair presentation of the financial position and results of
operations for the interim periods. The accompanying financial statements should
be read in conjunction with the Company's audited financial statements and
related footnotes for the year ended December 31, 1996 which are included in the
Company's annual report on Form 10-K for the year ended December 31, 1996. The
results of operations for the quarter ended June 30, 1997 are not necessarily
indicative of the results to be expected for the full year.
NOTE 2. EQUITY TRANSACTIONS
During the quarter ended June 30, 1997, 6,316 shares of common stock were issued
upon the exercise of options.
NOTE 3. RESTRUCTURING OF M4
On June 16, 1997, the Company and Lockheed Martin Corporation ("LMC") executed
agreements to restructure their relationship embodied in M4 Environmental L.P.
("M4"). The agreement stipulates the following: (1) LMC has the exclusive right
to lead and pursue contracts for the clean up of the US Department of Energy's
("DOE") tanked waste site in Hanford, Washington, and the Company will provide
directly to LMC certain construction and development services with respect to
Q-CEP(R). (2) The Company has the exclusive right to lead and pursue the
worldwide opportunities for processing UF6 and LMC has the right to participate
in this market on a case-by-case basis, subject to mutual agreement of the
parties. (3) The Company and LMC formed a new limited liability company to be
their exclusive vehicle to pursue the processing of chemical weapons worldwide.
(4) Retech was transferred to LMC. (5) The Company became the sole owner of M4
of which the principal asset is the Technology Center in Oak Ridge, Tennessee
(the "M4 Technology Center"). The Company is responsible for the operation of
the M4 Technology Center and is entitled to all future revenue from such
operations. The Company and LMC have agreed to share equally the debt service
of the $38 million of bonds issued by the Industrial Development Board of Oak
Ridge relating to the M4 Technology Center. (6) LMC terminated its line of
credit with M4 and deemed the approximately $15.8 million aggregate principal
and accrued interest outstanding thereunder to have been paid in full and the
Company contributed $14.6 million in outstanding accounts receivable to the
capital of M4. (7) LMC and the Company generally share equally in substantially
all of the costs of the restructuring. (8) All existing agreements between the
Company, LMC and M4 are terminated, including the CEP license to M4. (9) LMC
and the Company established a first offer process pursuant to which they will
jointly discuss new market opportunities within the DOE and US Department of
Defense ("DoD") markets prior to pursuing them individually.
Prior to the restructuring, the Company accounted for its investment in M4 using
the equity method. Under the M4 limited partnership agreement, the Company and
LMC shared equally in M4's revenues and other income and all expenses were
allocated to
7
<PAGE> 8
LMC until the capital accounts of the Company and LMC became equal. The capital
accounts became equal in the fourth quarter of 1996, and from that date until
March 26, 1997 the Company and LMC shared equally in the losses of M4. On March
26, 1997, the Company and LMC executed a letter of intent that contemplated the
restructuring described above. After the date of the letter of intent, the
Company and LMC agreed to fund the operations of M4 in a manner consistent with
the terms of the restructuring agreements and the Company recognized losses from
M4 in accordance with its funding obligation. Summarized income statement
information of M4 is presented below:
<TABLE>
<CAPTION>
Period April 1, 1997 Period January 1, 1997
through June 16, 1997 through June 16, 1997
--------------------- ---------------------
<S> <C> <C>
Revenue $ 7,261,000 $ 15,995,000
Expenses $(15,281,000) $(31,370,000)
Net loss $ (8,020,000) $(15,375,000)
The Company's share of M4's loss $ (6,063,000) $ (9,741,000)
<CAPTION>
Quarter ended Six months ended
June 30, 1996 June 30, 1996
------------- ----------------
<S> <C> <C>
Revenue $ 4,409,000 $ 4,809,000
Other income 251,000 597,000
------------ ------------
Total revenue and other income $ 4,660,000 $ 5,406,000
Expenses $(15,369,000) $(20,731,000)
------------ ------------
Net loss $(10,709,000) $(15,325,000)
============ ============
The Company's share of M4's
total revenue and other income $ 2,307,000 $ 2,676,000
</TABLE>
Effective on June 16, 1997, M4 became a wholly owned subsidiary of the Company.
Accordingly, use of the equity method of accounting for the Company's investment
in M4 ceased as of that date and M4 was consolidated with the Company for
financial reporting purposes from that date forward. As a result of the
restructuring, the Company assumed liabilities of $51,147,612 and obtained
assets of $45,133,064 which consisted primarily of receivables from LMC and
fixed and intangible assets.
In periods prior to the restructuring, the Company provided M4 with construction
services. For items that were capitalized by M4, the Company deferred the
portion of the gross profit representing the Company's designated ownership
interest related to such sales. The deferred income was being recognized by the
Company as the related assets were depreciated by M4. The deferred income
balance at June 16, 1997 related to assets that, as a result of the
restructuring, are now owned by the Company has been offset against the carrying
value of such assets.
In 1996, the Company sold the rights to the Japanese chemical weapons market to
M4 and deferred the portion of the gross profit representing the Company's
designated ownership interest. As a result of the restructuring, these rights
are now held by the
8
<PAGE> 9
new limited liability company (the "LLC") which will pursue the worldwide
chemical weapons market. Accordingly, the deferred income related to the sale of
the rights to the Japanese chemical weapons market will be recognized as a
reduction of cost of revenue as the rights are amortized by the LLC.
The net amount of funding due from LMC under the restructuring agreements is
recorded as short-term and long-term receivables of $6,292,000 and $19,000,000,
respectively.
NOTE 4. JAPANESE JOINT VENTURE
In February 1996, MMT, Nichimen Corporation, one of Japan's major trading
companies, and NKK Plant Engineering Corporation, one of Japan's largest
engineering providers of municipal waste systems ("NKP"), signed a letter of
intent to form a joint venture to process fly ash produced by Japanese
municipal solid waste incinerators. A definitive agreement to form this joint
venture was executed in October 1996 by the Company, Nichimen and NKP. The
agreement grants the joint venture the exclusive right to introduce CEP to the
Japanese municipal incinerator ash market. The joint venture will employ MMT's
proprietary Cerex-CEP technology to process and recycle incinerator ash to
recover ceramic and metal products. Under the agreement, the Company owns 49%
of the joint venture, will receive a two percent royalty on all revenues of the
joint venture, and will receive a $12.5 million licensing fee, to be paid from
the joint venture's profits. The Company and the joint venture have entered
into an agreement pursuant to which the joint venture will purchase an initial
CEP system from MMT. The CEP system is to be delivered in the first quarter of
1998 for a fixed price of $7.9 million. During the six months ended June 30,
1997, the Company recognized revenue of $784,000 for engineering and
construction work performed under the agreement. Revenue under this agreement
is being recognized using the percentage of completion method based on the
ratio that costs incurred to date bear to estimated total costs at completion.
The parties expect that the joint venture will purchase a minimum of 29 CEP
systems from the Company over the first ten years of the joint venture's
operations, including the initial CEP system. There can be no assurances that
the joint venture will order any additional CEP systems from MMT or that such
systems, if ordered and delivered to Japan, will be able to successfully
process and recycle incinerator ash.
NOTE 5. LITIGATION
In February and March 1997, purchasers of the Company's common stock filed five
purported class action suits against the Company and certain of its present and
former directors and executive officers in the United States District Court for
the District of Massachusetts. The complaints variously allege that defendants
made false and misleading statements and disseminated financial statements not
prepared in accordance with generally accepted accounting principles, in
violation of federal securities laws and state law, in order to enhance the
value of the Company's common
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<PAGE> 10
stock and to enable the Company to issue securities and the individual
defendants to sell shares of the Company's common stock at inflated prices. Each
of the suits seeks compensatory damages for unspecified alleged losses during
the class periods, the longest of which extends from September 26, 1995 through
October 21, 1996. These actions are at an early procedural stage. While the
Company has not yet filed answers to the complaints, the Company intends to deny
liability with respect to these actions. However, the ultimate outcome cannot be
determined at present. As such, no provision for liability from these suits has
been made in the financial statements as of June 30, 1997.
The Company has certain contingent liabilities resulting from other litigation
and claims incident to the ordinary course of business. Management believes that
the probable resolution of such contingencies will not materially affect the
financial condition or results of operations of the Company.
10
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Revenues for the second quarter of 1997 decreased to $6,561,000 from $17,854,000
in the second quarter of 1996 and decreased to $11,534,000 for the first half of
1997 from $40,228,000 for the first half of 1996. The following table compares
sources of revenue for the periods ended June 30, 1997 and 1996:
<TABLE>
<CAPTION>
Quarter ended June 30,
------------------------
1997 1996
---- ----
<S> <C> <C>
Waste services $5,093,000 $ --
Equipment sales 486,000 --
Engineering and construction 663,000 9,241,000
R&D and consulting 319,000 4,863,000
Technology transfer and success fees -- 3,750,000
---------- -----------
$6,561,000 $17,854,000
========== ===========
<CAPTION>
Six Months ended June 30,
------------------------
1997 1996
---- ----
<S> <C> <C>
Waste services $ 9,038,000 $ --
Equipment sales 1,193,000 --
Engineering and construction 784,000 25,725,000
R&D and consulting 519,000 7,003,000
Technology transfer and success fees -- 7,500,000
---------- -----------
$11,534,000 $40,228,000
=========== ===========
</TABLE>
Waste services revenue is from processing, managing and handling radioactive
wastes through the Company's nuclear waste services division based in Oak Ridge,
Tennessee. The first quarter of 1997 marked the commercial start-up of the
Company's Quantum-CEP(R) Facility in Oak Ridge, Tennessee ("Q-CEP Facility") and
the commencement of commercial CEP operations. The Company also began operations
of its newly acquired waste service business from The Scientific Ecology Group,
Inc. ("SEG") and VECTRA Technologies, Inc. ("VECTRA"). The Company expects that
revenue from plant operations will continue to increase in future periods as
operations at the Q-CEP Facility ramp up and as commercial operations commence
at additional facilities in Oak Ridge, Tennessee and Bay City, Texas.
Equipment sales are from the sale of waste storage and processing equipment for
commercial low-level radioactive waste. The sales are a result of operations
related to the acquisitions from SEG and VECTRA which occurred in December 1996
and January 1997, respectively.
11
<PAGE> 12
During the six months ended June 30, 1996, the Company recognized $25.7 million
in revenue related to the engineering, design and construction of M4's
Technology Center. During the six months ended June 30, 1997, engineering and
construction revenue related solely to the engineering, design and construction
of an initial CEP system for the joint venture with Nichimen and NKP for the
processing of fly ash in Japan. The Company expects engineering and construction
revenue to increase in the next few quarters due to increased activities related
to engineering, design and construction of the initial CEP system for the joint
venture with Nichimen and NKP and for a demonstration CEP unit for the DOE's
tanked waste site in Hanford, Washington.
During the six months ended June 30, 1996, the Company recognized revenue
related to research and development and consulting contracts with M4 and the US
government. During the six months ended June 30, 1997, the Company recorded no
such revenue from M4 or the US government. The Company expects to continue with
research and development projects, some of which will be funded by third parties
and some of which will be funded from the Company's working capital. The Company
anticipates that the amount of both internally and externally funded research
and development will decrease over the next year.
There were no technology transfer and success fees for 1997. Technology transfer
and success fees for 1996 resulted from the recognition of a portion of the
original $14 million license fee from M4 and from plant start-up fees from M4.
Part of the Company's strategy is to license its technology under arrangements
which provide for up-front technology transfer fees, ongoing tolling fees,
license fees or royalties and the Company expects such revenues to increase in
future periods over the first half of 1997.
The existence and timing of revenues related to the Company's commercial
operations will depend on a number of factors, including the ability of the
Company and its affiliates to successfully market, permit and build CEP systems
on a timely and economic basis for their target markets, customer acceptance of
the technology, and competition from other companies in the Company's target
markets, and no assurances can be made in this regard.
Cost of revenues for the second quarter of 1997 decreased to $11,043,000 from
$14,395,000 in the second quarter of 1996 and decreased to $19,002,000 for the
first half of 1997 from $30,718,000 for the first half of 1996. The decreases
are primarily attributable to a reduction in cost reimbursement contracts for
R&D and engineering and construction activities.
R&D expenses for the second quarter of 1997 increased to $6,416,000 from
$4,619,000 in the second quarter of 1996 and increased to $15,548,000 for the
first half of 1997 from $9,327,000 for the first half of 1996. The increases
reflect a lower absorption of R&D expenses into cost of revenue due to a
reduction in cost reimbursement contracts. The
12
<PAGE> 13
Company expects that R&D costs will decrease during the remainder of 1997 as
efforts become more directed toward commercial operations. SG&A expenses for the
second quarter of 1997 increased to $7,724,000 from $2,211,000 in the second
quarter of 1996 and increased to $14,664,000 for the first half of 1997 from
$4,629,000 for the first half of 1996. The increases reflects a lower absorption
of SG&A expenses into cost of revenue due to a reduction in cost reimbursement
contracts. The Company is making efforts to decrease SG&A expenses in future
periods. The classification of expenses between cost of revenue, R&D and SG&A
will depend on the number and amount of future cost reimbursement contracts and
the related absorption of R&D and SG&A expenses into cost of revenue.
Prior to the restructuring of M4 in June 1997, the Company accounted for its
investment in M4 using the equity method. The Company recorded an equity loss of
$6,063,000 for the second quarter of 1997 compared to equity income of
$2,307,000 for the second quarter of 1996 and equity loss of $9,741,000 for the
first half of 1997 compared to equity income of $2,676,000 for the first half of
1996. Under the M4 limited partnership agreement, the Company and LMC shared
equally in M4's revenues and other income and all expenses were allocated to LMC
until the capital accounts of the Company and LMC were equal. During 1996, the
Company's and LMC's capital accounts were not equal and the Company recorded its
share of revenues and other income from M4 without recognizing any expenses from
M4. This resulted in the Company having equity income from M4 during the first
half of 1996. In the fourth quarter of 1996, the Company's and LMC's capital
accounts became equal and the Company began to share in the recognition of
expenses from M4. On March 26, 1997, the Company and LMC agreed to fund the
operations of M4 in a manner consistent with how the funding would occur after
the restructuring took place. The Company recognized revenue and expenses of M4
in line with how the funding occurred and, as a result, recorded equity losses
in 1997.
Interest income for the second quarter of 1997 decreased to $909,000 from
$2,231,000 in the second quarter of 1996 and decreased to $2,481,000 for the
first half of 1997 from $3,585,000 for the first half of 1996. The decreases are
due to the use of cash and short-term investments to fund commercial operations
and investment activities, including expenditures for fixed assets. Interest
expense for the second quarter of 1997 increased to $2,090,000 from $1,675,000
in the second quarter of 1996 and increased to $4,399,000 for the first half of
1997 from $2,108,000 for the first half of 1996. The increases are due to
interest on the Company's 5 1/2% Convertible Subordinated Notes Due 2006 issued
in May 1996.
Inflation is not expected to have a material effect on future results of
operations.
The Company's results of operations have varied significantly in the past and
may continue to vary significantly in the future. The Company's future
profitability is dependent upon its ability to commercialize successfully its
CEP technology and to find
13
<PAGE> 14
alternative sources of revenue. There can be no assurance that the Company will
generate sufficient revenue to achieve profitability.
In February 1997, Financial Accounting Standards No. 128 "Earnings Per Share"
("FAS 128") was issued by the Financial Accounting Standards Board. FAS 128
specifies modifications to the calculation of earnings per share from that
currently used by the Company. Under FAS 128, "basic earnings per share" will be
calculated based upon the weighted average number of common shares actually
outstanding, and "diluted earnings per share" will be calculated based upon the
weighted average number of common shares outstanding and other potential common
shares (stock options, warrants and convertible debt) if they are dilutive. FAS
128 is effective for the Company's fourth quarter of 1997 and will be adopted at
that time. Had the Company determined earnings per share in accordance with FAS
128, basic earnings (loss) per share and diluted earnings (loss) per share for
the periods ended June 30, 1997 and 1996 would not have been materially
different from the net income (loss) per share reported by the Company.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company had cash, cash equivalents and short-term
investments totaling $44.6 million compared to $129.1 million at December 31,
1996. The decrease was primarily a result of cash used in operations and for the
acquisition of fixed assets. During 1997, the Company expects to incur
significant additional expenditures related to the engineering, construction and
start-up of commercial CEP systems owned by itself and through joint ventures.
The Company expects that its total capital expenditures for 1997 will be
approximately $83 million.
In June 1997, the Company and LMC executed an agreement to restructure their
relationship with respect to the commercialization of CEP for the government
waste market. The objective of the restructuring is to enable MMT and LMC to
access target markets more efficiently by eliminating many of the organizational
redundancies associated with the current M4 structure. LMC and MMT believe that
the restructuring also will enable them to better leverage LMC's expertise in
systems integration and MMT's ability to provide its CEP technology to target
markets. LMC and MMT are now free to pursue projects formerly governed by the
joint venture agreements, subject to the requirements established by the new
arrangements. The agreement stipulates five principal changes in the companies'
relationship: (1) LMC has the exclusive right to lead and pursue contracts for
the clean up of the DOE's tanked waste site in Hanford, Washington, and MMT will
provide directly to LMC certain construction and development services with
respect to Q-CEP, (2) the Company and LMC formed a new limited liability company
to be their exclusive vehicle to deliver processing services to customers in the
chemical demilitarization market worldwide, (3) MMT has the exclusive right to
lead and pursue worldwide opportunities for processing DUF6, (4) the Company
became the sole owner of M4, which will continue to own and operate its
14
<PAGE> 15
primary remaining asset, the M4 Technology Center, and (5) the Retech division
of M4, which provides plasma arc technology, was transferred to LMC.
As part of the LMC team for the Hanford project, LMC agreed to purchase and MMT
has agreed to deliver a pilot-scale, demonstration CEP plant in 1997 for a fixed
price of $5 million. This plant will be used to process surrogate Hanford tank
waste. Additionally, LMC has agreed to fund certain development work with
respect to Q-CEP for possible application to the Hanford project. LMC has
informed the DOE that LMC currently intends to propose an alternative
technology, vitrification, as its baseline processing technology for Phase 1B of
the Hanford contract. However, in connection with the development work to be
performed by MMT, LMC and MMT have agreed to develop a technology insertion plan
for the possible inclusion of Q-CEP in the Hanford project if such development
work is successful. LMC has informed the DOE of the development of this
technology insertion plan and LMC's intent to use such plan to include Q-CEP in
the Hanford project if MMT's development work is successful. If the LMC team is
awarded a contract under Phase 1B of the Hanford cleanup program and Q-CEP is
used in the Phase 1B performance, LMC has agreed to pay MMT a fee of $15
million. $5 million of this fee will be payable on award of the contract and the
remaining $10 million will be payable upon timely delivery and acceptance of a
CEP production plant pursuant to terms to be agreed upon by LMC and MMT. MMT
also is entitled to an on-going royalty of 3.5% of all revenues generated from
the processing of waste in equipment supplied by MMT under the Hanford contract.
There can be no assurances that LMC will include Q-CEP in any proposal for any
Phase 1B contract or that LMC will submit a bid for Phase 1B. There also can be
no assurances that DOE will award a Phase 1B contract to the LMC team or that,
even if it does so, Q-CEP will prove to be satisfactory to the DOE for
processing the Hanford waste.
The limited liability company formed by the Company and LMC has exclusive
worldwide rights to commercialize CEP for the chemical weapons demilitarization
market. The limited liability company is owned 50/50 by subsidiaries of LMC and
the Company. The Company is entitled to success fees of up to an aggregate of
$25 million in connection with the successful deployment of CEP systems to
process chemical weapons, each success fee to be paid from revenues generated by
the CEP plant to which it relates. The limited liability company has an initial
term of five years.
As sole owner of M4, the Company is responsible for the operations of the M4
Technology Center, and is entitled to all future revenues from such operations.
Under the terms of the agreement, the $38 million aggregate principal amount of
bonds issued by the Industrial Development Board of Oak Ridge relating to the M4
Technology Center remain outstanding, LMC's guarantee of these bonds remains in
place, and each of LMC and the Company are jointly responsible for the
principal, interest and other costs relating to these bonds.
15
<PAGE> 16
In addition to the changes described above, the Company and LMC have agreed that
the Company would have the exclusive right to lead and pursue worldwide
opportunities for processing DUF6. LMC will consider participating in this
market on a case-by-case basis, subject to mutual agreement of the parties, and
has agreed not to pursue this market for five years except jointly with the
Company.
LMC and the Company have also established a strategic alliance committee,
comprising three representatives from each company, to review and monitor the
relationships created by the restructuring and to evaluate new market
opportunities within the DOE and DoD markets. Prior to pursuing any such
opportunity alone, each of LMC and MMT will be obligated to first offer such
opportunity to the other party by presenting it to the strategic alliance
committee. The committee would determine whether such opportunity would be
pursued jointly by the parties and the terms thereof. If the committee does not
elect to pursue the opportunity jointly, either party would be free to pursue it
alone.
In connection with the restructuring, (i) LMC terminated its line of credit with
M4 and deemed the approximately $15.8 million aggregate principal and accrued
interest outstanding thereunder to have been paid in full, and (ii) MMT
contributed $14.6 million in outstanding accounts receivable to the capital of
M4. LMC and MMT generally will share equally in substantially all of the costs
of the restructuring.
Effective on June 16, 1997, M4 became a wholly owned subsidiary of the Company.
Accordingly, use of the equity method of accounting for the Company's
investment in M4 ceased as of that date and M4 was consolidated with the
Company for financial reporting purposes from that date forward. As a result of
the restructuring, the Company assumed liabilities of $51,147,612 and obtained
assets of $45,133,064 which consisted primarily of receivables from LMC and
fixed and intangible assets.
In periods prior to the restructuring, the Company provided M4 with
construction services. For items that were capitalized by M4, the Company
deferred the portion of the gross profit representing the Company's designated
ownership interest related to such sales. The deferred income was being
recognized by the Company as the related assets were depreciated by M4. The
deferred income balance at June 16, 1997 related to assets that, as a result of
the restructuring, are now owned by the Company has been offset against the
carrying value of such assets.
In 1996, the Company sold the rights to the Japanese chemical weapons market to
M4 and deferred the portion of the gross profit representing the Company's
designated ownership interest. As a result of the restructuring, these rights
are now held by the new limited liability company which will pursue the
worldwide chemical weapons market. Accordingly, the deferred income related to
the sale of the rights to the Japanese chemical weapons market will be
recognized as a reduction of cost of revenue as the rights are amortized by
this limited liability company.
The net amount of funding due from LMC under the restructuring agreements is
recorded as short-term and long-term receivables of $6,292,000 and $19,000,000,
respectively.
On January 29, 1997, MMT Tennessee acquired certain low-level radioactive waste
processing assets of VECTRA, a spent nuclear fuel and radioactive waste services
company located in San Ramon, California. MMT Tennessee paid $3.9 million in
cash for the VECTRA waste-handling assets, which include machinery, equipment,
spare parts, intellectual property and customer contracts.
The Company is currently constructing a CEP facility in Bay City, Texas that is
designed to service the industrial hazardous waste market. During the six months
ended June 30, 1997, the Company spent approximately $28 million for the
engineering, construction and permitting of this facility.
In March 1996, the Company entered into a new lease for the Company's corporate
headquarters. In September 1996, the Company entered into a new lease for
additional space in the same office park as the Company's corporate
headquarters. Each of these leases is for seven years, and lease payments are
due on a monthly basis throughout the seven-year term. The Company does not
currently intend to occupy the second
16
<PAGE> 17
building and is in the process of negotiating subleases for such space.
Currently, more than half of this building has been subleased at rents in excess
of the rent which the Company is required to pay. The Company has accrued
$613,000 for anticipated losses relating to this lease, net of expected sublease
income, at June 30, 1997. In connection with the restructuring of M4, the
Company assumed a lease for office space that it does not intend to occupy. The
Company has accrued $2.6 million for anticipated losses relating to this lease.
The lease requires payments on a monthly basis throughout the term of the lease
which expires in 2002. The Company is in the process of negotiating subleases
for such space.
The Company incurred a net loss of $49.3 million for the six months ended June
30, 1997. The Company's current business plan indicates that the Company will
require additional financing to be used for the completion of its planned
capital expenditures through the end of 1997, including the completion of the
Bay City CEP Facility, and to continue its research, development and other
efforts necessary to commercialize its CEP technology. Accordingly, the Company
intends to raise additional financing during 1997, and has retained several
investment banking firms to assist it in these efforts. These sources of
financing could include a tax-exempt or taxable bond financing for the Company's
subsidiary, MMT of Tennessee Inc. ("MMT Tennessee"), which owns and operates the
Q-CEP facility in Oak Ridge, Tennessee and the wet waste assets acquired from
SEG and VECTRA. In order to complete a tax-exempt financing, the Company will be
required to receive from the State of Tennessee, where the Q-CEP Facility is
located, a reservation of the total amount of tax-exempt private-activity bonds
permitted under federal tax rules to be issued by the State of Tennessee in
1997. The Company has received such a reservation in the amount of $20 million
from the State of Tennessee for this financing. Additional sources of financing
could include private equity financing from one or more institutional investors.
The Company believes that raising equity financing would facilitate the
completion of a bond financing for MMT Tennessee as described above. The Company
is currently in discussions with several different financing sources, although
there can be no assurances as to the timing or completion of any financing. If
the Company does not obtain additional financing during 1997, it would have a
materially adverse effect on the Company's operations. The amount, timing and
effect on liquidity of capital expenditures, including equity contributions to
joint ventures, to be made by the Company in connection with the development of
commercial CEP systems will depend on a number of factors, including the number
of systems to be developed, the timing of the development of such CEP systems,
the terms of the development arrangements with the Company's customers and
partners and the extent to which the Company is able to obtain financing for
such CEP systems.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
Certain statements contained in this Form 10-Q regarding future events or the
future financial performance of the Company are "forward-looking statements"
within the
17
<PAGE> 18
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These forward-looking statements include
statements concerning anticipated trends in the Company's revenue from plant
operations, engineering and construction activities and technology transfer and
success fees and research and development expenditures, anticipated capital
expenditures, and the Company's plans to obtain additional financing. These
forward-looking statements are based largely on the Company's expectations and
are subject to a number of risks and uncertainties, many of which are beyond the
Company's control. Accordingly, actual results could differ materially from
those contemplated by these forward-looking statements. Among the risks and
uncertainties which could affect actual results are that potential customers
will not accept the Company's CEP technology as an economically and
environmentally acceptable means of disposing of wastes and by-products; that
the Company will be unable to build its CEP plants on time and under budget;
that the Company will not be able to commercially operate CEP plants on a
sustained and profitable basis; and that the Company will not be able to obtain
required financing on satisfactory terms or at all.
Additional factors which may cause actual results to differ are described in
Exhibit 99.1 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996, as well as the Company's other filings with the Securities
and Exchange Commission and are incorporated herein by reference.
18
<PAGE> 19
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In June 1997, the Company received a letter from the Department of Energy (the
"DOE") requesting that the Company provide various Company information and
records in connection with a request received by the DOE from the U.S. House of
Representatives Committee on Commerce (the "House Committee"). In July 1997,
the Company received a letter from the Subcommittee on Oversight and
Investigations of the House Committee requesting that the Company provide
similar information to the House Committee in connection with the House
Committee's investigation of the Office of Science and Technology of the DOE.
The Company is voluntarily complying with both of these requests. The Company
is aware that the House Committee also has sent a letter to the U.S.
Environmental Protection Agency requesting similar information. In August 1997,
the Company received a subpoena from the U.S. Senate Committee on Governmental
Affairs (the "Senate Committee") which requests the production of various
Company information and records and requests that a representative of the
Company testify at a hearing of the Senate Committee and give a deposition.
William M. Haney, III, the President and Chief Executive Officer of the
Company, has received a similar subpoena from the Senate Committee. The Company
and Mr. Haney are in the process of responding to these subpoenas. In
connection with the foregoing requests for information and the Senate Committee
subpoenas, as well as the outstanding subpoenas received by the Company and M4
from the Office of the Inspector General (the "OIG") of the DOE which were
described in the Company's Form 10-Q for the quarter ended March 31, 1997,
employees and former employees of the Company have been interviewed by
representatives of several government agencies. The Company expects to be
providing information and records to the DOE, the House Committee, the Senate
Committee and the OIG over an extended period of time and further expects that
representatives of such entities will be conducting additional interviews with
employees and former employees of the Company. In addition, the House Committee
or the Senate Committee may hold hearings at which employees and former
employees of the Company may be asked to testify.
19
<PAGE> 20
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended June 30, 1997, the Company filed the
following Current Reports on Form 8-K:
Form 8-K dated June 25, 1997, with respect to the restructuring
of the Company's relationship with Lockheed Martin Corporation.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOLTEN METAL TECHNOLOGY, INC.
-----------------------------
Date: August 14, 1997 By: /s/ Benjamin T. Downs
--------------- -----------------------------------
Benjamin T. Downs
Executive Vice President of Finance
and Administration, Treasurer
(Principal Financial Officer and
Authorized Signatory)
20
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