<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 12, 1998
REGISTRATION NO. 333-49629
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
STARMET CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
MASSACHUSETTS 3350 04-2506761
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBERS) IDENTIFICATION NUMBER)
</TABLE>
------------------------
2229 MAIN STREET, CONCORD, MASSACHUSETTS 01742
(978) 369-5410
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
------------------------
ROBERT E. QUINN, PRESIDENT
STARMET CORPORATION
2229 MAIN STREET
CONCORD, MASSACHUSETTS 01742
(978) 369-5410
(Name and address, including zip code and telephone number, including area code,
of agent for service)
------------------------
Copies to:
<TABLE>
<S> <C>
THOMAS A. WOOTERS, ESQ. JAMES C. SCOVILLE, ESQ.
GREGORY L. WHITE, ESQ. Debevoise & Plimpton
Peabody & Arnold LLP 875 Third Avenue
50 Rowes Wharf New York, New York 10022
Boston, Massachusetts 02110
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As promptly
as practicable after this Registration Statement becomes effective. If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933 (the
"Securities Act"), check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION DATED JUNE 11, 1998
PROSPECTUS
3,000,000 SHARES
[STARMET NAME/LOGO]
COMMON STOCK
----------------
Of the 3,000,000 shares of common stock, $0.10 par value per share (the
"Common Stock"), offered hereby, 2,250,000 shares are being offered by Starmet
Corporation, a Massachusetts corporation (the "Company" or "Starmet"), and
750,000 shares are being offered by certain stockholders of the Company (the
"Selling Stockholders"). The Company will not receive any of the proceeds from
the sale of shares by the Selling Stockholders. See "Principal and Selling
Stockholders."
The Common Stock is quoted on the Nasdaq National Market under the symbol
"STMT." On June 10, 1998, the last reported sale price of the Common Stock was
$28.50 per share. See "Price Range of Common Stock." For factors to be
considered in determining the public offering price, see "Underwriting."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR CERTAIN INFORMATION THAT SHOULD
BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE DISCOUNTS AND PROCEEDS TO SELLING
TO PUBLIC COMMISSIONS (1) COMPANY (2) STOCKHOLDERS
<S> <C> <C> <C> <C>
Per Share........................... $ $ $ $
Total (3)........................... $ $ $ $
</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at $1,200,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 450,000 shares of Common Stock on the same terms and
conditions set forth above solely to cover over-allotments, if any. If the
Underwriters exercise this option in full, the total Price to Public,
Underwriting Discounts and Commissions, and Proceeds to Company will be
$ , $ and , respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered subject to prior sale, when, as and
if delivered to and accepted by the Underwriters and subject to certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made on or about , 1998, at
the offices of Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New York
10167.
------------------------
BEAR, STEARNS & CO. INC. FURMAN SELZ
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE>
[Appear in a circle (listed clockwise from top center):]
[Picture of disk drive components representing the market for Beralcast disk
drive armsets.]
[Picture of Comanche helicopter in flight representing military applications of
the Company's products.]
[Picture of a satellite representing the aerospace applications of the Company's
products.]
[Picture of Beralcast heat sink castings for electronic applications.]
[Picture of UF(6) gas by-products cylinder being brought in for recycling
representing the Company's recycling technologies.]
[Picture of U.S. Army's M1-A2 Main Battle Tank representing the Company's
depleted uranium penetrator business.]
[Picture of complex Beralcast casting.]
[Picture of golfer swinging a golf club representing the market for Beralcast
golf clubs.]
[Appears in Center of page:]
[Starmet logo]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT COVERING TRANSACTIONS AND THE
IMPOSITION OF PENALTY BIDS. SEE "UNDERWRITING."
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ALSO ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
2
<PAGE>
[Appears on upper left:]
RIGID DISK DRIVE ASSEMBLY
[Picture of disk drive assembly and components. There are two arrows pointing to
the picture.]
[Appears on upper right:]
MACHINED BERALCAST - Registered Trademark - ARMSET
[Picture of finished Beralcast disk drive armset. There is an arrow pointing to
the left.]
[Appears on middle right:]
BERALCAST - Registered Trademark - ARMSET CASTINGS
[Picture of pre-finished Beralcast disk drive armsets. There is an arrow
pointing to the left.]
[Appears on lower left:]
HIP JOINT REPLACEMENT
[Picture of artificial hip joint replacement. There is an arrow pointing to the
picture.]
[Appears on lower center:]
BIO-COMPATIBLE METAL POWDERS FOR POROUS COATINGS
[Picture of porous metal powders. There is an arrow pointing up and to the
left.]
[Appears on lower right:]
PROTOTYPE BERALCAST - Registered Trademark - GOLF PRODUCTS
[Picture of various Beralcast golf club heads.]
<PAGE>
[Appears on upper left:]
BERALCAST - Registered Trademark - OPTICAL PLATFORM
[Picture of Beralcast optical platform. There is an arrow that points to the
right.]
[Appears on upper right:]
U.S. ARMY RAH-66 COMANCHE
[Picture of Comanche helicopter in flight. There is an arrow pointing to the
picture.]
[Appears on middle left:]
SATELLITE BUS STRUCTURE
[Picture of partially assembled satellite. There is an arrow pointing to the
right.]
[Appears on lower left:]
SEAMLESS BERYLLIUM TUBING
[Picture of beryllium tubing. There is an arrow pointing to the right.]
[Appears on lower right:]
[Picture of satellite. There are two arrows pointing to the picture.]
COMMUNICATION SATELLITE
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY INFORMATION IS QUALIFIED IN ITS ENTIRETY BY, AND
SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL
DATA INCLUDING THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO
(THE "CONSOLIDATED FINANCIAL STATEMENTS") APPEARING ELSEWHERE IN THIS
PROSPECTUS. FOR PURPOSES OF THIS PROSPECTUS, UNLESS OTHERWISE INDICATED OR THE
CONTEXT OTHERWISE REQUIRES, REFERENCES TO "STARMET" AND THE "COMPANY" REFER TO
STARMET CORPORATION AND ITS SUBSIDIARIES. REFERENCES HEREIN TO A "FISCAL YEAR"
REFER TO THE COMPANY'S FISCAL YEAR WHICH ENDS ON SEPTEMBER 30 (E.G., FISCAL 1997
MEANS THE COMPANY'S FISCAL YEAR ENDED SEPTEMBER 30, 1997).
BERALCAST-REGISTERED TRADEMARK-, REP-REGISTERED TRADEMARK- AND
PREP-REGISTERED TRADEMARK- ARE TRADEMARKS OF THE COMPANY. THIS PROSPECTUS ALSO
CONTAINS TRADEMARKS AND TRADE NAMES OF PERSONS OTHER THAN THE COMPANY WHICH ARE
THE PROPERTY OF THEIR RESPECTIVE OWNERS. EXCEPT AS OTHERWISE INDICATED, ALL
INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT
OPTION IS NOT EXERCISED. SEE "UNDERWRITING."
THE COMPANY
Starmet is an innovator in the design, development and processing of
specialty metals, a precision manufacturer of technologically sophisticated
metal components and products, and a leader in certain advanced materials
conversion and recycling technologies. A central aspect of the Company's
strategy is to continue to capitalize on its metallurgical, materials science
and manufacturing expertise, developed primarily for military applications, in
order to introduce new products for what the Company believes are high-growth
opportunities in large commercial markets.
In its specialty metals business, Starmet produces a wide range of products
and components from advanced metals and alloys. Key among these materials is
Beralcast, the Company's family of beryllium aluminum alloys, which is being
commercially introduced for use in certain advanced applications. Based upon
initial responses by the Company's customers and testing by independent
laboratories, the Company believes that Beralcast is a cutting edge material
with advanced properties which is ideally suited for certain demanding
commercial and aerospace applications. Among its superior performance
characteristics are its light weight, dimensional stability, stiffness,
vibration damping qualities and workability. In its advanced recycling
technologies and uranium services businesses, Starmet is a fully integrated
processor of depleted uranium ("DU"), converting uranium hexafluoride ("UF(6)")
to uranium tetrafluoride ("UF(4)") and DU metal which it manufactures into DU
products such as feedstock used in the manufacture of nuclear reactor fuel by a
third party, radiation shielding, anti-armor tank penetrator munitions and
billets for conversion into tank armor.
Starmet focuses its research and business development efforts on markets it
has identified as offering significant opportunities for growth, particularly
high-end computer disk drives as well as military and commercial aerospace and
premium golf products, among others. For example, the Company has produced
prototype and pre-production quantities of high-end disk drive arm sets,
precision devices used in rigid computer disk drives, for evaluation by certain
leading disk drive manufacturers in their high-speed, high-capacity disk drives.
Beralcast's light weight, high stiffness to weight ratio and enhanced vibration
damping qualities when compared to competing materials results in significantly
increased data storage capacity and reduced data access time in high-end disk
drives equipped with Beralcast disk drive arm sets, according to certain
customers of the Company. The Company is in the process of or has completed
product optimization with three leading manufacturers, two of which have spent
in excess of $1.3 million to date for tooling and prototype production. While
the Company is hopeful that its disk drive arm sets will achieve significant
market penetration in upcoming generations of high-end disk drives, there can be
no assurance that customers will purchase its Beralcast arm sets in significant
quantities or that these products will be commercially successful. For military
applications, the Company has received contracts from Lockheed Martin
Corporation ("Lockheed Martin") for 58 separate Beralcast components to be used
in its most advanced electro-optical and target acquisition systems that will be
fitted on the RAH-66 Comanche ("Comanche"), the U.S. Army's next generation
advanced reconnaissance and attack helicopter. According to the U.S. Army,
Beralcast is the only known material capable of meeting critical
3
<PAGE>
Comanche requirements without significant costly redesigns. In addition, U.S.
and other military forces have identified opportunities for the use of Beralcast
components for other advanced military programs, such as the F-22 advanced
tactical fighter, the updated Patriot missile, LANTIRN (a low altitude
navigation and targeting system) and the French Rafael advanced fighter
aircraft. The Company has delivered prototype parts pursuant to contracts for
these applications and is awaiting follow-on funding for the next phases of
development. The Company believes that further significant opportunities exist
for the use of Beralcast products and components beyond these currently
identified applications in commercial and military markets.
The Company is expanding its manufacturing capacity and plans to invest a
substantial portion of the proceeds of the offering in order to meet anticipated
demand for Beralcast materials. One of the goals of the Company's planned
capital expenditure program is to further reduce product costs, which the
Company believes is essential to the commercialization of Beralcast. Since the
introduction of its Beralcast alloys, the Company has realized significant
reductions in manufacturing costs primarily as a result of its Comanche
development work and anticipates that its manufacturing expansion program and
ongoing experience with Beralcast will result in continued cost reductions. The
Company expects that Beralcast's advantageous characteristics, including its
light weight, dimensional stability and workability, will generally offset the
higher costs of Beralcast products as compared to certain materials currently
employed in markets in which the Company intends to compete. In addition, the
Company is committed to maintaining its high quality manufacturing standards.
The Company was recently certified under ISO 9002 at its Concord, Massachusetts
facility and is the first small business and one of only fourteen companies
nationwide to qualify for the U.S. Army's highest quality manufacturing
certification. Furthermore, the Company holds regulatory facilities licenses for
the processing of low-level radioactive materials, which management believes
represent a competitive advantage and a significant barrier to entry to
potential new competitors. The Company believes that it operates the only
licensed U.S. production facility capable of offering a broad spectrum of
processing, conversion, recycling, manufacturing and shielding services for DU
and other low-level radioactive materials.
Since its origins as a metallurgical laboratory affiliated with the
Massachusetts Institute of Technology ("MIT") in 1942, the Company has developed
a strong platform in the research and development of various materials science
technologies. Throughout its history, the Company has maintained close
relationships with MIT and several of the principal research laboratories
affiliated with the United States government, namely the Los Alamos National
Laboratories, the Lawrence Livermore National Laboratories, and the Sandia
National Laboratories. Each of these research laboratories has been or is a
party to cooperative research and development agreements with Starmet to jointly
develop and improve various materials science technologies and to share such
research. The Company has funded certain research programs led by MIT staff
members and shared laboratory facilities with MIT. In addition, Dr. Kenneth
Smith, a Professor of Chemical Engineering and former Associate Provost of MIT,
has served on the Company's Board of Directors since 1985. The Company believes
that these relationships, its patented and proprietary technology, internal and
customer funded research and development efforts and its sole supplier or
provider status in some instances position Starmet at the forefront of the
development and commercialization of various materials science technologies,
including casting, the manufacture of powdered metals, the development of
various specialized alloys and advanced materials recycling. Over the course of
its history, the Company has undergone several transitions in response to
fundamental changes in its markets and to take advantage of new business
opportunities. From its focus on high-volume commercial production of specialty
metal powders during the 1970s and the precision manufacture of DU penetrators
used in anti-armor munitions during the 1980s and 1990s, to the recent
introduction of Beralcast, the Company has a history of developing and bringing
to market products that are extensions of its strong foundation in materials
science, such as spherical powders for use in early Xerox machines, bi-metal
components for the Apollo space program and Beralcast components for the United
States military's F-22 fighter and Comanche helicopter.
4
<PAGE>
SPECIALTY METAL PRODUCTS
Starmet develops and manufactures a wide range of advanced metal products
and components for commercial and aerospace applications. These products are
manufactured from various metals and alloys, including the Company's Beralcast
alloys, pure beryllium, titanium, steel and zirconium. Beralcast is an
investment-castable family of beryllium aluminum alloys designed for use in
secondary structural and electronic applications. The Company believes that it
is the technological leader in the development and production of beryllium
aluminum alloys. The Company's patented Beralcast alloys are more than 3 times
stiffer than aluminum with 22 percent less weight and can be precision cast to
simple and complex configurations. For many applications, product requirements
demand lightweight, dimensionally stable, high stiffness and workable materials
such as Beralcast. In such applications, certain customers have reported
achieving up to 50% weight savings using Beralcast in place of aluminum. Certain
disk drive manufacturers for which the Company has produced prototype and
pre-production quantities of disk drive arm sets have advised the Company that
Beralcast provides distinct performance advantages compared with competing
materials for high-end disk drives. The Company believes that there is
significant potential to penetrate the market for high-end disk drives.
Shipments of rigid disk drives are expected to grow from an estimated 126
million units in 1997 to 201 million units in 2000 according to Disk/Trend, Inc.
The Company estimates that high-end disk drives represent between 5% and 10% of
this market. The Company also believes that Beralcast's light weight,
dimensional stability, workability and other performance characteristics make it
an ideal material for a number of other commercial applications including
commercial satellite components and premium golf club heads and shafts. In
addition to Beralcast products and components, the Company manufactures
high-quality spherical metal powders which are used in porous adhesion coatings
on medical prostheses and in other products. Management believes the Company's
metal powders offer performance advantages over competing powders in these
markets since they are cleaner, more uniformly spherical and have a higher
percentage of particles within a desired size range from a given amount of raw
material.
ADVANCED RECYCLING TECHNOLOGIES AND URANIUM SERVICES
Starmet develops and provides a variety of products and services based upon
its longstanding metallurgical, radiological and chemical know-how, including,
in particular, its expertise in processing and converting UF(6) and its
derivative UF(4) into materials and products that can be utilized in a variety
of specialized applications. Starmet owns and operates the only production
facility in North America capable of converting natural UF(6) and depleted UF(6)
into UF(4). Depleted UF(6) is a low-level radioactive by-product of the
enrichment of uranium. From UF(4), the Company produces DU and natural uranium
("NU") metal which it manufactures into various uranium metal products. The
Company's uranium metal products include DU penetrators used as anti-armor
munitions, DU billets for conversion into tank armor, NU and DU feedstock
supplied to the United States Enrichment Corporation's ("USEC") Atomic Vapor
Laser Isotope Separation ("AVLIS") program for laser-based enrichment into
nuclear reactor fuel, and industrial and medical shielding devices. Starmet also
owns and operates the only FAA-approved facility in the United States licensed
to repair DU counterweights, which are used in various wide-body commercial and
military aircraft and which are periodically required to be refurbished. Within
its shielding technology business, the Company has received exclusive commercial
production rights to a patented shielding product known as DUCRETE shielding,
which uses a uranium oxide aggregate mixed with concrete to form an enhanced
radiation shielding product. The Company is exploring with the Department of
Energy ("DoE") and several commercial customers specific applications for the
use of DUCRETE shielding, including as containment vessels for spent fuel and
other high-level radioactive waste products. In addition, the Company has the
capability to recycle radioactively contaminated steel into storage boxes for
containment of various radioactive wastes. Due to anticipated reduced U.S.
government procurement plans, the Company expects that no revenues will be
derived from DU penetrator operations after the second quarter of fiscal 1999.
5
<PAGE>
STRATEGY
The Company's strategy is to grow revenues and profits by exploiting its
materials expertise to manufacture products for currently identified markets and
develop new applications for its technologies. Specific components of the
Company's strategy include:
APPLY TECHNOLOGICAL EXPERTISE TO COMMERCIAL APPLICATIONS. The Company
intends to continue to capitalize on its metallurgical, materials science and
manufacturing expertise, developed primarily for military applications, in order
to introduce new products for what the Company believes are high-growth
opportunities in large commercial markets. In these efforts, the Company will
apply its skills in materials development, investment casting difficult alloys,
manipulating and forming complex components, and manufacturing, processing and
recycling certain advanced materials. An example is the development of the
Company's Beralcast technology which the Company is applying to various
applications in commercial and aerospace markets.
DEVELOP NEW PRODUCTS AND MARKETS THROUGH CONTINUED RESEARCH AND
DEVELOPMENT. The Company intends to continue to focus its own and customer
funded research and development efforts on technological innovation designed to
yield sophisticated, high-performance commercial products, materials and
services. The Company intends to pursue this strategy by maintaining a strong
internal research and development team, continuing its longstanding research
relationships with major government research centers and working closely with
customers. The primary goal of the Company's research and development efforts is
to accelerate commercialization of its materials science technologies by
addressing customer identified applications with significant market potential.
INCREASE MANUFACTURING CAPACITY AND REDUCE MANUFACTURING COSTS. The Company
intends to leverage its manufacturing expertise by shifting from prototype to
full-scale production in order to meet anticipated customer demands. A
substantial portion of the proceeds of the offering will be used to purchase
additional manufacturing equipment, including new furnaces and automated
production equipment, principally for the Company's Beralcast products. Among
the goals of the Company's planned capital expenditure program are to increase
manufacturing capacity, improve manufacturing efficiencies, enhance product
quality and further reduce manufacturing costs.
MAINTAIN FOCUS ON CUSTOMER SATISFACTION. The Company seeks to continue
providing the highest possible level of customer service and customer
satisfaction. For example, the Company engages in concurrent engineering with
its customers to create value-added, customized products that provide solutions
to specific technical issues. The Company seeks to implement design-to-cost
programs with its customers to lower overall product costs. In addition, the
Company has technical field offices at certain customer sites so that the
Company can cooperate in design optimization and provide technical and sales
support. The Company at its Concord facility is the first small business and one
of only fourteen companies nationwide to qualify for the U.S. Army's highest
quality manufacturing certification, and this facility is also ISO 9002
certified. The Company intends to continue its commitment to high-quality
manufacturing.
PURSUE SELECTED COOPERATIVE RELATIONSHIPS. In order to penetrate new
markets and accelerate its expansion, the Company intends to pursue selected
teaming arrangements, licenses, joint ventures and other cooperative business
relationships. This strategy is designed to leverage the Company's technological
expertise by increasing production capacity for the Company's products without
the Company having to fund all related capital expenditures. This strategy is
further designed to allow Starmet to take advantage of the existing distribution
channels of its current or potential partners. As part of this strategy and to
facilitate such cooperative relationships, in October 1997 the Company completed
an internal reorganization to organize the Company's subsidiaries along
functional business lines. A recent example of this co-development strategy is
Trio Star, LLC ("Trio Star"), a business venture formed by the Company with R-
Cubed Composites, Inc. (a subsidiary of Perstorp AB) and Advanced Product Labs,
to jointly market, develop and supply structural components to the commercial
satellite and aerospace markets.
6
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company................ 2,250,000
shares
Common Stock offered by the Selling Stockholders... 750,000 shares
Total Common Stock offered hereby (1).............. 3,000,000
shares
Common Stock to be outstanding after the offering
(1)(2)............................................. 7,040,674
shares
</TABLE>
<TABLE>
<S> <C>
Use of Proceeds.................................... The Company intends to use the net
proceeds of the offering to fund
capital expenditures on fixed assets
and equipment to increase manufacturing
capacity, to repay all borrowings
outstanding under the Company's
Existing Credit Facility (as defined
herein), to repay certain indebtedness
owed to certain stockholders and for
working capital and general corporate
purposes. The Company will not receive
any of the proceeds from the sale of
shares of Common Stock offered by the
Selling Stockholders. See "Use of
Proceeds" and "Principal and Selling
Stockholders."
Nasdaq National Market symbol...................... STMT
</TABLE>
- ------------------------
(1) Assumes that the Underwriters' over-allotment option is not exercised.
(2) Based on shares of Common Stock outstanding as of June 10, 1998. Does not
include (i) an aggregate of 721,420 shares of Common Stock reserved for
issuance upon the exercise of outstanding options or that may be granted
under the Company's stock option plans (of which, options to purchase
594,920 shares were outstanding as of June 10, 1998), (ii) 126,044 shares of
Common Stock reserved for issuance upon conversion of outstanding and
immediately convertible subordinated debentures and (iii) 182,790 shares of
Common Stock reserved for issuance upon exercise of outstanding and
immediately exercisable warrants (not giving effect to anti-dilution
provisions in the First Warrant (as defined herein) held by the Company's
principal bank lender that will be triggered as a result of the offering).
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources" and "Shares Eligible for
Future Sale."
RISK FACTORS
See "Risk Factors" beginning on page 9 for a discussion of certain risks
that should be considered in connection with an investment in the Common Stock
offered hereby.
7
<PAGE>
SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS EXCEPT PER SHARE INFORMATION)
The summary statement of operations and other data set forth below for each
of the years ended September 30, 1995, 1996 and 1997 have been derived from the
Company's Consolidated Financial Statements included elsewhere herein and should
be read in conjunction with such financial statements. The summary statement of
operations and other data set forth below for each of the years ended September
30, 1993 and 1994 have been derived from audited financial statements of the
Company that are not included herein. The summary statement of operations and
other data for the six month periods ended March 31, 1997 and 1998 and the
summary balance sheet data as of March 31, 1998 have been derived from the
unaudited financial statements of the Company included elsewhere herein and, in
the opinion of management, include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results of
operations and financial position of the Company for the periods and at the date
presented. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
FISCAL YEAR ENDING SEPTEMBER 30,
------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales and contract revenues............ $ 17,019 $ 19,004 $ 18,784 $ 28,694 $ 28,062
Operating income (loss).................... (10,496) (10,954) (1,924) (2,560) 1,811
Interest expense, net...................... 953 550 350 387 296
Net income (loss) (1)(2)................... (6,207) (10,196) 510 (3,037) 1,482
Basic net income (loss) per share (3)(4)... $ (1.35) $ (2.22) $ 0.11 $ (0.64) $ 0.31
Basic weighted average shares outstanding
(3)(4)................................... 4,590 4,600 4,701 4,779 4,783
Diluted net income (loss) per share
(3)(4)................................... $ (1.35) $ (2.22) $ 0.11 $ (0.64) $ 0.30
Diluted weighted average shares outstanding
(3)(4)................................... 4,590 4,600 4,706 4,779 4,959
OTHER DATA:
Research & development expense............. 1,031 575 439 876 1,309
Customer funded research and development
(5)...................................... 503 792 557 1,812 793
Capital expenditures....................... 1,265 709 777 1,449 1,788
Pro forma diluted net income (loss) per
share before extraordinary item
(3)(4)(6)................................ $ 0.32
Pro forma diluted weighted average shares
outstanding (3)(4)(6).................... 5,268
<CAPTION>
SIX MONTHS
ENDED MARCH 31,
-------------------
1997 1998
-------- --------
<S> <C> <C>
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Net sales and contract revenues............ $12,613 $ 18,769
Operating income (loss).................... 739 (799)
Interest expense, net...................... 119 489
Net income (loss) (1)(2)................... 618 (1,288)
Basic net income (loss) per share (3)(4)... $ 0.13 $ (0.27)
Basic weighted average shares outstanding
(3)(4)................................... 4,782 4,787
Diluted net income (loss) per share
(3)(4)................................... $ 0.13 $ (0.27)
Diluted weighted average shares outstanding
(3)(4)................................... 4,928 4,787
OTHER DATA:
Research & development expense............. 699 567
Customer funded research and development
(5)...................................... 111 291
Capital expenditures....................... 785 2,349
Pro forma diluted net income (loss) per
share before extraordinary item
(3)(4)(6)................................ $ (0.16)
Pro forma diluted weighted average shares
outstanding (3)(4)(6).................... 5,117
</TABLE>
<TABLE>
<CAPTION>
AS OF
MARCH 31, 1998
--------------------------
ACTUAL AS ADJUSTED (6)
--------- ---------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital.......................................................................... $ 7,928 $ 65,874
Total assets............................................................................. 38,540 90,778
Total liabilities........................................................................ 13,382 6,508
Stockholders' equity..................................................................... 25,158 84,270
</TABLE>
- ------------------------------
(1) Net loss for fiscal 1993 has been reduced by income of $1,100 related to the
cumulative effect of a change in accounting principle.
(2) Net income for fiscal 1995 includes an extraordinary gain of $585 on the
extinguishment of debt, net of taxes of $10.
(3) Adjusted to reflect the two-for-one stock dividend issued on April 7, 1997.
(4) Effective December 15, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, EARNINGS PER SHARE. Basic net income
(loss) per share was computed by dividing net income (loss) by the weighted
average shares outstanding. Diluted net income per share was computed by
dividing net income (loss) by the weighted average number of shares and
dilutive potential shares outstanding during the relevant period. In loss
periods, dilutive potential shares are excluded as they would be
anti-dilutive.
(5) Such amounts are included in net sales and contract revenues.
(6) Adjusted to give effect to the sale of 2,250,000 shares of Common Stock by
the Company at an assumed price of $28.50 per share after deducting
underwriting discounts and estimated expenses of $1,200 and the application
of the estimated net proceeds therefrom. Pro forma data do not include an
extraordinary loss of $725 ($0.14 per share) associated with early
extinguishment of indebtedness expected to occur upon the closing of the
offering. Balance sheet data are also adjusted to reflect (a) an
extraordinary loss of $725 associated with early extinguishment of
indebtedness, (b) the anticipated payment by the Company of a fee of
approximately $235 under the Facility Restructuring Agreement (as defined
herein) to eliminate certain anti-dilution provisions of warrants held by
its principal bank lender and (c) the assumed conversion of approximately
$1,400 in principal amount of outstanding and immediately convertible
subordinated debentures held by certain stockholders. See "Use of Proceeds"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
8
<PAGE>
RISK FACTORS
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. IN ADDITION
TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE FOLLOWING RISK
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS
BUSINESS BEFORE PURCHASING SHARES OF COMMON STOCK OFFERED HEREBY. CERTAIN
STATEMENTS IN THIS PROSPECTUS CONTAIN FORWARD-LOOKING STATEMENTS CONCERNING THE
COMPANY'S OPERATIONS, ECONOMIC PERFORMANCE AND FINANCIAL CONDITION. SEE
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS."
HISTORY OF LOSSES; RISK OF FUTURE LOSSES
The Company has experienced significant financial difficulties and liquidity
problems in recent years due primarily to the sharp decline in sales of DU
penetrators and a lack of orders for certain other DU products. As a result, the
Company has had to seek financing from stockholders, waivers of non-compliance
with, and amendments of, certain covenants and other provisions in its debt
instruments (including waivers and amendments under the Existing Credit Facility
in February, May and June of 1998), additional borrowings and extensions of
maturities under the Existing Credit Facility, and additional equipment
financing from another bank for capital expenditures required at its South
Carolina facility. Historically, a substantial portion of the Company's revenues
have been derived from the sale of products for defense munitions and tank armor
programs; however, revenues from these applications have declined sharply in
recent years due primarily to the general decline in defense spending. In fiscal
1997, the Company derived 37% of its revenues from the sale of products for
defense munitions and tank armor. The Company expects that no revenues will be
derived from sales of penetrator defense munitions after the second quarter of
fiscal 1999, and only limited revenue will be derived from sales of billets for
conversion into tank armor thereafter. The Company incurred operating losses in
four of its last five fiscal years and during the first six months of fiscal
1998. In addition, the Company's accountants, in their report to the Board of
Directors and stockholders of the Company for fiscal 1995, stated that there was
substantial doubt at that time about the Company's ability to continue as a
going concern. Although the Company was profitable in fiscal 1997, reserve
reversals and other non-recurring income items accounted for the profitability.
Excluding these items, the Company would have reported a net loss in fiscal
1997. There can be no assurance that the Company will not continue to incur
losses for the remainder of fiscal 1998 or in subsequent fiscal periods.
The Company expects to expend substantial resources on commercial growth
opportunities, in many cases before it can be certain of market acceptance of
its current and planned products and services. The Company's ability to realize
the objectives of its business strategy and to achieve its plans for commercial
growth and profitability are subject to a number of business, industry, economic
and other factors, many of which are beyond the control of the Company, such as
the Company's ability to successfully market its products and services,
particularly in new applications for its materials and technologies, the
Company's ability to manage planned expansion and large-scale commercial
production of new products, customer demand, competition in the industries which
the Company serves and general economic conditions. The failure of the Company
to realize the objectives of its business strategy, in particular, the
full-scale commercialization of Beralcast disk drive arm sets, would have a
material adverse effect on the Company's business, financial condition and
results of operations. Ongoing losses would hinder the Company's ability to
respond effectively to market conditions, to make capital expenditures and to
take advantage of business opportunities, the failure to perform any of which
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
9
<PAGE>
PENDING BERALCAST PATENT LITIGATION; PATENTS AND OTHER INTELLECTUAL PROPERTY
On December 9, 1997, Brush Wellman, Inc. ("Brush Wellman") filed a patent
infringement suit against the Company in the United States District Court for
the District of Massachusetts (the "Massachusetts District Court") alleging that
the Company is infringing on a process patent (the "Brush Wellman Patent")
awarded to Brush Wellman for the investment casting of beryllium aluminum
alloys. Brush Wellman is seeking an injunction against the Company's alleged
patent infringement, monetary damages (including treble damages) and attorney
fees. On March 28, 1998 the U.S. Patent and Trademark Office (the "PTO") granted
the Company's request (filed January 22, 1998) for re-examination (the
"Request") of the Brush Wellman Patent. In the Request, the Company contended,
among other things, that there was sufficient "prior art" in the field of
investment castings and castings of beryllium aluminum alloys such that the
Brush Wellman Patent should not have been issued. In granting the Request, the
patent examiner agreed that the Company's cited examples of prior art raised
substantial new issues of patentability which were not decided in the prior
examination which led to granting the Brush Wellman Patent. On May 26, 1998,
Brush Wellman submitted its response to the PTO's order granting the
reexamination. The PTO will undertake a process of re-examination of the
validity of the Brush Wellman Patent that, the Company anticipates, could last
for an extended period. There can be no assurance that the PTO will find the
Brush Wellman Patent to be invalid. On January 27, 1998, the Company filed in
the Massachusetts District Court a motion to stay the court case pending the
outcome of the re-examination proceeding. If the Massachusetts District Court
were to grant the motion to stay, the court case would not proceed until the
conclusion of the PTO's re-examination of the Brush Wellman Patent. Although the
Company believes that its motion to stay has merit, no assurance can be given
that the Massachusetts District Court will grant the motion.
Even though the Company has been advised by its patent counsel, Iandiorio &
Teska, that Brush Wellman's claims are without merit because the Brush Wellman
Patent is invalid as a matter of law due to "prior art" and due to the Company's
sales of investment cast beryllium aluminum products more than one year prior to
the Brush Wellman Patent application, no assurance can be given as to the
ultimate outcome of the lawsuit. Even if the lawsuit were not to proceed to
trial, the litigation could result in substantial costs to the Company, and an
unfavorable settlement of the lawsuit could place the Company at a competitive
disadvantage. An adverse judgment or settlement could subject the Company to
significant liabilities and expenses (E.G., reasonable royalties, lost profits,
attorneys' fees and trebling of damages for willfulness). An adverse outcome
also could cause the Company to incur substantial costs in redesigning the
investment casting process for its Beralcast products and components. Moreover,
there can be no assurance that redesign alternatives would be available to the
Company, and if available, that any redesign alternative would not place the
Company at a competitive disadvantage. The Company could be required to license
the disputed patent rights from Brush Wellman or to cease using the patented
technology. Any such license, if required, may not be available on terms
acceptable or favorable to the Company, or at all. Any of these results could
have a material adverse effect on the Company's business, financial condition
and results of operations. Even in the event of a successful outcome, the
Company may incur significant legal expenses in its defense.
The Company's success depends in substantial part on its proprietary
technology, in particular, Beralcast, the Company's family of beryllium aluminum
alloys. Although the Company protects and intends to continue to protect its
intellectual property rights through patents, copyrights, trade secrets, license
agreements and other measures, there can be no assurance that the Company will
be able to protect its technology adequately or that competitors will not be
able to develop similar technology independently. In addition, the laws of
certain foreign countries in which the Company's products may be licensed do not
protect the Company's products and intellectual property rights to the same
extent as the laws of the United States. If the Company were unable to maintain
the proprietary nature of its intellectual property with respect to its
significant current or proposed products, the Company's business, financial
condition and results of operation could be materially adversely affected. There
can be no assurance that the Company will be able to obtain patent protection
for products or processes discovered using the
10
<PAGE>
Company's technologies. Furthermore, there can be no assurance that any patents
issued to the Company will not be challenged, invalidated, narrowed or
circumvented, or that the rights granted thereunder will provide significant
proprietary protection or competitive advantages to the Company. Although the
Company believes that its products, patents and other proprietary rights do not
infringe upon the proprietary rights of third parties, as discussed above, the
Company has been sued by Brush Wellman with respect to the process of investment
casting of beryllium aluminum alloys, and there can be no assurance that other
third parties will not assert other infringement claims against the Company.
RISKS RELATED TO MANAGEMENT OF PLANNED GROWTH
The Company's anticipated growth could place a significant strain on its
management, operations, financial and other resources. The Company's ability to
manage its growth will require it to continue to invest in its operational,
financial and management information systems, procedures and controls and to
attract, retain, motivate and effectively manage its employees. The Company
intends to use a substantial portion of the proceeds of the offering to expand
its Beralcast manufacturing capacity. The Company may experience design and
start-up difficulties, such as cost overruns, manufacturing and operational
difficulties and significant delays. Moreover, there can be no assurance that
the Company will realize the goals of the planned capital expenditure program,
such as reductions in product costs and enhanced product quality. If the Company
is successful in achieving its growth plans, such growth is likely to place a
significant burden on the Company's operating and financial systems, resulting
in increased responsibility for senior management and other personnel within the
Company. There can be no assurance that the Company's existing management or any
new members of management will be able to augment or improve existing systems
and controls or implement new systems and controls in response to anticipated
future growth. The Company's failure to manage its growth could have a material
adverse effect on the Company's business, financial condition and results of
operation.
The Company may from time to time pursue selected teaming arrangements,
licenses, joint ventures and other cooperative relationships to increase its
production capacity or to complement or expand its existing businesses. Any of
these relationships may result in potentially dilutive issuances of equity
securities, the incurrence of additional debt, reductions of existing cash
balances, and charges to operations, any of which could have a material adverse
effect on the Company's business, results of operation and financial condition.
Selected teaming arrangements, licenses, joint ventures and other cooperative
relationships involve a number of risks that could adversely affect the
Company's operating results including the diversion of management's attention,
the entry into markets in which the Company has little or no direct prior
experience and the disruption of the Company's business. No assurance can be
given that any such relationship will not materially and adversely affect the
Company or that any such relationship will enhance the Company's business.
COMPETITION
The Company faces significant competition from established companies in
certain of its product lines. In addition, the Company's Beralcast alloys and
other products face competition from alternative or competing materials,
products and technologies, some of which are better established than those of
the Company. Many of the Company's current and potential competitors have
significantly greater financial, technical, marketing, purchasing and other
resources than the Company, and, as a result, may be able to respond more
quickly to new or emerging technologies or standards and to changes in customer
requirements, devote greater resources to the development, promotion and sale of
products, or deliver competitive products at lower prices. Current and potential
competitors have established or may establish cooperative relationships among
themselves or with third parties to increase the ability of their products to
address the needs of the Company's prospective customers. Accordingly, it is
possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share. Increased competition is likely to
result in price reductions, reduced operating margins and loss of market share,
any
11
<PAGE>
of which could have a material adverse effect on the Company's business, results
of operation and financial condition. Although the Company believes that it has
certain technological and other advantages over its competitors, realizing and
maintaining these advantages will require continued investment in manufacturing
capacity, research and development, sales and marketing, and customer service
and support. There can be no assurance that the Company will have sufficient
resources to continue to make such investments or that the Company will be
successful in maintaining such advantages. The Company believes that its ability
to compete successfully depends on a number of factors both within and outside
of its control, including price, product quality, success in developing and
introducing new products, and general market and economic conditions. There can
be no assurance that the Company will be able to compete as to these or other
factors or that competitive pressures faced by the Company will not materially
adversely affect its business, results of operation and financial condition. See
"Business--Competition."
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING
Expansion of the Company's operations, including anticipated growth in its
Beralcast business, the planned increase in manufacturing capacity and the
continued financing of research and development, will require the Company to
make significant expenditures. In particular, due to planned new product and
process introductions, principally to support anticipated large volume Beralcast
production, the Company anticipates spending up to approximately $90 million
over the next four years, subject to various factors, to increase the capacity
at the Company's facilities. Of this amount, the Company expects to spend
approximately $60 million on the expansion of its Beralcast business. The
Company intends to fund such capital expenditures with the proceeds of the
offering and cash expected to be generated from operations. If additional funds
in excess of the proceeds of the offering and the amount of cash available from
operations are required to permit future expansion, the Company may be required
to seek additional financing, including the issuance of additional debt and
equity securities, or curtail its expansion activities. There can be no
assurance that such funds will be sufficient to support the Company's business
strategy or that if additional financing is required it will be available in
amounts and on terms satisfactory to the Company, if at all. See "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and
"Business--Manufacturing and Operations."
RISKS RELATED TO NEW PRODUCT INTRODUCTIONS, RAPID TECHNOLOGICAL CHANGE AND
INDUSTRY CONDITIONS
The success of new product introductions is dependent on several factors,
including timely completion and introduction of new products, quality of new
products, market acceptance and timeliness of market acceptance, production
efficiency, costs, competition, the availability of substitute products and
customer service. Although the Company attempts to determine the specific needs
of new markets, there can be no assurance that the identified markets will in
fact materialize or that the Company's products designed for these markets will
achieve any significant degree of market acceptance or that any such acceptance
will be sustained for any significant period. In particular, the Company's
Beralcast materials, which are central to its strategy, are generally more
expensive than other materials currently employed in the markets in which the
Company intends to compete. There can be no assurance that the performance
characteristics of Beralcast alloys will outweigh the greater expense of
Beralcast compared to competing materials. The Company's Beralcast products and
components currently are in the development stage and have not been brought to
market, and there can be no assurance that significant commercial business will
develop as anticipated by the Company or that these products will gain
acceptance in commercial markets. While the Company believes that there are
additional commercial applications for its Beralcast alloys, there can be no
assurances that any of its products or services will be successful or produce
revenue for the Company. Failure of new products to achieve or sustain market
acceptance could have a material adverse effect on the Company's business,
results of operation and financial condition. New product introductions will
also require substantial expenditures, and there can be no assurance that
constraints on the Company's financial resources will not adversely affect its
ability to develop and market new products. In addition, the
12
<PAGE>
anticipated commercial markets for the Company's principal new products are
characterized by rapid technological change, changing customer needs, frequent
new product introduction, evolving industry standards and short product
lifecycles. Failure to successfully keep pace with technological developments
could have a material adverse affect on the Company's business, results of
operation and financial condition.
The Company plans to focus its efforts on sales of its specialty metal
products to the commercial markets and military aerospace industries. The
Company currently is developing, among other things, prototypes and
pre-production quantities of disk drive arm sets, prototype parts for military
and commercial aerospace applications and prototypes of premium golf club
products. The market for computer storage devices historically has grown rapidly
but at varying rates, and there can be no assurance that this market will
continue to grow at historical rates. The markets for aerospace products and
sporting goods have fluctuated historically. There can be no assurance that
factors relative to general economic conditions or particular industries will
not materially adversely affect orders for the Company's products. Disk drive
industry practice generally is to place only short-term orders, accompanied by
projections of demand for future operations. Accordingly, the Company expects to
commit to the cost of expanding its production capacity without firm orders for
products. Failure of markets for the Company's products to develop, cancellation
of orders or deferrals of scheduled delivery dates all could materially
adversely affect the Company's business, results of operation and financial
condition.
AVAILABILITY AND COST OF BERYLLIUM AND OTHER RAW MATERIALS
Raw materials used by the Company include a number of metals and minerals
used to produce the alloys included in its products and castings, including
beryllium, titanium, aluminum, nickel, cobalt, chromium and molybdenum, among
others. Prices of these materials can be volatile due to a number of factors
beyond the control of the Company, including domestic and international economic
conditions and competition. This volatility could significantly effect the
availability and prices of raw materials used by the Company. There can be no
assurance that the Company will be able to pass price fluctuations through to
customers, and price moves may adversely affect sales, operating margins and net
income. Depending upon certain market conditions, the Company may engage in
forward purchases of some of these materials. However, the Company ordinarily
does not attempt to hedge the price risk of its raw materials and has no
long-term, fixed price contracts or arrangements for the raw materials it
purchases. Commercial deposits of certain metals, such as beryllium, cobalt,
nickel, titanium, chromium and molybdenum, that are required for the alloys used
in the Company's precision castings and specialty metal powders, are found in
only a few parts of the world. The availability and prices of these metals may
be influenced by private or governmental cartels, changes in world politics,
unstable governments in exporting nations and inflation. In particular, the
Company currently purchases beryllium, a metal which is used to form its
Beralcast alloys, principally from a producer-supplier located in Kazakhstan and
from multiple distributors located in Estonia, Kazakhstan, Sweden, the United
States, China and Russia. The Company also purchases scrap beryllium from
domestic and foreign distributors. The only three producers of beryllium
worldwide are located in Kazakhstan, the United States and China. For
competitive reasons, the Company does not procure significant quantities of
beryllium raw materials from Brush Wellman, the sole U.S. producer of beryllium,
which is the Company's principal competitor for beryllium aluminum products and
the plaintiff in the pending patent lawsuit. The Company believes that a
sufficient supply of beryllium remains available for its current demand.
However, if its Beralcast products receive broad commercial acceptance, the
Company's demand for beryllium will increase. The cost of beryllium could
increase as a result of the Company's increased demand, and supplies of
beryllium could also be affected. Although the Company has not experienced
shortages of raw materials in the past, there can be no assurance that such
shortages will not occur in the future. Any substantial increase in raw material
prices or a continued interruption in supply of raw materials, in particular of
beryllium from the Company's producer-supplier located in Kazakhstan, could have
a material adverse effect on the Company's business, results of operation and
financial condition. See "Business--Sources of Raw Materials."
13
<PAGE>
ENVIRONMENTAL, HEALTH AND REGULATORY MATTERS
The Company is subject to comprehensive and changing federal, state, local
and international laws, regulations and ordinances (together, "Environmental
Laws") that (i) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water, as well as handling
and disposal practices for solid and hazardous wastes, and (ii) impose liability
for the costs of cleaning up, and certain damages resulting from, sites of past
spills, disposals or other releases of hazardous substances and materials,
including liability under the Comprehensive Environmental Response, Compensation
and Liability Act of 1980 ("CERCLA," the federal "Superfund" statute), and
similar state statutes for the investigation and remediation of environmental
contamination at properties owned and/or operated by it and at off-site
locations where it has arranged for the disposal of hazardous substances.
Furthermore, depleted uranium, a material regularly processed by the Company, is
a low-level radioactive material and the Company is subject to governmental
licensing and regulation.
If it is determined that the Company is not in compliance with current
Environmental Laws, the Company could be subject to fines and penalties. The
amount of any such fines and penalties could be material. In addition, the
Company uses depleted uranium, beryllium and other hazardous substances, and as
is the case with manufacturers in general, if a release of hazardous substances
occurs on or from the Company's properties or from an off-site disposal
facility, the Company may be held liable and may be required to pay the cost of
remedying the condition. The amount of any such liability could be material.
The Company has made, and expects to continue to make, expenditures to
comply with current and future Environmental Laws. The Company anticipates that
it could incur additional capital and operating costs in the future to comply
with existing Environmental Laws and new requirements arising from new or
amended statutes and regulations. In addition, because the applicable regulatory
agencies have not yet promulgated final standards for some existing
environmental programs, the Company cannot at this time reasonably estimate the
cost for compliance with these additional requirements. The amount of any such
compliance costs could be material. The Company cannot predict the impact that
future regulations will impose upon the Company's business.
The Company is required to maintain certain licenses to possess and process
depleted uranium materials at its facilities in Concord and South Carolina,
respectively. Under applicable licensing regulations pertaining to
decommissioning and disposal of certain hazardous materials ("D&D") at licensed
sites, the Company has submitted to the relevant regulatory agencies for each of
its facilities a Decommissioning Funding Plan ("DFP") to provide for possible
future decommissioning of its facilities. The Company is also required to
provide financial assurance for such decommissioning pursuant to applicable
regulations. The Company has satisfied these requirements through a combination
of letters of credit and certain assurances from the U.S. government, subject to
government funding appropriations. Although it believes that the U.S. government
will fund all eventual D&D costs, the Company has not requested, and has not
received, any specific written assurance that the U.S. government will accept
responsibility for the D&D costs at the Company's South Carolina facility. In
the event that U.S. government funding of D&D at any site is unavailable for any
reason, the Company could be required to pay for such D&D costs, which could
have a material adverse effect on the Company's business, result of operations
and financial condition. See Note 11 to Consolidated Financial Statements.
The Company is currently remediating the holding basin site at its Concord
facility and may incur costs in excess of its fixed price contract with the
United States Army for remediation of the holding basin. The Company was
notified by Zhagrus Environmental, Inc. ("Zhagrus"), a subcontractor performing
the remediation work, that Zhagrus will incur additional costs in connection
with the disposal of the material from the holding basin and has requested that
the Company pay it to the extent of any such additional costs. The amount of any
additional costs could be material. In the event that the Company became liable
to Zhagrus for any material amount which is not authorized to be paid by the
U.S. Army, such liability could have a material adverse effect on the Company's
business, results of operations and financial
14
<PAGE>
condition. See "Business--Environmental, Safety and Regulatory Matters" and
"Business--Concord Site Remediation and Decommissioning Planning Requirements."
DU and beryllium, materials regularly processed by the Company, have
characteristics considered to be health or safety hazards by various federal,
state and local regulatory agencies. The processing of these materials requires
a high level of safety consciousness, personnel monitoring devices and special
equipment. DU in a finely divided state, such as grinding dust or machine
turnings, is combustible at room temperature and requires special handling for
safe operations and disposal of process wastes. Airborne beryllium in respirable
form, such as powder, dusts or mists generated in some manufacturing processes
can represent a hazard to the lungs in certain susceptible individuals.
Processing this material requires use of extensive ventilation and dust
collecting systems. All of these operations are performed under strict
environmental and health safety controls consistent with the Occupational Safety
and Health Administration ("OSHA") and the Environmental Protection Agency
("EPA") regulations for pure beryllium. There can be no assurance that the
Company will be able to control all health and safety problems. The Company may
be held liable and may be required to pay the costs of remedying any such
problems. The amount of any such liability and costs could be material. See
"Business--Environmental, Safety and Regulatory Matters."
DEPENDENCE ON SALES TO PUBLIC SECTOR AND GOVERNMENT CONTRACTORS
The Company derives, and plans to continue to derive, substantial revenues
from public sector customers or contractors for such customers, including the
United States military. There are significant risks inherent in sales to such
customers which may cause material fluctuations in the Company's operating
results. For each contract with a public sector customer, the Company typically
is subject to a protracted procurement process which includes sealed competitive
bids, systems demonstrations and the integration of Company and third-party
products. The process also can include political influences, award protests
initiated by unsuccessful bidders and changes in budgets or appropriations which
are beyond the Company's control. Contracts of public sector customers typically
are subject to procurement policies which may be onerous and may include profit
limitations and rights on the part of the government to terminate for
convenience. Sales to the United States Department of Defense (the "DOD") are
subject to a number of significant uncertainties, including timing and
availability of funding, unforeseen changes in the timing and quantity of
government orders and the competitive nature of government contracting
generally. Furthermore, the DOD has been reducing total expenditures, and there
can be no assurance that funding will not be reduced in the future. A
significant loss of sales to the U.S. government or contractors for the U.S.
government could have a material adverse effect on the Company's business,
results of operation and financial condition.
The Company is directly and indirectly subject to various rules, regulations
and orders applicable to government contractors. Violation of applicable
government rules and regulations could result in civil liability, in
cancellation or suspension of existing contracts or in ineligibility for future
contracts or subcontracts funded in whole or in part with federal funds.
Similarly, changes in the regulations or other requirements relating to parts
manufactured by the Company could materially adversely affect the Company.
CONCENTRATION OF CUSTOMERS
A substantial portion of the Company's business currently is conducted with
a relatively small number of large customers. The Company's ten largest
customers accounted for approximately 78% and 83% of the Company's net sales in
the fiscal years ended September 30, 1997 and September 30, 1996, respectively,
and three of which (Primex Technologies, Royal Ordnance and USEC in fiscal 1997
and Primex Technologies, Royal Ordnance and Lockheed Martin in fiscal 1996)
individually accounted for greater than 10% of the Company's consolidated
revenues in fiscal 1997 and 1996. The Company currently is contracting with
Primex Technologies to provide DU penetrators for the U.S. Army's ABRAMS Tank
program through the
15
<PAGE>
second quarter of fiscal 1999. The Company is also under contract with Royal
Ordnance to manufacture penetrator blanks through December 1998. The Company is
currently under several contracts with Lockheed Martin to provide Beralcast
hardware for the Comanche helicopter program. USEC is the sole customer for the
Company's AVLIS feedstock material. See "--Uncertainties Relating to USEC and
UF(6) Conversion." While the Company's planned expansion into new commercial
markets may result in a substantial portion of its revenues being derived from
new customers, the dominance of a few companies in certain of these targeted
markets is likely to continue to result in a substantial portion of the
Company's revenues being derived from a small number of significant customers.
The loss of one of its key customers or any significant portion of orders from
any such customers could have a material adverse effect on the Company's
business, results of operation and financial condition. In addition, the Company
also could be materially adversely affected by any substantial work stoppage or
interruption of production at any of its major customers or if one or more of
its key customers were to reduce or cease conducting operations. See
"Business--Significant Customers" and Note 1 to Consolidated Financial
Statements.
UNCERTAINTIES RELATING TO USEC AND UF(6) CONVERSION
USEC, a government-owned global energy company created by the U.S. Congress
in 1992 to operate the DoE's uranium enrichment program, is the only customer
for the Company's AVLIS feedstock material. USEC is in the process of
privatizing, and the Company is unable to predict the impact of the
privatization process and resulting change of ownership on the Company's
business. There can be no assurance that USEC, or any successor to USEC as a
result of privatization or otherwise, will not abandon the AVLIS program or
reduce resources directed to the program or that the Company will continue to
receive contracts from USEC. In addition, USEC's privatization process may delay
the awarding of contracts to the Company. There can be no assurance that USEC,
or any successor to as a result of privatization or otherwise, will provide the
Company with business which is sufficient to sustain the profitability of the
Company's South Carolina facility. Failure of the Company to be awarded such
contracts could have a material adverse effect on the Company's business,
results of operation and financial condition. Furthermore, following
privatization, USEC will own all the new depleted UF(6) produced by its
enrichment plants and will not be allowed to store depleted UF(6) as has been
done by DoE, thereby necessitating that USEC develop a method for disposing of
depleted UF(6). The Company also intends to pursue opportunities with DoE for
the conversion of its depleted UF(6) stockpile. Although the Company owns and
operates the only production facility in North America capable of converting
natural UF(6) and depleted UF(6) into UF(4), there can be no assurance that USEC
or DoE will award contracts to the Company for the conversion of depleted UF(6).
See "Business--Industries and Markets--AVLIS and UF(6) Conversion."
DEPENDENCE ON KEY PERSONNEL
The Company's performance depends to a significant extent upon a number of
senior management and technical personnel. The loss of the services of one or
more key employees could have a material adverse effect on the Company. The
Company does not maintain key person life insurance on any of its employees. The
Company's future financial results will depend in large part on its ability to
continue to attract and retain highly skilled, technical, managerial and
marketing personnel and the ability of its officers and key employees to manage
growth successfully, to implement appropriate management information systems and
controls, and to continue successful development of new products and services
and enhancements to existing products and services. Competition for such
personnel is intense and there can be no assurance that the Company will
continue to be successful in attracting and retaining the personnel required to
successfully develop new and enhanced products.
16
<PAGE>
RISK OF BUSINESS INTERRUPTION
The Company's specialty metal products (including Beralcast) business is
concentrated at its Concord facility and its advanced recycling technologies and
uranium services business is concentrated at its South Carolina facility. Any
prolonged disruption at any of the Company's production facilities due to
equipment failure, destruction of or material damage to such facility, labor
difficulties, or other reasons, could have a material adverse effect on the
Company's business, results of operations and financial condition. Although the
Company maintains property and business interruption insurance to protect
against any such disruptions (other than for labor-related disruptions), there
can be no assurance that the proceeds from such insurance would be adequate to
compensate the Company for losses, including the loss of customers, incurred
during the period of any such disruption or thereafter.
YEAR 2000 COMPLIANCE
The Company has implemented a Year 2000 compliance program designed to
ensure that the Company's computer systems and applications will function
properly beyond 1999. The Company believes that adequate resources have been
allocated for this purpose and expects the Company's Year 2000 date conversion
programs to be completed on a timely basis. The Company does not expect to incur
significant expenditures to address this issue. However, there can be no
assurance that the Company will identify all Year 2000 problems in its computer
and other systems in advance of their occurrence or that the Company will be
able to successfully remedy any problems that are discovered. The expenses of
the Company's efforts to address such problems, or the expenses or liabilities
to which the Company may become subject as a result of such problems, could have
a material adverse effect on the Company's business, results of operations and
financial condition. In addition, the revenue stream and financial stability of
existing customers may be adversely impacted by Year 2000 problems, which could
cause fluctuations in the Company's revenues and operating profitability. In
addition, if any of the Company's significant customers or suppliers do not
successfully and timely achieve Year 2000 compliance, the Company's business
could be materially affected.
FLUCTUATION OF STOCK PRICE; ABSENCE OF ACTIVE TRADING
In recent periods there has been relatively little trading in the Company's
Common Stock and the market price per share of the Company's Common Stock has
fluctuated significantly. Although both the number of shares of the Common Stock
outstanding in the public float and the number of the Company's stockholders are
expected to increase significantly following the offering, there can be no
assurance that a more active trading market for the Common Stock will develop or
be sustained following the offering. Factors such as quarterly variations in the
Company's result of operations, changes in the Company's industry and market
conditions generally, the presence of a limited number of market makers for the
Company's Common Stock, the lack of availability of institutional market
research concerning the Company, and the limited and sporadic trading volume of
the Company's Common Stock have caused and may continue to cause the market
price of the Company's Common Stock to fluctuate significantly. In addition,
future announcements concerning the Company or its competitors, including
quarterly results, innovations, new product introductions, government
regulations or proceedings, or litigation may cause the market price of the
Common Stock to fluctuate significantly. Furthermore, the stock markets have
experienced extreme price and volume fluctuations during certain periods. These
broad market fluctuations and other factors may adversely affect the market
price of the Company's Common Stock for reasons unrelated to the Company's
operating performance. Accordingly, the price at which shares are offered hereby
should not be considered an indication of any price at which the Common Stock
may trade in the future.
17
<PAGE>
EFFECTS OF MASSACHUSETTS CONTROL SHARE ACQUISITION ACT
The Company is subject to Chapter 110D of the Massachusetts General Laws
which governs "control share acquisitions," which are certain acquisitions of
beneficial ownership of shares which raise the voting power of the acquiring
person (which can be a group of persons or entities sharing beneficial
ownership) above any one of three thresholds: one-fifth, one-third or one-half
of the total voting power. Each time one of these thresholds is crossed, all
shares acquired by the person making the control share acquisition within the
period beginning 90 days before and ending 90 days after such threshold is
crossed ("Affected Shares") obtain voting rights only (i) upon authorization by
a majority of the stockholders other than the holder of the Affected Shares,
officers of the Company and directors of the Company who also are employees of
the Company or (ii) when disposed of in non-control share acquisitions. Chapter
110D may have the effect of delaying or preventing a change of control of the
Company at a premium price. In addition, because the number of shares of Common
Stock currently entitled to vote is substantially less than the total number of
outstanding shares of Common Stock, holders of shares of Common Stock purchased
in transactions which are not control share acquisitions, and which occur at a
time when there are Affected Shares outstanding, will obtain voting rights which
are disproportionate to the number of shares held as a percentage of all
outstanding shares (including Affected Shares), which may facilitate the
acquisition of shareholdings which may permit the exercise of a controlling
influence on the management or policies of the Company. See "-- Substantial
Influence of Principal Stockholders" and "Description of Capital Stock."
SUBSTANTIAL INFLUENCE OF PRINCIPAL STOCKHOLDERS
The Company believes that certain control share acquisitions have occurred
and that members of the group which effected such control share acquisitions,
namely Wiaf Investors Co., Charles Alpert, Joseph Alpert, Melvin B. Chrein,
Meryl J. Chrein and Marshall J. Chrein (collectively, the "Investor Group"), as
of June 10, 1998 were the beneficial owners of 2,495,537 shares of Common Stock
(assuming full conversion of debentures and exercise of all warrants held by
certain members of the Investor Group), or approximately 50% of the Company's
outstanding shares of Common Stock. Of these shares, 1,759,255 are Affected
Shares (and thus not entitled to vote). The remaining 736,282 shares (assuming
full conversion of debentures and exercise of all warrants held by certain
members of the Investor Group) represent approximately 23% of the shares
entitled to vote. Directors and executive officers of the Company beneficially
own in the aggregate 1,063,249 shares of Common Stock (assuming full conversion
of debentures and exercise of all currently exercisable options and warrants
held by certain directors and executive officers), or approximately 33% of the
shares entitled to vote. The shares to be sold in the offering by members of the
Investor Group who are Selling Stockholders will become voting shares upon the
closing of the offering. Following the closing of the offering, the Investor
Group will beneficially own in the aggregate 2,045,537 shares of Common Stock
(assuming full conversion of debentures and exercise of all warrants held by
certain members of the Investor Group), or approximately 28% of the shares of
Common Stock (assuming no exercise of the Underwriters' over-allotment option).
Of the shares to be beneficially owned by the Investor Group, not more than
646,282 shares (assuming full conversion of convertible debentures and exercise
of all warrants held by certain members of the Investor Group) will be entitled
to vote, or approximately 11% of the shares entitled to vote (assuming no
exercise of the Underwriters' over-allotment option). Following the closing of
the offering, directors and executive officers of the Company, in the aggregate,
will beneficially own 768,249 of the outstanding shares of Common Stock
(assuming full conversion of debentures and exercise of all currently
exercisable options and warrants held by certain directors and executive
officers), or approximately 13% of the shares entitled to vote (assuming no
exercise of the Underwriters' over-allotment option). As a result, the Investor
Group and/or the Company's directors and executive officers could have
substantial influence on matters requiring approval of stockholders of the
Company, including the election of directors or the approval of significant
corporate matters. This concentration of ownership by existing stockholders may
also have the effect of delaying or preventing a change of control of the
Company. See "Principal and Selling Stockholders."
18
<PAGE>
SHARES AVAILABLE FOR FUTURE SALE
Upon the completion of the offering, the Company will have 7,040,674 shares
of Common Stock outstanding (7,490,674 if the Underwriters' over-allotment
option is exercised in full). Of these shares, approximately 4,607,948 shares
(including the 3,000,000 shares to be sold in the offering, assuming no exercise
of the Underwriters' over-allotment option) will be freely tradeable, without
restriction or further registration under the Securities Act, except for shares
purchased by "affiliates" of the Company, as that term is defined in Rule 144
under the Securities Act, or persons who have been affiliates within the
preceding three months. The remaining outstanding shares are owned by existing
stockholders and are currently deemed "restricted securities" under Rule 144. In
connection with the offering, the Company, and certain stockholders, including
directors and officers of the Company, holding in the aggregate 2,813,786 shares
of Common Stock (includes currently exercisable options and warrants and shares
issuable upon conversion of outstanding convertible debentures) after giving
effect to the offering, are expected to enter into lock-up agreements providing
that for a period of 180 days from the date of this Prospectus, the Company and
each such stockholder will not, directly or indirectly, without the prior
written consent of Bear, Stearns & Co. Inc., issue, sell, offer or agree to
sell, grant any option to purchase or otherwise transfer or dispose of any
Common Stock or any securities substantially similar to the Common Stock. In
addition, as of June 10, 1998, 721,420 shares of Common Stock have been reserved
for issuance upon the exercise of stock options outstanding or which may be
granted under the Company's stock option plans. Furthermore, the Company has
reserved 126,044 shares of Common Stock for issuance upon conversion of the
Company's convertible subordinated debentures and 182,790 shares (205,923 shares
after the completion of offering, giving effect to anti-dilution provisions in
the First Warrant held by the Company's principal bank lender and assuming no
exercise of the Underwriters' over-allotment option) of Common Stock for
issuance upon exercise of outstanding and immediately exercisable warrants, all
of which will be deemed "restricted securities" under Rule 144 upon issuance. It
is possible that some or all of these shares issued or which could be issued
could be available for future sales. Sales of substantial amounts of shares of
Common Stock in the public market, or the perception that such sales may occur,
could adversely affect the market price of the Common Stock. See "Use of
Proceeds," "Shares Eligible for Future Sale" and "Underwriting."
ABSENCE OF DIVIDENDS
The Company has not recently declared or paid cash dividends on its Common
Stock and intends to retain all available funds for use in the operation and
expansion of its business. The Company therefore does not anticipate that any
cash dividends will be declared or paid in the foreseeable future. Any future
decisions as to the payment of dividends will be at the discretion of the
Company's Board of Directors, subject to applicable law and any restrictions
contained in any bank loan or other debt agreements to which the Company may be
subject from time to time. See "Dividend Policy."
19
<PAGE>
THE COMPANY
The Company originated in 1942 at MIT as the metallurgical component of the
Manhattan Project. In the late 1940s, the Company separated from MIT while
remaining located on campus and operated as an independent business corporation
known as Nuclear Metals, Inc. Work commenced during this period with zirconium
and its alloys led to the development of a process, subsequently patented by the
Company, for the production of metal powders. In 1958, the Company was acquired
by Arthur D. Little, and was moved to its present headquarters in Concord,
Massachusetts. After a period of operation as a division of Textron, the
business of the Company was acquired by Whittaker Corporation and, in 1972, was
sold by Whittaker Corporation to a newly-organized company led by George
Matthews and Wilson Tuffin, who continue to serve the Company as Chairman and
Vice-Chairman of its Board of Directors, respectively.
In the 1970s and 1980s, a substantial portion of the Company's business
involved the supply of metal powders to Xerox Corporation for use in
photocopiers. During this period, the Company also developed expertise in the
production of beryllium alloys, including powder metallurgy and investment
casting, which eventually led to the development of the Company's family of
Beralcast alloys and techniques for investment casting beryllium alloy products.
In the late 1970s, the Company experienced a sharp decline in the sale of
powders to Xerox due to technological and market changes which largely obviated
the need for the Company's powders for these applications. As a result, the
Company shifted its focus to military applications for its metallurgical
expertise and began producing DU penetrators and billets for conversion into
tank armor, successfully moving into the defense contracting business. In the
late 1980s and the 1990s, the decline in U.S. defense spending resulted in
sharply reduced revenues from the sale of the Company's defense-related DU
products. The expectation that U.S. defense spending will continue at or below
current levels has also resulted in the writedown of the Company's equipment and
inventory related to its DU penetrators and tank armor businesses. See Note 5 to
Consolidated Financial Statements.
On October 1, 1997, the Company changed its name from "Nuclear Metals, Inc."
to "Starmet Corporation" and reorganized itself into a parent corporation with
the following five principal wholly-owned subsidiaries: Starmet NMI Corporation;
Starmet Powders, LLC; Starmet Commercial Castings, LLC; Starmet Aerocast, LLC;
and Starmet CMI Corporation (formerly known as Carolina Metals Inc.). This
reorganization was designed to allow management of the Company's operating
subsidiaries to assume substantial responsibility for day-to-day operations, new
business development, marketing and ultimately profitability. The Company's
management believes that the reorganization will result in concentration of
technical and human resources along functional business lines, which will allow
the Company, through its operating subsidiaries, to develop specialized
operational and marketing expertise, and to pursue selected teaming
arrangements, licenses, joint ventures and other cooperative relationships. On
October 1, 1997, the Company changed its Nasdaq National Market trading symbol
to "STMT."
The Company's principal executive offices are located at 2229 Main Street,
Concord, Massachusetts 01742, and the Company's telephone number is (978)
369-5410.
20
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,250,000 shares of
Common Stock offered by the Company are estimated to be approximately $58.4
million, based on an assumed offering price of $28.50 per share, and after
deduction of underwriting discounts and commissions and estimated offering
expenses payable by the Company. The Company will not receive any proceeds from
the sale of shares by the Selling Stockholders.
Of the net proceeds of the offering, the Company intends to make capital
expenditures of approximately $50.1 million to increase the capacity at the
Company's facilities, to repay approximately $4.9 million which is outstanding
under the Existing Credit Facility, to repay $850,000 of shareholder debt and to
use the remainder for general corporate purposes.
The Company has embarked upon a multi-year capital expenditure program under
which it plans to invest a substantial portion of the net proceeds of the
offering to expand its commercial Beralcast manufacturing capabilities through
fixed asset additions including the purchase of production equipment and
facility upgrades. The Company anticipates spending up to approximately $90
million over the next four years, subject to various factors, to increase the
capacity at the Company's facilities. Of this amount, the Company expects to
spend approximately $60 million on the expansion of its Beralcast business. The
Company intends to fund such capital expenditures with the proceeds of the
offering, the Proposed Credit Facility and cash expected to be generated from
operations. Under current plans, the Company intends to make capital
expenditures of approximately $30 million of the net proceeds of the offering
during the eighteen months following the closing of the offering. See
"Business--Manufacturing and Operations."
The Company intends to use a portion of the net proceeds of the offering to
repay all amounts outstanding under the Existing Credit Facility. As of June 10,
1998, borrowings of approximately $4.9 million were outstanding under the
Existing Credit Facility (excluding approximately $3.6 million in letters of
credit outstanding thereunder). Borrowings under the Existing Credit Facililty
bear interest, payable monthly in arrears, at a rate equal to the lender's prime
rate plus one-half percent. Under the terms of the Existing Credit Facility, the
maximum aggregate liability (including letters of credit) of the Company shall
not exceed $9.6 million through September 30, 1998, $8.1 million from October 1,
1998 through December 31, 1998, and $6.6 million from January 1, 1998 through
February 28, 1999, which is when the balance is due.
The Company has outstanding in the aggregate $2,250,500 in principal amount
under debt instruments to certain of its principal stockholders, consisting of
the following: $500,500 in principal amount of its 10% Convertible Subordinated
Debentures due December 10, 1998, which are convertible at any time into Common
Stock at $5.945 per share; $350,000 in principal amount of its 10% Subordinated
Debentures due December 10, 1998, with three-year warrants to purchase 42,000
shares of Common Stock at an exercise price of $7.50 per share; $500,000 in
principal amount of its 10% Subordinated Debentures due December 10, 2000, with
three-year warrants to purchase 60,000 shares of Common Stock at an exercise
price of $17.875 per share; and $900,000 in principal amount of its 10%
Convertible Subordinated Debentures due December 31, 1999, the principal amount
of which is convertible at any time into Common Stock at $21.50 per share. The
Company intends to use approximately $850,000 of the offering proceeds to repay
all of the 10% Subordinated Debentures. The Company intends to offer to repay
all of the 10% Convertible Subordinated Debentures but expects that the holders
thereof will convert such debentures into shares of Common Stock instead of
accepting repayment. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
The amounts and timing of actual capital and other expenditures will depend
upon numerous factors, including the timing and size of orders, the progress of
the Company's research and development programs, product marketing strategies,
cooperative business relationships, the competitive environment and the timing
of implementation of the Company's capital expansion plans. The Company intends
to utilize the remainder of the net proceeds of the offering for general
corporate purposes, including working capital requirements, additional capital
expenditures and in support of its general business expansion efforts. Pending
these uses, the net proceeds from the offering will be invested in short-term,
investment grade securities.
21
<PAGE>
DIVIDEND POLICY
The Company anticipates that, for the foreseeable future, all earnings will
be retained to support operations and finance expansion. The Company has not
paid cash dividends in recent years, and does not intend to pay cash dividends
on the Common Stock for the foreseeable future. The Company's ability to pay
cash dividends is limited by its dependence upon the receipt of cash from its
subsidiaries to make such dividend payments. The Company's Existing Credit
Facility contains financial covenants and other restrictions that prohibit or
restrict the payment of dividends and intercompany loans among Starmet and its
subsidiaries and by the Company to its stockholders. Upon completion of the
offering, the Existing Credit Facility will be replaced by a New Credit Facility
(as defined herein) which does not so prohibit or restrict dividends in the
absence of a default. See "Risk Factors--Absence of Dividends" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol STMT. As reported by the Nasdaq National Market, the high and low bid
prices for the two years ended September 30, 1996 and 1997, the first two
quarters of fiscal 1998 and the third quarter of fiscal 1998 (through June 10,
1998) are reflected in the following table. This information reflects
inter-dealer prices, without retail mark-up, mark-down or commissions and may
not represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
Fiscal 1996:
1st Quarter.................................................................................. $ 7.00 $ 5.25
2nd Quarter.................................................................................. 10.50 5.50
3rd Quarter.................................................................................. 9.25 6.75
4th Quarter.................................................................................. 9.38 6.00
Fiscal 1997:
1st Quarter.................................................................................. 10.75 7.25
2nd Quarter.................................................................................. 17.63 9.00
3rd Quarter.................................................................................. 18.50 14.00
4th Quarter.................................................................................. 19.00 14.50
Fiscal 1998:
1st Quarter.................................................................................. 31.00 14.25
2nd Quarter.................................................................................. 36.00 21.50
3rd Quarter (through June 10, 1998).......................................................... 38.00 27.25
</TABLE>
The stock prices listed above for fiscal 1996 and the first three quarters
of fiscal 1997 have been adjusted to reflect the Company's two-for-one stock
dividend paid on April 7, 1997.
On June 10, 1998 the last reported sale price for the Company's Common Stock
on the Nasdaq National Market was $28.50 per share. As of June 10, 1998, there
were approximately 300 holders of record of the Company's Common Stock. The
Company believes the actual number of beneficial owners of the Company's Common
Stock is greater because a large number of shares are held in custodial or
nominee accounts.
22
<PAGE>
CAPITALIZATION
(DOLLARS IN THOUSANDS)
The following table sets forth the capitalization of the Company as of March
31, 1998 and as adjusted to reflect the sale of 2,250,000 shares of Common Stock
offered by the Company hereby, at an assumed public offering price of $28.50 per
share and after deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by the Company, the application of the net
proceeds therefrom and the further adjustments described below. See "Use of
Proceeds." This table should be read in conjunction with the Consolidated
Financial Statements included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
-------------------------
ACTUAL AS ADJUSTED(1)
--------- --------------
<S> <C> <C>
Cash and cash equivalents............................................................. $ 247 $ 52,485
--------- --------------
--------- --------------
Short-term borrowings:
Bank credit facility, net of unamortized discount of $255......................... 4,859 --
Current portion of notes payable to stockholders and other long-term debt......... 1,029 179
--------- --------------
Total short-term borrowings................................................... 5,888 179
--------- --------------
--------- --------------
Long-term debt:
Notes payable to stockholders, net of unamortized discount of $235................ $ 1,165 $ --
Other long-term obligations....................................................... 336 336
--------- --------------
Total long-term debt.......................................................... 1,501 336
--------- --------------
Stockholders' equity:
Common Stock, $0.10 par value, 15,000,000 shares authorized, 4,790,274 shares issued
and outstanding (7,166,318 shares outstanding as adjusted)(1)(2).................... 479 717
Additional paid-in capital........................................................ 14,055 73,654
Warrants issued................................................................... 687 687
Retained earnings................................................................. 9,937 9,212
--------- --------------
Total stockholders' equity.................................................... 25,158 84,270
--------- --------------
Total capitalization.......................................................... $ 26,659 $ 84,606
--------- --------------
--------- --------------
</TABLE>
- ------------------------
(1) Adjusted to reflect (i) the sale by the Company of Common Stock in the
offering, (ii) the application of the proceeds therefrom, (iii) an
extraordinary loss of $725 associated with early extinguishment of
indebtedness, (iv) the anticipated payment by the Company of a fee of
approximately $235 under the Facility Restructuring Agreement to eliminate
certain anti-dilution provisions of warrants held by the Company's principal
bank lender and (v) the assumed conversion of approximately $1,400 in
principal amount of outstanding and immediately convertible subordinated
debentures held by certain stockholders. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations--Liquidity and Capital Resources."
(2) Based on shares of Common Stock outstanding as of March 31, 1998. Does not
include (i) an aggregate of 721,420 shares of Common Stock reserved for
issuance upon the exercise of outstanding options or that may be granted
under the Company's stock option plans (of which, options to purchase
594,920 shares were outstanding as of March 31, 1998) and (ii) 182,790 of
Common Stock reserved for issuance upon exercise of outstanding and
immediately exercisable warrants (not giving effect to anti-dilution
provisions in the First Warrant held by the Company's principal bank lender
that will be triggered as a result of the offering). See "Management's
Discussion and Analysis of Financial Conditions and Results of
Operations--Liquidity and Capital Resources" and "Shares Eligible for Future
Sale."
23
<PAGE>
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS EXCEPT PER SHARE INFORMATION)
The selected statement of operations and other data set forth below for each
of the years ended September 30, 1995, 1996 and 1997 have been derived from the
Company's Consolidated Financial Statements included elsewhere herein and should
be read in conjunction with such financial statements. The selected statement of
operations and other data set forth below for each of the years ended September
30, 1993 and 1994 have been derived from audited financial statements of the
Company that are not included herein. The selected statement of operations and
other data for the six month periods ended March 31, 1997 and 1998 and the
selected balance sheet data as of March 31, 1998 have been derived from the
unaudited financial statements of the Company included elsewhere herein and, in
the opinion of management, include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results of
operations and financial position of the Company for the period and at the date
presented. The selected statement of operations and other data set forth below
should be read in conjunction with the Consolidated Financial Statements and
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein. The results of the Company's operations
for the six months ended March 31, 1998 are not necessarily indicative of
results to be expected for any future period or fiscal 1998.
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDING SEPTEMBER 30, ENDED MARCH 31,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales and contract revenues............... $ 17,019 $ 19,004 $ 18,784 $ 28,694 $ 28,062 $ 12,613 $ 18,769
Cost of sales................................. 19,861 21,590 15,452 25,053 19,136 7,902 14,526
--------- --------- --------- --------- --------- --------- ---------
Gross profit.................................. (2,842) (2,586) 3,332 3,641 8,926 4,711 4,243
Selling, general & administration............. 6,623 4,209 4,817 5,325 5,448 3,273 4,475
Research and development 1,031 575 439 876 1,309 699 567
Loss on fixed asset writedown................. -- 3,584 -- -- 358 -- --
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss)....................... (10,496) (10,954) (1,924) (2,560) 1,811 739 (799)
Interest and other income (expense), net 396 120 232 (89) (2) 11 --
Interest expense, net......................... 953 550 350 387 296 119 489
Income (loss) before taxes & extraordinary
item........................................ (11,053) (11,384) (2,042) (3,036) 1,513 631 (1,288)
Income tax provision (benefit)................ (3,746) (1,188) (1,967) 1 31 13 --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) (1)(2)...................... $ (6,207) $ (10,196) $ 510 $ (3,037) $ 1,482 $ 618 $ (1,288)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Basic net income (loss) per share (3)(4)...... $ (1.35) $ (2.22) $ 0.11 $ (0.64) $ 0.31 $ 0.13 $ (0.27)
Basic weighted average shares outstanding
(3)(4)...................................... 4,590 4,600 4,701 4,779 4,783 4,782 4,787
Diluted net income (loss) per share (3)(4).... $ (1.35) $ (2.22) $ 0.11 $ (0.64) $ 0.30 $ 0.13 $ (0.27)
Diluted weighted average shares outstanding
(3)(4)...................................... 4,590 4,600 4,706 4,779 4,959 4,928 4,787
OTHER DATA:
Research & development expense................ 1,031 575 439 876 1,309 699 567
Customer funded research and development
(5)......................................... 503 792 557 1,812 793 111 291
Capital expenditures.......................... 1,265 709 777 1,449 1,788 785 2,349
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF SEPTEMBER 30, MARCH 31, 1998
----------------------------------------------------- --------------------------
1993 1994 1995 1996 1997 ACTUAL AS ADJUSTED (6)
--------- --------- --------- --------- --------- --------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................ $ 24,532 $ 17,477 $ 15,866 $ 9,249 $ 10,743 $ 7,928 $ 65,874
Total assets........................... 57,223 40,542 40,886 35,118 34,704 38,540 90,778
Total liabilities...................... 20,852 14,290 13,641 10,748 8,608 13,382 6,508
Stockholders' equity................... 36,371 26,252 27,245 24,370 26,096 25,158 84,270
</TABLE>
- ------------------------
(1) Net loss for fiscal 1993 has been reduced by income of $1,100 related to the
cumulative effect of a change in accounting principle.
(2) Net income for fiscal 1995 includes an extraordinary gain of $585 on the
extinguishment of debt, net of taxes of $10.
(3) Adjusted to reflect the two-for-one stock dividend issued on April 7, 1997.
(4) Effective December 15, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, EARNINGS PER SHARE. Basic net income
(loss) per share was computed by dividing net income (loss) by the weighted
average shares outstanding. Diluted net income per share was computed by
dividing net income (loss) by the weighted average number of shares and
dilutive potential shares outstanding during the relevant period. In loss
periods, dilutive potential shares are excluded as they would be
anti-dilutive.
(5) Such amounts are included in net sales and contract revenues.
(6) Adjusted to give effect to (i) the sale of 2,250,000 shares of Common Stock
by the Company at an assumed price of $28.50 per share after deducting
underwriting discounts and estimated expenses of $1,200 and the application
of the estimated net proceeds therefrom, (ii) an extraordinary loss of $725
associated with early extinguishment of indebtedness, (iii) the anticipated
payment by the Company of a fee of approximately $235 under the Facility
Restructuring Agreement to eliminate certain anti-dilution provisions of
warrants held by its principal bank lender and (iv) the assumed conversion
of approximately $1,400 in principal amount of outstanding and immediately
convertible subordinated debentures held by certain stockholders. See "Use
of Proceeds" and "Managements' Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF THE COMPANY'S FINANCIAL CONDITION
AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH "SELECTED FINANCIAL
DATA" AND THE CONSOLIDATED FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS
PROSPECTUS.
GENERAL
The following discussion and analysis of the Company's financial condition
and results of operations is based on the three business segments in which the
Company currently reports its results, namely Specialty Metal Products, Depleted
Uranium Penetrators and Uranium Services and Recycle. The Specialty Metal
Products segment consists of the manufacture of the Company's Beralcast alloys,
specialty metal powders, billets for tank armor, and industrial and medical
shielding products. The Depleted Uranium Penetrators segment consists of the
manufacture of DU penetrators for military munitions applications. The Uranium
Services and Recycle segment consists of the manufacture of DU and NU metal for
use as uranium feedstock supplied to USEC's AVLIS program, conversion of UF(6)
to UF(4), recycling of various low-level radioactive metals, DUCRETE shielding
capabilities and repair of counterweights for commercial and military aircraft.
In the late 1980s and the 1990s, the decline in U.S. defense spending
resulted in sharply reduced revenues from the sale of the Company's
defense-related depleted uranium products, including DU penetrators and billets
for conversion into tank armor. The Company expects that no revenue will be
derived from sales of DU penetrators after the second quarter of fiscal 1999 and
that only limited revenue will be derived from sales of billets for conversion
into tank armor thereafter. As revenues from defense-related DU products decline
overall and as a percentage of revenues, the Company may provide information on
two business segments in future periods. In order to facilitate an understanding
of the Company's business as currently anticipated to be conducted in future
periods, the discussion of the Company's business elsewhere in this Prospectus
combines the Company's Uranium Services and Recycle and Depleted Uranium
Penetrators segments under the designation Advanced Recycling Technologies and
Uranium Services. See "--Segment Information."
A central aspect of the Company's strategy is to concentrate its efforts and
resources on commercial applications for its technology. In particular, the
Company intends to focus on the commercialization of its family of Beralcast
alloys. To date, the Company's Beralcast business has received most of its
orders and funding from military aerospace applications. In particular, the
Company has received contracts from Lockheed Martin for Beralcast components to
be used in its Electro Optic Sensor System ("EOSS"), the night vision and target
acquisition system on the Comanche helicopter, which is scheduled for full-scale
production commencing in 2003. The Company is applying its Beralcast technology
to develop, among other things, disk drive arm sets for high-end disk drives as
well as satellite components, premium golf products and other products. These
products currently are in the development and, for certain customers, the
pre-production stages. The Company believes that as a result of the general
practice of manufacturers in the disk drive industry and other targeted
commercial industries of placing only short-term orders, the Company could
experience substantial fluctuations in revenues and earnings from quarter to
quarter. The Company is also developing additional commercial applications for
its Beralcast alloys. See "Risk Factors--Risks Related to New Product
Introductions, Rapid Technological Change and Industry Conditions."
In the third quarter of fiscal 1996, the Company reduced its workforce at
its South Carolina facility due to the completion of a contract for a foreign
customer and lack of anticipated new orders. During most of fiscal 1996, the
Company operated this facility at approximately 40% of capacity on a one-shift
basis. In the fourth quarter of fiscal 1996, the Company took a $2,100,000
reserve for estimated fiscal 1997 losses associated with then current production
contracts, which reserve was fully utilized during fiscal 1997.
25
<PAGE>
Losses at the facility continued through the first quarter of fiscal 1998 due to
underutilization. At the same time, the Company increased its workforce in
preparation for the receipt of an AVLIS production contract. USEC recently
exercised production options under its existing AVLIS contract with the Company,
and the Company anticipates receiving additional contractual work from USEC in
the summer of 1998. The Company's operations in South Carolina are currently
substantially dependent on orders from USEC and are expected to remain so.
Failure of the Company to be awarded such contracts could have a material
adverse effect on the Company's business, results of operations and financial
condition. See "Risk Factors--Uncertainties Relating to USEC and UF(6)
Conversion."
Due primarily to the sharp decline in sales of DU penetrators and lack of
orders in its uranium services and recycle business, the Company incurred losses
in three of its last four previous fiscal years and in the first six months of
fiscal 1998. The Company's accountants, in their report to the Board of
Directors and stockholders of the Company on the Company's financial statements
for fiscal 1995, stated that there was substantial doubt at that time about the
Company's ability to continue as a going concern. Although the Company was
profitable in fiscal 1997, reserve reductions and other non-recurring income
items accounted for the profitability. Excluding these items, the Company would
have reported a net loss in fiscal 1997. See "Risk Factors--History of Losses;
Risk of Future Losses" and "--Results of Operations." As a result, the Company
has experienced significant financial difficulties and liquidity problems in
recent years and has had to seek financing from stockholders, waivers of
non-compliance with, and amendments of, certain covenants and other provisions
in its debt instruments (including waivers and amendments under the Existing
Credit Facility in February, May and June of 1998), additional borrowings and
extensions of maturities under the Existing Credit Facility, and additional
equipment financing from another bank for capital expenditures required at its
South Carolina facility. See "--Liquidity and Capital Resources."
In connection with additional borrowings under the Existing Credit Facility
in December 1997, the Company issued the Second Warrant (as defined herein) to
its principal bank lender, which has been recorded as a discount to the related
debt at fair value. The fair value attributable to the Second Warrant, $327,000,
will be amortized as interest expense for the period January 1, 1998 through
October 1, 1998. On April 1, 1998, the Company and the lender entered into the
Facility Restructuring Agreement under which the Company received an option to
pay a fee of $235,313 to eliminate certain anti-dilution provisions of the
lender's warrants upon the closing of the offering. Upon the closing of the
offering and the repayment of all amounts outstanding under the Company's
Existing Credit Facility and certain stockholder subordinated indebtedness, the
Company expects to record an extraordinary loss on the early extinguishment of
debt of $725,000, as a result of writing off all unamortized deferred financing
costs and discounts. See "-- Liquidity and Capital Resources."
The Company had established inventory reserves totaling approximately $1.6
million at the end of fiscal 1995. During fiscal 1996, the Company established
additional inventory reserves of approximately $3.3 million related to its DU
inventory. These additional reserves were established based on management's
evaluation of the risks associated with the DU inventory, including risks
associated with excess and obsolete inventory. In conducting this evaluation,
management considered the type and quantity of inventory on hand, historical
sales volumes and revised expectations concerning the timing and amounts of then
anticipated sales of current and proposed products (based upon longer than
expected sales cycles for certain products). At September 30, 1996, the
Company's utilization of DU inventory was uncertain. In particular, the Company
considered future use of DU for munitions contracts with the U.S. Army as
unlikely. At that time, the Company was also discussing with USEC the
possibility, timing and volume of AVLIS feedstock production, and was evaluating
the potential use of DU in other proposed products and the timing of inventory
usage with respect to such products. Although the Company believed the long-term
possibilities for DU usage were numerous, the uncertainties related to the usage
of the DU inventory were significant. Based on these uncertainties, management's
judgment and discussions between the Company and its independent public
accountants, inventory reserves were increased by such $3.3 million amount,
bringing the total inventory reserves at September 30, 1996 to approximately
$4.9 million. Of this amount,
26
<PAGE>
approximately $3.8 million was allocated to DU inventory, with the balance
allocated to various other inventories. As of September 30, 1996, gross DU
inventory was approximately $9.0 million.
Revenues related to a munitions contract with a foreign customer and an
AVLIS feedstock production contract for fiscal 1997 were $5.4 million and $3.9
million, respectively, as compared to $3.1 million and $1.3 million,
respectively, for fiscal 1996. Revenues by quarter under these two contracts
were approximately $3.7 million, $1.0 million, $2.1 million and $2.5 million for
the fiscal quarters ended December 31, 1996, March 31, 1997, June 30, 1997 and
September 30, 1997, respectively. At the end of the second quarter of fiscal
1997, the Company conducted a review of its inventory reserves and determined
that approximately $0.7 million of inventory reserves was no longer required.
Approximately $2.4 million of DU inventory was used in fiscal 1997, principally
related to the sale of DU penetrators under such munitions contract,
approximately a 27% decrease in DU inventory during the fiscal year. Based on
its fiscal 1997 DU inventory usage and the Company's expectations of future
sales, at the end of fiscal 1997 management again reviewed its inventory
reserves and determined that an additional approximate $0.3 million of inventory
reserves was no longer required. The total DU inventory reserve reduction in
fiscal 1997 was approximately 27%, a percentage reduction approximately equal to
the reduction in DU inventory. See Notes 2 and 5 to Consolidated Financial
Statements.
27
<PAGE>
SEGMENT INFORMATION
The following table sets forth certain information regarding the revenue,
operating profit (loss) and identifiable assets attributable to the three
business segments in which the Company currently operates.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30, MARCH 31,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales and contract revenues:
Specialty Metal Products................................. $ 12,102 $ 13,730 $ 13,170 $ 5,553 $ 6,478
Depleted Uranium Penetrators............................. 1,713 8,775 9,927 5,379 8,864
Uranium Services & Recycle............................... 4,969 6,189 4,965 1,681 3,427
Operating profit (loss):
Specialty Metal Products................................. (341) 1,432 391 (1,639) (244)
Depleted Uranium Penetrators............................. (237) (942) 575 202 (1,467)
Uranium Services & Recycle............................... (996) (2,700) 1,195 2,176 912
Identifiable assets:
Specialty Metal Products................................. 5,140 6,195 6,155 5,735 7,339
Depleted Uranium Penetrators............................. 12,158 8,441 7,965 10,995 9,503
Uranium Services & Recycle............................... 16,609 13,749 14,849 11,271 14,679
</TABLE>
The following table sets forth segment information based on segmentation of
the Company's business into two segments, namely Specialty Metal Products and
Advanced Recycling Technologies and Uranium Services. See "--General."
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30, MARCH 31,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales and contract revenues:
Specialty Metal Products (1)............................. $ 9,184 $ 11,744 $ 9,884 $ 4,523 $ 5,237
Advanced Recycling Technologies and Uranium Services
(2).................................................... 9,600 16,950 18,178 8,090 13,532
Operating profit (loss):
Specialty Metal Products................................. (169) 1,415 209 (1,505) (250)
Advanced Recycling Technologies and Uranium Services..... (1,405) (3,625) 1,952 2,244 (549)
Identifiable assets:
Specialty Metal Products................................. 4,097 5,565 5,315 4,897 6,577
Advanced Recycling Technologies and Uranium Services..... 29,810 22,820 23,654 23,104 24,944
</TABLE>
- ------------------------
(1) Specialty Metal Products excludes the production of DU billets for
conversion into tank armor and DU industrial and medical shielding products.
(2) Advanced Recycling Technologies and Uranium Services includes the Company's
current Depleted Uranium Penetrators and Uranium Services & Recycle
segments, plus production of DU tank armor billets and shielding products.
28
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain items in the consolidated statements
of income as a percentage of net sales and contract revenues for the fiscal
years 1995, 1996 and 1997 and the six months ended March 31, 1998.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30, MARCH 31,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales and contract revenues............................. 100% 100% 100% 100% 100%
Costs and expenses:
Cost of sales............................................. 82 87 68 63 77
Selling, general and administrative expenses.............. 26 19 19 26 24
Research and development expenses......................... 2 3 5 5 3
Loss on write-off of fixed asset.......................... -- -- 1 -- --
Operating income (loss)..................................... (10) (9) 6 6 (4)
Interest and other income (expense), net.................... 1 -- -- -- --
Interest expense............................................ 2 1 1 1 3
Income (loss) before income taxes and extraordinary item.... (11) (11) 5 5 (7)
Provision (benefit) for income taxes........................ (10) -- -- -- --
Income (loss) before extraordinary item..................... -- (11) 5 5 (7)
Net income (loss)........................................... 3 (11) 5 5 (7)
</TABLE>
SIX MONTHS ENDED MARCH 31, 1998 COMPARED WITH SIX MONTHS ENDED MARCH 31, 1997
Net sales increased by $6,156,000 or 49% to $18,769,000 in the first six
months of fiscal 1998 compared to the first six months of fiscal 1997. Sales in
the Uranium Services and Recycle industry segment increased by $1,746,000 or
104%. Sales in the specialty Metal Products segment increased by $925,000 or
17%. Sales in the Depleted Uranium Penetrator segment increased by $3,485,000 or
65%.
The sales increase in the Uranium Services and Recycle segment was due
primarily to AVLIS feedstock production orders which were completed in the
second quarter of fiscal 1998. To be prepared for anticipated AVLIS production,
the workforce at Starmet CMI Corporation was increased significantly during the
first six months of fiscal 1998. The sales increase in the Specialty Metal
Products segment was due primarily to increased production volume of Beralcast
products and medical powders. The sales increase in the Depleted Uranium
Penetrator segment was due to a $3,806,000 increase in revenue recognized on the
remediation of the holding basin at the Company's Concord facility pursuant to a
U.S. Army contract, which revenue generates nominal gross margin. That increase
was partially offset by a $321,000 decrease in sales of Depleted Uranium
penetrators and blanks. Due to anticipated reduced U.S. government procurement
plans, the Company expects that no revenues will be derived from the Depleted
Uranium penetrator operations after the second quarter of fiscal 1999.
Gross profit in the first six months of fiscal 1998 decreased by $468,000 to
$4,243,000 or 10% from $4,711,000 in the first six months of fiscal 1997. Within
the Specialty Metal Products segment, gross profit increased by $1,386,000,
including a gross profit increase on Beralcast products of $1,031,000 from
($1,379,000) in the first six months of fiscal 1997 to ($348,000) in the first
six months of fiscal 1998, principally due to increased sales volumes and the
absence in the second quarter of fiscal 1998 of certain Beralcast production
start-up costs incurred in the second quarter of fiscal 1997. Also contributing
to the gross profit increase within this segment were gross profit increases in
commercial DU and powder products, partially offset by a gross profit decrease
associated with other Specialty Metal Products sales. Gross profit within the
Uranium Services and Recycle segment in the first six months of fiscal 1998
decreased by $878,000 over the comparable period of fiscal 1997. This decrease
was largely attributable to
29
<PAGE>
the absence in the first six months of fiscal 1998 of a reserve reduction for
waste disposal of $670,000 and a $740,000 reduction in an inventory reserve
related to the Company's South Carolina facility which occurred in the
comparable period of fiscal 1997. The first six months of fiscal 1998 also
included a $982,000 decrease in gross profit within the Depleted Uranium
Penetrator segment due primarily to reduced volumes of penetrators and blanks
partially offset by increased sales of other products within this segment. As a
percentage of sales, gross profit was 22% for the first six months of fiscal
1998 compared to 37% for the first six months of fiscal 1997.
Selling, general and administrative expenses increased by $1,202,000 or 37%
in the first six months of fiscal 1998 compared to the first six months of
fiscal 1997. Of this increase, $719,000 related to an increase in sales and
administrative personnel at the Company's Concord, Massachusetts facility to
support its sales growth. The balance of the increase, approximately $483,000,
related to an increase in sales and administrative personnel at the Company's
South Carolina facility to support sales growth of the AVLIS feedstock program
and remediation contracts for customers. As a percentage of sales, these
expenses were 24% in the first six months of fiscal 1998 compared to 26% in the
first six months of fiscal 1997.
Interest expense increased to $489,000 in the first six months of fiscal
1998 from $119,000 for the first six months of fiscal 1997. This increase was
primarily attributable to interest expense associated with increased borrowings
under the Company's line of credit and shareholder notes, as well as the
increase in the amortization of warrants issued in connection with an amendment
to the Company's line of credit and the issuance of certain shareholder notes.
Income taxes during the first six months of fiscal 1998 and 1997 were at an
effective rate of 0% and 2%, respectively. The Company has unrecognized net
operating loss carryforwards resulting in a minimal effective tax rate.
FISCAL 1997 COMPARED WITH FISCAL 1996
Net sales decreased by $632,000 or 2% to $28,062,000 in fiscal 1997 compared
to $28,694,000 in fiscal 1996. Sales in the Uranium Services and Recycle segment
decreased by $1,224,000 or 20%. Sales in the Specialty Metal Products segment
decreased by $560,000 or 4%. Sales in the Depleted Uranium Penetrator segment
increased by $1,152,000 or 13%.
The sales decrease in the Uranium Services and Recycle segment was primarily
due to lack of volume in depleted uranium products due to completion of a
production contract for a foreign customer in fiscal 1996. This decrease was
partially offset by increases in AVLIS feedstock production for USEC. The sales
decrease in the Specialty Metal Products industry segment was a result of
decreased volumes of beryllium products due to a delay in expected orders,
partially offset by an increase in commercial depleted uranium products. The
sales increase in the Depleted Uranium Penetrator segment was the result of
higher production volume of penetrators for a foreign customer as a result of an
order which was expected to receive government funding in fiscal 1996 but which
was not funded until fiscal 1997 and the revenue recognized pursuant to the
Company's contract with the United States Army to remediate the holding basin at
the Company's Concord facility.
Gross profit increased by $5,285,000 to $8,926,000 or 32% of sales in fiscal
1997 compared to $3,641,000 or 13% of sales in fiscal 1996. This increase in
gross profit was primarily due to reduction of certain accruals in fiscal 1997
for waste burial costs of $1,750,000 and a reduction of inventory reserves of
$1,000,000. The revised contract price for waste burial costs was approximately
$1,750,000 lower than what was previously estimated and accrued. During 1997,
the Company used approximately $2,400,000 worth of depleted uranium inventory in
connection with the production of depleted uranium penetrators under a munitions
contract with a foreign customer and AVLIS feedstock production for USEC. As a
result of this reduction in inventory, the Company decreased the inventory
reserves by $1,000,000. In addition, gross profit for fiscal 1996 was reduced by
an accrual of a $2,100,000 reserve for anticipated fiscal 1997 operating losses
associated with production contracts in the Uranium Services and Recycle
segment. As of September 30, 1997, the accrual had been fully utilized.
30
<PAGE>
Selling, general and administrative expenses increased by $123,000 or 2% to
$5,448,000 in fiscal 1997 compared to fiscal 1996. This increase was primarily
due to additional employees required to support the forecasted growth in
business. As a percentage of sales, these expenses remained at 19% in fiscal
1997 compared to fiscal 1996.
Company-sponsored research and development expenses increased by 49% or
$433,000 to $1,309,000 for fiscal 1997. As a percentage of sales, these expenses
were 5% compared to 3% in fiscal 1996.
Interest and other income decreased to ($2,000) in fiscal 1997 as compared
to ($89,000) in fiscal 1996. This decrease was mainly due to the absence in
fiscal 1997 of a restructuring fee associated with amendments to the Company's
credit facility during the third quarter of fiscal 1996.
Interest expense decreased by $91,000 to $296,000 in fiscal 1997 as compared
to fiscal 1996. This decrease was primarily the result of higher interest rates
and fees associated with outstanding debt during fiscal 1996.
Income taxes provided during 1997 and 1996 were at effective rates of 2% and
0%, respectively. The 1997 effective rate of 2% differs from the statutory rate
of 34% due to a reduction in the valuation allowance associated with to the
benefit of net operating loss carryforwards.
FISCAL 1996 COMPARED WITH FISCAL 1995
Net sales increased by $9,910,000 or 53% to $28,694,000 in fiscal 1996
compared to $18,784,000 in fiscal 1995. Sales in the Uranium Services and
Recycle segment increased by $1,220,000 or 25%. Sales in the Specialty Metal
Products segment increased by $1,628,000 or 13%. Sales in the Depleted Uranium
Penetrator segment increased by $7,062,000 or 412%.
The sales increase in the Uranium Services and Recycle segment was primarily
due to increases in AVLIS feedstock production for USEC. The sales increase in
the Specialty Metal Products segment was a result of higher sales of beryllium
products and commercial depleted uranium. The sales increase in the Depleted
Uranium Penetrator segment was the result of higher sales of large caliber
penetrators.
During the third quarter of fiscal 1996, the Company reduced its workforce
from 55 to 24 employees at its South Carolina facility due to the completion of
a multi-year contract for the manufacture of depleted uranium for a foreign
customer and the lack of anticipated new orders. The Company had expected to
obtain orders from USEC and the DoE in the second half of fiscal 1996. These
orders did not materialize and as a result this facility operated at
approximately 40% capacity on a one-shift basis through most of fiscal 1996. In
the fourth quarter of fiscal 1996, the Company established a $2,100,000 reserve
for estimated fiscal 1997 losses associated with then current production
contracts.
Gross profit increased by $309,000 to $3,641,000 or 13% of sales in fiscal
1996 compared to $3,332,000 or 18% of sales in fiscal 1995. This increase in
gross profit was primarily due to increased sales volume during fiscal 1996. As
a percentage of sales, the decrease in gross profit was primarily due to the
establishment of a $2,100,000 reserve for estimated losses associated with CMI's
production contracts.
Selling, general and administrative expenses increased by $508,000 to
$5,325,000 in fiscal 1996 compared to fiscal 1995. This increase was primarily
due to additional employees required to support the growth in business. As a
percentage of sales, these expenses decreased to 19% in fiscal 1996 compared to
26% in fiscal 1995, as a result of sales increasing at a higher rate than
expenses.
Company-sponsored research and development expenses increased by 100% or
$439,000 to $876,000 in fiscal 1996 compared to fiscal 1995 due to increased
research and development costs related to the use of the Company's Beralcast
technology in certain military aerospace applications. As a percentage of sales,
these expenses were 3% in fiscal 1996 compared to 2% in fiscal 1995.
Interest and other income decreased to $89,000 of expense in fiscal 1996
compared to $232,000 of income for fiscal 1995. This decrease was mainly from a
$150,000 restructuring fee associated with
31
<PAGE>
amendments to the Company's credit facility during the third quarter of fiscal
1996 and a gain of $175,000 recognized during the second quarter of fiscal 1995
on the sale of an office building.
Interest expense increased by $37,000 to $387,000 in fiscal 1996 compared to
fiscal 1995. This increase was primarily the result of higher interest rates and
fees associated with outstanding debt during fiscal 1996.
During fiscal 1995, the Company realized a $585,000 extraordinary gain net
of taxes of $10,000 on the early extinguishment of debt.
Income taxes provided during 1996 were at an effective rate of 0%. The 1996
effective rate of 0% differed from the statutory rate of 34% due to a reduction
in the valuation allowance associated with to the benefit of net operating loss
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
In recent fiscal years, the Company's primary sources of liquidity have been
borrowings under the Existing Credit Facility, borrowings from shareholders and,
to a limited extent, cash from operations. The Company has experienced
significant financial difficulties and liquidity problems in recent years due
primarily to the sharp decline in sales of DU penetrators and a lack of orders
for certain other DU products. As a result, the Company has had to seek
financing from stockholders, waivers of non-compliance with, and amendments of,
certain covenants and other provisions in its debt instruments (including
waivers and amendments under the Existing Credit Facility in February, May and
June of 1998), additional borrowings and extensions of maturities under the
Existing Credit Facility, and additional equipment financing from another bank
for capital expenditures required at its South Carolina facility. Bank
borrowings and borrowings from stockholders were effected to fund working
capital requirements, capital expenditures and a number of expenses which were
incurred in expectation of future business and revenues from the Company's
Beralcast business and its South Carolina facility.
The Company's future liquidity needs are expected to arise primarily from
its capital expenditure program, which is designed primarily to increase
manufacturing capacity to support its Beralcast business. In order to obtain and
satisfy orders for large scale commercial production of its Beralcast products,
the Company plans to significantly increase capital expenditures to expand its
commercial Beralcast manufacturing capabilities through fixed asset additions
including furnaces, automated production equipment and facility upgrades. The
Company anticipates spending up to approximately $90 million over the next four
years, subject to various factors, to increase the capacity at the Company's
facilities. Of this amount, the Company expects to spend approximately $60
million on the expansion of its Beralcast business. The Company expects to fund
such capital expenditures with the proceeds of the offering and cash expected to
be generated from operations. See "Business--Manufacturing and Operations."
Net cash provided (used) by operating activities in fiscal years 1997, 1996
and 1995 was ($921,000), $3,776,000 and ($278,000), respectively. Differences in
cash flows from operating activities over this three-year period were primarily
related to significant year-to-year changes in accounts receivable, inventories
and accounts payable. The Company used net cash of $1,788,000, $1,107,000 and
provided $36,000 in fiscal years 1997, 1996 and 1995, respectively, primarily to
fund investing activities largely related to capital expenditures made in
anticipation of future commercial business. Net cash flows from financing
activities for fiscal years 1997, 1996 and 1995 were $1,676,000, ($2,444,000)
and $105,000, respectively. Net cash provided for financing activities in fiscal
1997 was primarily the result of an increase in bank borrowings of approximately
$1,700,000 and $500,000 in borrowings from shareholders. Fiscal 1996 net cash
used by financing activities was primarily the result of reduction of bank debt
in accordance with credit terms. As a result of the foregoing, net cash
increased (decreased) in fiscal years 1997, 1996 and 1995 by ($1,033,000),
$225,000 and ($137,000), respectively.
Net cash used by operating activities in the six months ended March 31, 1997
and 1998 was $508,000 and $1,785,000, respectively. Differences in cash flows
from operating activities were primarily related to
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significant changes in net income, accounts receivable, inventories and accounts
payable. The Company used net cash of $773,000 and $2,349,000 for periods ended
March 31, 1997 and 1998, respectively, primarily to fund investing activities
largely related to capital expenditures made in anticipation of future
commercial business. Net cash provided by financing activities for the periods
ended March 31, 1997 and 1998 was $428,000 and $4,186,000, respectively and
resulted primarily from increases in bank borrowings and borrowings from
stockholders. As a result of the foregoing, net cash decreased by $853,000 in
the six month periods ended March 31, 1997 and increased by $52,000 in the six
month period ended March 31, 1998.
At March 31, 1998, the Company had working capital of $7,928,000, a decrease
of $2,815,000 since the end of fiscal 1997. At March 31, 1998, the Company's
accounts receivable and inventories increased by $2,197,000 and $45,000,
respectively, compared to September 30, 1997 levels. Cash (less restricted cash)
at March 31, 1998 was $247,000. Current indebtedness increased to $11,881,000
from $7,130,000 as a result of increased borrowings under the Existing Credit
Facility (as described below) and increased borrowings from shareholders. At
March 31, 1998, the Company had $5,113,000 outstanding under its bank line of
credit, with $887,000 available for borrowing thereunder (after subtraction of
$3,550,000 in letters of credit issued thereunder). At March 31, 1998, notes
payable to shareholders increased to $2,250,000 from $1,350,000 as at September
30, 1997, excluding the unamortized discount. At June 10, 1998, the Company had
$4,887,000 outstanding under its line of credit, $3,550,000 outstanding in
letters of credit and $1,113,000 available for borrowing thereunder.
As of March 31, 1998, the Company was out of compliance with the capital
expenditure financial covenant under its credit agreement which prohibits the
Company from making capital expenditures above $2,000,000 annually. On May 15,
1998, the Company received a waiver for this event of non-compliance and of
non-compliance with the capital expenditure financial covenant for the remainder
of fiscal 1998. The Company also received a waiver of non-compliance in February
1998 with respect to its failure to meet a net income covenant in the first
quarter of fiscal 1998.
On October 1, 1997, the Company and its principal bank lender, State Street
Bank & Trust Company, entered into an Amended and Restated Credit Agreement
providing for a credit facility (as amended, the "Existing Credit Facility") of
$6.6 million, including $3.6 million in letters of credit. Borrowings under the
Existing Credit Facility bear interest, payable monthly in arrears, at a rate
equal to the lender's prime rate plus one-half of one percent and the Company
pays a fee of one-half of one percent of the unused portion of the facility.
Borrowings are secured by a security interest in all of the Company's accounts,
inventory and general intangibles. The Company and its lender entered into the
First Amendment to Credit Agreement dated December 9, 1997 which provided for an
increase in the Existing Credit Facility to $8.0 million. On December 29, 1997,
the Company entered into the Second Amendment to Credit Agreement which provided
for the following: (i) an increase in the total amount of credit available to
the Company from $8.0 million to $9.6 million consisting of a $6.0 million line
of credit and $3.6 million letters of credit; (ii) a revised amortization
schedule whereby the maximum aggregate liability (including letters of credit)
of the Company under the Existing Credit Facility shall not exceed $8.1 million
from July 1, 1998 through September 30, 1998, and $6.6 million from October 1,
1998 through February 28, 1999, which is when the balance is due; and (iii)
waiver of non-compliance by the Company with certain covenants in the Existing
Credit Facility and amendment of certain financial covenants. As a result of the
loss in the first quarter of fiscal 1998, the Company sought and obtained a
waiver of non-compliance with certain covenants in the Existing Credit Facility.
The Company and its lender entered into the Third Amendment to Credit Agreement
dated June 11, 1998 which provided for (i) a revised amortization schedule
whereby the maximum aggregate liability (including letters of credit) of the
Company under the Existing Credit Facility shall not exceed $9.6 million through
September 30, 1998, $8.1 million from October 1, 1998 through December 31, 1998,
and $6.6 million from January 1, 1999 through February 28, 1999, which is when
the balance is due, and (ii) a reduction of the net income covenant for the
third quarter of fiscal 1998. The Company intends to use a portion of the
proceeds of the offering to repay all amounts outstanding under the Existing
Credit Facility.
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In September 1995, in connection with an increase of the Company's borrowing
capacity under the Existing Credit Facility as then in effect, the Company
issued to the lender a warrant (the "First Warrant") to purchase 55,790 shares
of Common Stock (as adjusted for a two-for-one stock dividend paid on April 7,
1997 and certain subsequent anti-dilution adjustments) at an exercise price of
$5.95, based on the market price of the Common Stock at that time. The First
Warrant has a ten-year exercise period. In consideration of the Second Amendment
to the Credit Agreement, the Company issued to the lender a warrant (the "Second
Warrant" and, together with the First Warrant, the "Warrants") to purchase
25,000 shares of Common Stock at an exercise price of $23.58, based on the
market price of the Common Stock at that time. The Second Warrant has a
seven-year exercise period. The Second Warrant has been valued at approximately
$327,000, which amount will be amortized as interest expense over the period
ending October 1, 1998. Under the original terms of each of the Warrants, the
holder of the Warrants would be entitled to receive, without further
consideration, a number of shares of Common Stock which would permit the holder
to maintain its percentage ownership in the Company, on a fully-diluted basis,
upon any future issuances of Common Stock by the Company.
On April 1, 1998, the Company entered into an agreement (the "Facility
Restructuring Agreement") with its principal bank lender pursuant to which,
contingent upon the closing of the offering, the Company received an option to
make a payment of $235,313 to the lender whereupon no further adjustments for
issuances of Common Stock by the Company will be made under the First Warrant
(other than an adjustment related to the closing of the offering) and no
adjustments for issuances of Common Stock by the Company will be made under the
Second Warrant. After the completion of the offering, the number of shares
issuable upon exercise of the First Warrant will equal 78,923 shares (83,550
shares assuming the Underwriters' over-allotment option is exercised in full).
Upon the closing of the offering and the repayment of all amounts outstanding
under the Company's Existing Credit Facility and certain stockholder
subordinated indebtedness, the Company expects to record an extraordinary loss
on the early extinguishment of debt of $725,000, as a result of writing off all
unamortized deferred financing costs and discounts. See "--General" and Notes 6
and 8 to the Consolidated Financial Statements.
The Company and its subsidiaries have entered into an agreement with the
Company's principal bank lender that, effective upon the closing of the
offering, the lender shall make available to the Company a $10,000,000 unsecured
revolving credit facility, maturing on February 28, 2000 (the "New Credit
Facility"). Borrowings under the New Credit Facility will bear interest, at the
Company's option, at either a variable rate equal to the lender's prime rate
(with interest payable monthly in arrears) or at a rate equal to the London
Inter-Bank Offered Rate plus a sliding-scale fixed rate spread based upon the
Company's net income for the previous quarter (with interest payable at the end
of a one, two or three month period, at the option of the Company). Borrowings
under the New Credit Facility will be used for working capital and stand-by
letters of credit, and will be subject to the satisfaction of certain financial
covenants. The New Credit Facility terms provide that the Company and its
subsidiaries will not further pledge their respective assets to any third party.
The Company's subsidiary, Starmet CMI Corporation, has a term loan
obligation in the amount of $370,000 to Palmetto Federal Savings and Loan
Association of South Carolina ("Palmetto"). As of March 31, 1998 the outstanding
balance on this term loan obligation was approximately $323,000. On March 20,
1998, Starmet CMI Corporation entered into a second loan with Palmetto and the
Lower Savannah Regional Development Corporation in the aggregate principal
amount of $995,000, which bears interest at a rate of 10% and matures in ten and
one-half years with a rate adjustment at the end of five and one-half years. As
of June 10, 1998, the Company had drawn $500,000 against the second loan. Both
the first and second loans are guaranteed by the Company and secured by
mortgages on CMI's South Carolina property. The second loan will be used to
expand CMI's manufacturing capabilities at its South Carolina facility.
The Company has outstanding in the aggregate $2,250,500 in principal amount
under debt instruments issued to certain of its principal stockholders,
consisting of the following: $500,500 in principal
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amount of its 10% Convertible Subordinated Debentures due December 10, 1998,
which are convertible at any time into Common Stock at $5.945 per share;
$350,000 in principal amount of its 10% Subordinated Debentures due December 10,
1998, with three-year warrants to purchase 42,000 shares of Common Stock at an
exercise price of $7.50 per share; $500,000 in principal amount of its 10%
Subordinated Debentures due December 10, 2000, with three-year warrants to
purchase 60,000 shares of Common Stock at an exercise price of $17.875 per
share; and $900,000 in principal amount of its 10% Convertible Subordinated
Debentures due December 31, 1999, the principal amount of which is convertible
at any time into Common Stock at $21.50 per share. The Company intends to use a
portion of the proceeds of the offering to repay all of the 10% Subordinated
Debentures. The Company intends to offer to repay all of the 10% Convertible
Subordinated Debentures but expects that the holders thereof will convert such
debt into Common Stock instead of accepting repayment.
The Company believes, based on assumptions concerning backlog fulfillment
and the expected timing of new orders, that the proceeds of the offering, cash
from operations, and borrowings which will become available under the New Credit
Facility will be sufficient to sustain operations for more than 12 months and to
fund anticipated capital expenditures.
The Company anticipates that, for the foreseeable future, all earnings will
be retained to support operations and finance expansion. The Company has not
paid cash dividends in recent years, and does not intend to pay cash dividends
on the Common Stock for the foreseeable future. The Company's ability to pay
cash dividends is limited by its dependence upon the receipt of cash from its
subsidiaries to make such dividend payments. The Company's Existing Credit
Facility contains financial covenants and other restrictions that prohibit or
restrict the payment of dividends and intercompany loans among Starmet and its
subsidiaries and by the Company to its stockholders. The New Credit Facility
will not prohibit or restrict payment of dividends in the absence of a default.
The Company has not invested in derivative securities or any other financial
instrument that involves a high level of complexity or risk. Management expects
that, in the future, cash in excess of current requirements will be invested in
investment-grade, interest-bearing securities.
ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
The Company is subject to comprehensive and changing Environmental Laws that
(i) govern activities or operations that may have adverse environmental effects,
such as discharges to air and water, as well as handling and disposal practices
for solid and hazardous wastes, and (ii) impose liability for the costs of
cleaning up, and certain damages resulting from, sites of past spills, disposals
or other releases of hazardous substances and materials, including liability
under CERCLA, and similar state statutes for the investigation and remediation
of environmental contamination at properties owned and/or operated by it and at
off-site locations where it has arranged for the disposal of hazardous
substances. Furthermore, depleted uranium, a material regularly processed by the
Company, is a low-level radioactive material and the Company is subject to
governmental licensing and regulation.
If it is determined that the Company is not in compliance with current
Environmental Laws, the Company could be subject to fines and penalties. The
amount of any such fines and penalties could be material. In addition, the
Company uses depleted uranium, beryllium and other hazardous substances, and as
is the case with manufacturers in general, if a release of hazardous substances
occurs on or from the Company's properties or from an off-site disposal
facility, the Company may be held liable and may be required to pay the costs of
remedying the condition. The amount of any such liability and costs could be
material. See "Risk Factors--Environmental, Health and Regulatory Matters"
"Business--Environmental, Safety and Regulatory Matters" and "Business--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 the South Carolina
Department of Health and Environmental Control ("DHEC") in order to possess and
process depleted uranium materials at its facilities in Concord and
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South Carolina, respectively. Under applicable licensing regulations pertaining
to decommissioning and disposal of certain hazardous materials ("D&D") at
licensed sites, the Company submitted to the Nuclear Regulatory Commission
("NRC") (the predecessor of DPH, in this regard) and the applicable state
agencies a Decommissioning Funding Plan ("DFP") to provide for possible future
decommissioning of its facilities. The Concord facility DFP estimated cost is
$11.7 million and the South Carolina facility DFP estimate is $2.9 million. The
Company is required to provide financial assurance for such decommissioning
pursuant to applicable regulations. The Company has satisfied these
requirements, and as a result, the site licenses for both locations have been
renewed.
The estimated costs of the DFPs for the D&D at the Company's facilities have
not been and are not expected to be material to the Company's results of
operations or financial condition. Substantially all of the depleted uranium
materials to which the DFP requirements apply were processed by the Company for
the U.S. government. Based on the terms of certain contracts with the U.S.
government to process such depleted uranium materials, the U.S. government is
obligated, under applicable laws, to pay for its percentage of the eventual
costs of the D&D. The U.S. 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 the D&D costs related to the Company's Concord facility. The Army
has also provided written assurance to the NRC (subject to funding
appropriations) of its intention to provide funding for the D&D costs at the
Concord facility.
The Company has not requested, and has not received, any specific written
assurance that the Army will accept responsibility for the D&D costs at the
Company's South Carolina facility. However, substantially all of the depleted
uranium materials to which the South Carolina facility DFP requirements apply
resulted directly from work under U.S. government contracts. Based on the
practice of the U.S. Army to fund historical and current D&D costs and the
advice of legal counsel, the Company believes that the U.S. Army is responsible
for substantially all of the remaining D&D costs. See Note 11 to Consolidated
Financial Statements.
The United States Army has issued to the Company a fixed price contract for
remediation of the holding basin at its Concord facility and the Company entered
into a fixed price subcontract with Zhagrus to perform this remediation. The
Company's contract with Zhagrus is fixed price based on a specified volume of
waste to be removed from the basin and delivered to a disposal site. If the
volume of the material removed exceeds the specified level, then the Company is
obligated to pay an additional fee per cubic yard of excess material removed.
Based on currently available information, management believes that the costs to
complete remediation of the holding basin may exceed the fixed price contract
with the United States Army. On May 11, 1998, the Company was notified by
Zhagrus that Zhagrus will incur additional costs in connection with the disposal
of the material from the holding basin as a result of the need for additional
work which must be performed to treat the holding basin material in order for it
to meet conditions for burial imposed by applicable regulations. Zhagrus has
requested that the Company pay it to the extent of any additional costs which
may be incurred by it as a result of such additional services which may be
rendered. The Company has requested that Zhagrus provide it with further
information in order to permit the Company to determine whether it has any
liability to Zhagrus under the subcontract and to calculate the amount, if any,
that the Company may be required to pay to Zhagrus under the subcontract. The
Company intends to request a contract price modification for allowance of any
such additional costs under its contract with the U.S. Army, although there can
be no assurance of the timing and amount, if any, of any recovery of such costs
from the U.S. Army. The Company has notified Zhagrus of its proposed course of
action without admitting that the Company has any liability for the amount of
any such additional costs which may be incurred by Zhagrus under the
subcontract. The Company has not yet been provided with sufficient information
concerning the nature and extent of any additional work which may be required to
allow proper burial of the materials. Accordingly, the Company is unable to
determine whether it is obligated to Zhagrus under the terms of its subcontract
or the potential amount involved. The amount of any additional costs could be
material. While the Company believes that any additional remediation costs, if
not directly reimbursed pursuant to a contract price
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modification, would be allowable and recoverable costs through the Company's
overhead structure on government contracts, in the event that the Company became
liable to Zhagrus for any material amount which is not authorized to be paid by
the U.S. Army, such liability could have a material adverse effect on the
Company's business, results of operations and financial condition.
LEGAL PROCEEDINGS
On December 9, 1997, Brush Wellman filed a patent infringement suit against
the Company in the Massachusetts District Court alleging that the Company is
infringing on the Brush Wellman Patent for the process of investment casting of
beryllium aluminum alloys. Brush Wellman is seeking an injunction against the
Company's alleged patent infringement, monetary damages (including treble
damages) and attorney fees. On March 28, 1998, the PTO granted the Company's
request for re-examination (filed January 27, 1998). In the Request, the Company
contended, among other things, that there was sufficient "prior art" in the
field of investment castings and castings of beryllium aluminum alloys such that
the Brush Wellman Patent should not have been issued. In granting the Request,
the patent examiner agreed that the Company's cited examples of prior art raised
substantial new issues of patentability which were not decided in the prior
examination which led to granting the Brush Wellman Patent. On May 26, 1998,
Brush Wellman submitted its response to the PTO's order granting the
reexamination. The PTO will undertake a process of re-examination of the
validity of the Brush Wellman patent that, the Company anticipates, could last
for an extended period. There can be no assurance that the PTO will find the
Brush Wellman Patent to be invalid. On January 27, 1998, the Company filed in
the Massachusetts District Court a motion to stay the court case pending the
outcome of the re-examination proceeding. If the Massachusetts District Court
were to grant the motion to stay, the court case would not proceed until the
conclusion of the PTO's re-examination of the Brush Wellman Patent. Although the
Company believes that its motion to stay has merit, no assurance can be given
that the Massachusetts District Court will grant the motion.
Even though the Company has been advised by patent counsel that Brush
Wellman's claims are without merit because the Brush Wellman Patent is invalid
as a matter of law due to "prior art" and due to the Company's sales of
investment cast beryllium aluminum products more than one year prior to the
Brush Wellman Patent application, no assurance can be given as to the ultimate
outcome of the lawsuit. Even if the lawsuit were not to proceed to trial, the
litigation could result in substantial costs to the Company, and an unfavorable
settlement of the lawsuit could place the Company at a competitive disadvantage.
An adverse judgment or settlement could subject the Company to significant
liabilities and expenses (e.g., reasonable royalties, lost profits, attorneys'
fees or trebling of damages for willfulness). An adverse outcome also could
cause the Company to incur substantial costs in redesigning the investment
casting process for its Beralcast products and components. Moreover, there can
be no assurance that redesign alternatives would be available to the Company,
and if available, that any redesign alternative would not place the Company at a
competitive disadvantage. The Company could be required to license the disputed
patent rights from Brush Wellman or to cease using the patented technology. Any
such license, if required, may not be available on terms acceptable or favorable
to the Company, or at all. Any of these results could have a material adverse
effect on the Company's business, financial condition and results of operations.
Even in the event of a successful outcome, the Company may incur significant
legal expenses in its defense. See "Risk Factors--Pending Beralcast Patent
Litigation; Patents and Other Intellectual Property" and "Business--Legal
Proceedings."
IMPACT OF YEAR 2000 ISSUE
The Company is in the process of updating its accounting and information
systems to ensure that its computer systems are Year 2000 compliant and to
improve the Company's overall manufacturing, planning and inventory related
systems. In fiscal 1997, the Company invested approximately $250,000 to ensure
that the Company is Year 2000 compliant and will continue to make investments in
its computer systems and applications to ensure that the Company is Year 2000
compliant. The Company believes that the Company's computer system is Year 2000
compliant. In addition, the Company maintains a Year 2000
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expert on its staff. The financial impact to the Company of its Year 2000
compliance programs has not been and is not anticipated to be material to its
financial position or results of operations in any given year. While the Company
does not believe it will suffer any major effects from the Year 2000 issue, it
is possible that such effects could materially impact future financial results,
or cause reported financial information not to be necessarily indicative of
future operating results or future financial condition. In addition, if any of
the Company's significant customers or suppliers do not successfully and timely
achieve year 2000 compliance, the Company's business could be materially
affected. See "Risk Factors--Year 2000 Compliance."
INFLATION
Inflation has not had a material impact on the Company's cost of doing
business. Management attempts to protect the Company by adjusting prices where
market conditions permit and by reviewing and improving production processes
where possible. There can be no assurance that the Company's business will not
be affected by inflation.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes
standards for public business enterprises to report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
This statement supersedes FASB Statement No. 14, "Financial Reporting for
Segments of a Business Enterprise," but retains the requirement to report
information about major customers. SFAS 131 requires, among other items, that a
public business enterprise report a measure of segment profit or loss, certain
specific revenue and expense items, and segment assets, information about the
revenues derived from the enterprise's products or services, and major
customers. SFAS 131 also requires that the enterprise report descriptive
information about the way that the operating segments were determined and the
products and services provided by the operating segments. SFAS 131 is effective
for financial statements for periods beginning after December 15, 1997. In the
initial year of application, comparative information for earlier years is to be
restated. SFAS 131 need not be applied to interim financial statements in the
initial year of its application, but comparative information for interim periods
in the initial year of application is to be reported in financial statements for
interim periods in the second year of application.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Prospectus, including, without limitation, those
concerning (i) the Company's business and growth strategies, (ii) the Company's
new business and expansion plans, (iii) the effects on the Company of certain
legal proceedings and environmental matters, (iv) the effects on the Company of
changes in the businesses in which it operates or in economic conditions
generally, (v) the use of proceeds of the offering and (vi) the effect on the
Company of actions taken or not taken by its customers, suppliers and
competitors, contain certain forward-looking statements concerning the Company's
operations, economic performance and financial condition. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of the Company
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Factors that could
cause such differences include, but are not limited to, those discussed in "Risk
Factors," elsewhere herein. 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. See "Risk
Factors."
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BUSINESS
GENERAL
Starmet is an innovator in the design, development and processing of
specialty metals, a precision manufacturer of technologically sophisticated
metal components and products, and a leader in certain advanced materials
conversion and recycling technologies. A central aspect of the Company's
strategy is to continue to capitalize on its metallurgical, materials science
and manufacturing expertise, developed primarily for military applications, in
order to introduce new products for what the Company believes are high-growth
opportunities in large commercial markets.
In its specialty metals business, Starmet produces a wide range of products
and components from advanced metals and alloys. Key among these materials is
Beralcast, the Company's family of beryllium aluminum alloys, which is being
commercially introduced for use in certain advanced applications. Based upon
initial responses by the Company's customers and testing by independent
laboratories, the Company believes that Beralcast is a cutting edge material
with advanced properties which is ideally suited for certain demanding
commercial and aerospace applications. Among its superior performance
characteristics are its light weight, dimensional stability, stiffness,
vibration damping qualities and workability. In its advanced recycling
technologies and uranium services businesses, Starmet is a fully integrated
processor of DU, converting UF(6) to UF(4) and DU metal which it manufactures
into DU products such as feedstock used in the manufacture of nuclear reactor
fuel by USEC for its AVLIS program, radiation shielding, anti-armor tank
penetrator munitions and billets for conversion into tank armor. USEC is the
only customer for the Company's AVLIS feedstock material. See "Risk
Factors--Uncertainties Relating to USEC and UF(6) Conversion."
Starmet focuses its research and business development efforts on markets it
has identified as offering significant opportunities for growth, particularly
high-end disk drives as well as military and commercial aerospace and premium
golf products, among others. For example, the Company has produced prototype and
pre-production quantities of high-end disk drive arm sets, precision devices
used in rigid computer disk drives, for evaluation by certain leading disk drive
manufacturers in their high-speed, high-capacity disk drives. Beralcast's light
weight, high stiffness to weight ratio and enhanced vibration damping qualities
when compared to competing materials results in significantly increased data
storage capacity and reduced data access time in high-end disk drives equipped
with Beralcast disk drive arm sets, according to certain customers of the
Company. The Company's development process progresses through an initial design
and procurement review followed by prototype development, product optimization
and finally to production commitments. The Company is in the process of or has
completed product optimization with three leading manufacturers, two of which
have spent in excess of $1.3 million to date for tooling and prototype
production. While the Company is hopeful that its disk drive arm sets will
achieve significant market penetration in upcoming generations of high-end disk
drives, there can be no assurance that customers will purchase its Beralcast arm
sets in significant quantities or that these products will be commercially
successful. For military applications, the Company has received contracts from
Lockheed Martin for 58 separate Beralcast components to be used in its most
advanced electro-optical and target acquisition systems that will be fitted on
the Comanche, the U.S. Army's next generation advanced reconnaissance and attack
helicopter. According to the U.S. Army, Beralcast is the only known material
capable of meeting critical Comanche requirements without significant costly
redesigns. In addition, U.S. and other military forces have identified
opportunities for the use of Beralcast components for other advanced military
programs, such as the F-22 advanced tactical fighter, the updated Patriot
missile, LANTIRN (a low altitude navigation and targeting system) and the French
Rafael advanced fighter aircraft. The Company has delivered prototype parts
pursuant to contracts for these applications and is awaiting follow-on funding
for the next phases of development. The Company believes that further
significant opportunities exist for the use of Beralcast products and components
beyond these currently identified applications in commercial and military
markets.
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The Company is expanding its manufacturing capacity and plans to invest a
substantial portion of the proceeds of the offering in order to meet anticipated
demand for Beralcast materials. One of the goals of the Company's planned
capital expenditure program is to further reduce product costs, which the
Company believes is essential to the commercialization of Beralcast. Since the
introduction of its Beralcast alloys, the Company has realized significant
reductions in manufacturing costs primarily as a result of its Comanche
development work, and anticipates that its manufacturing expansion program and
its ongoing experience with Beralcast will result in continued cost reductions.
The Company expects that Beralcast's advantageous characteristics, including its
light weight, dimensional stability and workability, will generally offset the
higher costs of Beralcast products as compared to certain materials currently
employed in markets in which the Company intends to compete. In addition, the
Company is committed to maintaining its high quality manufacturing standards.
The Company was recently certified under ISO 9002 at its Concord, Massachusetts
facility and is the first small business and one of only fourteen companies
nationwide to qualify for the U.S. Army's highest quality manufacturing
certification. Furthermore, the Company holds regulatory facilities licenses for
the processing of low-level radioactive materials, which management believes
represent a competitive advantage and a significant barrier to entry to
potential new competitors. The Company believes that it operates the only
licensed U.S. production facility capable of offering a broad spectrum of
processing, conversion, recycling, manufacturing and shielding services for DU
and other low-level radioactive materials.
Since its origins as a metallurgical laboratory affiliated with MIT in 1942,
the Company has developed a strong platform in the research and development of
various materials science technologies. Throughout its history, the Company has
maintained close relationships with MIT and several of the principal research
laboratories affiliated with the United States government, namely the Los Alamos
National Laboratories, the Lawrence Livermore National Laboratories, and the
Sandia National Laboratories. Each of these research laboratories has been or is
a party to cooperative research and development agreements with Starmet to
jointly develop and improve various materials science technologies and to share
such research. The Company has funded certain research programs led by MIT staff
members and shared laboratory facilities with MIT. In addition, Dr. Kenneth
Smith, a Professor of Chemical Engineering and former Associate Provost of MIT,
has served on the Company's Board of Directors since 1985. The Company believes
that these relationships, its patented and proprietary technology, internal and
customer funded research and development efforts and its sole supplier or
provider status in some instances position Starmet at the forefront of the
development and commercialization of various materials science technologies,
including casting, the manufacture of powdered metals, the development of
various specialized alloys and advanced materials recycling. Over the course of
its history, the Company has undergone several transitions in response to
fundamental changes in its markets and to take advantage of new business
opportunities. From its focus on high-volume commercial production of specialty
metal powders during the 1970s and the precision manufacture of DU penetrators
used in anti-armor munitions during the 1980s and 1990s, to the recent
introduction of Beralcast, the Company has a history of developing and bringing
to market products that are extensions of its strong foundation in materials
science, such as spherical powders for use in early Xerox machines, bi-metal
components for the Apollo space program and Beralcast components for the United
States military's F-22 fighter and Comanche helicopter.
INDUSTRIES AND MARKETS
BERALCAST
The Company's Beralcast products and components were initially developed for
the military aerospace industry. To date, the Company has supplied prototype
products and subassemblies made of Beralcast for several high-performance weapon
systems including Comanche. Comanche is the U.S. Army's next generation advanced
reconnaissance and attack helicopter. The U.S. government has appropriated $300
million for the Comanche helicopter program for fiscal 1998 and full-scale
production is anticipated in 2003.
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<PAGE>
In addition to use in military aerospace applications, the Company believes
opportunities exist for Beralcast alloys in a number of commercial applications,
such as computer disk drive arm sets. According to Disk/Trend, Inc., an industry
source, sales of rigid disk drives are expected to grow from $34 billion in 1997
to over $75 billion in 2000. Approximately 105 million rigid disk drives were
shipped in 1996, and shipments of rigid disk drives are expected to grow from an
estimated 126 million units in 1997 to 201 million units in 2000, according to
Disk/Trend, Inc. Within the computer disk drive market, the Company has
identified high-end computer disk drives as the target for its Beralcast
products, a market which the Company believes represents between 5% and 10% of
the total rigid disk drive market. Disk drive manufacturers have historically
increased storage capacity of their disk drives at a very rapid rate and
anticipate that their next generation disk drives will double current storage
capacity. According to International Business Machines Corporation ("IBM"), disk
drive storage density has grown by 60% annually since 1991, while semiconductor
density grew 47% to 50% each year. The four largest disk drive manufacturers,
Quantum Corporation, Seagate Technology, Inc. (including its subsidiary Quinta
Corporation), Western Digital Corporation and IBM, represent approximately 76%
of the rigid disk drive market. Based upon input from certain disk drive
manufacturers, Starmet believes that its Beralcast disk drive arm sets will be
an instrumental part of enabling high-end disk drive manufacturers to develop
and introduce new generations of disk drives, although no assurance can be given
in this regard.
The Company is also seeking to apply its technology and expertise in the
satellite and commercial aerospace industries. Trio Star was formed to develop
structural components using Beralcast and other lightweight materials for
commercial satellite and aerospace applications by combining the engineering and
manufacturing talents of its partners. For these applications, customers seek
components and subassemblies that are fabricated using a combination of
lightweight metals and non-metallic composites. With the anticipated significant
growth in low-Earth-orbit satellite applications, major aerospace corporations
are focusing their internal manufacturing resources on the assembly of major
component subsystems and outsourcing the manufacturing of the individual
components and subassemblies. Teledesic LLC ("Teledesic"), in conjunction with
its manufacturing partners, Motorola Inc. and The Boeing Company, has begun the
development of a network of 300 low-Earth-orbit satellites to provide global,
broadband, high-speed data and video communications worldwide. Trio Star has
submitted a proposal to the Teledesic team to manufacture certain structural
components for these satellites. If the contract is awarded to Trio Star,
pre-production would be expected to commence in 1999, with full-scale production
expected in 2000. Trio Star also expects to bid on subassemblies for other
commercial satellite programs.
The Company believes that Beralcast's light weight, stiffness and design
flexibility as compared to titanium and other competing materials also make it
an ideal material for premium golf club heads and shafts. Beralcast club heads
offer the potential of having a larger "sweet spot" and better mass
distribution, thereby increasing performance, and the Company is exploring
opportunities to introduce Beralcast alloys into extruded seamless tubing for
premium golf shaft applications requiring increased stiffness.
AVLIS AND UF(6) CONVERSION
The Company supplies DU and NU feedstock to USEC's AVLIS program for
laser-enrichment into nuclear reactor fuel. USEC is a government-owned global
energy company created by the U.S. Congress in 1992 to operate the DoE uranium
enrichment program. Uranium enrichment is an essential step in transforming NU
into nuclear fuel, which is used by nuclear power plants to produce electric
power. Two technologies are currently used to enrich uranium for commercial
nuclear power plants, gaseous diffusion and gas centrifuge. USEC currently uses
gaseous diffusion as its primary method for enriching uranium and is investing
in AVLIS, a next-generation, laser-based enrichment process. USEC expects that
AVLIS will replace the current gaseous diffusion process beginning in 2005. The
principal advantage of AVLIS over the current gaseous diffusion process is that
it consumes significantly less electric power. Based upon engineering studies
and demonstrated systems performance, USEC expects that a fully deployed AVLIS
facility will use only about five percent of the electric power currently used
by gaseous diffusion plants.
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<PAGE>
According to USEC, electric power represents about 60 percent of the cost of
operating gaseous diffusion plants.
Current methods for enrichment of uranium for use as a nuclear fuel generate
depleted UF(6). USEC's predecessors, including DoE, have been enriching uranium
for defense and commercial nuclear fuel purposes since the 1940s. Over the
years, DoE has stockpiled over 1 billion pounds of depleted UF(6) in steel
cylinders at three uranium enrichment sites. Since USEC continues to enrich
uranium for commercial nuclear power customers in the United States and abroad,
approximately 2,500 cylinders are added to this inventory each year.
The Company believes that the large stockpile of depleted UF(6) cylinders
will have to be reprocessed and will not be allowed to continue to be stored.
DoE is currently considering several alternatives for the long-term management
of depleted UF(6). Of these alternatives, DoE's preferred solution is to convert
its depleted UF(6) inventory into DU oxide and/or DU metal. DoE has estimated
the cost for such disposition in the $3 billion range. USEC is in the process of
privatizing, and following its privatization, USEC will no longer be permitted
to store depleted UF(6) produced as a result of its uranium enrichment process
as DoE has done. Rather, USEC will be required to dispose of it or use it.
Starmet believes that USEC's privatization and the aging DoE depleted UF(6)
stockpile will create opportunities for the Company's processing and conversion
technology. Starmet has developed an expertise in processing and converting
UF(6) and its derivative UF(4) into several uranium metal and uranium oxide
products and owns and operates the only production facility in North America
capable of this process. The Company believes its ability to convert UF(6) and
UF(4) into useful products, such as AVLIS feedstock and DUCRETE shielding, will
permit useful recycling of depleted UF(6). Conversion of depleted UF(6) can
generate fluorine or fluorine compounds such as hydrogen fluoride which have
economic uses, thus rendering the conversion process more economically
attractive. The Company has filed applications for three patents on new
processes which it believes can be advantageously employed in the conversion of
UF(6) into performance fluorine products and a variety of other products.
According to DoE, conversion of depleted UF(6) would begin as early as
practicable and could begin as soon as 2005. The Company believes that its new
processing and conversion technology could accelerate the DoE's conversion
program due to the increased economic benefits which could result from the
production of performance fluorine products.
STRATEGY
The Company's strategy is to grow revenues and profits by exploiting its
materials expertise to manufacture products for currently identified markets and
develop new applications for its technologies. Specific components of the
Company's strategy include:
APPLY TECHNOLOGICAL EXPERTISE TO COMMERCIAL APPLICATIONS. The Company
intends to continue to capitalize on its metallurgical, materials science and
manufacturing expertise, developed primarily for military applications, in order
to introduce new products for what the Company believes are high-growth
opportunities in large commercial markets. In these efforts, the Company will
apply its skills in materials development, investment casting difficult alloys,
manipulating and forming complex components, and manufacturing, processing and
recycling certain advanced materials. An example is the development of the
Company's Beralcast technology which the Company is applying to various
applications in commercial and aerospace markets.
DEVELOP NEW PRODUCTS AND MARKETS THROUGH CONTINUED RESEARCH AND
DEVELOPMENT. The Company intends to continue to focus its own and customer
funded research and development efforts on technological innovation designed to
yield sophisticated, high-performance commercial products, materials and
services. The Company intends to pursue this strategy by maintaining a strong
internal research and development team, continuing its longstanding research
relationships with major government research centers and working closely with
customers. The primary goal of the Company's research and development efforts is
to accelerate commercialization of its materials science technologies by
addressing customer identified applications with significant market potential.
42
<PAGE>
INCREASE MANUFACTURING CAPACITY AND REDUCE MANUFACTURING COSTS. The Company
intends to leverage its manufacturing expertise by shifting from prototype to
full-scale production in order to meet anticipated customer demands. A
substantial portion of the proceeds of the offering will be used to purchase
additional manufacturing equipment, including new furnaces and automated
production equipment, principally for the Company's Beralcast products. Among
the goals of the Company's planned capital expenditure program are to increase
manufacturing capacity, improve manufacturing efficiencies, enhance product
quality and further reduce manufacturing costs.
MAINTAIN FOCUS ON CUSTOMER SATISFACTION. The Company seeks to continue
providing the highest possible level of customer service and customer
satisfaction. For example, the Company engages in concurrent engineering with
its customers to create value-added, customized products that provide solutions
to specific technical issues. The Company seeks to implement design-to-cost
programs with its customers to lower overall product costs. In addition, the
Company has technical field offices at certain customer sites so that the
Company can cooperate in design optimization and provide technical and sales
support. The Company at its Concord facility is the first small business and one
of only fourteen companies nationwide to qualify for the U.S. Army's highest
quality manufacturing certification, and this facility is also ISO 9002
certified. The Company intends to continue its commitment to high-quality
manufacturing.
PURSUE SELECTED COOPERATIVE RELATIONSHIPS. In order to penetrate new
markets and accelerate its expansion, the Company intends to pursue selected
teaming arrangements, licenses, joint ventures and other cooperative business
relationships. This strategy is designed to leverage the Company's technological
expertise by increasing production capacity for the Company's products without
the Company having to fund all related capital expenditures. This strategy is
further designed to allow Starmet to take advantage of the existing distribution
channels of its current or potential partners. As part of this strategy and to
facilitate such cooperative relationships, in October 1997 the Company completed
an internal reorganization to organize the Company's subsidiaries along
functional business lines. A recent example of this co-development strategy is
Trio Star, a business venture formed by the Company with R-Cubed Composites,
Inc. (a subsidiary of Perstorp AB) and Advanced Product Labs, to jointly market,
develop and supply structural components to the commercial satellite and
aerospace markets.
CHARACTERISTICS OF BERALCAST
The first beryllium aluminum material commercially produced (called
"Lockalloy") was developed in the 1960s by Lockheed Corporation and NASA as a
replacement for magnesium alloys in certain advanced aircraft structures.
Starmet participated in the early development of Lockalloy as a subcontractor to
Lockheed Corporation. Lockalloy was a light weight material with the equivalent
stiffness of steel. However, Lockalloy was made from pre-alloyed powder, and was
available only in wrought product forms (i.e., extrusions and sheet). Because of
the complex processing and low yield inherent in the production of Lockalloy,
the cost was high, even for a beryllium-based material. The cost and
difficulties in producing the alloy limited it to special applications, and in
the late 1970s Lockalloy was withdrawn from commercial production.
Many of today's advanced systems for aerospace applications require
materials with high stiffness and low weight that maintain dimensional
stability. Traditional materials possessing the desired properties, like pure
beryllium, are often difficult and expensive to fabricate. Common lightweight
metal and composite investment castable materials such as aluminum, titanium,
magnesium and aluminum silicon carbide composite alloys do not offer the
stiffness and light weight which these applications require. Ceramics and
ceramic-matrix composites are mostly restricted to specialized applications due
to low ductility and machining difficulties. Beryllium and beryllium alloys
produced through powder metallurgy meet the criteria of being lightweight and
stiff but are inherently expensive and limited to configurations that can be
machined or hot pressed.
In an effort to eliminate the primary limitations of the powder metallurgy
technology while retaining the benefits of the beryllium aluminum material,
Starmet developed a family of castable beryllium
43
<PAGE>
aluminum alloys suited for production using a proprietary investment casting
process. These new alloys, named Beralcast, yield a fine grain homogenous
microstructure with attractive mechanical, physical and thermal properties,
which permit economical precision machining. Beralcast incorporates the best
attributes of its component materials and eliminates many individual
shortcomings. Beralcast combines the high stiffness and low density
characteristics of beryllium with the excellent processing capabilities of
aluminum. Certain customers have reported that Beralcast's combination of
properties have provided a weight savings of up to 50% in designs requiring high
levels of stiffness by, in addition to straight density advantages, reducing
casting section thickness requirements. Beralcast can be precision cast to
comparable specifications of aluminum. In contrast, pure beryllium is not
investment castable. Due to its homogenous fine grain microstructure, Beralcast
can be fabricated using conventional processes, such as welding, joining,
rolling, extrusion, machining, straightening, finishing and heat treatment.
Until recently, such materials have been available only in a pre-alloyed powder
metal wrought form. In aerospace applications, this limitation has typically
resulted in "buy to fly" ratios of up to 20 to 1, where the majority of the
material used for the part ends up as low value machined scrap, most of which is
not economic to recycle.
Beralcast is a metal matrix composite material. The Company's patented
Beralcast alloys contain approximately 65 weight percent beryllium, 31 weight
percent aluminum and the balance minor alloying additions, including silver,
cobalt, germanium and silicon. These Beralcast compositions, developed for
specific properties and applications, are as follows:
BERALCAST 363: General, high-strength composition used primarily for
precision cast structural applications.
BERALCAST 191: Moderate strength composition used primarily for cast
electronic and thermal packaging applications.
BERALCAST 310: Composition used for cast and wrought products. Used
primarily for select directional high-strength applications.
The Company's patented Beralcast alloys have numerous advantages over other
competing materials and particularly over its primary elemental component
materials, aluminum and beryllium. Utilizing the synergistic effects of an
alloyed metal matrix of the two primary components, Beralcast materials offer a
combination of improvements as shown below, based on analyses by certain
customers and independent testing laboratories.
<TABLE>
<CAPTION>
ADVANTAGES OVER ALUMINUM ADVANTAGES OVER BERYLLIUM
- -------------------------------------------- --------------------------------------------
<S> <C>
- - 22% lower density with essentially - Castable for complex and precise net shape
equivalent strength of cast aluminum configurations
- - 3 times higher modulus (stiffness) - 25% of the raw material input cost
- - 6 to 10 times better in damping - 3 times greater ductility than hot pressed
coefficient for stability and jitter beryllium
reduction depending upon the resonant
frequency
- - 2 to 4 times more dimensionally stable - Reduced scrap generation, machining and
environmental process concerns
- - 30% lower coefficient of thermal expansion - Weldable for defect repair and structural
joining
</TABLE>
In addition, the Company is producing other proprietary Beralcast alloys
that are extensions of the Company's current Beralcast technologies. The Company
is currently offering these and its patented Beralcast alloys to its customers.
44
<PAGE>
As shown in the table below, Beralcast has a high stiffness to weight ratio
("specific stiffness"), making it an ideal structural material for certain
applications compared to conventional and certain other advanced materials such
as aluminum silicon carbide composites and aluminum boron carbide composites
(such as Boralyn-Registered Trademark-).
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SPECIFIC STIFFNESS - SELECTED MATERIALS
<S> <C>
(Ratio of stiffness to weight in 10(8)
inches)
Conventional Materials
Magnesium (AZ91) 0.98
Steel (4131Cr-Mo) 1.00
Titanium (6AL-4V) 1.01
Aluminum (6061) 1.04
Advanced Materials
AlSiC (F3S.ZOs) 1.43
Boralyn(Registered Trademark) (A1B4C) (H-15) 1.46
Beralcast(Registered Trademark) (363) 3.83
</TABLE>
[Diagram comparing specific stiffness of selected materials to Beralcast
- -Registered Trademark-.]
PRODUCTS AND SERVICES
SPECIALTY METAL PRODUCTS
Starmet develops and manufactures a range of advanced metal products and
components for commercial and aerospace applications. These products are
manufactured from various metals and alloys, including the Company's Beralcast
beryllium aluminum alloys, pure beryllium, titanium, steel and zirconium.
Beralcast is an investment-castable beryllium aluminum alloy designed for
secondary structural and electronic applications. The Company believes that it
is the technological leader in the development and production of beryllium
aluminum alloys. The Company also manufactures high-quality spherical metal
powders for niche markets which are used in porous adhesion coatings on medical
prostheses and in other products.
DISK DRIVES. Using Beralcast alloys, disk drive designers have reduced the
thickness of individual arm sets in the disk stack and placed additional disks
within the same volume. This arm set thickness reduction enables manufacturers
to achieve increased storage capacity while maintaining current disk drive
dimensional standards. In addition, the higher vibration damping properties of
Beralcast, which certain customers have determined to be 6 to 10 times greater
than aluminum, significantly increase data retrieval speeds compared to
conventional materials by facilitating higher disk rotational speeds and
reducing arm vibration. Furthermore, Beralcast has lower thermal expansion and
is more dimensionally stable than
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<PAGE>
aluminum, which is critical in certain next generation disk drive systems which
are being developed to incorporate laser-optical technology. Based in part upon
input from customers concerning performance and component requirements for
doubling data storage capacity in future disk drive applications, the Company
believes Beralcast will be a critical aspect of achieving these goals. The
Company has produced prototype and pre-production Beralcast disk drive arm sets
for evaluation by several of the leading disk drive manufacturers. The Company's
development process progresses through an initial design and procurement review
phase followed by prototype development, product optimization and finally to
production commitments. Certain leading disk drive manufacturers have funded
research, development, prototype work and production tooling to support initial
production plans, and the Company is in the process of or has completed product
optimization with three leading manufacturers.
MILITARY AEROSPACE. Beralcast components have been specified for use on
such high performance defense applications as the Comanche. In addition, the
Company has manufactured prototype parts for the F-22, LANTIRN, the PAC-3, the
French Rafael and a number of other advanced design programs. As compared to
various competing materials, including other beryllium aluminum alloys, the
Company has been advised by customers that the Company's Beralcast products
uniquely meet performance requirements for certain demanding applications where
stiffness, vibration damping, lightweight, workability and material uniformity
are critical, including the Comanche program. The Company has developed defense
applications for Beralcast primarily through its work with Lockheed Martin over
the past seven years. The Company has received contracts from Lockheed Martin
for 58 separate Beralcast components to be used in EOSS, the night vision and
target acquisition system on the Comanche helicopter. The EOSS consists of the
night vision, target acquisition, and accessory equipment giving Comanche its
advanced night vision capabilities. The qualities of Beralcast make it optimal
for use in this type of aerospace application because of its light weight,
stiffness and vibration damping characteristics, which are required by the very
sensitive operations of this night vision and laser acquisition system. The U.S.
Army has stated that if it were required to design the EOSS without the benefits
of Beralcast, it would increase costs of the Comanche project by approximately
$300 million.
In addition to its work on Comanche, Starmet was recently advised by
Lockheed Martin that it has received funding to upgrade the night vision system
of the Apache helicopter with its EOSS. The U.S. Army has approved funding a
development program, which is managed by the Sikorsky Aircraft Corp., to
investigate building the Comanche main gear transmission housing with Beralcast.
The Company has been advised that Beralcast is being considered by two aerospace
engine manufacturers for applications in hydraulic and fuel system components
for next generation high performance military engines. Although Starmet expects
to provide Beralcast components to support these programs, it has not received
related contracts.
SATELLITES AND COMMERCIAL AEROSPACE. Since the early 1960s, the Company has
produced bi-metallic transition joints and seamless beryllium tubes for
satellite applications. In addition to continuing to produce these products, the
Company recently formed Trio Star, a joint venture with R-Cubed Composites Inc.
(a subsidiary of Perstorp AB) and Advanced Product Laboratories, to develop
structural components using Beralcast and other lightweight materials for
commercial satellite and aerospace applications. The Company holds an
approximate 44% interest in Trio Star. Trio Star's target launch customer is
Teledesic, which is developing a system of 300 low-Earth-orbit satellites to
provide global, broadband, high-speed data and video communications worldwide.
The program requirements call for the launch of satellites over a 3-year period
beginning in the year 2000. If Trio Star is successful in obtaining orders from
Teledesic, revenue is anticipated to be recognized beginning in 1999. Trio Star
is also marketing its capabilities to other commercial aerospace companies.
Applications include Beralcast structural components and extruded heat pipes for
heat dissipation requirements.
GOLF PRODUCTS. The Company is pursuing the premium golf products market
where it plans to market Beralcast as a high-end golf products material.
Beralcast is 50% lighter than, and twice as stiff as, titanium
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<PAGE>
and can be investment cast to a thinner wall thickness than titanium. With these
qualities, engineers can design a lighter club head, permitting additional
perimeter weighting which achieves a larger "sweet spot." The Company has
delivered prototype Beralcast golf club heads to a leading golf club
manufacturer that has completed initial testing and has concluded that the club
heads meet performance requirements. The customer is now in the process of
design optimization. The Company believes that if this design optimization is
successful, production of these golf clubs could commence by 2001. Starmet is
also exploring with a leading golf shaft manufacturer the introduction of
extruded Beralcast alloys for seamless tubing in premium golf club shafts.
POWDERS. The Company manufactures certain metal powders for niche markets
through its proprietary processes called the Rotating Electrode Process ("REP")
and the Plasma Rotating Electrode Process ("PREP"), which produce spherical
metal particles within a relatively controllable size range, including steel,
titanium alloy and several nickel and cobalt-based alloys generally known in the
industry as specialty powders. Metal powders can be used effectively in a
variety of applications where exacting sizes, shapes and cleanliness are
important. For example, clean cobalt, chrome and titanium powders, made through
PREP, are used in medical implants to effectively bond prosthetic devices to
bone and tissue, and uniform steel powders made through PREP are used in
photocopiers, sophisticated rapid prototyping applications, and magnetic paint
for children's' books, wallpaper, and toys. Management believes the Company's
metal powders offer performance advantages in these markets over competing
powders since they are cleaner, more uniformly spherical and have a higher
percentage of particles within a desired size range from a given amount of raw
material.
ADVANCED RECYCLING TECHNOLOGIES AND URANIUM SERVICES
Starmet develops and provides a variety of products and services based upon
its longstanding metallurgical, radiological and chemical know-how, including,
in particular, its expertise in processing and converting UF(6) and its
derivative UF(4) into materials and products that can be utilized in a variety
of specialized applications. Starmet owns and operates the only production
facility in North America capable of converting natural UF(6) and depleted UF(6)
into UF(4). Depleted UF(6) is a low-level radioactive by-product of the
enrichment of uranium. From UF(4), the Company produces DU and NU metal which it
manufactures into various uranium metal products. The Company's uranium metal
products include DU penetrators used as anti-armor munitions, DU billets for
conversion into tank armor, NU and DU feedstock supplied to USEC's AVLIS program
for laser-based enrichment into nuclear reactor fuel, and industrial and medical
shielding devices. See "Risk Factors--Uncertainties Relating to USEC and UF(6)
Conversion." Starmet also owns and operates the only FAA-approved facility in
the United States licensed to repair DU counterweights, which are used in
various wide-body commercial and military aircraft and which are periodically
required to be refurbished. Within its shielding technology business, the
Company has received exclusive commercial production rights to a patented
shielding product known as DUCRETE shielding, which uses a uranium oxide
aggregate mixed with concrete to form a radiation shielding product. The Company
is exploring with DoE and several commercial customers specific applications for
the use of DUCRETE shielding, including as containment vessels for spent fuel
and other high-level radioactive wastes. In addition, the Company has the
capability to recycle radioactively contaminated steel into storage boxes for
containment of various radioactive wastes and other products.
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<PAGE>
The following diagram depicts the processing of uranium supplied by DoE and
USEC into various products offered by the Company.
[DIAGRAM]
[Diagram showing conversion of UF(6) into UF(4) and UF(4) into DU Metal products
(ALVIS Feedstock, Penetrators and Tank Armor, Industrial and Medical Shielding
and Aircraft Counterweights) and DU Oxide products (DU Aggregate, DUCRETE
Shielding and Performance Fluorine and Other Chemicals - under development).]
PENETRATORS AND TANK ARMOR. DU is a dense, heavy metal that is 67% heavier
than lead. Because of its density and workability, DU is an effective material
for anti-armor munitions, or penetrators, and is used in numerous United States
government and foreign government weapons systems. The U.S. government has
funded and owns a portion of the manufacturing machinery and equipment used by
the Company for producing penetrators. The Company continues to produce
penetrators under a production contract with production scheduled through the
second quarter of fiscal 1999. The Company plans to consolidate its DU
operations at its South Carolina facility. Due to anticipated reduced U.S.
government procurement plans, the Company expects that no revenues will be
derived from DU penetrator operations in after the second quarter of fiscal
1999. The Company will continue, however, under a multi-year contract with
Lockheed Martin Idaho Technologies Corporation ("LMITCO"), to produce DU billets
in support of the Army's tank armor program, which contract is expected to run
through 2001.
AVLIS FEEDSTOCK. The Company supplies DU and NU alloy material to USEC for
use as AVLIS feedstock. AVLIS, a laser based enrichment process, is expected to
replace the current gaseous diffusion process for producing enriched fuel used
in nuclear reactors, according to USEC. USEC expects full-scale AVLIS production
to commence by 2005. The Company is currently supplying AVLIS feedstock to USEC
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<PAGE>
under an existing contract and anticipates receiving additional contractual work
from USEC in the summer of 1998. The Company is currently the primary supplier
to USEC of AVLIS feedstock; however, other companies are expected to compete for
future business. See "--Industries and Markets."
COUNTERWEIGHTS. Starmet operates the only FAA-approved facility in the
United States licensed to repair DU aircraft counterweights. Aircraft
counterweights are used in wide body commercial and certain miliary aircraft,
such as the Boeing 747, DC-10 and L-1011, and are periodically required to be
refurbished. The Company refurbishes DU counterweights for many international
and domestic carriers flying wide body aircraft, and has begun work on certain
military aircraft as well. The Company also has the capability to produce
replacement counterweights.
UF(6) CONVERSION. Starmet owns and operates the only production facility in
North America capable of converting natural UF(6) and depleted UF(6) into UF(4).
DoE has stockpiled over 1 billion pounds of UF(6) which Starmet believes must
eventually be dispositioned. Additionally, USEC will be generating new depleted
UF(6) following its privatization which it will be required to dispose of or
use. The Company also has patents pending on a new process to recover and
convert the fluorine and related products from UF(4) which is the by-product of
the UF(6) conversion step. The Company believes that such fluorine processing
has the potential to produce a valuable by-product that can be readily sold in
the open market. To date, the Company has not received contracts for UF(6)
conversion from DoE or USEC, other than UF(6) conversion related to production
of AVLIS feedstock for USEC. See "--Industries and Markets."
DUCRETE SHIELDING. The Company has received exclusive commercial production
rights to a patented shielding product known as DUCRETE shielding, which was
developed by the DoE's Idaho National Engineering Laboratory. DUCRETE uses a
uranium oxide aggregate mixed with concrete to form a stable and economical
shielding for spent fuel and other high-level radioactive waste products.
According to DoE studies, DUCRETE shielding has been shown to have two and
one-half times the shielding capabilities of commercial grade concrete. DUCRETE
shielding containers could serve as shielding for above ground storage of spent
fuel and high-level wastes, providing an economical means of disposing of
stockpiled depleted UF(6), the raw material for the DU oxide aggregate in
DUCRETE shielding. A variety of shielding barriers and structures have been
identified as potential applications for use of DUCRETE shielding. The Company
installed pilot facilities during 1997 to convert DU oxide into high density
DUCRETE shielding aggregate. The Company is actively pursuing a contract with
the DoE for conversion of uranium oxide into DU aggregate for DUCRETE shielding
production. To date, the Company has not received contracts for DUCRETE
shielding products.
RECYCLING AND RECOVERY. The Company has demonstrated the technical
feasibility of recycling radioactively contaminated steel into storage boxes for
containment of various radioactive wastes at DoE sites. DoE facilities have
millions of tons of radioactively contaminated steel in the form of structural
components and various types of processing equipment. In addition to the DoE
facilities, it is estimated that several million tons of low-level contaminated
steel will be generated as a result of decommissioning the more than 100
currently operating commercial nuclear power plants over the next 30 years. The
Company is exploring with the DoE funding of a potential contract to develop
full-scale reprocessing of contaminated steel.
SOURCES OF RAW MATERIALS
Raw materials used by the Company include a number of metals and minerals
used to produce the alloys included in its products and castings, including
beryllium, titanium, aluminum, nickel, cobalt, chromium and molybdenum, among
others. The Company currently purchases beryllium, a metal which is used to form
its Beralcast alloys, principally from a producer-supplier located in Kazakhstan
and from multiple distributors located in Estonia, Kazakhstan, Sweden, the
United States, China and Russia. The Company also purchases scrap beryllium from
domestic and foreign distributors. The only three producers of beryllium
worldwide are located in Kazakhstan, the United States and China. For
competitive reasons,
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the Company does not procure significant quantities of beryllium raw materials
from Brush Wellman, the sole U.S. producer of beryllium, which is the Company's
principal competitor for beryllium aluminum products and the plaintiff in the
pending Brush Wellman patent lawsuit. The Company believes that a sufficient
supply of beryllium remains available for its current demand. However, if its
Beralcast products receive broad commercial acceptance, the Company's demand for
beryllium will increase. The cost of beryllium could increase as a result of the
Company's increased demand, and supplies of beryllium could also be affected.
Prices of raw materials used by the Company can be volatile, which could
significantly effect their availability and price. The Company has no long-term,
fixed price contracts or arrangements for the raw materials it purchases.
Commercial deposits of certain metals, such as beryllium, cobalt, nickel,
titanium, chromium and molybdenum, that are required for the alloys used in the
Company's precision castings and specialty metal powders, are found in only a
few parts of the world. See "Risk Factors-- Availability and Cost of Beryllium
and Other Raw Materials."
The principal raw material for the Company's steel powders is cold-rolled
steel bars, which are readily available. Other metal powders are manufactured to
customer specifications, and the metals for these powders are generally
available for purchase in job lots from specialty metal suppliers.
UF(6), the raw material for DU products, is currently available in abundant
supply from DoE's inventory and from USEC's ongoing operations.
RESEARCH AND DEVELOPMENT ACTIVITIES
The Company intends to continue to focus its own and customer funded
research and development efforts on technological innovation designed to yield
sophisticated, high-performance commercial products, materials and services. The
Company intends to pursue this strategy by maintaining a strong internal
research and development team, continuing its longstanding research
relationships with major government research centers and working closely with
customers. The primary goal of the Company's research and development efforts is
to accelerate commercialization of its materials science technology by
addressing customer identified applications with significant market potential.
The Company is involved in research covering a variety of product areas for
applications of Beralcast castings, metal powders, and uranium processing
technologies. Research and development activities in the Company's specialty
metals products business are focused on Beralcast technology. New development
efforts include new casting processes and technologies, extrusion and rolling of
wrought materials, alternate alloy compositions to meet specialized
applications, processes to convert beryllium ore to metal economically, advanced
beryllium and beryllium aluminum recycling technologies, and casting simulation
and solidification modeling to improve product quality and reduce product
development lead times. The focus of research and development activities in the
Company's advanced recycling technologies and uranium services businesses is on
advanced casting technologies for AVLIS feed material, the development of
fluorine recovery from UF(6) conversion, the manufacture of DUCRETE as a means
of incorporating depleted uranium oxide aggregate in a cement matrix to make
shielded concrete structures and recycling processes for radioactively
contaminated steel scrap.
The Company participates in certain cooperative research and development
activities through arrangements with selected customers and government agencies
where there is potential for utilizing proprietary technology or specialized
resources not directly available to the Company. Such research and development
activities are funded both by the Company and through customer sponsored
programs. During the past fiscal year, funded research and development has been
sponsored by the DOD, DoE, and various aerospace and commercial customers. This
includes research and development of the use of Beralcast products for the
Comanche program, disk drive applications and other applications. The Company
employs a staff of six Ph.D. technologists with backgrounds in chemistry,
mechanical and metallurgical engineering to conduct research and new product
development. The cost for Company-sponsored research and development activities
was $1,309,000 in fiscal 1997, $876,000 in fiscal 1996, and
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$439,000 in fiscal 1995. Total revenues from customer-funded research and
development were $793,000 in fiscal 1997, $1,812,000 in fiscal 1996 and $557,000
in fiscal 1995.
MANUFACTURING AND OPERATIONS
Beralcast is produced using a proprietary investment casting technology. The
alloys are vacuum-induction melted and cast into pre-heated ceramic shells.
Vacuum melting is not required but is preferred because it prevents oxidation
and also serves to de-gas the melt. A typical casting cycle begins with
preparation of the elemental charge materials and alloy additions. The charge is
loaded into the crucible, the furnace chamber is evacuated and power is applied
to melt the charge. The charge is heated and stirred to ensure complete melting
and homogenization. A separate preheated mold chamber is evacuated for the
investment shells. Once the optimal temperatures for the cast alloy and mold
have been achieved, the melting chamber and mold chamber interlocks are opened
and the metal is poured into the ceramic mold. Following the metal pouring, the
chambers are isolated and the mold is control cooled to optimize the alloy
microstructure. Residual material inside the crucible is reheated and poured
into additional ceramic molds once the metal and mold temperatures have been
achieved. Once the casting has cooled sufficiently, the ceramic mold is removed
and the casting is cut from the gating and feed network. The residual gating and
feed materials are recycled back into the casting process. The casting is
subsequently finished by grinding, deburring, straightening, welding and
sandblasting for final inspection. Following inspection, the castings are
delivered to machining facilities for finish machining into the final
configuration.
The investment molds used in the process are produced from a formulation
developed specifically for Beralcast. These molds are fabricated using either
conventional wax patterns or rapid prototype patterns. Pursuant to a teaming
agreement between Starmet and Nu-Cast Inc., a producer of thin-walled,
lightweight aluminum castings, the molds are fabricated in accordance with
Starmet's specifications at Nu-Cast Inc. using a dedicated mold fabrication line
which was installed to support the manufacture of Beralcast investment molds. To
support the future growth of Beralcast, the Company intends to establish ceramic
mold manufacturing capabilities at its Concord facility.
The majority of the Company's activities are conducted at a Company-owned
site in Concord, Massachusetts which comprises approximately 46 acres and
includes a 180,000 square feet building used for manufacturing activities,
offices and warehousing. Beralcast investment castings are currently produced at
the Company's Concord, Massachusetts facility. The Company's current facilities
in Concord, Massachusetts may not be adequate depending upon the demand for
Beralcast products, and possible alternatives sites for additional production
facilities are being explored. The Company plans to consolidate its DU
operations at its South Carolina facility.
The Company owns and operates a facility in Barnwell, South Carolina located
on over 300 acres of land which includes a 109,000 square foot facility housing
two manufacturing units (one unit provides the capability of converting UF(6) to
UF(4) and a second unit houses a reduction process to convert UF(4) to metallic
depleted uranium), a 70,000 square foot facility adjacent to the manufacturing
facility to provide recovery and recycle of DU and other materials, and a
full-scale analytical laboratory.
Due to planned new product and process introductions, principally to support
anticipated large volume Beralcast production, the Company anticipates spending
up to approximately $90 million over the next four years, subject to various
factors, to increase the capacity at the Company's facilities. Specifically, the
Company has embarked upon a multi-year capital expenditure program, under which
it plans to invest approximately $60 million in five phases to expand its
commercial Beralcast manufacturing capabilities to meet anticipated customer
demand through fixed asset additions, including production equipment, such as
casting furnaces, shell lines, wax mold lines, de-waxing lines and finishing
lines, and facility upgrades. The Company intends to fund such capital
expenditures with the proceeds of the offering and cash expected to be generated
from operations. Depending upon the demand for Beralcast products, this program
may be accelerated, delayed or otherwise adjusted. See "Risk Factors--Future
Capital Needs; Uncertainty of Additional Financing" and "Management's Discussion
and Analysis of Financial Condition and Results of Operation--Liquidity and
Capital Resources."
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The Company at its Concord facility is the first small business and one of
only fourteen companies nationwide to qualify for the U.S. Army's highest
quality manufacturing certification, and this facility is ISO 9002 certified.
The Company intends to continue its commitment to high quality manufacturing.
SALES AND MARKETING
The Company relies on a variety of marketing strategies, including
advertising and direct sales. Technical papers given at industry symposia,
presented by Starmet and in conjunction with customers, are also used as
marketing vehicles for the Company's advanced metal products and services. In
addition, the Company has developed concurrent engineering procedures between
customers, suppliers and Starmet. The benefit of concurrent engineering is to
provide customers cost-effective solutions to product designs which mitigate
technical and scheduling risks. Furthermore, understanding the importance of
design-to-cost principles especially those of a major aerospace firm such as
Lockheed Martin, is essential to supporting the Company's Beralcast customers.
The Company expects concentrated efforts on cost reduction in the form of
concurrent engineering, low cost beryllium metal production, facility expansion,
and other efforts, to enhance its competitive position.
Sales of Beralcast products at present are made directly to manufacturers of
assemblies and systems. In addition, the Company markets its products through a
multi-step process consisting of initial discussions of the products,
highlighting the advantages of beryllium aluminum, an engineering and marketing
evaluation by the prospective customer of sample material and demonstration
products, appropriate agreements allowing the customer to use and market
Beralcast in the relevant application and market and, finally, a production
program where appropriate expenditures are made on tooling, equipment and
quality control necessary to fulfill market requirements. The Company intends to
continue to sell primarily to OEM customers, with distribution from the
Company's manufacturing site to customer facilities.
The Company's sales and marketing organization consists of sales offices in
Concord, Massachusetts, San Jose, California, Washington, DC, Oak Ridge,
Tennessee, Idaho Falls, Idaho, Aiken, South Carolina, Barnwell, South Carolina
and sales representatives in Europe and Japan. The Company's marketing
activities also include the use of applications engineering support
professionals to assist in the development of products for specific customers
and markets, evaluations by institutions that specialize in technology and/or
markets of this type, development of appropriate sales materials such as
specification sheets and corporate brochures, and promotion through appearances
at selected trade shows and selective advertising in journals and the trade
press.
In order to penetrate new markets and accelerate its expansion, the Company
intends to pursue selected teaming arrangements, licenses, joint ventures and
other cooperative relationships. This strategy is designed to leverage the
Company's technological expertise by increasing production capacity for the
Company's products without the Company having to fund all related capital
expenditures and to leverage the existing distribution channels of partners.
PATENTS, TRADEMARKS AND LICENSES
The Company's future success depends in substantial part on its proprietary
technology, in particular, Beralcast, the Company's family of beryllium aluminum
alloys. It seeks to protect its interests and competitive position through a
combination of patent protection, confidentiality agreements with key employees,
and restricted access to certain of the Company's critical information.
The Company pursues a diligent patent application program in the United
States and abroad. The Company's holds three U.S. patents on the alloy
compositions for Beralcast materials, which provide patent rights through the
year 2012 and certain Beralcast process details are trade secrets.
The Company holds a U.S. patent relating to developments in REP production
equipment for metal powders, which provide patent rights through the year 2001.
The Company has also filed and effected this patent in certain European
countries, Canada, Israel and Japan.
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In addition, the Company has also filed applications for three patents on
new processes which it believes can be advantageously employed in the processing
and conversion of UF(6) into a variety of products, including performance
fluorine chemicals.
The Company has received exclusive commercial production rights to a
patented shielding product known as DUCRETE shielding, which uses a uranium
oxide aggregate mixed with concrete to form a stable radiation shielding
product. DUCRETE shielding was developed and patented by DoE's Idaho National
Engineering Laboratory.
The Company believes that its current and anticipated businesses do not
infringe on any patent owned by others; however, the Company has been sued by
Brush Wellman for alleged infringement of Brush Wellman's investment casting
process patent. There can also be no assurance that the Company's products will
not infringe upon the patent rights of others or that it will not be forced to
expend substantial funds to defend against infringement claims of, or to obtain
licenses from, third parties. See "Risk Factors-- Pending Beralcast Patent
Litigation; Patents and Other Intellectual Property."
COMPETITION
The Company faces significant competition from established companies in
certain of its product lines. In addition, the Company's Beralcast alloys and
other products and services face competition from alternative or competing
materials, products, services and technologies. Many of the Company's current
and potential competitors have significantly greater financial, technical,
marketing, purchasing and other resources than the Company, and, as a result,
may be able to respond more quickly to new or emerging technologies or standards
and to changes in customer requirements, or may be able to devote greater
resources to the development, promotion and sale of products, or to deliver
competitive products at lower prices. Increased competition is likely to result
in price reductions, reduced operating margins and loss of market share, any of
which could have a material adverse effect on the Company's business, results of
operation and financial condition. Although the Company believes that it has
certain technological and other advantages over its competitors, realizing and
maintaining these advantages will require continued investment in research and
development, sales and marketing, and customer service and support. There can be
no assurance that the Company will have sufficient resources to continue to make
such investments or that the Company will be successful in maintaining such
advantages. The Company believes that its ability to compete successfully
depends on a number of factors both within and outside of its control including
price, product quality, success in developing or otherwise introducing new
products, and general market and economic conditions. See "Risk
Factors--Competition."
The Company competes with Brush Wellman in the production of beryllium
products, specifically beryllium aluminum alloys. Historically, Brush Wellman,
the current sole U.S. producer of beryllium metal, was the dominant supplier of
beryllium and beryllium alloys. With the development of Starmet's Beralcast
alloys, the Company has become the leading producer of investment cast beryllium
aluminum alloys in direct competition with Brush Wellman. The Company and
several of its customers believe that the Company's Beralcast products offer
mechanical and other benefits superior to Brush Wellman's materials. Brush
Wellman has attempted to enter into cross-licensing arrangements with the
Company related to the Company's patented Beralcast alloys, but the Company has
not licensed any of its Beralcast patents to Brush Wellman or any other
companies. See "--Legal Proceedings."
Beralcast investment castings compete directly with aluminum, magnesium,
titanium, aluminum silicon carbide and aluminum boron carbide castings. Use of
Beralcast depends largely on the customer's weight, stiffness, and vibration
damping needs, in combination with a willingness to pay a premium for the
materials' performance benefits.
Key competitive factors in the metal powders market are price and the
ability to meet exact dimensional, metallurgical and other specifications. The
steel powder marketed by the Company for photocopy applications competes with
less expensive powders produced by larger manufacturers.
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The Company has historically competed with Aerojet Ordnance, a division of
GenCorp Inc., as one of two domestic DU penetrator manufacturers. Since the
requirements for DU penetrator munitions have declined, the Company believes
that Aerojet Ordnance will attempt to compete with Starmet in the production of
AVLIS feedstock. Although the Company has been the primary supplier of AVLIS
feedstock to USEC, it expects other companies to compete for future USEC
business.
SIGNIFICANT CUSTOMERS
A substantial portion of the Company's business is currently conducted with
a relatively small number of large customers. The Company's ten largest
customers accounted for approximately 78% and 83% of the Company's sales in the
fiscal years 1997 and 1996, respectively. While the Company's planned expansion
into new commercial markets may result in a substantial portion of its revenues
being derived from new customers, the dominance of a few companies in certain of
these targeted markets is likely to continue to result in a substantial portion
of the Company's revenues being derived from a small number of significant
customers. The loss of one of its key customers or any significant portion of
orders from any such customers could have a material adverse affect on the
Company's business, results of operation and financial condition. See "Risk
Factors--Concentration of Customers," "Risk Factors--Uncertainties Relating to
USEC" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Overview."
Royal Ordnance, a U.K. defense contractor, is a significant customer of the
Company's DU penetrator business. In fiscal 1997, sales to Royal Ordnance
accounted for 19% of sales. The Company currently is under contract to
manufacture penetrator blanks for Royal Ordnance with a completion date of
December 1998. USEC is the only customer of the Company's AVLIS feedstock
material. In fiscal 1997, sales to USEC accounted for 14% of sales. Primex
Technologies is also a significant customer of the Company's DU penetrator
business. In fiscal 1997, sales to Primex Technologies accounted for 12% of
sales. The Company currently is under contract to provide Primex Technologies
with 120mm penetrators for the U.S. Army's ABRAMS Tank program through the
second quarter of fiscal 1999. Lockheed Martin is a significant customer of the
Company's specialty metal products business. In fiscal 1997, sales to Lockheed
Martin accounted for 7% of sales. The Company currently is under several
contracts with Lockheed Martin to provide Beralcast hardware for the Comanche
helicopter program.
BACKLOG
The following table sets forth certain information with respect to the
Company's backlog at September 30, 1995, 1996 and 1997, and at March 31, 1997
and March 31, 1998 including the portions thereof represented by orders from the
Company's principal customers, Lockheed Martin, LMITCO, Primex Technologies and
USEC. The backlog for the Company is affected by the timing of orders from these
customers. The Company believes all orders in backlog are firm. The following
information is based on the Company's anticipated future business segments.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT MARCH 31,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Specialty Metal Products................................... $ 9,749 $ 10,532 $ 8,098 $ 9,256 $ 6,747
Advanced Recycling Technologies and Uranium Services....... 20,960 12,712 19,556 17,845 13,682
--------- --------- --------- --------- ---------
Total.................................................... $ 30,709 $ 23,244 $ 27,654 $ 27,101 $ 20,429
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
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ENVIRONMENTAL, SAFETY AND REGULATORY MATTERS
Two of the materials regularly processed by the Company, depleted uranium
and beryllium, have characteristics considered to be health or safety hazards by
various federal, state and local regulatory agencies. The processing of these
materials requires a high level of safety consciousness, personnel monitoring
devices and special equipment. Depleted uranium is a low-level radioactive
material, and the Company is subject to government licensing and regulation.
Depleted uranium in the finely divided state, such as grinding dust or machine
turnings, is combustible at room temperature and requires special handling for
safe operations and disposal of process wastes. Airborne beryllium in respirable
form, such as powder, dusts or mists generated in some manufacturing processes
can represent a hazard to the lungs in certain, susceptible individuals.
Processing this material requires use of extensive ventilation and dust
collecting systems. All of these operations are performed under strict
environmental and health safety controls consistent with OSHA and EPA
regulations for pure beryllium. Management believes that the experience gained
in its many years of working with these metals has resulted in capabilities for
dealing effectively with the health and safety concerns associated with these
materials.
The Company is subject to Environmental Laws that (i) govern activities or
operations that may have adverse environmental effects, such as discharges to
air and water, as well as handling and disposal practices for solid and
hazardous wastes, and (ii) impose liability for the costs of cleaning up, and
certain damages resulting from, sites of past spills, disposals or other
releases of hazardous substances and materials, including liability under CERCLA
and similar state statutes for the investigation and remediation of
environmental contamination at properties owned and/or operated by it and at
off-site locations where it has arranged for the disposal of hazardous
substances. In 1997, the Company's licenses at its Concord and South Carolina
facilities were renewed for a period of five years.
If it is determined that the Company is not in compliance with current
Environmental Laws, the Company could be subject to fines and penalties. The
amount of any such fines and penalties could be material. In addition, the
Company uses depleted uranium, beryllium and other hazardous substances, and as
is the case with manufacturers in general, if a release of hazardous substances
occurs on or from the Company's properties or from an off-site disposal
facility, the Company may be held liable and may be required to pay the cost of
remedying the condition. The amount of any such liability could be material.
The Company's facilities have made, and will continue to make, expenditures
to comply with current and future Environmental Laws. The Company anticipates
that it could incur additional capital and operating costs in the future to
comply with existing Environmental Laws and new requirements arising from new or
amended statutes and regulations. In addition, because the applicable regulatory
agencies have not yet promulgated final standards for some existing
environmental programs, the Company cannot at this time reasonably estimate the
cost for compliance with these additional requirements. The amount of any such
compliance costs could be material. The Company cannot predict the impact that
future regulations will impose upon the Company's business.
In the process of manufacturing depleted uranium products, the Company
generates low-level radioactive waste materials that must be disposed of at
sites licensed by federal, state, and local governments. The operation of these
disposal sites is at the discretion of these regulatory entities, which may at
times result in temporary closures and limited access. For this reason, the
Company does not rely upon any one disposal site for its waste, but, rather,
seeks to use all sites available on the basis of user rates and contract terms.
The Company has benefitted recently from a resurgence of competition in the
waste disposal industry where rates are again being driven by market forces. New
disposal sites and options are becoming available to the Company while at the
same time the Company has made significant progress in developing and
instituting technical alternatives to the generation and disposal of its waste.
The Company intends to continue the development of technologies and processes
aimed at the reduction and elimination of waste materials associated with its
manufacturing processes.
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For a number of years, ending in 1985, the Company deposited spent acid and
associated depleted uranium waste and other residual materials by neutralizing
them with lime and discharging the neutralized mixture to a holding basin on its
premises in Concord. In 1986, the holding basin was covered with Hypalon, an
impervious material used to prevent rain and surface run-off water from leaching
through the holding basin. The Company now uses a proprietary "closed loop"
process that it developed to discontinue such discharges. The Company believes
that both practices were and are in compliance with all applicable regulations.
The Company is now near completion of the process of removing and disposing of
material in the holding basin. For a discussion of the status of remediation of
the holding basin at the Company's Concord facility, see "--Concord Site
Remediation and Decommissioning Planning Requirements."
Over the next eighteen months, the Company expects to spend approximately $3
million for environmental control facilities, including air filtration systems
and dust and particle collection systems.
CONCORD SITE REMEDIATION AND DECOMMISSIONING PLANNING REQUIREMENTS
The Company is required to maintain certain licenses issued by DPH and DHEC
in order to possess and process depleted uranium materials at its facilities in
Concord and South Carolina, respectively. Under applicable licensing regulations
pertaining to D&D at licensed sites, the Company submitted to NRC (the
predecessor of DPH, in this regard) and the applicable state agencies a DFP to
provide for possible future decommissioning of its facilities. The Concord
facility DFP estimated cost is $11.7 million and the South Carolina facility DFP
estimate is $2.9 million. The Company is required to provide financial assurance
for such decommissioning pursuant to applicable regulations. The Company has
satisfied these requirements, and as a result, the site licenses for both
locations have been renewed.
Substantially all of the depleted uranium materials to which the DFP
requirements apply were processed by the Company for the United States
government. Based on the terms of certain contracts that the Company entered
into with the United States government to process such depleted uranium
materials, the Company believes that such materials continue to be owned by the
United States government and that the United States government is obligated,
under applicable law, to pay for its percentage of eventual D&D. 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.
The United States Army, in the Memorandum of Decision, pursuant to Public
Law 85-804, agreed that it would fund remediation of the Company's Concord
holding basin site as well as 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. Subject to funding appropriations, the Army has provided written
assurances of its intention to provide funding for D&D costs at the Concord
facility under future contracts or under an existing contract in the event that
no future contracts are awarded. D&D costs for the Company's South Carolina
facility are covered by the existing letter of credit. The Company has no
assurance that the Army will accept responsibility for the share of the
estimated cost of D&D at its South Carolina facility which directly resulted
from production work under U.S. government contracts on government supplied
materials. However, management believes that the Army is responsible for its
estimated share of D&D.
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 fixed price
subcontract with Zhagrus to perform this remediation. The Company's contract
with Zhagrus is fixed price based on a specified volume of waste to be removed
from the basin and delivered to a disposal site. If the volume of the material
removed exceeds the specified level, then the Company is obligated to pay an
additional fee per cubic yard of excess material removed. Based on currently
available information, management believes that the costs to complete remediaton
of the holding basin may exceed the fixed price contract with the United States
Army. On May 11, 1998, the Company was notified by Zhagrus that Zhagrus will
incur additional costs in connection
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<PAGE>
with the disposal of the material from the holding basin as a result of the need
for additional work which must be performed to treat the holding basin material
in order for it to meet conditions for burial imposed by applicable regulations.
Zhagrus has requested that the Company pay it to the extent of any additional
costs which may be incurred by it as a result of such additional services which
may be rendered. The Company has requested that Zhagrus provide it with further
information in order to permit the Company to determine whether it has any
liability to Zhagrus under the subcontract and to calculate the amount, if any,
that the Company may be required to pay to Zhagrus under the subcontract. The
Company intends to request a contract price modification for allowance of any
such additional costs under its contract with the U.S. Army, although there can
be no assurance of the timing and amount, if any, of any recovery of such costs
from the U.S. Army. The Company has notified Zhagrus of its proposed course of
action without admitting that the Company has any liability for the amount of
any such additional costs which may be incurred by Zhagrus under the
subcontract. The Company has not yet been provided with sufficient information
concerning the nature and extent of any additional work which may be required to
allow proper burial of the materials. Accordingly, the Company is unable to
determine whether it is obligated to Zhagrus under the terms of its subcontract
or the potential amount involved. The amount of any additional costs could be
material. While the Company believes that any additional remediation costs, if
not directly reimbursed pursuant to a contract price modification, would be
allowable and recoverable costs through the Company's overhead structure on
government contracts, in the event that the Company became liable to Zhagrus for
any material amount which is not authorized to be paid by the U.S. Army, such
liability could have a material adverse effect on the Company's business,
results of operations and financial condition.
LEGAL PROCEEDINGS
On December 9, 1997, Brush Wellman filed a patent infringement suit against
the Company in the Massachusetts District Court alleging that the Company is
infringing on the Brush Wellman Patent for the process of investment casting of
beryllium aluminum alloys. Brush Wellman is seeking an injunction against the
Company's alleged patent infringement, monetary damages (including treble
damages) and attorney fees. On March 28, 1998, the PTO granted the Company's
request for re-examination (filed January 22, 1998). In the Request, the Company
contended, among other things, that there was sufficient "prior art" in the
field of investment castings and castings of beryllium aluminum alloys such that
the Brush Wellman Patent should not have been issued. In granting the Request,
the patent examiner agreed that the Company's cited examples of prior art raised
substantial new issues of patentability which were not decided in the prior
examination which led to granting the Brush Wellman Patent. On May 26, 1998,
Brush Wellman submitted its response to the PTO's order granting the
reexamination. The PTO will undertake a process of re-examination of the
validity of the Brush Wellman patent that, the Company anticipates, could last
for an extended period. There can be no assurance that the PTO will find the
Brush Wellman Patent to be invalid. On January 27, 1998, the Company filed in
the Massachusetts District Court a motion to stay the court case pending the
outcome of the re-examination proceeding. If the Massachusetts District Court
were to grant the motion to stay, the court case would not proceed until the
conclusion of the PTO's re-examination of the Brush Wellman Patent. Although the
Company believes that its motion to stay has merit, no assurance can be given
that the Massachusetts District Court will grant the motion.
Even though the Company has been advised by its patent counsel, Iandiorio &
Teska, that Brush Wellman's claims are without merit because the Brush Wellman
Patent is invalid as a matter of law due to "prior art" and due to the Company's
sales of investment cast beryllium aluminum products more than one year prior to
the Brush Wellman Patent application, no assurance can be given as to the
ultimate outcome of the lawsuit. Even if the lawsuit were not to proceed to
trial, the litigation could result in substantial costs to the Company, and an
unfavorable settlement of the lawsuit could place the Company at a competitive
disadvantage. An adverse judgment or settlement could subject the Company to
significant liabilities and expenses (e.g., reasonable royalties, lost profits,
attorneys' fees or trebling of damages for willfulness). An adverse outcome also
could cause the Company to incur substantial costs in redesigning the investment
57
<PAGE>
casting process for its Beralcast products and components. Moreover, there can
be no assurance that redesign alternatives would be available to the Company,
and if available, that any redesign alternative would not place the Company at a
competitive disadvantage. The Company could be required to license the disputed
patent rights from Brush Wellman or to cease using the patented technology. Any
such license, if required, may not be available on terms acceptable or favorable
to the Company, or at all. Any of these results could have a material adverse
effect on the Company's business, financial condition and results of operations.
Even in the event of a successful outcome, the Company may incur significant
legal expenses in its defense. See "Risk Factors--Pending Beralcast Patent
Litigation; Patents and Other Intellectual Property" and "Business--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
PRP's, 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 liability at this
site is expected to be approximately $80,000 over 10 years.
EMPLOYEES
As of June 10, 1998, the Company employed 276 employees. Of these employees,
140 were involved in manufacturing, 38 in health and safety, 38 in engineering,
20 in administration, 22 in finance and 18 in sales. No employees are covered by
any collective bargaining agreements. The Company believes that its
relationships with its employees are good.
58
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company as of June 10, 1998 are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
- ---------------------------------------------------- ----- ----------------------------------------------------
<S> <C> <C>
Robert E. Quinn (1)................................. 44 President, Chief Executive Officer, Treasurer and
Director
George J. Matthews (1).............................. 68 Chairman of the Board of Directors
Wilson B. Tuffin (1)................................ 67 Vice Chairman of the Board of Directors
Kenneth A. Smith (2)................................ 61 Director
Frank H. Brenton (2)................................ 72 Director
William J. Shea (2)................................. 50 Director
Kevin R. Raftery.................................... 39 President, Starmet Commercial Castings, LLC and
Starmet Aerocast, LLC
Douglas F. Grotheer................................. 40 President, Starmet CMI Corporation
William T. Nachtrab................................. 45 Vice President, Engineering & Technology
James M. Spiezio.................................... 50 Vice President, Finance & Administration
James H. Scarboro................................... 58 Vice President, Marketing
Frank J. Vumbaco.................................... 44 Vice President, Health/Safety & Corporate
Communications
Bruce E. Zukauskas.................................. 47 Vice President, Operations
</TABLE>
- ------------------------
(1) Member of Stock Option Committee
(2) Member of Audit Committee.
The term of office for each director and executive officer of the Company is
the earlier of one year or until a successor is chosen and qualified. The
executive officers are elected by the directors at their first meeting following
the annual meeting of stockholders. There are no family relationships among the
directors and executive officers.
ROBERT E. QUINN was elected President of the Company on November 30, 1994
and Chief Executive Officer and Treasurer on January 20, 1998. Prior to November
30, 1994, he held the position of Vice President, Sales with the Company for six
years. Mr. Quinn is also a director of the Company. Upon graduation from
college, Mr. Quinn joined the Company as a sales administrator. At age 34, he
became the youngest Vice President in the Company's history. Mr. Quinn is a
graduate of Tufts University and has a Masters of Business Administration from
Babson College. Mr. Quinn is a member of the Massachusetts High Technology
Council, National Defense Industrial Association, Tufts University Alumni
Admissions and sits on the Board of Governors of the Concord Museum.
GEORGE J. MATTHEWS has been Chairman of the Board of Directors since 1972,
when he and his partner, Mr. Wilson B. Tuffin, purchased the Company from
Whittaker Corporation. From November 1994 to January 1998, Mr. Matthews held the
positions of Chief Executive Officer and Treasurer of the Company. Mr. Matthews
is a former Chairman of the Board of Trustees of Northeastern University and
currently is Chairman of the Gorbachev Institute of North America and Chairman
of Globalview Associates Limited. He is a graduate of Northeastern University's
DDA Management Program majoring in Electrical Engineering. He received his M.S.
in Business Administration at Suffolk University. Mr. Matthews has received
honorary degrees from Ricker College and Northeastern University. He is also the
recipient of several educational, civic and philanthropic honors and awards.
WILSON B. TUFFIN has been Vice Chairman of the Board of Directors since
November 1994. From 1972 when he and his partner, Mr. Matthews, purchased the
Company from Whittaker Corporation, to
59
<PAGE>
November 1994, Mr. Tuffin held the positions of President, Chief Executive
Officer and Treasurer of the Company. Mr. Tuffin is an alumnus of the Tufts
University School of Engineering.
KENNETH A. SMITH was elected a member of the Company's Board of Directors in
1985. Dr. Smith has been an Edwin R. Gilliland Professor of Chemical Engineering
at Massachusetts Institute of Technology since 1989 and was the Associate
Provost at MIT from 1980 to 1991. Dr. Smith has done extensive consulting for
major international petroleum and chemical companies and other companies
including E.I. DuPont de Nemours & Co., Inc., Air Products and Chemicals, Inc.,
Qatar General Petroleum Corporation, Arthur D. Little, Inc., Cabot Corporation,
and Stone and Webster Engineering Corp. Dr. Smith received his S.B., S.M., and
ScD. in Chemical Engineering from MIT. He has written over 100 articles in
journals on fluid mechanics, heat and mass transfer, polymer characterization,
desalination, liquified natural gas and biomedical engineering.
FRANK H. BRENTON was elected a member of the Company's Board of Directors in
1986. Mr. Brenton is also a principal of Frank H. Brenton Associates, a business
consulting firm. From 1984 to 1986, Mr. Brenton was Chairman of the board of
directors of Marshall's Incorporated, an off-price retailer and division of
Melville, Inc. He also served as Vice President of Melville Corporation during
that period. Mr. Brenton served as CFO of Mammoth Mart from 1962 to 1975.
WILLIAM J. SHEA was elected a member of the Company's Board of Directors in
February 1998. From 1992 to 1997, Mr. Shea served as Vice-Chairman, Chief
Financial Officer and Treasurer of BankBoston, NA. Prior to joining BankBoston,
NA in 1992, Mr. Shea spent 19 years with Coopers & Lybrand, where he was a
Senior Partner and a member of the Firm Council, the partnership's governing
body. Mr. Shea is currently the Chief Executive Officer and a director of View
Tech, Inc., Chairman of the board of directors of Centennial Technologies, Inc.
and serves on the board of directors of Miros, Inc. Mr. Shea received his B.A.
and M.A. in Economics from Northeastern University.
KEVIN R. RAFTERY became President of Starmet Commercial Castings, LLC and
Starmet Aerocast, LLC (both subsidiaries of the Company) in October 1997. Prior
to that he was the Manager of the Company's Beralcast business unit. Mr. Raftery
joined the Company in 1976 as a technician working for several project
engineers. He quickly advanced into project engineering becoming the lead
project engineer for several demanding aerospace programs. Mr. Raftery was
promoted to Program Manager in 1994 and Business Unit Manager in 1996. Mr.
Raftery is a recognized expert in casting, extrusion, heat treating, coating,
welding and joining technologies for aerospace specialty metals. During his
twenty year tenure with the Company, Mr. Raftery has authored and co-authored
several technical publications and is a co-inventor of two Beralcast patents.
Mr. Raftery received his B.S. in Mechanical Engineering Technology from the
University of Massachusetts.
DOUGLAS F. GROTHEER became President of Starmet CMI Corporation (a
subsidiary of the Company) in 1997. Prior to this promotion, Mr. Grotheer was
Vice President of Engineering, Programs and Quality for the Company since 1994.
Mr. Grotheer joined the Company as a project engineer directly after graduating
from college in 1980. He was promoted to Manager of Ordnance Programs. Mr.
Grotheer is a recognized expert in uranium metallurgy and processing, as well as
ISO 9002 Quality Systems. Mr. Grotheer received his degree in Materials
Engineering from Rensselaer Polytechnic Institute.
WILLIAM T. NACHTRAB, PH.D. has held the position of Vice President,
Engineering and Technology with the Company since 1997 and Vice President of
Technology since 1994. Dr. Nachtrab is the Company's senior technologist. Dr.
Nachtrab, who joined the Company in 1988, is the author and co-author of
numerous technical and scientific publications and an inventor of four of the
Company's patents. He is a recognized expert in beryllium, titanium, alloy
steels, uranium metallurgy and extrusion and powder metal processing. Before
joining the Company, Dr. Nachtrab was a Senior Member of the Technical Staff of
the GE/RCA Corporation. Prior to that he was a Division Research Engineer for
Lukens Steel Company, a Research Engineer for Lehigh University, and a
Metallurgist for LTV Steel Company. Dr. Nachtrab has a Ph.D. in Metallurgical
and Materials Engineering from Lehigh University.
60
<PAGE>
JAMES M. SPIEZIO has been Vice President, Finance and Administration since
October 1993. Prior to October 1993, he held the position of Corporate
Controller and prior to April 1989, he served as Manager of Business Planning
and Financial Analysis for four years. Before joining the Company, Mr. Spiezio
held positions of increasing responsibility in finance at Pratt & Whitney
Company, United Technologies Inc., and the General Electric Company. Mr. Spiezio
also held the position of President of Starmet CMI Corporation from October 1993
to July 1997. Mr. Spiezio is a graduate of Indiana University School of
Business.
JAMES H. SCARBORO became Vice President in December 1997 and is responsible
for government relations and strategic business development for the Company. Mr.
Scarboro has been with the Company for over five years. Mr. Scarboro was
Assistant Program Manager for the U.S. Army's Tank Main Armament Systems and
Program Manager for the Abrams Tank. Mr. Scarboro is a graduate of Rawlins
College, Ball State University, the U.S. Army Command and General Staff College
and the DOD Systems Management College and retired from the U.S. Army with the
rank of Lieutenant Colonel.
FRANK J. VUMBACO has held the position of Vice President, Health/Safety and
Corporate Communications with the Company since November 1995. Prior to November
1995, he held the position of Vice President, Health/Safety since November 1993.
Prior to November 1993, he was Manager of Health/Safety for over five years.
Before joining the Company in 1980, Mr. Vumbaco served as the Manager of Health,
Safety & Security for National Lead Industries, Albany, NY. He is a director of
the New England Consortium of Radioactive Material Users (NELRAD) and a member
of the Massachusetts Nuclear Incident Advisory Team. Mr. Vumbaco is a graduate
of Siena College and has a Masters in Applied Business Management from Lesley
College.
BRUCE E. ZUKAUSKAS has held the position of Vice President, Operations since
October 1994. Prior to October 1994, he was Quality Manager for over five years.
Before joining the Company, Mr. Zukauskas served as Operations Engineer for
Babcock and Wilcox Tubular Products Group. Mr. Zukauskas is a graduate of the
U.S. Military Academy at West Point and the U.S. Army Command and General Staff
College and received his Masters in Industrial Engineering from the University
of Pittsburgh. Mr. Zukauskas is a Colonel in the U.S. Army, Reserves.
DIRECTOR COMPENSATION
Each outside director of the Company receives an annual fee of $15,000 and
is eligible to receive options under the Company's 1995 Directors Option Plan
(the "1995 Directors Plan"). Messrs. Brenton and Smith, the Company's two
non-employee directors during fiscal 1997, were each granted options to purchase
3,000 shares of Common Stock at an exercise price of $15.56 per share in fiscal
1997. During the second fiscal quarter of fiscal 1998, the Company granted to
each of Messrs. Matthews, Tuffin, Smith, Brenton and Shea options to purchase
7,500 shares of Common Stock at an exercise price of $23.67 per share, based on
the market price of the Common Stock at that time. At the same time, the Company
also granted Mr. Quinn (in his capacity as President of the Company) an
incentive stock option to purchase 15,000 shares of Common Stock at the same
exercise price under the Company's 1998 Stock Option Plan.
The Company has entered into a management agreement with Matthews Associates
Limited, a Massachusetts corporation ("MAL"), of which George J. Matthews,
Director and Chairman of the Board of Directors of the Company, is sole owner.
The management agreement is described in the section titled "Employment
Agreements with Certain Officers."
The Company entered into an employment and consulting agreement with Mr.
Tuffin in November 1994, which shall continue in force until February 1999.
Pursuant to such agreement, Mr. Tuffin receives annual compensation of $105,000
for his services as a consultant to the Company. Mr. Tuffin's duties include his
service as a director and Vice Chairman of the Board of Directors of the
Company. During the term of the agreement and for a period of two years after
its expiration, Mr. Tuffin may not compete directly or indirectly with the
Company within the continental United States.
61
<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has an Audit Committee which is reconstituted at the
first meeting of the Board following the annual meeting of stockholders. The
Audit Committee, which met two times during fiscal 1997, meets with the
Company's independent auditors and principal financial personnel to review the
scope and results of the annual audit and the Company's financial reports. The
Audit Committee also reviews the scope of audit and non-audit services performed
by the independent public accountants, and reviews the adequacy and
effectiveness of internal accounting controls. The present members of the Audit
Committee are Messrs. Brenton, Smith and Shea.
The Board of Directors has a Stock Option Committee which was formed during
fiscal 1997. The Stock Option Committee, which met once during fiscal 1997,
recommends to the Board of Directors for its approval the terms, amounts and
recipients of stock options under the Company's stock option plans. The present
members of the Stock Option Committee are Messrs. Matthews, Tuffin and Quinn.
The Board of Directors does not have standing committees on compensation or
nominations.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1997, the Board of Directors of the Company was responsible
for establishing executive compensation (other than stock option compensation).
Messrs. Quinn and Matthews participated in deliberations of the Company's Board
of Directors concerning executive officer compensation. Neither participated in
setting his own compensation. No executive officer of the Company served as a
director or member of a compensation committee, or its equivalent, of another
entity, one of whose executive officers served as a director of the Company.
62
<PAGE>
EXECUTIVE COMPENSATION
The following table and notes present the compensation provided by the
Company during the last three fiscal years for its Chief Executive Officer and
for the four most highly compensated executive officers of the Company, other
than the Chief Executive Officer, whose total compensation exceeded $100,000 for
fiscal 1997 (collectively, the "Named Executive Officers"):
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
---------------------------------------
ANNUAL COMPENSATION AWARDS
--------------------------------------- -------------------------- PAYOUTS
OTHER RESTRICTED SECURITIES -----------
ANNUAL STOCK UNDERLYING LTIP
NAME AND COMPEN- AWARD(S) OPTIONS/ PAYOUTS
PRINCIPAL POSITION YEAR(1) SALARY ($) BONUS($) SATION($)(2) $ SARS (#)(3) $
------------------ ----------- ----------- ----------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
George J. Matthews................. 1997 350,000 -- -- -- -- --
Chairman of Board of 1996 350,000 -- -- -- -- --
Directors (4)(5) 1995 350,000 -- -- -- 20,000 --
Robert E. Quinn.................... 1997 200,000 15,000 -- -- 25,000 --
President, CEO and 1996 173,769 -- -- -- 20,000 --
Treasurer (5)(6) 1995 151,673 200 35,000 -- 60,000 --
James M. Spiezio................... 1997 131,616 13,250 -- -- 8,000 --
Vice President, Finance & 1996 121,058 -- -- -- 10,000 --
Administration 1995 113,270 10,930 -- -- 12,000 --
William T. Nachtrab................ 1997 131,616 9,050 -- -- 8,000 --
Vice President, Engineering and 1996 114,849 -- -- -- -- --
Technology 1995 108,703 10,830 -- -- 12,000 --
Douglas F. Grotheer................ 1997 121,934 6,700 -- -- 5,000 --
President, Starmet CMI 1996 100,252 -- -- -- -- --
Corporation 1995 95,002 10,830 -- -- 5,000 --
<CAPTION>
ALL
OTHER
NAME AND COMPEN-
PRINCIPAL POSITION SATION($)
------------------ -----------
<S> <C>
George J. Matthews................. --
Chairman of Board of --
Directors (4)(5) --
Robert E. Quinn.................... --
President, CEO and --
Treasurer (5)(6) --
James M. Spiezio................... --
Vice President, Finance & --
Administration --
William T. Nachtrab................ --
Vice President, Engineering and --
Technology --
Douglas F. Grotheer................ --
President, Starmet CMI --
Corporation --
</TABLE>
- ------------------------
(1) The Company's fiscal year ends on September 30 of each year.
(2) Excludes perquisites in amounts less than the threshold level required for
reporting.
(3) Options have been adjusted to reflect Company's two-for-one stock dividend
paid on April 7, 1997.
(4) Mr. Matthews is a consultant to the Company pursuant to a management
agreement between Matthews Associates Limited and the Company. His
compensation (as reflected in the above table) for fiscal 1997 was
determined pursuant to such management agreement. All compensation under the
agreement is paid by the Company to Matthews Associates Limited. See
"Employment Agreements with Certain Officers."
(5) On January 20, 1998, Mr. Matthews resigned as Chief Executive Officer and
Treasurer of the Company and the Company elected Mr. Quinn as Chief
Executive Officer and Treasurer.
(6) Mr. Quinn's compensation for fiscal 1997 was determined pursuant to his
employment agreement. See "Employment Agreements with Certain Officers."
EMPLOYMENT AGREEMENTS WITH CERTAIN OFFICERS
EMPLOYMENT AGREEMENT WITH MR. QUINN
In October 1997, the Company entered into an amended employment agreement
with Mr. Quinn. Pursuant to the agreement, Mr. Quinn will receive initial
compensation at the annual rate of $200,000, subject to such annual increases
and bonuses as the Board of Directors may from time to time determine. The
agreement shall continue in force until February 28, 2002, unless terminated by
either party in accordance with its terms, and is subject to annual renewals as
described in the agreement. During the term of the agreement and for a period of
two years after its expiration, or after the termination of Mr. Quinn's
employment with the Company, whichever occurs later, Mr. Quinn may not compete
directly or indirectly with the Company within the continental United States.
The Company shall require any successor to a majority of the Company's business
activities to assume its obligations under this agreement.
63
<PAGE>
EMPLOYMENT AGREEMENTS WITH MESSRS. SPIEZIO, NACHTRAB, GROTHEER AND RAFTERY
In October 1997, the Company entered into employment agreements with Messrs.
Spiezio, Nachtrab, Grotheer and Raftery (each an "Executive"). Under the terms
of their respective agreements, Messrs. Spiezio, Nachtrab, Grotheer and Raftery
are entitled to an annual base salary of $142,000, $136,000, $135,000, and
$100,000, respectively, subject to such annual increases and bonuses as the
Board of Directors may from time to time determine. Each of the agreements shall
continue in force for an initial period of three years, unless such agreement is
terminated by the Company or the Executive in accordance with its terms.
Annually, the Board of Directors, in its discretion, may extend the term of each
agreement for an additional year. During the term of each agreement and for a
period of eighteen months after any termination of employment, each Executive
may neither compete directly or indirectly with the Company within the
continental United States nor solicit any of the Company's customers or
employees. Each of the agreements may be terminated by the Company prior to a
change in control (as defined in the agreements) and upon twelve months written
notice.
MANAGEMENT AGREEMENT WITH MATTHEWS ASSOCIATES LIMITED
The Company has entered into a management agreement with Matthews Associates
Limited, a Massachusetts corporation ("MAL"), of which George J. Matthews,
Director and Chairman of the Board of Directors of the Company, is sole owner.
The agreement provides MAL with a minimum compensation of $350,000 per annum for
services performed under the agreement, including financial management advice,
representation of the Company before government regulatory bodies, Mr. Matthews'
service on the Board and such other duties as assigned by the Board of
Directors. The agreement expires on February 28, 2002, subject to annual
renewals as described in the agreement. In the event of termination of MAL by
the Company, the Company is obligated to pay to MAL all of the amounts due under
the agreement for the remaining term.
PENSION PLAN
The following table sets forth the aggregate annual benefit payable upon
retirement at normal retirement age for each level of remuneration specified at
the listed years of service.
<TABLE>
<CAPTION>
YEARS OF SERVICE
ANNUAL REMUNERATION -----------------------------------------------
PRIOR TO RETIREMENT 15 20 25 30 OR MORE
- -------------------------------------------------------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
up to $100,000.......................................... $ 23,520 $ 31,360 $ 39,220 $ 47,040
100,001--150,000........................................ 38,520 51,360 64,200 77,040
150,001--200,000........................................ 53,520 71,360 89,200 107,040
200,001--300,000........................................ 83,520 111,360 139,200 167,040
300,001--400,000........................................ 113,520 151,360 189,200 227,040
400,000--500,000........................................ 143,520 191,360 239,200 287,040
</TABLE>
The Company has a defined benefit plan (the "Pension Plan") designed to
provide retirement benefits for employees and ancillary benefits to their
beneficiaries, joint annuitants and spouses. All employees of the Company become
participants in the Pension Plan after attaining the later of age 21 or one year
of service with the Company. The Pension Plan provides retirement benefits based
on years of service and compensation. An employee's benefits under the Pension
Plan generally become fully vested after five years of service. At normal
retirement (the later of age 65 and five years of Pension Plan participation),
participants are entitled to a monthly benefit for the remainder of their life
in an amount equal to one-twelfth of the sum of their "Annual Credits" for their
last 30 years or lesser period of employment with the Company and its
predecessors. An employee's "Annual Credit" is 1.25% of the portion of his
annual compensation that is subject to Social Security tax and 2% of the balance
of his annual compensation. Participants with five years of service are entitled
to retirement at age 55, but the monthly benefit payable
64
<PAGE>
under the Pension Plan is reduced by 0.5% for each month that early retirement
precedes normal retirement but not to less than $100 per month if the
Participant has ten or more years of service. The surviving spouse of a retiree
under the Plan is entitled to receive benefits equal to one-half the amount the
retiree had been receiving. Alternative benefit payments that are equivalent to
the benefit described above are also available to participants. Benefits payable
under the plan are not reduced by Social Security payments to the retiree.
Amounts shown assume benefits commence at age 65. Benefit amounts shown are
straight-life annuities. The executive officers named in the Summary
Compensation Table have the following years of credited service for pension plan
purposes: Robert E. Quinn--21 years; James M. Spiezio--11 years; William T.
Nachtrab--7 years; and Douglas F. Grotheer--17 years. Mr. Matthews does not
participate in the Pension Plan.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information regarding options granted
during fiscal 1997 by the Company to the Named Executive Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------------------------
PERCENT POTENTIAL REALIZABLE
OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES IN EXERCISE OR OPTION TERM(3)
OPTIONS FISCAL BASE PRICE EXPIRATION -------------------------
NAME GRANTED (#) YEAR (1) ($/SHARE)(2) DATE 5%($) 10%($)
- --------------------------------------- ----------- ------------- ----------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
George J. Matthews..................... -- -- -- -- -- --
Robert E. Quinn........................ 15,000(4) $ 15.563 8/5/2007 $ 146,812 $ 372,051
10,000(5) 20.8% 7.38 11/19/2006 46,412 117,618
James M. Spiezio....................... 4,000(4) 15.563 8/5/2007 39,150 99,214
4,000(5) 6.7% 7.38 11/19/2006 18,565 47,047
William T. Nachtrab.................... 4,000(4) 15.563 8/5/2007 39,150 99,214
4,000(5) 6.7% 7.38 11/19/2006 18,565 47,047
Douglas F. Grotheer.................... 3,000(4) 15.563 8/5/2007 29,362 74,410
2,000(5) 4.2% 7.38 11/19/2006 9,282 23,524
</TABLE>
- ------------------------
(1) Percentage is total percentage of all options granted to employee in fiscal
1997.
(2) The exercise price per share was based on the market price of the underlying
Common Stock on the date of grant. The exercise price reflects the
two-for-one stock dividend paid on April 7, 1997.
(3) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based upon assumed rates of share price appreciation set by the
Securities and Exchange Commission of five percent and ten percent
compounded annually from the date the respective options were granted to
their expiration date. The gains shown are net of the option exercise price,
but do not include deductions for taxes of the options exercise price or
other expenses associated with the exercise. Actual gains, if any, are
dependent on the performance of the Common Stock and the date on which the
option is exercised. There can be no assurance that the amounts reflected
will be achieved.
(4) These options will vest in three equal annual installments on August 5,
1998, 1999 and 2000.
(5) These options will vest in three equal annual installments on November 19,
1997, 1998 and 1999. The number of shares has been adjusted to reflect the
Company's two-for-one stock dividend paid on April 7, 1997.
65
<PAGE>
AGGREGATED OPTIONS EXERCISED IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth certain information concerning options
exercised during fiscal 1997 by the Named Executive Officers, as well as the
aggregate value of unexercised options held by such executive officers on
September 30, 1997. The Company has no outstanding stock appreciation rights,
either freestanding or in tandem with options.
<TABLE>
<CAPTION>
VALUE OF
UNEXERCISED
IN-THE-MONEY
NUMBER OF SECURITIES OPTIONS
UNDERLYING UNEXERCISED AT
SHARES OPTIONS AT FY-END (#) FY-END(2)
ACQUIRED ON VALUE -------------------------- -----------
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE
- ----------------------------------------- ----------------- --------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
George J. Matthews....................... 0 $ 0 13,334 6,666 $ 148,274
Robert E. Quinn.......................... 0 0 46,667 58,333 509,003
James M. Spiezio......................... 0 0 16,333 18,667 193,679
William T. Nachtrab...................... 0 0 13,000 12,000 157,449
Douglas F. Grotheer...................... 0 0 8,334 6,666 83,324
<CAPTION>
NAME UNEXERCISABLE
- ----------------------------------------- -------------
<S> <C>
George J. Matthews....................... $ 74,126
Robert E. Quinn.......................... 487,202
James M. Spiezio......................... 162,599
William T. Nachtrab...................... 90,129
Douglas F. Grotheer...................... 43,327
</TABLE>
- ------------------------
(1) Value realized equals fair market value on the date of exercise, less the
exercise price, times the number of shares acquired, without deducting taxes
or commissions paid by employee.
(2) Value of unexercised options equals fair market value of the shares
underlying in-the-money options on September 30, 1997 (closing price of
Common Stock on September 30, 1997 was $17.25 per share), less the exercise
price, times the number of options outstanding. All such options were "in
the money" as of September 30, 1997.
STOCK OPTION PLANS
1998 STOCK PLAN
On February 20, 1998, the Board of Directors adopted the Company's 1998
Stock Plan (the "1998 Stock Plan") and the 1998 Stock Plan was approved by the
Company's stockholders at a meeting on March 18, 1998. The Company has reserved
300,000 shares of Common Stock for issuance under the 1998 Stock Plan to
employees, officers, directors and consultants of the Company. The Board of
Directors believes that the use of long-term stock incentives is the most
effective tool to motivate and retain key management, other employees,
non-employee directors and consultants of the Company and to provide such
persons with an additional incentive to promote the long-term interests and
financial success of the Company. The purpose of the 1998 Stock Plan is to
benefit the Company through the retention and motivation of its employees by
offering such individuals an opportunity to become owners of the Common Stock of
the Company with an additional incentive to advance the best interests of the
Company by increasing their proprietary interest in the success of the Company.
Accordingly, on March 18, 1998 the Company granted options to purchase 200,000
shares of Common Stock at an exercise price of $23.67 per share, based on the
market price of the Common Stock at that time, under the 1998 Stock Plan, of
which 65,000 were granted to certain Company officers. The remaining options to
purchase were distributed to all of the full-time employees of the Company.
The 1998 Stock Plan provides for the granting of incentive stock options
("ISOs") which are intended to meet the requirements of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), the granting of
non-qualified stock options ("Non-Qualified Options") which do not meet the
requirements of Section 422 of the Code, opportunities to make direct purchases
of the Company's Common Stock ("Purchase Rights") and the making of awards of
the Company's Common Stock ("Awards"). If any unexercised option granted
pursuant to the 1998 Stock Plan lapses or terminates for any reason, the shares
of Common Stock covered thereby are again available for subsequent option grants
under the 1998 Stock Plan.
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<PAGE>
The 1998 Stock Plan will be administered by the Board of Directors. The
Board of Directors may delegate any or all of its powers under the 1998 Stock
Plan to a committee appointed by the Board of Directors. Subject to the terms of
the 1998 Stock Plan, the Board of Directors determines the recipients to whom
options will be granted, the number of shares to be covered by such options and
the terms of such options.
The Board of Directors may, at its discretion, select any eligible person to
participate in the 1998 Stock Plan. Non-Qualified Options and Purchase Rights
may be granted, and Awards may be made, to any director, officer, employee or
consultant of the Company. Only employees of the Company are eligible to receive
ISOs. The number of options granted to any eligible person is within the
discretion of the Board of Directors, subject to certain conditions concerning
ISOs.
The aggregate fair market value (determined at the time of grant) of shares
issuable pursuant to ISOs which first become exercisable in any calendar year by
an employee may not exceed $100,000. ISOs may not be granted at less than the
fair market value of the Common Stock on the date of grant or 110% of fair
market value in the case of ISOs granted to any optionee holding 10% or more of
the total combined voting power of all classes of stock of the Company. In
addition, no ISO is exercisable after 10 years from the date on which it is
granted, and in the case of ISOs granted to an employee holding 10% or more of
the total combined voting power of all classes of stock of the Company, the term
shall not exceed 5 years from the date of grant.
Options issued under the 1998 Stock Plan are exercisable only by the
optionee during the life of the optionee and, generally, are not transferable,
except by will or the laws of descent and distribution or as determined by the
Board of Directors. The Board of Directors shall determine the period of time
during which an optionee may exercise an option following the termination of
employment or service to the Company subject to certain restrictions set forth
below with respect to ISOs. ISOs are generally only exercisable while an
optionee is employed by the Company, except that the Board of Directors may
determine to permit exercise within up to three months after termination of
employment to the extent such option has vested at the time of such termination.
If an optionee dies while employed by the Company or within three months of the
termination of his or her employment by the Company, such optionee's ISOs may be
exercised up to twelve months after his or her death. If an optionee is
permanently disabled during his or her employment by the Company, such
optionee's options may be exercised up to one year following termination of his
or her employment due to such disability.
The exercise price of options granted under the 1998 Stock Plan is
determined by the Board of Directors on the date of grant, subject to the
limitation that the exercise price may not be less than par value. However,
there are certain pricing restrictions for ISOs as set forth above. The exercise
price of options granted under the 1998 Stock Plan must be paid in full upon
exercise in cash, by delivery of shares of Common Stock already owned by the
optionee, through the delivery of an assignment to the Company of a sufficient
amount of the proceeds from the sale of the Common Stock acquired upon exercise
of the option, by any other means the Board of Directors deems acceptable, or a
combination thereof.
The Board of Directors may terminate, modify or amend the 1998 Stock Plan
except that no amendment or modification for which stockholder approval is
required under Section 422 of the Code is permissible without the approval of
the stockholders of the Company. With respect to ISOs, the 1998 Stock Plan shall
terminate on the earlier of (i) February 19, 2008 or (ii) the date on which all
shares available for issuance under the 1998 Stock Plan have been issued
pursuant to the exercise or cancellation of options granted under the 1998 Stock
Plan.
1995 DIRECTORS OPTION PLAN
Non-management members of the Board of Directors of the Company and its
subsidiaries participate in the Company's 1995 Directors Plan, which was adopted
to promote the interests of the Company and its stockholders in strengthening
the Company's ability to attract and retain experienced and knowledgeable
67
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non-management directors by enhancing their incentive to work on behalf of the
Company and its stockholders and to encourage them to acquire an increased
proprietary interest in the Company.
The Company has reserved 70,000 shares of Common Stock for issuance under
the 1995 Directors Plan to the Company's non-management directors. All options
granted under the 1995 Directors Plan shall be Non-Qualified Options and have an
exercise price equal to the closing price of the Company's Common Stock on the
day prior to the date of option grant. The 1995 Directors Plan shall expire on
November 20, 2000.
The Company has granted options to purchase 43,500 shares of Common Stock
under the 1995 Directors Plan.
1990 EMPLOYEE, NON-QUALIFIED AND DIRECTORS OPTION PLANS
The Company has a 1990 amended and restated employee stock option plan for
the granting of ISOs to employees, a 1990 amended non-qualified option plan for
the granting of Non-Qualified Options to certain key employees and a 1990
directors plan for the granting of Non-Qualified Options to the Company's
directors. No additional options will be granted under these plans; however,
351,420 options are outstanding under these plans, of which 195,061 are
currently exercisable.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Section 67 of Chapter 156B of the Massachusetts General Laws ("Section 67")
provides that a corporation may indemnify its directors and officers to the
extent specified in or authorized by (i) the articles of organization, (ii) a
by-law adopted by the stockholders, or (iii) a vote adopted by the holders of a
majority of the shares of stock entitled to vote on the election of directors.
In all instances, the extent to which a corporation provides indemnification to
its directors and officers under Section 67 is optional. Article 6 of the
Company's Amended and Restated Articles of Organization provides that the
Company shall indemnify directors and officers of the Company against
liabilities and expenses arising out of legal proceedings brought against them
by reason of their status as directors and officers or by reason of their
agreeing to serve, at the request of the Company, as a director or officer with
another organization. Under this provision, a director or officer of the Company
shall be indemnified by the Company for all costs and expenses (including
attorneys' fees), judgments, liabilities, and amounts paid in settlement of such
proceedings, even if he is not successful on the merits, if he acted in good
faith in the reasonable belief that his or her action was in the best interests
of the Company. The Board of Directors may authorize advancing litigation
expenses to a director or officer at his request upon receipt of an undertaking
by any such director or officer to repay such expenses if it is ultimately
determined that he is not entitled to indemnification for such expenses.
Article 6 of the Company's Articles of Organization eliminates the personal
liability of the Company's directors to the Company or its stockholders for
monetary damages for breach of a director's fiduciary duty, except to the extent
Chapter 156B of the Massachusetts General Laws prohibits the elimination or
limitation of such liability.
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<PAGE>
CERTAIN TRANSACTIONS
In January 1996, the Company sold $500,500 of its 10% Convertible
Subordinated Debentures due on June 10, 1997 to Wiaf Investors Co. ($334,000),
Melvin Chrein ($83,500), and Kathleen Matthews ($83,000). Such debentures are
convertible into shares of Common Stock at an exercise price of $5.945 per
share. Wiaf Investors Co. and Mr. Chrein have filed Schedules 13DA identifying
themselves as part of an investor group which holds more than five percent of
the Company's outstanding Common Stock and Mrs. Matthews is the wife of George
Matthews, a director of the Company. In September 1996, the Company, Wiaf
Investors Co., Mr. Chrein, and Mrs. Matthews amended the above debentures and
extended the due date to December 10, 1998
In September 1996, the Company sold $350,000 of its 10% Subordinated
Debentures due on December 10, 1998 and issued warrants to purchase 42,000
shares of Common Stock to Melvin Chrein ($100,000 and 12,000 shares), Marshall
Chrein ($25,000 and 3,000 shares), and Charles Alpert ($225,000 and 27,000
shares). Melvin Chrein, Marshall Chrein and Charles Alpert have filed Schedules
13DA identifying themselves as part of an investor group which holds more than
five percent of the Company's outstanding Common Stock.
In December 1997, the Company sold $900,000 of its 10% Convertible
Subordinated Debentures due on December 31, 1999 to Wiaf Investors Co.
($500,000), Melvin Chrein ($150,000), Marshall Chrein ($50,000), George Matthews
($50,000) and $150,000 to an individual not affiliated with the Company. Such
debentures are convertible into shares of Common Stock at an exercise price of
$21.50 per share. Wiaf Investors Co., Melvin Chrein and Marshall Chrein have
filed Schedules 13DA identifying themselves as part of an investor group which
holds more than five percent of the Company's outstanding Common Stock and Mr.
Matthews is currently a director of the Company.
The Company has entered into a management agreement with Mr. Matthews, and
employment agreements with Messrs. Quinn, Spiezio, Nachtrab, Grotheer and
Raftery, as described in "Employment Agreements with Certain Officers" and an
employment and consulting agreement with Mr. Tuffin, as described in "Director
Compensation."
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth as of June 10, 1998, certain information with
respect to the beneficial ownership of the Common Stock by (i) each person known
by the Company to be a beneficial owner of more than five percent of the Common
Stock, (ii) each director of the Company, (iii) each Named Executive Officer,
(iv) all directors and executive officers of the Company as a group, and (v)
each Selling Stockholder. In accordance with Rule 13d-3 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), a person is deemed to be
the beneficial owner, for purposes of this table, of any shares of Common Stock
of the Company if he or she has or shares voting power or investment power with
respect to such security or has the right to acquire beneficial ownership at any
time within 60 days of June 10, 1998. As used herein "voting power" is the power
to vote or direct the voting of shares, and "investment power" is the power to
dispose of or direct the disposition of shares. Except as otherwise noted, each
party included in the table has sole voting and investment power with respect to
the shares beneficially owned.
BENEFICIAL OWNERSHIP PERCENTAGES SET FORTH IN THE FOLLOWING TABLE DO NOT
REFLECT ACTUAL VOTING POWER RESULTING FROM THE APPLICATION OF THE MASSACHUSETTS
CONTROL SHARE ACQUISITION ACT. SEE "RISK FACTORS-- EFFECTS OF MASSACHUSETTS
CONTROL SHARE ACQUISITION ACT," "RISK FACTORS--SUBSTANTIAL INFLUENCE OF
PRINCIPAL STOCKHOLDERS" AND "DESCRIPTION OF CAPITAL STOCK--MASSACHUSETTS
CORPORATE LAW."
<TABLE>
<CAPTION>
PERCENT SHARES PERCENT
BENEFICIALLY NUMBER OF BENEFICIALLY BENEFICIALLY
AMOUNT AND NATURE OWNED PRIOR SHARES OWNED AFTER OWNED AFTER
NAME AND ADDRESS OF BENEFICIAL TO THE BEING THE THE
OF BENEFICIAL OWNER OWNERSHIP OFFERING(1) OFFERED OFFERING OFFERING(1)(2)
- ----------------------------------------- ------------------- ----------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Charles Alpert(1)(3)(4).................. 2,495,537 50.56% 450,000 2,045,537 28.47%
Joseph Alpert
Wiaf Investors Co.
466 Arbuckle Avenue
Lawrence, NY 11516
and
Melvin B. Chrein, M.D.
Meryl J. Chrein
Marshall J. Chrein
21 Copper Beech Lane
Lawrence, NY 11559
George J. Matthews(5).................... 423,420 8.77% 145,000 278,420 3.93%
Chairman of the Board of Directors,
Director & Consultant
c/o Matthews Associates Limited
100 Corporate Place
Peabody, MA 01960
Wilson B. Tuffin(6)...................... 405,316 8.44% 150,000 255,316 3.62%
Vice Chairman and Director
23 Arlington Street
Acton, MA 01720
Dimensional Fund Advisors, Inc.(7)....... 335,500 7.00% -- 335,500 4.77%
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401
Robert E. Quinn(8)....................... 103,811 2.13% -- 103,811 1.46%
President, CEO and Treasurer
James M. Spiezio(9)...................... 28,332 * -- 28,332 *
Vice President, Finance and
Administration
William T. Nachtrab(10).................. 21,666 * -- 21,666 *
Vice President, Engineering &
Technology
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
PERCENT SHARES PERCENT
BENEFICIALLY NUMBER OF BENEFICIALLY BENEFICIALLY
AMOUNT AND NATURE OWNED PRIOR SHARES OWNED AFTER OWNED AFTER
NAME AND ADDRESS OF BENEFICIAL TO THE BEING THE THE
OF BENEFICIAL OWNER OWNERSHIP OFFERING(1) OFFERED OFFERING OFFERING(1)(2)
- ----------------------------------------- ------------------- ----------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Eleanor Donelan.......................... 19,788 * 5,000 14,788 *
27 Beverly Road
Arlington, MA 02174
Kenneth A. Smith, Director(11)........... 15,000 * -- 15,000 *
Frank H. Brenton, Director(11)........... 15,000 * -- 15,000 *
Douglas F. Grotheer(12).................. 13,740 * -- 13,740 *
President of Starmet CMI Corporation
William J. Shea, Director................ -- -- -- -- --
All directors and executive officers (13 1,063,249 21.15% 295,000 768,249 10.56%
persons) as a group(13)..................
</TABLE>
- ------------------------
(1) Does not reflect the effect on voting rights of the Massachusetts Control
Share Acquisition Act. The Company is subject to Chapter 110D of the
Massachusetts General Laws which governs "control share acquisitions," which
are acquisitions of beneficial ownership of shares which would raise the
voting power of the acquiring person above any one of three thresholds:
one-fifth, one-third or one-half of the total voting power. All shares
acquired by the person making the control share acquisition within 90 days
before or after any such threshold is crossed obtain voting rights only upon
the authorization from a majority of the stockholders other than the person
acquiring such shares, officers of the Company and those directors of the
Company who also are employees. Based on certain filings made with the
Securities and Exchange Commission, the Company believes that certain
control share acquisitions have occurred and that the members of the group
which effected such control share acquisitions, namely Wiaf Investors Co.,
Charles Alpert, Joseph Alpert, Melvin B. Chrein, Meryl J. Chrein and
Marshall J. Chrein (collectively, the "Investor Group") are the holders of
1,759,255 shares (the "Affected Shares") which were acquired in control
share acquisitions (within the meaning of Chapter 110D) and accordingly will
have no voting rights unless or until such voting rights are authorized as
described in "Description of Capital Stock." Upon the closing of the
offering, the Investor Group will beneficially own in the aggregate
2,045,537 shares of Common Stock (assuming full conversion of convertible
debentures and including shares issuable upon exercise of all warrants held
by certain members of the Investor Group), or approximately 28.47% of the
shares of Common Stock (assuming no exercise of the Underwriters'
over-allotment option). Of the shares to be beneficially owned by the
Investor Group, not more than 646,282 (assuming full conversion of
convertible debentures and including shares issuable upon exercise of all
warrants held by certain members of the Investor Group) will be entitled to
vote, or approximately 11.17% of the total outstanding shares entitled to
vote (assuming no exercise of the Underwriters' over-allotment option).
(2) Assumes that the Underwriters' over-allotment option is not exercised.
(3) Derived from Schedules 13DA, dated March 28, 1997, Forms 5 and stockholder
questionnaires submitted to the Company. The six persons named are described
as a group in such Schedules 13DA. The persons named reported ownership of
the following shares: Wiaf Investors Co. 1,756,756; Melvin B. Chrein
202,300; Meryl J. Chrein 245,500; Charles Alpert 50,000; Joseph Alpert
50,000; and Marshall J. Chrein 46,200. Each person reported sole voting and
dispositive power with respect to the shares owned by such person. Also
includes 21,021, 79,435 and 2,325 shares which Melvin B. Chrein, Wiaf
Investors Co. and Marshall Chrein, respectively, have the right to acquire
upon conversion of outstanding 10% Convertible Subordinated Debentures and
27,000, 12,000 and 3,000 shares which Charles Alpert or nominee, Melvin B.
Chrein and Marshall J. Chrein, respectively, have the right to acquire under
outstanding warrants.
(4) 300,000 shares will be sold by Wiaf Investors Co. and Melvin B. Chrein and
Meryl J. Chrein will each sell 75,000 shares.
(5) Includes (i) 20,000 shares which may be purchased upon the exercise of
currently exercisable options, (ii) 2,325 shares which may be acquired upon
the conversion of an outstanding 10% Convertible Subordinated Debenture,
(ii) 13,961 shares which Mr. Matthews' wife has the right to acquire upon
the conversion of an outstanding 10% Convertible Subordinated Debenture, and
(iii) 1,980 shares owned by Mr. Matthews' wife. Mr. Matthews disclaims
beneficial ownership of the debenture and shares held by Mrs. Matthews.
(6) Includes 10,000 shares which may be purchased upon the exercise of currently
exercisable options.
(7) The officers of Dimensional Fund Advisors, Inc. also serve as officers of
DFA Investment Dimensions Group, Inc. (the "Fund") and The DFA Investment
Trust Company (the "Trust"), each an open-end management investment company
registered under the Investment Company Act of 1940. In their capacity as
officers of the Fund and the Trust, these persons vote 126,100 shares which
are owned by the Fund and 13,000 shares which are owned by the Trust.
Dimensional Fund Advisors, Inc. disclaims beneficial ownership of these
securities.
(8) Includes 81,665 shares which may be purchased upon the exercise of currently
exercisable options.
(9) Includes 26,332 shares which may be purchased upon the exercise of currently
exercisable options.
(10) Includes 19,666 shares which may be purchased upon the exercise of
currently exercisable options.
(11) Includes 9,000 shares which may be purchased upon the exercise of currently
exercisable options.
(12) Includes 11,666 shares which may be purchased upon the exercise of
currently exercisable options.
(13) See notes (5), (6), (8), (9), (10), (11) and (12) above. Also includes an
additional 32,664 shares which may be purchased upon the exercise of
currently exercisable options.
71
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summary of certain provisions of the Company's Articles of
Organization, as amended, its By-laws, as amended, and certain provisions of
Massachusetts law pertaining to the Company's capital stock does not purport to
be complete and the summary of each such document is qualified in its entirety
by reference to the full text of such documents, which are included as exhibits
to the Registration Statement of which this Prospectus is a part. For
information as to how such documents may be obtained, see "Available
Information."
The authorized capital stock of the Company consists of 15,000,000 shares of
Common Stock, $0.10 par value (the "Common Stock"). As of June 10, 1998 there
were issued and outstanding 4,790,674 shares of Common Stock, held of record by
approximately 300 stockholders, options to purchase 594,920 shares of Common
Stock and warrants to purchase 182,790 shares of Common Stock (205,923 shares
upon the completion of the offering, after taking into account anti-dilution
provisions in the First Warrant held by the Company's principal bank lender, and
assuming no exercise of the Underwriters' over-allotment option). Additionally,
126,044 shares are issuable upon the conversion of outstanding convertible
subordinated debentures.
COMMON STOCK
Subject to applicable laws, holders of Common Stock are entitled to one vote
for each share held on all matters submitted to a vote of stockholders and will
not have cumulative voting rights. Accordingly, holders of a majority of the
shares of Common Stock entitled to vote in any election of directors may elect
all of the directors standing for election. Holders of Common Stock are entitled
to receive ratably such dividends, if any, as may be declared by the Board of
Directors out of funds legally available therefor. Holders of the Common Stock
have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of Common Stock are, and the shares offered by the Company in
the offering made by this Prospectus will be, when issued and paid for, fully
paid and nonassessable.
MASSACHUSETTS CORPORATE LAW
The Company is subject to Chapter 110D of the Massachusetts General Laws
which governs "control share acquisitions," which are certain acquisitions of
beneficial ownership of shares which raise the voting power of the acquiring
person (which can be a group of persons or entities sharing beneficial
ownership) above any one of three thresholds: one-fifth, one-third or one-half
of the total voting power. Each time one of these thresholds is crossed, all
shares acquired by the person making the control share acquisition within the
period beginning 90 days before and ending 90 days after such threshold is
crossed ("Affected Shares") obtain voting rights only (i) upon authorization by
a majority of the stockholders other than the holder of the Affected Shares,
officers of the Company and directors of the Company who also are employees of
the Company or (ii) when disposed of in non-control share acquisitions. The
Company's stockholders, at a duly-constituted meeting, may, by amendment to the
By-Laws or the Articles of Organization, provide that the provisions of Chapter
110D shall not apply to future control share acquisitions of the Company.
Management currently has no plans to propose such an amendment. Chapter 110D may
have the effect of delaying or preventing a change of control of the Company at
a premium price. In addition, because the number of shares of Common Stock
entitled to vote is substantially less than the total number of outstanding
shares of Common Stock, holders of shares of Common Stock purchased in
transactions which are not control share acquisitions, and which occur at a time
when there are Affected Shares outstanding, will obtain voting rights which are
disproportionate to the number of shares held as a percentage of all outstanding
shares (including Affected Shares), which may facilitate the acquisition of
shareholdings which may permit the exercise of a controlling influence on the
management or policies of the Company.
Pursuant to Section 7 of Chapter 110D, if the question of voting rights for
Affected Shares is, at some later date, presented to the Company's stockholders
for their consideration, and voting rights are
72
<PAGE>
authorized for the Affected Shares and it is determined that the person making
the control share acquisition has acquired beneficial ownership of shares which,
when added to all other shares of the Company beneficially owned by such person,
entitles such person to vote, or direct voting of, shares of the Company having
a majority or more of all voting power in the election of directors, each
stockholder of record of the Company, other than the person making such control
share acquisition, who does not vote in favor of authorizing voting rights for
the shares acquired in such control share acquisition may demand payment for his
stock in an appraisal in accordance with the provisions of Section 86 to 98,
inclusive, of Chapter 156B of the Massachusetts General Laws. Such appraisal
rights would only become operative in the event that the members of the Investor
Group were to demand that the stockholders consider authorization of voting
rights for the Affected Shares and such authorization were granted. The Investor
Group has not requested that the stockholders of the Company consider
authorization of such voting rights. See "Risk Factors--Effects of Massachusetts
Control Share Acquisition Act."
Massachusetts General Laws Chapter 156B, Section 50A generally requires that
publicly-held Massachusetts corporations have a classified board of directors
consisting of three classes as nearly equal in size as possible, unless the
corporation elects to opt out of the statute's coverage. The Company has elected
to opt out of the statute's coverage.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Boston EquiServe
LP.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, the Company will have 7,040,674 shares of
Common Stock outstanding (7,490,674 shares if the Underwriters' over-allotment
option is exercised in full), assuming no exercise of the Company's outstanding
options and warrants and no conversion of the Company's convertible debentures.
Of these shares, approximately 1,607,948 currently outstanding shares and the
3,000,000 shares sold in this offering will be freely tradable, without
restriction or further registration under the Securities Act, except for shares
purchased by "affiliates" of the Company, as that term is defined in Rule 144
under the Securities Act, or persons who have been affiliates within the
preceding three months.
The remaining 2,432,726 outstanding shares of Common Stock are owned by
existing stockholders and are currently deemed "restricted securities" under
Rule 144 and are currently eligible for sale under Rule 144, subject to
restrictions on the timing, manner and volume of such shares.
As of June 10, 1998, an aggregate of 721,420 shares of Common Stock have
been reserved for issuance upon exercise of options issued or issuable pursuant
to the Company's stock option plans for employees and directors. The Company has
reserved 126,044 shares of Common Stock for issuance upon conversion of the
Company's convertible subordinated debentures and 182,790 shares of Common Stock
for issuance upon exercise of outstanding and immediately exercisable warrants.
Upon completion of the offering and after giving effect of the offering to the
anti-dilution provisions in the First Warrant held by the Company's principal
bank lender, 205,923 shares of Common Stock (210,550 shares assuming exercise in
full of the Underwriters' over-allotment option) will be reserved for issuance
upon exercise of outstanding and immediately exercisable warrants.
Pursuant to the agreement related to the issuance to the Company's principal
bank lender of certain warrants, the holder of such warrants is entitled to
certain piggyback registration rights in the event that the Company registers
its securities under the Securities Act for certain transactions (excluding this
offering). These rights are generally subject to certain conditions and
limitations, among them the right of the managing underwriters of an offering to
limit the number of shares included in such registration in certain
circumstances. The Company is obligated to pay all expenses of any such
registration and to indemnify such holder against certain liabilities, including
liabilities under the Securities Act.
73
<PAGE>
In connection with this offering, certain stockholders of the Company, who
will hold in the aggregate 2,813,786 shares of Common Stock (includes currently
exercisable options and warrants and shares issuable upon conversion of
outstanding convertible debentures) after giving effect to the offering, are
expected to enter into the lock-up agreements. See "--Lock-up Agreements."
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including persons deemed to be "affiliates" of the
Company, who has beneficially owned his or her shares for at least one year
since the later of the date of the acquisition of the securities from the
Company or from an affiliate is entitled to sell within any three-month period
that number of restricted securities that does not exceed the greater of (i) 1%
of the then outstanding shares of securities of the same class or (ii) the
average weekly trading volume of such securities during the four calendar weeks
immediately preceding such sale. Sales under Rule 144 are also subject to
certain requirements relating to the manner and notices of sale and the
availability of the public information concerning the Company. After two years
have elapsed since the later of the date the securities were acquired from the
Company or from an affiliate of the Company, such shares may be sold without
limitation by persons who are not affiliates of the Company and have not been
affiliates of the Company for at least three months prior to the sale under Rule
144(k).
The Company has filed a registration statement on Form S-8 under the
Securities Act registering all 370,000 shares of Common Stock issuable under the
Company's 1995 Directors Plan and 1998 Stock Plan. Accordingly, such shares may
be immediately sold, except for shares held by affiliates or persons who have
been affiliates within the preceding three months, which are subject to the
restrictions on the timing, manner and volume of sales under Rule 144, and any
shares subject to the lock-up agreements described below.
No prediction can be made as to the effect, if any, that market sales of
additional shares or the availability of such additional shares for sale will
have an impact on the market price of the Common Stock. Nevertheless, sales of
substantial amounts of Common Stock in the public market, or the perception that
such sales may occur, could have an adverse impact on the market price of the
Common Stock.
LOCK-UP AGREEMENTS
Each of the Company, its directors and executive officers, the Selling
Stockholders and certain other stockholders are expected to agree that for a
period of 180 days from the date of this Prospectus, he or it will not, directly
or indirectly, without the prior written consent of Bear, Stearns & Co. Inc.,
issue, sell, offer or agree to sell, grant any option to purchase, or otherwise
transfer or dispose of any Common Stock or any securities substantially similar
to the Common Stock, otherwise than in this offering.
74
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), through their representatives,
Bear, Stearns & Co. Inc. and Furman Selz LLC, have severally agreed to purchase
from the Company and the Selling Stockholders the number of shares of Common
Stock set forth opposite their respective names below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
<S> <C>
Bear, Stearns & Co. Inc....................................................
Furman Selz LLC............................................................
-----------------
Total...................................................................... 3,000,000
-----------------
-----------------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that, if any of the foregoing
shares of Common Stock are purchased by the Underwriters pursuant to the
Underwriting Agreement, all such shares must be so purchased. The Company and
the Selling Stockholders have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act, or to
contribute to payments that the Underwriters may be required to make in respect
thereof.
The Company and the Selling Stockholders have been advised that the
Underwriters propose initially to offer the shares of Common Stock to the public
at the public offering price set forth on the cover page of this Prospectus and
to certain selected dealers (who may include the Underwriters) at such public
offering price less a concession not to exceed per share. The selected
dealers may reallow a concession to certain other dealers not to exceed
per share. After the offering to the public, the public offering price, the
concession to selected dealers and the reallowance to other dealers may be
changed by the Underwriters.
The Company has granted the Underwriters an option, exercisable during the
30-day period after the date of this Prospectus, to purchase up to 450,000
additional shares of Common Stock at the public offering price, less the
underwriting discount, set forth on the cover page of this Prospectus, solely to
cover over-allotments, if any. To the extent that the Underwriters exercise such
option, each of the Underwriters will have a firm commitment, subject to certain
conditions, to purchase such additional shares in approximately the same
proportion as set forth in the above table.
The public offering price of the Common Stock will be determined by
negotiations between the Company and the representatives of the Underwriters.
Among the factors to be considered in determining the public offering price
will be prevailing conditions in the securities market, estimates of the
business potential and earnings prospects of the Company and other factors
deemed relevant. There can be no assurance that an active trading market will
develop for the Common Stock or that the Common Stock will trade in the public
market subsequent to the offering at or above the public offering price.
In order to facilitate the offering, certain persons participating in this
offering may engage in transactions that stabilize, maintain or otherwise affect
the price of the Common Stock during and after this offering. Specifically, the
Underwriters may over-allot or otherwise create a short position in the Common
Stock for their own account by selling more shares of Common Stock than have
been sold to them by the Company and the Selling Stockholders. The Underwriters
may elect to cover any such short position by purchasing shares of Common Stock
in the open market or by exercising the over-allotment option granted to the
Underwriters. In addition, such persons may stabilize or maintain the price of
the
75
<PAGE>
Common Stock by bidding for or purchasing shares of Common Stock in the open
market and may impose penalty bids, under which selling concessions allowed to
syndicate members or other broker-dealers participating in this offering are
reclaimed if shares of Common Stock previously distributed in this offering are
repurchased in connection with stabilization transactions or otherwise. The
effect of these transactions may be to stabilize or maintain the market price of
the Common Stock at a level above that which might otherwise prevail in the open
market. The imposition of a penalty bid may also affect the price of the Common
Stock to the extent that it discourages resales thereof. No representation is
made as to the magnitude or effect of any such stabilization or other
transactions. Such transactions may be effected on the Nasdaq National Market or
otherwise and, if commenced, may be discontinued at any time.
Certain persons participating in this offering may also engage in passive
market making transactions in the Common Stock on the Nasdaq National Market in
accordance with Rule 103 of Regulation M under the Exchange Act. Rule 103
permits, upon the satisfaction of certain conditions, underwriting and selling
group members participating in a distribution that are also registered Nasdaq
market makers in the security being distributed (or a related security) to
engage in limited passive market making transactions during the period when
Regulation M would otherwise prohibit such activity. In general, a passive
market maker may not bid for or purchase a security at a price that exceeds the
highest independent bid for those securities by a person that is not
participating in the distribution and must identify its passive market making
bids on Nasdaq electronic inter-dealer reporting system. In addition, the net
daily purchases made by a passive market maker generally may not exceed 30% of
such market maker's average daily trading volume in the security for the two
full consecutive calendar months (or any 60 consecutive days ending within 10
days) immediately preceding the date of filing of the Registration Statement of
which this Prospectus forms a part.
Each of the Company, its directors and executive officers, the Selling
Stockholders and certain other stockholders are expected to agree that for a
period of 180 days from the date of this Prospectus, he or it will not, directly
or indirectly, without the prior written consent of Bear, Stearns & Co. Inc.,
issue, sell, offer or agree to sell, grant any option to purchase or otherwise
transfer or dispose of any shares of Common Stock (or any securities convertible
into, exercisable for or exchangeable for shares of Common Stock).
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company and the Selling Stockholders by Peabody & Arnold LLP,
Boston, Massachusetts. Thomas A. Wooters, Esq., a Partner of Peabody & Arnold
LLP, is the Clerk of the Company. Mr. Wooters currently holds 8,200 shares of
the Company's Common Stock in an Individual Retirement Account. Mr. Wooters also
holds unvested options to purchase 3,000 shares of Common Stock at an exercise
price of $15.56 per share and 7,500 shares of Common Stock at an exercise price
of $23.67 per share, in each case based on the market price of the Common Stock
at the time of the grant. Iandiorio & Teska is acting as the Company's counsel
in connection with legal matters relating to its patents. Debevoise & Plimpton
is acting as counsel for the Underwriters in connection with certain legal
matters relating to the sale of the shares of Common Stock offered hereby.
EXPERTS
The Consolidated Financial Statements and the financial statement schedule
included in this Prospectus and elsewhere in the Registration Statement of which
the Prospectus is a part, to the extent of and for the periods indicated in
their reports, have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
76
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational reporting requirements of the
Exchange Act and in accordance therewith files reports, proxy statements and
other information with the Securities and Exchange Commission (the
"Commission"). Such reports, proxy statements and other information may be
inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, and at the public reference facilities of Commission's following
Regional Offices: Chicago Regional Office, Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511; and New York Regional Office,
7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such
material can be obtained at prescribed rates from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549. Certain of such reports, proxy statements and other information
concerning the Company are also available on the Commission's Web Site
(http://www.sec.gov). In addition, this material may also be inspected at the
offices of The Nasdaq National Market at 1735 K Street, N.W., Washington, D.C.
20006, where copies may be obtained at prescribed rates.
The Company has filed with the Commission under the Securities Act a
Registration Statement on Form S-1 (the "Registration Statement") with respect
to the shares of Common Stock to be offered and sold hereby. This Prospectus is
included as a part of the Registration Statement, but does not contain all of
the information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to herein are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit or appendix to the Registration Statement, each such statement
being qualified in all respects by such reference. The Registration Statement in
full, including the exhibits and schedules thereto, may be inspected without
charge at the Commission's Public Reference Section, Room 1-24, located at 450
Fifth Street, N.W., Washington, D.C. 20549. Copies thereof may also be obtained
from the Commission upon payment of prescribed fees by writing to the Commission
at the above address.
77
<PAGE>
STARMET CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.............................................. F-2
Consolidated Balance Sheets........................................................... F-3
Consolidated Statement of Operations.................................................. F-4
Consolidated Statement of Stockholders' Equity........................................ F-5
Consolidated Statement of Cash Flows.................................................. F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Starmet Corporation:
We have audited the accompanying consolidated balance sheets of Starmet
Corporation (formerly Nuclear Metals, Inc.) (a Massachusetts corporation) and
subsidiaries as of September 30, 1996 and 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended September 30, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Starmet
Corporation and subsidiaries as of September 30, 1996 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended September 30, 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
November 14, 1997
(Except with respect to the matters
discussed in Notes 6 and 11 as to which the
date is December 29, 1997)
F-2
<PAGE>
STARMET CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
---------------------------- -------------
<S> <C> <C> <C>
1996 1997 1998
------------- ------------- -------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 1,051,000 $ 195,000 $ 247,000
Restricted cash................................................. 250,000 73,000 73,000
Accounts receivable, net of allowances for doubtful accounts of
$821,000 and $421,000 as of September 30, 1996 and 1997,
respectively and $421,000 as of March 31, 1998................ 4,931,000 5,546,000 7,743,000
Inventories..................................................... 12,025,000 11,440,000 11,485,000
Other current assets............................................ 376,000 619,000 261,000
------------- ------------- -------------
Total current assets.......................................... 18,633,000 17,873,000 19,809,000
------------- ------------- -------------
Property, plant and equipment:
Land............................................................ 2,178,000 2,124,000 2,124,000
Buildings....................................................... 18,040,000 17,656,000 17,779,000
Machinery, equipment, and fixtures.............................. 26,179,000 18,472,000 19,380,000
Construction-in-progress........................................ 583,000 831,000 2,149,000
------------- ------------- -------------
Total property, plant and equipment........................... 46,980,000 39,083,000 41,432,000
Less: accumulated depreciation................................ 31,834,000 24,036,000 24,860,000
------------- ------------- -------------
Net property, plant, and equipment............................ 15,146,000 15,047,000 16,572,000
Other assets........................................................ 1,339,000 1,784,000 2,159,000
------------- ------------- -------------
$ 35,118,000 $ 34,704,000 $ 38,540,000
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations and notes payable to
stockholders.................................................. $ 510,000 $ 1,885,000 $ 5,888,000
Accounts payable................................................ 2,143,000 3,123,000 3,648,000
Accrued payroll and related costs............................... 1,170,000 1,215,000 1,154,000
Other accrued expenses.......................................... 5,561,000 907,000 1,191,000
------------- ------------- -------------
Total current liabilities..................................... 9,384,000 7,130,000 11,881,000
------------- ------------- -------------
Long-term obligations............................................. 644,000 430,000 336,000
------------- ------------- -------------
Notes payable to stockholders..................................... 720,000 1,048,000 1,165,000
------------- ------------- -------------
Commitments and contingencies (Note 11)
Stockholders' equity:
Common stock, par value $0.10; authorized--15,000,000 shares;
issued and outstanding as of September 30, 1996 and 1997 and
March 31, 1998; 4,781,928, 4,784,244 and 4,790,274,
respectively.................................................. 478,000 478,000 479,000
Additional paid-in capital...................................... 14,019,000 14,033,000 14,055,000
Warrants issued................................................. 130,000 360,000 687,000
Retained earnings............................................... 9,743,000 11,225,000 9,937,000
------------- ------------- -------------
Total stockholders' equity.................................... 24,370,000 26,096,000 25,158,000
------------- ------------- -------------
$ 35,118,000 $ 34,704,000 $ 38,540,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
STARMET CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30, SIX MONTHS ENDED MARCH 31,
------------------------------------------- ----------------------------
1995 1996 1997 1997 1998
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Net sales and contract revenues....... $ 18,784,000 $ 28,694,000 $ 28,062,000 $ 12,613,000 $ 18,769,000
Cost of sales......................... 15,452,000 25,053,000 19,136,000 7,902,000 14,526,000
Selling, general, and administrative
expenses............................ 4,817,000 5,325,000 5,448,000 3,273,000 4,475,000
Research and development expenses..... 439,000 876,000 1,309,000 699,000 567,000
Loss on write-off of fixed assets..... -- -- 358,000 -- --
------------- ------------- ------------- ------------- -------------
20,708,000 31,253,000 26,251,000 11,874,000 19,568,000
------------- ------------- ------------- ------------- -------------
Operating income (loss)............... (1,924,000) (2,560,000) 1,811,000 739,000 (799,000)
Interest and other income (expense),
net................................. 232,000 (89,000) (2,000) 11,000 --
Interest expense...................... (350,000) (387,000) (296,000) (119,000) (489,000)
------------- ------------- ------------- ------------- -------------
Income (loss) before income taxes and
extraordinary item.................. (2,042,000) (3,036,000) 1,513,000 631,000 (1,288,000)
Provision (benefit) for income
taxes............................... (1,967,000) 1,000 31,000 13,000 --
------------- ------------- ------------- ------------- -------------
Income (loss) before extraordinary
item................................ (75,000) (3,037,000) 1,482,000 618,000 (1,288,000)
Extraordinary gain on extinguishment
of debt net of taxes of $10,000..... 585,000 -- -- -- --
------------- ------------- ------------- ------------- -------------
Net income (loss)..................... $ 510,000 $ (3,037,000) $ 1,482,000 $ 618,000 $ (1,288,000)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Per share information (1):
- --------------------------------------
Basic income (loss) before
extraordinary item.................. $ (0.02) $ (0.64) $ 0.31 $ 0.13 $ (0.27)
Extraordinary gain on extinguishment
of debt net of taxes of $10,000..... 0.12 -- -- -- --
------------- ------------- ------------- ------------- -------------
Basic net income (loss) per common
share............................... $ 0.11 $ (0.64) $ 0.31 $ 0.13 $ (0.27)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Weighted average number of common
shares outstanding.................. 4,701,000 4,779,000 4,783,000 4,782,000 4,787,000
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Diluted net income (loss) per common
and dilutive potential common shares
outstanding......................... $ 0.11 $ (0.64) $ 0.30 $ 0.13 $ (0.27)
Weighted average number of common and
dilutive potential common shares
outstanding......................... 4,706,000 4,779,000 4,959,000 4,928,000 4,787,000
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
(1) Adjusted to reflect the two-for-one stock dividend issued on April 7, 1997.
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
STARMET CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ADDITIONAL
NUMBER PAR PAID-IN RETAINED
OF SHARES VALUE CAPITAL WARRANTS EARNINGS TOTAL
---------- ---------- ------------- ---------- ------------- -------------
Balance at September 30, 1994.......... 4,614,928 $ 460,000 $ 13,522,000 $ -- $ 12,270,000 $ 26,252,000
---------- ---------- ------------- ---------- ------------- -------------
Stock options exercised................ 161,000 18,000 465,000 -- -- 483,000
Net income for year.................... -- -- -- -- 510,000 510,000
---------- ---------- ------------- ---------- ------------- -------------
Balance at September 30, 1995.......... 4,775,928 $ 478,000 $ 13,987,000 $ -- $ 12,780,000 $ 27,245,000
---------- ---------- ------------- ---------- ------------- -------------
Warrants issued........................ -- -- -- 130,000 -- 130,000
Stock options exercised................ 6,000 -- 32,000 -- -- 32,000
Net loss for year...................... -- -- -- -- (3,037,000) (3,037,000)
---------- ---------- ------------- ---------- ------------- -------------
Balance at September 30, 1996.......... 4,781,928 $ 478,000 $ 14,019,000 $ 130,000 $ 9,743,000 $ 24,370,000
---------- ---------- ------------- ---------- ------------- -------------
Warrants issued........................ -- -- -- 230,000 -- 230,000
Stock options exercised................ 2,316 -- 14,000 -- -- 14,000
Net income for year.................... -- -- -- -- 1,482,000 1,482,000
---------- ---------- ------------- ---------- ------------- -------------
Balance at September 30, 1997.......... 4,784,244 $ 478,000 $ 14,033,000 $ 360,000 $ 11,225,000 $ 26,096,000
---------- ---------- ------------- ---------- ------------- -------------
Warrants issued (unaudited)............ -- -- -- 327,000 -- 327,000
Stock options exercised (unaudited).... 6,030 1,000 22,000 -- -- 23,000
Net loss for the six months ended March
31, 1998 (unaudited)................. -- -- -- -- (1,288,000) (1,288,000)
---------- ---------- ------------- ---------- ------------- -------------
Balance at March 31, 1998
(unaudited).......................... 4,790,274 479,000 14,055,000 687,000 9,937,000 25,158,000
---------- ---------- ------------- ---------- ------------- -------------
---------- ---------- ------------- ---------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
STARMET CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED SEPTEMBER 30, MARCH 31,
------------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Cash flows from operating activities:
Net income (loss)................................. $ 510,000 $(3,037,000) $ 1,482,000 $ 618,000 $(1,288,000)
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization................... 1,339,000 1,493,000 1,588,000 751,000 999,000
Loss on write-off of fixed assets............... -- -- 358,000 -- --
Changes in assets and liabilities, net:
Decrease (increase) in accounts receivable.... 725,000 (201,000) (616,000) 511,000 (2,197,000)
Decrease (increase) in inventories............ (2,982,000) 2,099,000 585,000 346,000 (45,000)
(Decrease) increase in accounts payable and
accrued expenses............................ 1,387,000 3,358,000 (3,629,000) (2,650,000) 762,000
Decrease (increase) in other assets........... -- -- -- (83,000) (17,000)
Gain on sale of building........................ (175,000) (75,000) -- -- --
Changes in accrued and deferred taxes........... (1,000) -- -- -- --
Changes in other long-term liabilities.......... (981,000) (301,000) -- -- --
Other........................................... (100,000) 440,000 (689,000) (1,000) 1,000
----------- ----------- ----------- ----------- -----------
Net cash provided (used) by operating
activities.................................. (278,000) 3,776,000 (921,000) (508,000) (1,785,000)
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures, net......................... (777,000) (1,449,000) (1,788,000) (785,000) (2,349,000)
Sales of marketable securities, net............... 326,000 170,000 -- -- --
Proceeds from sale of property, plant &
equipment....................................... 487,000 172,000 -- 12,000 --
----------- ----------- ----------- ----------- -----------
Net cash (used) provided by investing
activities.................................. 36,000 (1,107,000) (1,788,000) (773,000) (2,349,000)
----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Principal payments under long-term obligations.... -- -- (545,000) (1,994,000) (9,934,000)
Net proceeds from bank debt....................... (378,000) (3,326,000) 1,707,000 2,422,000 13,220,000
Proceeds from notes payable to stockholders and
warrants........................................ -- 850,000 500,000 -- 900,000
Proceeds from stock issuance...................... 483,000 32,000 14,000 -- --
----------- ----------- ----------- ----------- -----------
Net cash (used) provided by financing
activities.................................. 105,000 (2,444,000) 1,676,000 428,000 4,186,000
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents....................................... (137,000) 225,000 (1,033,000) (853,000) 52,000
Cash and cash equivalents at beginning of period.. 1,213,000 1,076,000 1,301,000 1,051,000 195,000
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of period........ $ 1,076,000 $ 1,301,000 $ 268,000 $ 198,000 $ 247,000
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest, net of amounts capitalized............ $ 280,000 $ 345,000 $ 266,000 $ 46,000 $ 158,000
Income taxes.................................... $ 978,000 $ 11,000 $ 14,000 $ -- $ --
Non-cash investing & financing activities:
Capital lease obligations......................... $ -- $ 75,000 $ -- $ 6,000 $ 7,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
STARMET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OPERATIONS
The Company (Starmet Corporation and its subsidiaries) is an innovator in
the design, development and processing of specialty metals, a precision
manufacturer of technologically sophisticated metal components and products, and
a leader in certain advanced materials conversion and recycling technologies.
Effective October 1, 1997 the Company changed its name from Nuclear Metals, Inc.
to Starmet Corporation. Export sales to foreign unaffiliated customers were 33%
of total net sales and contract revenues in fiscal 1995, 28% in fiscal 1996, 25%
in fiscal 1997 and 24% in the six months ended March 31, 1998. A significant
portion of the Company's sales revenue has been derived from major customers as
follows:
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30,
-------------------------------------
1995 1996 1997
----- ----- ----- SIX MONTHS
ENDED MARCH 31,
-----------------------
1998
-----------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Royal Ordnance................................... 0% 11% 19% 19%
United States Enrichment Corporation............. 0 5 14 2
Primex Technologies.............................. 8 20 12 14
Lockheed Martin.................................. 18 16 7 6
Lockheed Idaho Falls............................. 9 4 5 6
U.S. Army (holding basin)........................ 0 0 3 21
</TABLE>
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Starmet Corporation and its wholly owned subsidiaries: Starmet Powders, LLC,
Starmet Aerocast, LLC, Starmet Commercial Castings, LLC, Starmet NMI
Corporation, Starmet CMI Corporation, Starmet Holdings Corporation and NMI
Foreign Sales Corporation. All material intercompany transactions and balances
have been eliminated in consolidation.
FISCAL YEARS
References in these financial statements to 1997, 1996 and 1995 are for the
fiscal years ended September 30, 1997, September 30, 1996, and September 30,
1995, respectively. The accompanying financial statements and all share and per
share information have been restated to reflect the two-for-one stock dividend
issued on April 7, 1997.
INTERIM FINANCIAL STATEMENTS
The financial information as of and for the six months ended March 31, 1998
and for the six months ended March 31, 1997 has been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission
and is not subject to audit by independent public accountants. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. 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
F-7
<PAGE>
STARMET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
that results for the interim periods are not necessarily indicative of the
results expected for any other interim period or the full year.
REVENUE RECOGNITION
Revenues are recorded when products are shipped, except for revenues on
long-term contracts, which are recorded on the percentage-of-completion method.
The percentage-of-completion method is used for research and development
contracts and for production contracts, which require significant amounts of
initial engineering and development costs. The percentage-of-completion is
determined by relating the actual number of contract units completed to date to
the total units to be completed under the respective contract or by relating
total costs incurred to total estimated cost at completion. When the estimated
total costs on a contract indicates a loss, the Company's policy is to record
the entire loss currently. Performance incentives and penalties incorporated in
certain government contracts are recognized when incentives are earned or
awarded or when penalties are incurred or assessed. Contract revenues include
fees resulting from facilitization contracts with the U.S. Army (contracts to
establish production capacity through the purchase and installation of equipment
to be owned by the U.S. Army). The consolidated balance sheets do not include
the cost of this U.S. Army-owned equipment.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are recorded at cost, which approximates market
value. Cash equivalents include certificates of deposit with a maturity of three
months or less.
RESTRICTED CASH
The Company is required to maintain a certain amount of cash at a bank as
collateral for a letter of credit issued by the bank on behalf of the Company.
As of September 30, 1997, $73,000 was held in an account with the bank pursuant
to the letter of credit agreement.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
and include materials, labor, and manufacturing and engineering overhead. 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. Changes in estimated reserve requirements, based on
relevant information, management's experience, and the timing of expected
inventory usage, are charged or credited to cost of sales in the period in which
the change is determined.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are recorded at the lower of cost or net
realizable value. For financial reporting purposes, the Company provides
depreciation on the straight-line method over the estimated useful lives of the
assets, which are as follows:
<TABLE>
<S> <C>
Buildings...................................................... 20-30 years
Machinery, equipment, and fixtures............................. 3-10 years
</TABLE>
F-8
<PAGE>
STARMET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Maintenance and repairs are charged to operations as incurred; renewals and
betterments are capitalized. When property, plant, and equipment are sold,
retired or disposed of, the asset cost and accumulated depreciation are removed
from the accounts, and the resulting gain or loss is included in operations.
During fiscal 1997 the Company completed a review of its property, plant and
equipment and identified assets with a net book value of $358,000 that were no
longer being utilized. The Company recorded a charge to write off these assets.
In fiscal 1997, the Company adopted the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and of Long-Lived Assets to
be Disposed of." This statement requires a review of impairment for long-lived
assets and certain identifiable intangibles to be held and used by an entity
whether events or changes in circumstances indicate that the carrying amount of
the assets may not be recoverable. An impairment loss is recognized if the sum
of the expected future cash flows to result from the use and eventual
disposition of the asset is less than the carrying amount of the asset. The
amount by which the carrying amount of the asset exceeds the fair value less
costs to sell, is an impairment loss. The effect of adopting this statement was
not material to the Company's financial position or results of operation.
In the fourth quarter of fiscal 1996, the Company established a $2,100,000
reserve for estimated losses associated with Starmet CMI's production contracts.
The Company was obligated to complete these contracts, which were fixed price.
The contracts have been completed and the reserve has been fully utilized as of
September 30, 1997.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Accordingly, the Company recognizes deferred
income taxes based on the expected future tax consequences of differences
between the financial statement basis and the tax basis of assets and
liabilities, calculated using enacted tax rates in effect for the year in which
the differences are expected to be reflected in the tax return. The Company
records a valuation allowance against any net deferred tax assets whose
realizability is uncertain.
The deferred federal and state income taxes result primarily from using
accelerated depreciation on property, plant, and equipment for income tax
reporting purposes and from establishing reserves which are not currently
deductible for income tax purposes, respectively.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. Research and
development incurred under customer contracts are expensed through cost of sales
in the period incurred.
F-9
<PAGE>
STARMET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Customer funded research and development:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED SEPTEMBER 30, ENDED MARCH 31,
------------------------------------ ----------------------
1995 1996 1997 1997 1998
---------- ------------ ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue........................ $ 557,000 $ 1,812,000 $ 793,000 $ 111,000 $ 291,000
Cost of sales.................. 459,000 1,273,000 675,000 84,000 340,000
</TABLE>
INCOME PER SHARE OF COMMON STOCK
The Company has adopted SFAS No. 128, Earnings per Share, effective December
15, 1997. SFAS No. 128 replaces primary earnings per share with "basic earnings
per common share." Basic earnings per common share is computed by dividing net
income by the weighted average number of shares of common stock outstanding
during the year. No dilution for any potentially dilutive securities is
included. In addition, SFAS No. 128 replaces fully diluted earnings per common
share with "diluted earnings per common share." Dilution for options and
warrants under SFAS No. 128 is computed using the average share price of the
Company's common stock for the period. In loss periods, potentially dilutive
securities are excluded as they would be anti-dilutive. All previously reported
amounts for EPS have been restated to conform with SFAS 128.
Common share and common share dilutive potential disclosures are:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED SEPTEMBER 30, MARCH 31,
---------------------------------- ----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Weighted average common shares outstanding....... 4,701,000 4,779,000 4,783,000 4,782,000 4,787,000
Dilutive potential common shares................. 5,000 -- 176,000 146,000 --
---------- ---------- ---------- ---------- ----------
Diluted common shares............................ 4,706,000 4,779,000 4,959,000 4,928,000 4,787,000
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Options and warrants excluded from diluted income
per common share as their effect would be
antidilutive................................... 90,000 303,000 -- -- 778,000
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
RECLASSIFICATIONS
Certain amounts previously reported in the consolidated financial statements
have been reclassified to conform to the 1997 presentation.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-10
<PAGE>
STARMET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist mainly of cash and cash
equivalents, restricted cash, accounts receivable, notes receivable from
officers, accounts payable and notes payable. The carrying amounts of the
Company's cash and equivalents, restricted cash accounts receivable, notes
receivable from officers and accounts payable approximate their fair value due
to the short-term nature of these instruments. The carrying value of the notes
payable also approximates the fair value, based on rates available to the
Company for debt with similar terms and remaining maturities.
LEGAL COSTS FOR LOSS CONTINGENCIES
Legal costs are recorded in the period in which the legal services are
provided.
3. OTHER ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT MARCH 31,
------------------------ ---------------
1996 1997 1998
------------ ---------- ---------------
<S> <C> <C> <C>
(UNAUDITED)
Waste burial cost................................. $ 2,884,000 $ 404,000 $ 677,000
Estimated loss on contracts....................... 2,100,000 -- --
Other............................................. 577,000 503,000 514,000
------------ ---------- ---------------
$ 5,561,000 $ 907,000 $ 1,191,000
------------ ---------- ---------------
------------ ---------- ---------------
</TABLE>
During the fiscal year ended September 30, 1997, the Company reduced certain
accruals by $1,750,000 for waste burial costs which were deemed no longer
necessary.
4. ACCOUNTS RECEIVABLE
The following is an analysis of accounts receivable (net of allowances for
doubtful accounts):
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT MARCH 31,
-------------------------- ---------------
1996 1997 1998
------------ ------------ ---------------
<S> <C> <C> <C>
(UNAUDITED)
Accounts receivable.............................. $ 3,479,000 $ 5,460,000 $ 6,680,000
Unbilled receivables and retainages due upon
completion of contracts........................ 1,452,000 86,000 1,063,000
------------ ------------ ---------------
$ 4,931,000 $ 5,546,000 $ 7,743,000
------------ ------------ ---------------
------------ ------------ ---------------
</TABLE>
F-11
<PAGE>
STARMET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INVENTORIES
Inventories (net of reserves) were as follows:
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT MARCH 31,
---------------------------- ---------------
1996 1997 1998
------------- ------------- ---------------
<S> <C> <C> <C>
(UNAUDITED)
Work-in-process............................... $ 805,000 $ 2,511,000 $ 2,288,000
Raw materials................................. 10,512,000 8,271,000 8,538,000
Spare parts................................... 708,000 658,000 659,000
------------- ------------- ---------------
$ 12,025,000 $ 11,440,000 $ 11,485,000
------------- ------------- ---------------
------------- ------------- ---------------
</TABLE>
As of September 30, 1997, approximately $6.9 million of the Company's
inventory consisted of DU in various stages of production. This amount consisted
of $3.6 million value-added costs to government owned material which is used for
U.S. Military contracts and $3.3 million of material which the Company has
acquired from other sources. During fiscal 1995, the U.S. Army notified the
Company that the Army would provide the DU for production for the most recent
penetrator contract. Management strongly believes that the Army is responsible
to compensate the Company for the value-added costs of this material and that at
a minimum the Army would allow the Company to use this material for non-U.S.
military contracts at no additional cost to the Company. Management is pursuing
several Department of Energy programs that would require more DU over the next
several years than the Company currently has on hand. Management believes that
the carrying cost of the inventory on hand will be fully realizable through
these possible programs or from its ongoing usage for U.S. and foreign military
procurements; however, it is uncertain how much of the inventory balance will be
utilized in fiscal 1998. During fiscal 1997, the Company reduced inventory
reserves by approximately $1,000,000 which were deemed no longer necessary.
F-12
<PAGE>
STARMET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM OBLIGATIONS AND NOTES PAYABLE
Long-term obligations and notes payable of the Company are as follows:
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT MARCH 31,
-------------------------- ---------------
1996 1997 1998
------------ ------------ ---------------
<S> <C> <C> <C>
(UNAUDITED)
Term credit, interest rate of prime plus 0.5% due in monthly
principal payments through 1996.................................... $ 133,000 $ -- $ --
Line of credit, interest rate of prime plus 0.5% (9.0% at September
30, 1997).......................................................... -- 1,706,000 5,113,000
Industrial development revenue notes, variable interest rates
(5.6524% at September 30, 1997) due in quarterly principal payments
through 2000....................................................... 492,000 180,000 140,000
Notes payable to stockholders interest only payments of 10% until
maturity........................................................... 850,000 1,350,000 2,251,000
Note payable, monthly interest and principal payments through
November 2000, interest rate of 10.25%............................. 457,000 370,000 323,000
Capital leases....................................................... 72,000 59,000 52,000
------------ ------------ ---------------
$ 2,004,000 $ 3,665,000 $ 7,879,000
Less unamortized discount on stockholder debentures and line of
credit............................................................. 130,000 302,000 490,000
Less current portion of long-term obligations........................ 510,000 1,885,000 5,888,000
------------ ------------ ---------------
Total long-term obligations and stockholder debentures............... $ 1,364,000 $ 1,478,000 $ 1,501,000
------------ ------------ ---------------
------------ ------------ ---------------
</TABLE>
CREDIT FACILITY
On August 7, 1997, the Company and its principal bank lender, State Street
Bank & Trust Company, signed the Third Amendment to the credit agreement dated
March 31, 1995 (as amended, the "Credit Agreement"). The Third Amendment
increased the Company's credit facilities from $4.25 million to $6.55 million,
with a maturity date of February 28, 1998. The $6.55 million consists of $3.55
million of letters of credit and $3.0 million credit line for working capital.
Borrowings under the Credit Agreement bear interest at the prime rate plus 1/2
of 1%. The Company also pays a fee of 1/2 of 1% on the unused portion of the
credit facilities.
As of September 30, 1997, the Company was not in compliance with certain
financial covenants contained in the Credit Agreement including minimum working
capital and maximum capital expenditures incurred for the year ended September
30, 1997, as defined.
On October 1, 1997, the Company amended and restated the Credit Agreement
(the "Amended Credit Agreement") which amended and restated the Credit Agreement
dated March 31, 1995. The total amount of the credit available to the Company
remained at $6.55 million, and the Company and all its subsidiaries became
borrowers under the Amended Credit Agreement. The Amended Credit Agreement is
secured by an Amended and Restated Joint Security Agreement, whereby the Company
and its subsidiaries granted to the lender a first priority security interest in
all accounts, inventory and general intangibles. The Company is subject to
certain operating and financial covenants, including minimum tangible capital,
F-13
<PAGE>
STARMET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM OBLIGATIONS AND NOTES PAYABLE (CONTINUED)
as defined and net income requirements in connection with the credit facility.
Also, the minimum working capital requirement in the Credit Agreement was
deleted.
The Company has entered into a First Amendment to the Amended Credit
Agreement with its lender dated December 9, 1997, which provided for an increase
in the credit facility to $8.05 million.
On December 29, 1997, the Company entered into a Second Amendment to the
Amended Credit Agreement which provides for the following: (i) the total amount
of credit available to the Company increased from $8.05 million to $9.55
million; (ii) the terms of repayment for the line of credit have been revised as
follows, the maximum aggregate liability (including letters of credit) of the
Company under the Existing Credit Facility shall not exceed $8.1 million from
July 1, 1998 through September 30, 1998, and $6.6 million from October 1, 1998
through February 28, 1999, which is when the balance is due; and (iii) the
non-compliance with the maximum capital expenditures for the year ended
September 30, 1997 was waived and certain financial covenants have been amended.
As of September 30, 1997 all amounts due under the Amended Credit Agreement were
classified in the accompanying balance sheet in accordance with the stated
maturity dates of the Amended Credit Agreement as Amended on December 29, 1997.
In consideration of the Second Amendment to the Amended Credit Agreement the
Company has issued to the lender a warrant to purchase 25,000 shares of common
stock at the ten day average of fair market value as of December 29, 1997. The
Company also paid its lender $15,000 upon execution of the Second Amendment.
As of September 30, 1997 and March 31, 1998, 1.7 million and $5.1 million
were outstanding under the Amended Credit Agreement, respectfully. The Company
had $3.55 million letters of credit outstanding at December 31, 1997.
For the three months ended December 31, 1997, the Company recorded a loss
before interest and taxes in excess of the amount permitted under the Amended
Credit Agreement. On February 23, 1998, the Company received a waiver from the
lender for this event of non-compliance for the three months ended December 31,
1997.
As of March 31, 1998 the Company was out of compliance with one of its
financial covenants, pursuant to the Amended Credit Agreement, that limits the
amount of capital expenditures the Company may make during the year ending
September 30, 1998. On May 15, 1998, the Company received a waiver from the bank
for this event of non-compliance and of non-compliance with the capital
expenditure financial covenant for the remainder of fiscal 1998. As of March 31,
1998 all amounts due under the Amended Credit Agreement have been classified as
current in the accompanying balance sheet in accordance with the stated maturity
dates of the Agreement.
On June 11, 1998, the Company and its lender entered into the Third
Amendment to Credit Agreement dated June 11, 1998 which provided for (i) a
revised amortization schedule whereby the maximum aggregate liability (including
letters of credit) of the Company under the Existing Credit Facility shall not
exceed $9.6 million through September 30, 1998, $8.1 million from October 1,
1998 through December 31, 1998, and $6.6 million from January 1, 1999 through
February 28, 1999, which is when the balance is due and (ii) a reduction of the
net income covenant for the third quarter of fiscal 1998.
F-14
<PAGE>
STARMET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM OBLIGATIONS AND NOTES PAYABLE (CONTINUED)
NOTES PAYABLE TO STOCKHOLDERS
On January 10, 1996, the Company issued $500,500 in principal amount of its
10% Convertible Subordinated Debentures, the principal amount of which is
convertible at the option of the holder into shares of the Company's Common
Stock at the rate of $5.945 per share. The original maturity date of these
Debentures, June 10, 1997, has been extended by the holders pursuant to certain
letter agreements until December 10, 1998. These Debentures were issued to
persons who are significant stockholders of the Company or related to such
persons.
On September 16, 1996 the Company issued an additional $350,000 in principal
amount pursuant to its 10% Subordinated Debentures due December 10, 1998 which
were issued to certain significant stockholders of the Company. In consideration
for the Debentures, the holders were issued three-year warrants to purchase an
aggregate of 42,000 shares of common stock at an exercise price of $7.50 per
share, subject to antidilution adjustments.
On September 22, 1997 the Company issued an additional $500,000 in principal
amount pursuant to its 10% Subordinated Debentures due December 10, 2000 which
were issued to a stockholder of the Company. In consideration for the
Debentures, the holder was issued three-year warrants to purchase an aggregate
of 60,000 shares of common stock at an exercise price of $17.875 per share,
subject to antidilution adjustments.
On December 23, 1997 the Company issued $850,000 in principal amount of its
10% Convertible Subordinated Notes due December 31, 1999 which were issued to
certain significant stockholders of the Company. The principal amount of the
notes are convertible at the option of the holder into shares of the Company's
Common Stock at the rate of $21.50 per share. Subsequent to December 31, 1997,
the Company issued an additional $50,000 in principal amount of these
Convertible Subordinated Notes on the same terms.
INDUSTRIAL REVENUE BONDS
The Industrial Revenue Bonds (the "IRBs") outstanding consists of one note
issue. The interest rate on this note is 66.5% of the lenders bank's prime
interest rate. This note is secured by property, plant and equipment.
The IRBs contain restrictive covenants including, among others, a
requirement to maintain minimum working capital, consolidated net worth and a
minimum current ratio. As of September 30, 1997, the Company was not in
compliance with certain of these financial covenants. The Company has received a
waiver from the trustee for these events of non-compliance.
Maturities of long-term obligations subsequent to September 30, 1997 are:
1998--$1,885,000, 1999-- $1,052,000; 2000--$655,000; thereafter $73,000.
F-15
<PAGE>
STARMET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES
The provision (benefit) for income taxes differs from the amount computed by
applying the statutory federal income tax rate due to the following:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Statutory rate................................................ (34.0)% (34.0)% 34.0%
Increase (reduction) in taxes resulting from:
State taxes, net of federal effect.......................... (6.0) (6.0) 6.0
Valuation allowance........................................... (2.0) 40.0 (38.0)
Tax reserves no longer required............................... (48.0) -- --
Other......................................................... (6.0) -- --
--------- --------- ---------
(96.0)% --% 2.0%
--------- --------- ---------
--------- --------- ---------
</TABLE>
As of September 1997, the Company has a federal net operating loss
carryforward of approximately $11.1 million of which $3.2 million expires in
2009 and $1.8 million expires in 2010, $3.0 million expires in 2011, and $3.1
million in 2012. State net operating loss carry forwards of approximately $20.2
million, will expire between 1999 through 2009. These net operating loss
carryforwards are fully reserved by valuation allowances due to uncertainty
regarding their realizability.
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Current (benefit) provision:
Federal........................................ $ (766,000) $ (363,000) $ (961,000)
State.......................................... (135,000) (112,000) (299,000)
Valuation allowance............................ 901,000 475,000 1,260,000
------------- ------------- -------------
Total current (benefit) provision............ $ -- $ -- $ --
------------- ------------- -------------
------------- ------------- -------------
Deferred (benefit) provision:
Federal........................................ $ (1,819,000) $ (592,000) $ (1,310,000)
State.......................................... (148,000) (183,000) (451,000)
Valuation allowance............................ -- 776,000 1,792,000
------------- ------------- -------------
Total deferred (benefit) provision:.......... (1,967,000) 1,000 31,000
------------- ------------- -------------
Total (benefit) provision:................... $ (1,967,000) $ 1,000 $ 31,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
During 1995, the Company received $978,000 of Federal income tax refunds. As
of September 30, 1994, the Company had established a full valuation allowance
for this amount. Accordingly, the Company reduced its valuation allowance by
$978,000 upon receipt of this amount.
The Company has provided a full valuation allowance on the net deferred tax
assets as of September 30, 1997, and 1996. The Company's alternative minimum tax
credit has an unlimited life. The tax
F-16
<PAGE>
STARMET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
effects of significant items making up the deferred tax liabilities and deferred
tax assets, as of the end of the 1997 and 1996 fiscal years are as follows:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Assets:
Reserves not currently deductable for tax purpose............... $ 2,475,000 $ 1,665,000
Accrued employee health benefits................................ 38,000 36,000
Federal operating loss carryforward............................. 1,850,000 3,344,000
State operating loss carryforwards and other assets............. 1,438,000 1,903,000
Other........................................................... 1,867,000 460,000
Valuation allowance............................................. (4,653,000) (4,082,000)
------------ ------------
Total deferred tax assets..................................... 3,015,000 3,326,000
Alternative minimum tax credit................................ 407,000 407,000
------------ ------------
$ 3,422,000 $ 3,733,000
------------ ------------
------------ ------------
Liabilities:
Fixed asset basis difference.................................... $ 2,549,000 $ 2,422,000
Employee benefits............................................... 715,000 813,000
Other........................................................... 158,000 498,000
------------ ------------
$ 3,422,000 $ 3,733,000
------------ ------------
------------ ------------
</TABLE>
F-17
<PAGE>
STARMET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK OPTIONS AND WARRANTS
STOCK OPTION PLANS
As of September 30, 1997, a total of 342,680 shares of common stock have
been reserved for issuance upon exercise of options issued or issuable pursuant
to the Company's stock option plans for employees and directors. The exercise
price of options issued or issuable under such plans may not be less than 100%
of the fair market value of the shares purchasable on the date of grant of the
options. Information concerning options which have been granted under the plans
and the exercise prices thereof is set forth below. Those options with an
indicated exercise price of $3.32 expire in 2003, those with an exercise price
of $6.75, $7.00, or $8.00 expire in 2004, those with an exercise price of $6.13
expire in 2005, those with an exercise price of $7.38 expire in 2006, and those
with an exercise price of $15.56 expire in 2007, in each case on the anniversary
of the date of the grant.
<TABLE>
<CAPTION>
1996 1997
1995 -------------------- -------------------
---------------------- WEIGHTED WEIGHTED
RANGE OF NUMBER AVERAGE NUMBER AVERAGE
NUMBER EXERCISE OF EXERCISE OF EXERCISE
OF SHARES PRICES SHARES PRICE SHARES PRICE
--------- ---------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of year....... 197,800 $3.00-8.00 77,000 $ 6.25 211,000 $ 6.20
Exercised.................................. (161,000) 3.00 -- -- (2,316) 6.13
Granted.................................... 50,600 6.75-7.00 136,000 6.13 128,000 11.53
Canceled................................... (10,400) 3.00-3.25 (2,000) 3.32 (3,334) 6.88
--------- ---------- -------- --------- -------- --------
Options outstanding, end of year............. 77,000 3.32-8.00 211,000 6.20 333,350 8.24
--------- ---------- -------- --------- -------- --------
--------- -------- --------
Options exercisable.......................... 25,719 100,444 205,361
--------- -------- --------
--------- -------- --------
Options available for future grants.......... 9,330
--------
--------
Weighted average fair value per share of
options granted during the year............ $ -- $ 4.41 $ 8.18
</TABLE>
F-18
<PAGE>
STARMET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK OPTIONS AND WARRANTS (CONTINUED)
The following summarizes certain data for options outstanding at September
30, 1997:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE
RANGE OF AVERAGE REMAINING
NUMBER EXERCISE EXERCISE CONTRACTUAL
OF SHARES PRICES PRICES LIFE
----------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
Options outstanding, end of year:.......... 15,000 $ 3.32 $ 3.32 6.21
243,350 6.13-7.00 6.60 8.02
10,000 8.00 8.00 6.79
65,000 15.56 15.56 9.85
----------- -------------- ----------- -----
333,350 $ 8.24 8.26
----------- ----------- -----
----------- ----------- -----
Options exercisable:....................... 15,000 $ 3.32 $ 3.32
158,651 6.13-7.00 6.60
10,000 8.00 8.00
21,710 15.56 15.56
----------- -------------- -----------
205,361 $ 7.32
----------- -----------
----------- -----------
</TABLE>
On February 20, 1998, the Board of Directors adopted the Company's 1998
Stock Plan (the "1998 Stock Plan") and the 1998 Stock Plan was approved by the
Company's stockholders at a meeting on March 18, 1998. The Company has reserved
300,000 shares of Common Stock for issuance under the 1998 Stock Plan to
employees, officers, directors and consultants of the Company.
The 1998 Stock Plan provides for the granting of incentive stock options
which are intended to meet the requirements of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), the granting of non-qualified
stock options which do not meet the requirements of Section 422 of the Code,
opportunities to make direct purchases of the Company's Common Stock and the
making of awards of the Company's Common Stock. If any unexercised option
granted pursuant to the 1998 Stock Plan lapses or terminates for any reason, the
shares of Common Stock covered thereby are again available for subsequent option
grants under the 1998 Stock Plan.
The Company has granted options to purchase 200,000 shares of Common Stock
at an exercise price of $23.67 per share, based on the market price of the
Common Stock at that time, under the 1998 Stock Plan, of which 65,000 were
granted to certain Company officers. The remaining options to purchase were
granted to all of the full-time employees of the Company.
On November 20, 1995, the Board of Directors adopted the Company's 1995
Directors Plan (the "1995 Directors Plan") and the 1995 Directors Plan was
approved by the Company's stockholders at a meeting on May 1, 1996. The Company
has reserved 70,000 shares of Common Stock for issuance under the 1995 Directors
Plan to the Company's non-management directors.
Options granted under the 1995 Directors Plan will be non-qualified options
which do not meet the requirements of Section 422 of the Code. If any
unexercised option granted pursuant to the 1995 Directors Plan lapses or
terminates for any reason, the shares of Common Stock covered thereby are again
available for subsequent option grants under the 1995 Directors Plan. The
Company has granted options to purchase 43,500 shares of Common Stock at varying
exercise prices based upon the market price of the Common Stock at the time of
grant.
F-19
<PAGE>
STARMET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK OPTIONS AND WARRANTS (CONTINUED)
On December 21, 1981, the Board of Directors adopted the Company's Employee
Stock Plan (the "1981 Stock Plan"), which was approved by the Company's
stockholders at a meeting on February 3, 1982 and subsequently amended and
restated by the Board of Directors on August 1, 1990. The 1981 Stock Plan
provides for the granting of 255,800 shares of Common Stock to the Company's
employees, and such options are intended to be incentive stock options and meet
the requirements of Section 422 of the Code. On February 4, 1988, the Board of
Directors adopted, and amended on August 1, 1990, a Non-Qualified Stock Plan,
under which 190,000 shares of Common Stock were reserved for the granting of
non-qualified options to certain of the Company's key employees. Also, on August
1, 1990, the Company adopted a Directors Plan, under which 70,000 shares of
Common Stock were reserved for the granting of non-qualified options to the
Company's directors. No additional options will be granted under these plans;
however, 351,420 options are outstanding under these plans.
WARRANT AGREEMENTS
In consideration of entering into a credit agreement with its principal bank
lender in September 1995, the Company issued the lender a warrant (the "First
Warrant") to purchase 50,000 shares (subject to adjustment pursuant to
anti-dilution provisions contained in the warrant) of the Company's Common Stock
for $5.95 per share, which was the approximate market value of the Company's
Common Stock at the date of the transaction. The First Warrant expires in 2005.
The holder of the First Warrant has the option to exercise a portion of the
warrant in a cashless transaction by surrendering the remaining portion of the
warrant as defined.
In consideration of the purchase of its 10% Subordinated Notes due December
10, 1998, the Company issued the holders of the notes three-year warrants to
purchase 42,000 shares of Common Stock for $7.50 per share, which was the
approximate market value of the Company's Common Stock at the date of the
transactions. The holders of the warrants have the option to exercise a portion
of the warrant in a cashless transaction by surrendering the remaining portion
of the warrants.
In consideration of the purchase of its 10% Subordinated Notes due December
10, 2000, the Company issued the holder of the Notes three-year warrants to
purchase 60,000 shares of Common Stock for $17.875 per share, which was the
approximate market value of the Company's Common Stock at the date of the
transactions.
In consideration of the Second Amendment to the Amended Credit Agreement the
Company issued to the lender a warrant (the "Second Warrant") to purchase 25,000
shares (subject to adjustment pursuant to anti-dilution provisions of the
warrant) of Common Stock of the Company at an exercise price of $23.58 per
share, based on the average fair market value for the ten days ended December
29, 1997.
On April 1, 1998, the Company entered into the Facility Restructuring
Agreement with its principal bank lender pursuant to which, contingent upon the
closing of a public offering, the Company received an option to make a payment
of $235,313 whereupon no further adjustments for issuances of Common Stock by
the Company will be made under the First Warrant following the closing of the
offering and no adjustments for issuances of Common Stock by the Company will be
made under the terms of the Second Warrant.
F-20
<PAGE>
STARMET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK OPTIONS AND WARRANTS (CONTINUED)
PRO FORMA STOCK-BASED COMPENSATION EXPENSE
In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which sets forth a fair-value based method of recognizing
stock-based compensation expense. As permitted by SFAS No. 123, the Company has
elected to continue to apply APB No. 25 to account for its stock-based
compensation plans. Had compensation cost for awards in 1997 and 1996 under the
Company's stock-based compensation plans been determined based on fair value at
the grant dates consistent with the method set forth under SFAS No. 123, the
effect on the Company's net income and earnings per share would have been as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------
1996 1997
------------- ------------
<S> <C> <C>
Net income (loss):
As reported.................................................... $ (3,037,000) $ 1,482,000
Pro forma...................................................... (3,100,000) 1,373,000
Diluted earnings per share:
As reported.................................................... $ (0.64) $ 0.30
Pro forma...................................................... (0.65) 0.28
</TABLE>
Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to October 1, 1995, the resulting pro forma compensation
expense may not be representative of the amount to be expensed in future years.
Pro forma compensation expense for options granted is reflected over the vesting
period; therefore future pro forma compensation expense may be greater as
additional options are granted.
The fair value of each option granted was estimated on the grant date using
the Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rates of 6.19% to 6.21% and 5.38% to 6.50% for
1997 and 1996, respectively, expected life of 10 years, expected volatility of
51% and 54% for 1997 and 1996, respectively.
9. PENSION PLAN
The Company has a defined benefit pension plan designed to provide
retirement benefits to all employees. This plan provides pension benefits that
are based on the employee's salary and years of service. The Company's policy is
to fund the plan at a level within the range required by applicable regulations.
F-21
<PAGE>
STARMET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. PENSION PLAN (CONTINUED)
The Company's net pension cost for 1995, 1996, and 1997 was $165,000,
$281,000, and $375,000, respectively. Net pension cost for the Company's defined
benefit plan included the following components:
<TABLE>
<CAPTION>
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Service cost (benefits earned during the
period)........................................ $ 155,000 $ 183,000 $ 308,000
Interest cost on projected benefit obligation.... 954,000 1,022,000 1,056,000
Actual return on plan assets..................... (985,000) (932,000) (1,570,000)
Net amortization and deferral.................... 41,000 8,000 581,000
------------- ------------- -------------
Net pension cost................................. $ 165,000 $ 281,000 $ 375,000
------------- ------------- -------------
------------- ------------- -------------
Assumptions used in determining the plan's funded
status:
Discount rate.................................... 8.0% 8.0% 8.0%
Expected rate of increase in compensation
levels......................................... 5.5% 5.5% 5.5%
Expected long-term rate of return on assets...... 8.5% 8.5% 8.5%
</TABLE>
The following table sets forth the plan's funded status as of September 30,
1996 and September 30, 1997:
<TABLE>
<CAPTION>
1996 1997
-------------- --------------
<S> <C> <C>
Vested benefit obligation..................................... $ (11,869,000) $ (12,421,000)
Accumulated benefit obligation................................ (11,884,000) (12,456,000)
Projected benefit obligation.................................. (13,654,000) (14,164,000)
Plan assets at fair value..................................... 12,517,000 14,418,000
Funded status................................................. (1,137,000) 254,000
Unrecognized prior service costs.............................. 98,000 89,000
Unrecognized net loss......................................... 2,392,000 1,698,000
-------------- --------------
Prepaid pension cost.......................................... $ 1,353,000 $ 2,041,000
-------------- --------------
-------------- --------------
</TABLE>
Plan assets are invested under the provision of a trust agreement with a
bank in common trust funds.
10. POST RETIREMENT BENEFITS
Effective the beginning of fiscal 1994 the Company adopted Statement of
Financial Accounting Standards No. 106 ("SFAS 106"), "Employers' Accounting for
Post Retirement Benefits Other Than Pensions." The statement requires companies
to accrue the cost of post retirement health care and life insurance benefits
within the employees' active service periods.
The Company provides employees who retired from the Company prior to January
1, 1993, with at least ten years of service and under the age of 65, with Group
Health Insurance on a cost-sharing basis. Coverage for an employee's spouse or
dependents will also continue under this plan until the employee has reached age
65 at which time, the coverage ceases. In addition, the Company provides the
same employees who are at least 62 years of age with life insurance equal to
their ending annual salary up to a maximum of $50,000.
F-22
<PAGE>
STARMET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. POST RETIREMENT BENEFITS (CONTINUED)
For employees who retire after January 1, 1993, the post-retirement benefits
do not include health insurance. In addition, the life insurance benefit, up to
a maximum of $50,000, is provided for one year after retirement.
The accumulated benefit obligation of these benefits as of September 30,
1997, is approximately $767,000 ($5,000 for medical insurance and $762,000 for
life insurance). Plan assets of $401,000 in cash reserves are on hand with an
insurance company to partially cover the cost of the life insurance benefits.
The Company adopted the new standard prospectively as of October 1, 1993, and is
amortizing the transition obligation of $456,000, over three years for the
medical insurance benefits and fifteen years for the life insurance benefits.
Post retirement benefit expense for fiscal 1995, 1996 and 1997 are as
follows:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Service cost of benefits earned........................... $ 1,000 $ 1,000 $ 1,000
Interest cost on liability................................ 57,000 58,000 59,000
Return on plan assets..................................... (10,000) (12,000) (12,000)
Amortization of transition obligation..................... 48,000 24,000 24,000
---------- ---------- ----------
Net postretirement benefit cost........................... $ 96,000 $ 71,000 $ 72,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The following table sets forth the Benefit Plan's funded status as of
September 30, 1996 and September 30, 1997:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Retirees and dependents............................................. $ (742,000) $ (750,000)
Actives eligible to retire.......................................... (4,000) (3,000)
----------- -----------
Fully eligible subtotal............................................. (746,000) (753,000)
Other active employees.............................................. (12,000) (14,000)
----------- -----------
Accumulated post retirement benefit obligation...................... (758,000) (767,000)
Plan asset at fair value............................................ 401,000 401,000
----------- -----------
Funded status....................................................... (357,000) (366,000)
Transition obligation............................................... 266,000 267,000
----------- -----------
Accrued post retirement benefit cost................................ $ (91,000) $ (99,000)
----------- -----------
----------- -----------
</TABLE>
The following actuarial assumptions were used:
<TABLE>
<CAPTION>
1995 1996 1997
------------ ----------- -----------
<S> <C> <C> <C>
Salary increase..................................... 5.5% 5.5% 5.5%
Discount rate....................................... 7.0% 8.0% 8.0%
Return on assets.................................... 3.0% 3.0% 3.0%
Medical inflation................................... 10.0% 4-9% 4-9%
</TABLE>
F-23
<PAGE>
STARMET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES
WASTE DISPOSAL
In the process of manufacturing depleted uranium products, the Company
generates low-level radioactive waste (LLRW) that must be disposed of at sites
licensed by federal, state, and local governments. At present, there is one
licensed commercial repository in the United States available for use by the
Company. For LLRW originating in Concord, no site currently exists and
provisions have been made to accommodate interim storage. State government has
the responsibility to implement the provisions of the federal Low-Level Waste
Policy Amendments Act and provide a state solution for Massachusetts companies
that generate this type of waste. Management is of the opinion that an extended
period of storage can be accommodated within existing buildings and in an
environmentally safe manner acceptable to all regulatory agencies until such
time as an acceptable site is identified.
CONCORD SITE REMEDIATION AND DECOMMISSIONING PLANNING REQUIREMENTS
For a number of years, ending in 1985, the Company disposed of
manufacturing-related depleted uranium waste and the associated spent acid and
other residual materials by neutralizing with lime and discharging the
neutralized mixture to a holding basin on its premises in Concord,
Massachusetts. In 1986 the holding basin was covered with hypalon, an impervious
material used to prevent rain and surface run-off water from leaking through the
holding basin. (The Company now uses a proprietary "closed loop" process that it
developed to discontinue such discharges. The Company believes that both
practices were and are in compliance with all applicable regulations.)
Substantially all of these waste materials were the by-product of work performed
for the U.S. Army. On September 13, 1996, the Army Contract Adjustment Board
("ACAB") decided, among other things, that the costs to clean up the holding
basin materials would be funded by the Army and that the Army would be obligated
to provide transportation and disposal of the holding basin material pursuant to
a supplement to an existing contract with the Company. In a Supplemental
Memorandum of Decision dated March 5, 1997, ACAB decided to pay the Company to
transport and dispose of the holding basin material. Pursuant to ACAB's
decision, the Company contracted with the U.S. Army to remove and dispose of the
material from the holding basin and then subcontracted with Zhagrus
Environmental, Inc. ("Zhagrus") to perform such work under a contract dated May
8, 1997. Zhagrus arranged for disposal of the holding basin materials at a
disposal site operated by its parent corporation, Envirocare of Utah, Inc.
("Envirocare"). On May 11, 1998, the Company was notified by Zhagrus that
Zhagrus will incur additional costs in connection with the disposal of the
material from the holding basin as a result of the need for additional work
which must be performed by Envirocare to treat the holding basin material in
order for it to meet the conditions for burial imposed by regulations applicable
to Envirocare's license issued by the State of Utah. Zhagrus has requested that
the Company pay it to the extent of any additional costs which may be incurred
by Envirocare as a result of such additional services which may be rendered. The
Company has requested that Zhagrus provide it with further information in order
to permit the Company to determine whether it has any liability to Zhagrus under
the subcontract and to calculate the amount, if any, that the Company may be
required to pay to Zhagrus under the subcontract. The Company intends to request
a contract price modification for allowance of any such additional costs under
its contract with the U.S. Army, although there can be no assurance of the
timing and amount, if any, of any recovery of such costs from the U.S. Army. The
Company has notified Zhagrus of its proposed course of action without admitting
that the Company has any liability to Zhagrus or Envirocare for the amount of
any such additional costs which may be incurred by Zhagrus under the
subcontract. The Company has not yet been provided with sufficient information
concerning the nature and extent of any additional work which may be required to
allow proper burial by
F-24
<PAGE>
STARMET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Envirocare. Accordingly, the Company is unable to determine whether it is
obligated to Zhagrus under the terms of its subcontract or the potential amount
involved. Accordingly, the amount of any additional costs could be material. In
the event that the Company became liable to Zhagrus for any material amount
which is not authorized to be paid by the U.S. Army, such liability could could
have a material adverse effect on the Company's business, results of operations
and financial condition.
The Company is required to maintain certain licenses issued by the
Massachusetts Department of Public Health ("DPH") and the 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, respectively. Under applicable licensing regulations pertaining to
decommissioning and disposal of certain hazardous materials ("D&D") at licensed
sites, the Company submitted to the Nuclear Regulatory Commission ("NRC") 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 Barnwell Facility DFP estimates is $2.9
million. The Company is required to provide financial assurance for such
decommissioning pursuant to applicable regulations. The Company has satisfied
these requirements and as a result, the site licenses for both locations have
been renewed.
Substantially all of the depleted uranium materials to which the DFP
requirements apply were processed by the Company for the United States
Government. Based on the terms of certain contracts that the Company entered
into with the United States Government to process such depleted uranium
materials, the Company believes that such materials continue to be owned by the
United States Government and that the United States Government is obligated,
under applicable law, to pay for its percentage of eventual D&D. The Company's
DFP 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 locations regulatory agency.
The United States Army, in a memorandum of Decision dated September 13,
1996, determined pursuant to Public Law 85-804, that it should fund remediation
of the Concord holding basin site as well as D&D related to the Concord
facility, based in part on the Army's determination that the Company's
activities are essential to the national defense. This work is expected to
continue into the first half of fiscal 1998. The Company's contract with the
contractor is fixed price based on a specified volume of waste to be removed
from the basin and delivered to a burial site. If the volume of the material
removed exceeds the specified level then the Company is obligated to pay an
additional fee per cubic yard of excess material removed. At September 30, 1997,
based on current estimates, management believed that the amount of material to
be removed would not exceed the specified amount and that the fixed price
contract issued by the United States Army would be adequate to fully fund the
remediation of the basin. The Army has provided written assurances (subject to
funding appropriations) of its intention to provide funding for D&D costs at the
Concord facility in addition to the Basin under future contracts or, in the
event that no future contracts were awarded (which the Army has indicated is
unlikely in view of its current plans) under an existing contract. D&D costs for
the Company's CMI facility are adequately covered by the existing letter of
credit, which is currently in place to assure funding for potential D&D
obligations to date. The Company has no written 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, based on the
advice of legal counsel, management believes that the Army is responsible for
its estimated share of D&D.
F-25
<PAGE>
STARMET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company is currently remediating the holding basin site at its Concord
facility and may incur costs in excess of its fixed price contract with the
United States Army for remediation of the holding basin. The Company's
management believes that any additional remediation costs would not be material
in part because the United States Army has agreed to recognize additional costs
to remediate the holding basin as allowable and recoverable costs through the
Company's overhead structure on government contracts.
LEGAL PROCEEDINGS
On December 9, 1997, Brush Wellman, Inc. ("Brush Wellman") filed a patent
infringement suit against the Company in the United States District Court for
the District of Massachusetts (the "Massachusetts District Court") alleging that
the Company is infringing on a process patent (the "Brush Wellman Patent")
awarded to Brush Wellman for the investment casting of beryllium aluminum
alloys. Brush Wellman is seeking an injunction against the Company's alleged
patent infringement, monetary damages (including treble damages) and attorney
fees.
On March 28, 1998 the U.S. Patent and Trademark Office (the "PTO") granted
the Company's request (filed January 22, 1998) for re-examination (the
"Request") of the Brush Wellman Patent. In the Request, the Company contended,
among other things, that there was sufficient "prior art" in the field of
investment castings and castings of beryllium aluminum alloys such that the
Brush Wellman Patent should not have been issued. In granting the Request, the
patent examiner agreed that the Company's cited examples of prior art raised
substantial new issues of patentability which were not decided in the prior
examination which led to granting the Brush Wellman Patent. The PTO will
undertake a process of re-examination of the validity of the Brush Wellman
Patent that, the Company anticipates, could last for an extended period. There
can be no assurance that the PTO will find the Brush Wellman Patent to be
invalid. On January 27, 1998, the Company filed in the Massachusetts District
Court a motion to stay the court case pending the outcome of the re-examination
proceeding. If the Massachusetts District Court were to grant the motion to
stay, the court case would not proceed until the conclusion of the PTO's re-
examination of the Brush Wellman Patent. Although the Company believes that its
motion to stay has merit, no assurance can be given that the Massachusetts
District Court will grant the motion.
Even though the Company has been advised by patent counsel that Brush
Wellman's claims are without merit because the Brush Wellman Patent is invalid
as a matter of law due to "prior art" and due to the Company's sales of
investment cast beryllium aluminum products more than one year prior to the
Brush Wellman Patent application, no assurance can be given as to the ultimate
outcome of the lawsuit. Even if the lawsuit were not to proceed to trial, the
litigation could result in substantial costs to the Company, and an unfavorable
settlement of the lawsuit could place the Company at a competitive disadvantage.
An adverse judgment or settlement could subject the Company to significant
liabilities and expenses (E.G., reasonable royalties, lost profits, attorneys'
fees and trebling of damages for willfulness). An adverse outcome also could
cause the Company to incur substantial costs in redesigning the investment
casting process for its Beralcast products and components. Moreover, there can
be no assurance that redesign alternatives would be available to the Company,
and if available, that any redesign alternative would not place the Company at a
competitive disadvantage. The Company could be required to license the disputed
patent rights from Brush Wellman or to cease using the patented technology. Any
such license, if required, may not be available on terms acceptable or favorable
to the Company, or at all. Any of these results could have a material adverse
effect on the Company's business, financial condition and results of operations.
Even in the event of a successful outcome, the Company may incur significant
legal expenses in its defense.
F-26
<PAGE>
STARMET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. TRANSACTIONS WITH RELATED PARTIES
Under the terms of a management agreement, Matthews Associates Limited
("MAL") is entitled to an annual management fee. George J. Matthews, Chairman of
the Board of Directors, and a significant stockholder, is sole owner of MAL.
These fees, as well as certain expenses of MAL that were reimbursed by the
Company, have been included in selling, general, and administrative expenses.
Management fees were $350,000 in 1997, 1996, and 1995. Mr. Matthews does not
receive any other salary or fee for services as Chairman of the Board of
Directors. The agreement expires on February 28, 2002, subject to annual
renewals as described in the agreement. In the event of termination of MAL by
the Company, the Company is obligated to pay to MAL all of the amounts due under
the agreement for the remaining term. Also see Note 6 concerning Notes Payable
to Shareholders.
Wilson B. Tuffin, Vice Chairman of the Board of Directors, and a significant
stockholder, entered into an employment and consulting agreement with the
Company in November 1994, which shall continue in force until February 1999.
Pursuant to such agreement, Mr. Tuffin receives annual compensation of $105,000
for his services as a consultant to the Company. Mr. Tuffin's duties include his
service as a director and Vice Chairman of the Board of Directors of the
Company. During the term of the agreement and for a period of two years after
its expiration, Mr. Tuffin may not compete directly or indirectly with the
Company within the continental United States.
13. MAINTENANCE AND REPAIRS
Maintenance and repair expenditures, which are charged to cost and expense
as incurred, amounted to $854,000 in 1995, $1,092,000 in 1996, and $1,536,000 in
1997.
14. INDUSTRY SEGMENT INFORMATION
The Company is engaged in the manufacture and sale of various specialty
metal products. The Company currently operates and reports its business in three
industry segments: Uranium Services and Recycle, Specialty Metal Products, and
Depleted Uranium Penetrators.
F-27
<PAGE>
STARMET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. INDUSTRY SEGMENT INFORMATION (CONTINUED)
Information relating to the Company's operations for the industry segments
described above for each of the three years in the period ended September 30 is
as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net sales and contract revenues:
Specialty Metal Products...................... $ 12,102,000 $ 13,730,000 $ 13,170,000
Depleted Uranium Penetrators.................. 1,713,000 8,775,000 9,927,000
Uranium Services & Recycle.................... 4,969,000 6,189,000 4,965,000
------------- ------------- -------------
Total....................................... $ 18,784,000 $ 28,694,000 $ 28,062,000
------------- ------------- -------------
------------- ------------- -------------
Operating income (loss):
Specialty Metal Products...................... $ (341,000) $ 1,432,000 $ 391,000
Depleted Uranium Penetrators.................. (237,000) (942,000) 575,000
Uranium Services & Recycle.................... (996,000) (2,700,000) 1,195,000
------------- ------------- -------------
Subtotal.................................... (1,574,000) (2,210,000) 2,161,000
General corporate expenses 350,000 350,000 350,000
------------- ------------- -------------
Net operating income (loss)..................... (1,924,000) (2,560,000) 1,811,000
------------- ------------- -------------
Other expense, net.............................. 118,000 476,000 298,000
------------- ------------- -------------
Income (loss) before taxes...................... $ (2,042,000) $ (3,036,000) $ 1,513,000
------------- ------------- -------------
------------- ------------- -------------
Identifiable assets:
Specialty Metal Products...................... $ 5,140,000 $ 6,195,000 $ 6,155,000
Depleted Uranium Penetrators.................. 12,158,000 8,441,000 7,965,000
Uranium Services & Recycle.................... 16,609,000 13,749,000 14,849,000
Corporate..................................... 6,979,000 6,733,000 5,735,000
------------- ------------- -------------
Total....................................... $ 40,886,000 $ 35,118,000 $ 34,704,000
------------- ------------- -------------
------------- ------------- -------------
Depreciation and amortization expenses:
Specialty Metal Products...................... $ 251,000 $ 291,000 $ 275,000
Depleted Uranium Penetrators.................. 443,000 519,000 498,000
Uranium Services & Recycle.................... 404,000 430,000 492,000
Corporate..................................... 241,000 254,000 323,000
------------- ------------- -------------
Total....................................... $ 1,339,000 $ 1,494,000 $ 1,588,000
------------- ------------- -------------
------------- ------------- -------------
Capital expenditures:
Specialty Metal Products...................... $ 85,000 $ 436,000 $ 746,000
Depleted Uranium Penetrators.................. 6,000 77,000 6,000
Uranium Services & Recycle.................... 325,000 379,000 627,000
Corporate..................................... 361,000 557,000 409,000
------------- ------------- -------------
Total....................................... $ 777,000 $ 1,449,000 $ 1,788,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The Specialty Metal Products segment includes a large assortment of metal
products fabricated using foundry, extrusion, and machining capabilities
including commercial depleted uranium products and involves the production and
sale of various metal powders manufactured by the Company's patented Rotating
Electrode Process. Operations in the Depleted Uranium Penetrator industry
segment include the
F-28
<PAGE>
STARMET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. INDUSTRY SEGMENT INFORMATION (CONTINUED)
production of various penetrators (a component of armor-piercing ammunition used
in certain U.S. military gun systems) which are sold to the DOD, to prime
contractors manufacturing such ammunition for the DOD or to foreign military
operations. Revenues derived from contract research and development activities
have been included in the above segments based on the nature of the product. The
Uranium Services and Recycle segment includes the manufacture of depleted
uranium products (non-penetrator) and the recycle of low level radioactive
metal.
Net sales and contract revenues by industry segment include sales to
unaffiliated customers (intersegment sales are not significant). A significant
portion of the Company's revenues has been derived from five major customers
(see Note 1). Sales to USEC are included in the Uranium Services & Recycle
industry segment. Sales to Royal Ordnance and Primex Technologies are included
in the Depleted Uranium Penetrators industry segment. Sales to Lockheed Martin
and Lockheed Idaho Falls are included in the Speciality Metal Products industry
segment.
Due to the utilization among segments of common production facilities and
equipment and the involvement of a single management organization in all phases
of the Company's operations, necessary allocations have been made based on
estimates which management believes to be reasonable.
Operating income includes net sales and contract revenues less operating
expenses allocated to the individual segments. General corporate expenses
represent expenses which are not of an operating nature and, therefore, are not
allocable to industry segments.
Identifiable assets shown include accounts receivable, inventory, and plant
and equipment that have been allocated to each of the Company's industry
segments. Corporate assets consist primarily of cash and other assets.
F-29
<PAGE>
STARMET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. QUARTERLY RESULTS (UNAUDITED)
Financial results by quarter for 1997 and 1996 are summarized below:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1997:
Net sales............................................ $ 7,271 $ 5,342 $ 7,013 $ 8,436
Gross profit......................................... 2,001 2,024 2,043 2,858
Operating income..................................... 566 173 399 673
Net income........................................... 509 109 293 571
Basic net income per share........................... $ 0.11 $ 0.02 $ 0.06 $ 0.12
Diluted net income per share......................... 0.10 0.02 0.06 0.11
1996:
Net sales............................................ $ 6,671 $ 10,021 $ 6,434 $ 5,568
Gross profit......................................... 1,435 1,858 2,104 (1,756)
Operating income (loss).............................. 198 287 523 (3,568)
Net income (loss).................................... 109 238 249 (3,633)
Basic net income (loss) per share.................... $ 0.02 $ 0.05 $ 0.05 $ (0.76)
Diluted net income (loss) per share.................. 0.02 0.05 0.05 (0.76)
</TABLE>
During 1997 the Company reduced certain accruals by $1,750,000 for site
remediation and waste burial costs, consisting of $670,000 in the second quarter
and $1,080,000 in the fourth quarter. Also during 1997 the Company had reduced
inventory reserves by $1,000,000, consisting of $90,000 in the first quarter,
$650,000 in the second quarter and $260,000 in the fourth quarter.
F-30
<PAGE>
[Appears on upper left:]
AVLIS FEED RODS FOR LASER ENRICHMENT
[Picture of AVLIS feed rods.]
[Appears on upper right:]
D.U. ANTI-TANK PENETRATOR ROUNDS
[Picture of D.U. penetrator. There is an arrow pointing down.]
[Appears on middle right:]
U.S. ARMY M1-A2 MAIN BATTLE TANK
[Picture of M1-A2 Main Battle Tank. There is an arrow pointing to the
picture.]
[Appears on lower left:]
AIRCRAFT CONTROL SURFACE COUNTERWEIGHTS
[Picture of aircraft counterweights. There is an arrow pointing to the right.]
[Appears on lower center:]
[Picture of tail section of DC-10. There is an arrow pointing to the picture.]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY OF THE SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER
OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING THE OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. UNDER NO CIRCUMSTANCES SHALL THE DELIVERY OF
THIS PROSPECTUS OR ANY SALE MADE PURSUANT TO THIS PROSPECTUS CREATE ANY
IMPLICATION THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary................................ 3
Risk Factors...................................... 9
The Company....................................... 20
Use of Proceeds................................... 21
Dividend Policy................................... 22
Price Range of Common Stock....................... 22
Capitalization.................................... 23
Selected Financial Data........................... 24
Management's Discussion and Analysis of Financial
Condition and Results of Operations............. 25
Business.......................................... 39
Management........................................ 59
Certain Transactions.............................. 69
Principal and Selling Stockholders................ 70
Description of Capital Stock...................... 72
Shares Eligible for Future Sale................... 73
Underwriting...................................... 75
Legal Matters..................................... 76
Experts........................................... 76
Available Information............................. 77
Index to Financial Statements..................... F-1
</TABLE>
3,000,000 SHARES
[LOGO]
COMMON STOCK
----------------
PROSPECTUS
----------------
BEAR, STEARNS & CO. INC.
FURMAN SELZ
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Company in connection with the sale of
the Common Stock being registered:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee............. $ 30,533
NASD Filing Fee................................................. 10,591
Printing and Engraving.......................................... 250,000
Legal Fees and Expenses......................................... 400,000
Accounting Fees................................................. 300,000
Blue Sky Qualification Fees and Expenses........................ 2,000
Transfer Agent and Registrar Fees............................... 10,000
Miscellaneous................................................... 196,876
---------
Total......................................................... $1,200,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 67 of Chapter 156B of the Massachusetts General Laws ("Section 67")
provides that a corporation may indemnify its directors and officers to the
extent specified in or authorized by (i) the articles of organization, (ii) a
by-law adopted by the stockholders, or (iii) a vote adopted by the holders of a
majority of the shares of stock entitled to vote on the election of directors.
In all instances, the extent to which a corporation provides indemnification to
its directors and officers under Section 67 is optional. Article 6 of the
Company's Amended and Restated Articles of Organization provides that the
Company shall indemnify directors and officers of the Company against
liabilities and expenses arising out of legal proceedings brought against them
by reason of their status as directors and officers or by reason of their
agreeing to serve, at the request of the Company, as a director or officer with
another organization. Under this provision, a director or officer of the Company
shall be indemnified by the Company for all costs and expenses (including
attorneys' fees), judgments, liabilities, and amounts paid in settlement of such
proceedings, even if he is not successful on the merits, if he acted in good
faith in the reasonable belief that his or her action was in the best interests
of the Company. The Board of Directors may authorize advancing litigation
expenses to a director or officer at his request upon receipt of an undertaking
by any such director or officer to repay such expenses if it is ultimately
determined that he is not entitled to indemnification for such expenses.
Article 6 of the Company's Articles of Organization eliminates the personal
liability of the Company's directors to the Company or its stockholders for
monetary damages for breach of a director's fiduciary duty, except to the extent
Chapter 156B of the Massachusetts General Laws prohibits the elimination or
limitation of such liability.
The underwriting agreement, a form of which is filed as exhibit 1(a) to this
Registration Statement on Form S-1 (the "Underwriting Agreement"), provides that
the Underwriters are obligated under certain circumstances to indemnify
directors, officers and controlling persons of the Company against certain
liabilities, including liabilities under the Securities Act of 1933, as amended
(the "Securities Act"). Reference is made to the form of Underwriting Agreement.
The Company has obtained directors and officers liability insurance for the
benefit of its directors and certain officers.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In September 1995, the Company issued a warrant to purchase 50,000 shares of
Common Stock (adjusted for the Company's two-for-one stock dividend paid on
April 7, 1997) to its lender in partial consideration for an increase in a line
of credit, without registration under the Securities Act of 1933, as amended
(the "Securities Act"), in reliance upon the exemption from such registration
provided by Section 4(2) thereof.
In January 1996, the Company raised net proceeds of approximately $500,500
through the sale of convertible subordinated debentures to private investors,
two of whom are participating as Selling Stockholders in this offering, without
registration under the Securities Act in reliance upon the exemption from such
registration provided by Section 4(2) thereof.
In September 1996, the Company raised net proceeds of approximately $350,000
through the sale of subordinated debentures and the issuance of warrants to
purchase 42,000 shares of Common Stock (adjusted for the Company's two-for-one
stock dividend paid on April 7, 1997) to private investors who are participating
as Selling Stockholders in this offering, without registration under the
Securities Act in reliance upon the exemption from such registration provided by
Section 4(2) thereof.
In September 1997, the Company raised net proceeds of approximately $500,000
through the sale of a subordinated debenture and a warrant to purchase 60,000
shares of Common Stock to a private investor, without registration under the
Securities Act in reliance upon the exemption from such registration provided by
Section 4(2) thereof.
In December 1997, the Company issued a warrant to purchase 25,000 shares of
Common Stock to its lender in consideration for an aggregate $3,000,000 increase
in the Company's line of credit and certain amendments to the Company's credit
agreement, without registration under the Securities Act in reliance upon the
exemption from such registration provided by Section 4(2) thereof.
In December 1997 and January 1998, the Company raised net proceeds of
approximately $900,000 through the sale of convertible subordinated debentures
to several private investors, certain of whom are participating as Selling
Stockholders in this offering, without registration under the Securities Act in
reliance upon the exemption from such registration provided by Section 4(2)
thereof.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
- ------------- ---------------------------------------------------------------------------------------------------
<C> <S>
1(a) Form of Underwriting Agreement *
2 Plan of Reorganization, dated June 24, 1997. (1)
3(a) Articles of Organization, as amended, of the Company. (2)
3(b) By-laws, as amended, of the Company. **
4(a) Financing Agreement, dated September 27, 1984 among Barnwell County, South Carolina, Company and
Carolina Metals, Inc. (a wholly owned-subsidiary) relating to Barnwell County, South Carolina
Industrial Development Revenue Bond (Nuclear Metals, Inc. project) 1984, incorporated by reference
to File No. 0-8836, Part II, Exhibit 4(e).
4(b) Nuclear Metals, Inc. Non-Qualified Stock Option Plan as amended. (3)
4(c) Nuclear Metals, Inc. Restated Employees' Stock Option Plan as amended. (3)
4(d) Nuclear Metals, Inc. Directors' Stock Option Plan as amended. (4)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
- ------------- ---------------------------------------------------------------------------------------------------
<C> <S>
4(e) Warrant to Purchase 25,000 shares of the Company's Common Stock issued to State Street Bank & Trust
Company. (4)
4(f) Common Stock Purchase Warrant dated September 16, 1996 issued to Melvin B. Chrein and schedule of
similar warrants. (5)
4(g) Common Stock Purchase Warrant dated September 22, 1997 issued to Roger M. Marino for 60,000 shares.
(2)
4(h) Starmet Corporation 1998 Stock Plan. (6)
5(a) Legal opinion of Peabody & Arnold LLP counsel to the Company. *
10(a) Agreement, effective March 1, 1993, between the Company and Matthews Associates Limited. (7)
10(b) Agreement, effective March 1, 1993, between the Company and Wilson B. Tuffin, as amended November
17, 1994. (7)
10(c) Employment Agreement, effective February 8, 1995 between the Company and Robert E. Quinn. (5)
10(d) Agreement with Olin Corporation regarding large caliber penetrators. (Confidential treatment has
been granted for certain portions of this Exhibit). (8)
10(e) Credit Agreement dated March 31, 1995 among the Company, Carolina Metals, Inc. and State Street
Bank & Trust Company. (9)
10(f) First Amendment to Credit Agreement dated as of June 30, 1995 among the Company, Carolina Metals,
Inc. and State Street Bank & Trust Company. (10)
10(g) Amended and Restated Revolving Credit Note dated March 31, 1995 (as amended December 24, 1996 ) of
the Company and Carolina Metals, Inc. (5)
10(h) Second Amendment to Credit Agreement dated as of December 24, 1996 among the Company, Carolina
Metals, Inc. and State Street Bank & Trust Company. (5)
10(i) 10% Convertible Subordinated Debenture dated January 10, 1996 payable to Wiaf Investors Co. in
amount of $334,000 and schedule of similar debentures. (5)
10(j) 10% Subordinated Debenture dated September 16, 1996 payable to Melvin B. Chrein in the amount of
$100,000 and schedule of similar debentures. (5)
10(k) Letter Agreement dated as of September 16, 1996 with Kathleen Matthews and schedule similar letter
agreements. (5)
10(l) Joint Security Agreement dated as of March 31, 1995 among the Company, Carolina Metals, Inc. and
State Street Bank & Trust Company. (4)
10(m) First Amendment to Joint Security Agreement dated September 26, 1995 among the Company, Carolina
Metals, Inc. and State Street Bank & Trust Company. (4)
10(n) Patent Assignment of Security dated September 26, 1995 between the Company and State Street Bank &
Trust Company. (4)
10(o) Trademark Assignment of Security dated September 26, 1995 between the Company and State Street Bank
& Trust Company. (4)
10(p) Purchase order dated August 23, 1995 between the Company and Olin Corporation. (Confidential
treatment requested as to certain portions.) (4)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
- ------------- ---------------------------------------------------------------------------------------------------
<C> <S>
10(q) Forbearance and Amendment Agreement dated as of January 11, 1996 between the Company, Carolina
Metals, Inc. and State Street Bank & Trust Company. (4)
10(r) Waiver of Breach of Covenant, by and among the Company, Carolina Metals, Inc. and State Street Bank
& Trust Company. (5)
10(s) Envirocare of Utah Inc. Low-Activity Radioactive Waste Disposal Agreement. (Confidential treatment
has been granted for certain portions of this Exhibit). (11)
10(t) Amendment of Solicitation/Modification of Contract dated March 10, 1997 issued by Department of the
Army. (12)
10(u) Securities Pledge Agreement dated July 3, 1997 between Khosrow B. Semnoni and Nuclear Metals, Inc.
(13)
10(v) Employment Agreement, effective October 1, 1997 between the Company and James M. Spiezio. (2)
10(w) Amended and Restated Revolving Credit Note dated October 1, 1997 among the Company, Starmet
Powders, LLC, Starmet Aerocast, LLC, Starmet Commercial Castings, LLC, Starmet NMI Corporation,
Starmet CMI Corporation, Starmet Holdings Corporation, NMI Foreign Sales Corporation and State
Street Bank & Trust Company. (2)
10(x) Amended and Restated Credit Agreement dated October 1, 1997 among the Company, Starmet Powders,
LLC, Starmet Aerocast, LLC, Starmet Commercial Castings, LLC, Starmet NMI Corporation, Starmet CMI
Corporation, Starmet Holdings Corporation, NMI Foreign Sales Corporation and State Street Bank &
Trust Company. (2)
10(y) Amended and Restated Joint Security Agreement dated October 1, 1997 among the Company, Starmet
Powders, LLC, Starmet Aerocast, LLC, Starmet Commercial Castings, LLC, Starmet NMI Corporation,
Starmet CMI Corporation, Starmet Holdings Corporation, NMI Foreign Sales Corporation and State
Street Bank & Trust Company. (2)
10(z) Patent Assignment of Security dated October 1, 1997 between the Company and State Street Bank &
Trust. (2)
10(aa) Employment Agreement, effective October 1, 1997 between the Company and William T. Nachtrab. (2)
10(bb) Employment Agreement, effective October 1, 1997 between the Company and Douglas F. Grotheer. (2)
10(cc) Employment Agreement, effective October 1, 1997 between the Company and Kevin R. Raftery. (2)
10(dd) First Amendment to Credit Agreement dated as of December 9, 1997 among the Company, Starmet
Powders, LLC, Starmet Aerocast, LLC, Starmet Commercial Castings, LLC, Starmet NMI Corporation,
Starmet CMI Corporation, Starmet Holdings Corporation, NMI Foreign Sales Corporation and State
Street Bank & Trust Company. (2)
10(ee) Third Amendment to Credit Agreement dated August 7, 1997 among Nuclear Metals, Inc., Carolina
Metals, Inc. and State Street Bank & Trust Company. (2)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
- ------------- ---------------------------------------------------------------------------------------------------
<C> <S>
10(ff) Amendment to Employment Agreement dated October 1, 1997 between the Company and Robert E. Quinn.
(2)
10(gg) Letter agreement with Roger M. Marino dated September 22, 1997 between the registrant and Roger M.
Marino. (2)
10(hh) 10% Subordinated Debenture dated September 22, 1997 payable to Roger M. Marino in the amount of
$500,000. (2)
10(ii) Letter agreement dated December 23, 1997 regarding issuance of subordinated convertible debentures
among the Company Melvin Chrein, Wiaf Investors Co., Marshall Chrein, Joshua Feibusch and George J.
Matthews. (2)
10(jj) 10% Convertible Subordinated Debenture dated December 23, 1997 payable to Wiaf Investors Co. in
amount of $500,000 and schedule of similar debentures. (2)
10(kk) Second Amendment to Credit Agreement dated as of December 29, 1997 among the Company, Starmet
Powders, LLC, Starmet Aerocast, LLC, Starmet Commercial Castings, LLC, Starmet NMI Corporation,
Starmet CMI Corporation, Starmet Holdings Corporation, NMI Foreign Sales Corporation and State
Street Bank & Trust Company. (2)
10(ll) Second Additional Revolving Credit Note dated December 29, 1997 among the Company, Starmet Powders,
LLC, Starmet Aerocast, LLC, Starmet Commercial Castings, LLC, Starmet NMI Corporation, Starmet CMI
Corporation, Starmet Holdings Corporation, NMI Foreign Sales Corporation and State Street Bank &
Trust Company. (2)
10(mm) Operating Agreement for Trio Star LLC dated December 31, 1997 among Starmet Commercial Castings,
LLC, Advanced Products Labs, Inc. and R-Cubed Composites, Inc. (Confidential treatment requested as
to certain portions) (14)
10(nn) Warrant Agreement dated as of December 29, 1997 between the Company and SSB Investments, Inc. **
10(oo) Common Stock Purchase Warrant dated as of December 29, 1997 issued to SSB Investments, Inc. **
10(pp) Promissory Note dated March 20, 1998 payable to Palmetto Federal Savings Bank of South Carolina
from Starmet CMI Corporation in the amount of $495,000. **
10(qq) Promissory Note dated March 20, 1998 payable to Lower Savannah Regional Development Corporation
from Starmet CMI Corporation in the amount of $500,000. **
10(rr) Mortgage, Security Agreement and Financing Statement dated March 20, 1998 from Starmet CMI
Corporation to Palmetto Federal Savings Bank of South Carolina. **
10(ss) Mortgage, Security Agreement and Financing Statement dated March 20, 1998 from Starmet CMI
Corporation to Lower Savannah Regional Development Corporation. **
10(tt) Letter Agreement between Starmet CMI Corporation, Palmetto Federal Savings Bank of South Carolina
and Lower Savannah Regional Development Corporation dated March 20, 1998. **
10(uu) Guaranty by the Company in favor of Palmetto Federal Savings Bank of South Carolina dated March 20,
1998. **
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
- ------------- ---------------------------------------------------------------------------------------------------
<C> <S>
10(vv) Guaranty by the Company in favor of Lower Savannah Regional Development Corporation dated March 20,
1998. **
10(ww) Letter Agreement dated April 1, 1998 between the Company, State Street Bank & Trust Company and SSB
Investment, Inc. regarding the First and Second Warrants. **
10(xx) Holding Basin Remediation and Waste Disposal Agreement dated as of May 8, 1997, by and between the
Company and Zhagrus Enviromental Inc. (Confidential treatment requested as to certain portions.)
(15)
10(yy) Loan Agreement dated as of May 28, 1998 among the Company, Starmet Powders, LLC, Starmet Aerocast,
LLC, Starmet Commercial Castings, LLC, Starmet NMI Corporation, Starmet CMI Corporation, Starmet
Holdings Corporation, NMI Foreign Sales Corporation and State Street Bank & Trust Company. *
10(zz) Revolving Credit Agreement dated May 28, 1998, among the Company, Starmet Powders, LLC, Starmet
Aerocast, LLC, Starmet Commercial Castings, LLC, Starmet NMI Corporation, Starmet CMI Corporation,
Starmet Holdings Corporation, NMI Foreign Sales Corporation and State Street Bank & Trust Company.
*
10(aaa) Third Amendment to Credit Agreement dated as of June 11, 1998 among the Company, Starmet Powders,
LLC, Starmet Aerocast, LLC, Starmet Commercial Castings, LLC, Starmet NMI Corporation, Starmet CMI
Corporation, Starmet Holdings Corporation, NMI Foreign Sales Corporation and State Street Bank &
Trust Company. *
11(a) Computation re: per share earnings. ***
21 Subsidiaries of the Company. **
23(a) Consent of Independent Public Accountants. *
23(b) Consent of Peabody & Arnold LLP (Included as part of Exhibit 5(a))*
23(c) Consent of Iandiorio & Teska **
24(a) Power of Attorney **
99(a) Memorandum of Decision dated September 13, 1996 from the United States Army Contract Adjustment
Board. (16)
</TABLE>
- ------------------------
* Filed as exhibit herewith.
** Previously filed.
*** Not applicable.
(1) Incorporated by reference to Annex A to Company's proxy statement for
special meeting held on September 29, 1997.
(2) Incorporated by reference to similarly numbered Exhibit filed with the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
1997.
(3) Incorporated by reference to the similarly numbered Exhibit filed with the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
1992.
(4) Incorporated by reference to the similarly numbered Exhibit filed with the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
1995.
(5) Incorporated by reference to the similarly numbered Exhibit filed with the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
1996.
(6) Incorporated by reference to Exhibit 4.2 to the Company's Registration
Statement on Form S-8 filed on May 7, 1998.
II-6
<PAGE>
(7) Incorporated by reference to the similarly numbered Exhibit filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992.
(8) Incorporated by reference to Exhibit 10 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1993.
(9) Incorporated by reference to Exhibit 10A to the Company's Form 10-Q for the
quarter ended March 31, 1995.
(10) Incorporated by reference to Exhibit 10(c) to the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 1995.
(11) Incorporated by reference to Exhibit 10A to Company's Form 10-Q for the
quarter ended March 31, 1997.
(12) Incorporated by reference to Exhibit 10B to Company's Form 10-Q for the
quarter ended March 31, 1997.
(13) Incorporated by reference to Exhibit 10 to Company's Form 10-Q for the
quarter ended June 30, 1997.
(14) Incorporated by reference to similarly numbered Exhibit filed with the
Company's Form 10-Q for the quarter ended December 31, 1997.
(15) Incorporated by reference to Exhibit 10(A) filed with the Company's Form
10-Q for the quarter ended March 31, 1998.
(16) Incorporated by reference to Exhibit 99 filed with the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1996.
(b) Financial Statement Schedules.
Report of Independent Auditors on Schedule II--Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act") may be permitted to directors,
officers and controlling persons of the Company pursuant to the provisions
described under "Item 14--Indemnification of Directors and Officers" above, or
otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Company of expenses incurred or paid by a director, officer or
controlling person of the Company in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
(b) The undersigned Company hereby undertakes that: (1) For purposes of
determining any liability under the Securities Act, the information omitted from
the form of prospectus filed as part of this Registration Statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the Company
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this Registration Statement as of the time it was declared
effective. (2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Company has duly
caused this Amendment No. 2 to Registration Statement on Form S-1 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Boston, Commonwealth of Massachusetts, on the 11th day of June, 1998.
STARMET CORPORATION
BY: /S/ ROBERT E. QUINN
-----------------------------------------
Robert E. Quinn,
President, CEO
and Treasurer
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ ROBERT E. QUINN President, CEO, Treasurer
- ------------------------------ and Director June 11, 1998
Robert E. Quinn
* Vice President Finance and
- ------------------------------ Administration June 11, 1998
James M. Spiezio
* Controller
- ------------------------------ June 11, 1998
Theodore Crowell
* Chairman of the Board of
- ------------------------------ Directors June 11, 1998
George J. Matthews
* Vice Chairman
- ------------------------------ June 11, 1998
Wilson B. Tuffin
* Director
- ------------------------------ June 11, 1998
Frank H. Brenton
* Director
- ------------------------------ June 11, 1998
Kenneth A. Smith
* Director
- ------------------------------ June 11, 1998
William J. Shea
* /s/ ROBERT E. QUINN
By:
- ------------------------------
Attorney-in-Fact
II-8
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Starmet Corporation:
We have audited in accordance with generally accepted auditing standards,
the financial statements included in this registration statement, and have
issued our report thereon dated November 14, 1997 (except with respect to the
matters discussed in Notes 6 and 11 as to which the date is December 29, 1997).
Our audit was made for the purpose of forming an opinion on those statements
taken as a whole. The schedule listed in the index of the financial statements
is presented for purposes of complying with the Securities and Exchange
Commission rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
November 14, 1997
<PAGE>
STARMET CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING
ACCOUNTS FOR THE THREE YEARS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING COSTS AND END
CLASSIFICATION OF YEAR EXPENSES DEDUCTIONS OF YEAR
- --------------------------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30, 1997:
Allowance for doubtful accounts.......................... $ 821,000 $ -- $ 400,000 $ 421,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Inventory Reserves....................................... $ 4,862,000 $ -- $ 1,002,000 $ 3,860,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
YEAR ENDED SEPTEMBER 30, 1996:
Allowance for doubtful accounts.......................... $ 883,000 $ 100,000 $ 162,000 $ 821,000
------------ ------------ ------------ ------------
Inventory Reserves....................................... $ 1,522,000 $ 3,340,000 $ -- $ 4,862,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
YEAR ENDED SEPTEMBER 30, 1995:
Allowance for doubtful accounts.......................... $ 1,290,000 $ 400,000 $ 807,000 $ 883,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Inventory Reserves....................................... $ 2,000,000 $ -- $ -- $ 1,522,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
- ------------- ---------------------------------------------------------------------------------------------------
<C> <S>
1(a) Form of Underwriting Agreement *
2 Plan of Reorganization, dated June 24, 1997. (1)
3(a) Articles of Organization, as amended, of the Company. (2)
3(b) By-laws, as amended, of the Company. **
4(a) Financing Agreement, dated September 27, 1984 among Barnwell County, South Carolina, Company and
Carolina Metals, Inc. (a wholly owned-subsidiary) relating to Barnwell County, South Carolina
Industrial Development Revenue Bond (Nuclear Metals, Inc. project) 1984, incorporated by reference
to File No. 0-8836, Part II, Exhibit 4(e).
4(b) Nuclear Metals, Inc. Non-Qualified Stock Option Plan as amended. (3)
4(c) Nuclear Metals, Inc. Restated Employees' Stock Option Plan as amended. (3)
4(d) Nuclear Metals, Inc. Directors' Stock Option Plan as amended. (4)
4(e) Warrant to Purchase 25,000 shares of the Company's Common Stock issued to State Street Bank & Trust
Company. (4)
4(f) Common Stock Purchase Warrant dated September 16, 1996 issued to Melvin B. Chrein and schedule of
similar warrants. (5)
4(g) Common Stock Purchase Warrant dated September 22, 1997 issued to Roger M. Marino for 60,000 shares.
(2)
4(h) Starmet Corporation 1998 Stock Plan. (6)
5(a) Legal opinion of Peabody & Arnold LLP counsel to the Company. *
10(a) Agreement, effective March 1, 1993, between the Company and Matthews Associates Limited. (7)
10(b) Agreement, effective March 1, 1993, between the Company and Wilson B. Tuffin, as amended November
17, 1994. (7)
10(c) Employment Agreement, effective February 8, 1995 between the Company and Robert E. Quinn. (5)
10(d) Agreement with Olin Corporation regarding large caliber penetrators. (Confidential treatment has
been granted for certain portions of this Exhibit.) (8)
10(e) Credit Agreement dated March 31, 1995 among the Company, Carolina Metals, Inc. and State Street
Bank & Trust Company. (9)
10(f) First Amendment to Credit Agreement dated as of June 30, 1995 among the Company, Carolina Metals,
Inc. and State Street Bank & Trust Company. (10)
10(g) Amended and Restated Revolving Credit Note dated March 31, 1995 (as amended December 24, 1996) of
the Company and Carolina Metals, Inc. (5)
10(h) Second Amendment to Credit Agreement dated as of December 24, 1996 among the Company, Carolina
Metals, Inc. and State Street Bank & Trust Company. (5)
10(i) 10% Convertible Subordinated Debenture dated January 10, 1996 payable to Wiaf Investors Co. in
amount of $334,000 and schedule of similar debentures. (5)
</TABLE>
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<TABLE>
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<C> <S>
10(j) 10% Subordinated Debenture dated September 16, 1996 payable to Melvin B. Chrein in the amount of
$100,000 and schedule of similar debentures. (5)
10(k) Letter Agreement dated as of September 16, 1996 with Kathleen Matthews and schedule similar letter
agreements. (5)
10(l) Joint Security Agreement dated as of March 31, 1995 among the Company, Carolina Metals, Inc. and
State Street Bank & Trust Company. (4)
10(m) First Amendment to Joint Security Agreement dated September 26, 1995 among the Company, Carolina
Metals, Inc. and State Street Bank & Trust Company. (4)
10(n) Patent Assignment of Security dated September 26, 1995 between the Company and State Street Bank &
Trust Company. (4)
10(o) Trademark Assignment of Security dated September 26, 1995 between the Company and State Street Bank
& Trust Company. (4)
10(p) Purchase order dated August 23, 1995 between the Company and Olin Corporation. (Confidential
treatment requested as to certain portions) (4)
10(q) Forbearance and Amendment Agreement dated as of January 11, 1996 between the Company, Carolina
Metals, Inc. and State Street Bank & Trust Company. (4)
10(r) Waiver of Breach of Covenant, by and among the Company, Carolina Metals, Inc. and State Street Bank
& Trust Company. (5)
10(s) Envirocare of Utah Inc. Low-Activity Radioactive Waste Disposal Agreement. (Confidential treatment
has been granted for certain portions of this Exhibit.) (11)
10(t) Amendment of Solicitation/Modification of Contract dated March 10, 1997 issued by Department of the
Army. (12)
10(u) Securities Pledge Agreement dated July 3, 1997 between Khosrow B. Semnoni and Nuclear Metals, Inc.
(13)
10(v) Employment Agreement, effective October 1, 1997 between the Company and James M. Spiezio. (2)
10(w) Amended and Restated Revolving Credit Note dated October 1, 1997 among the Company, Starmet
Powders, LLC, Starmet Aerocast, LLC, Starmet Commercial Castings, LLC, Starmet NMI Corporation,
Starmet CMI Corporation, Starmet Holdings Corporation, NMI Foreign Sales Corporation and State
Street Bank & Trust Company. (2)
10(x) Amended and Restated Credit Agreement dated October 1, 1997 among the Company, Starmet Powders,
LLC, Starmet Aerocast, LLC, Starmet Commercial Castings, LLC, Starmet NMI Corporation, Starmet CMI
Corporation, Starmet Holdings Corporation, NMI Foreign Sales Corporation and State Street Bank &
Trust Company. (2)
10(y) Amended and Restated Joint Security Agreement dated October 1, 1997 among the Company, Starmet
Powders, LLC, Starmet Aerocast, LLC, Starmet Commercial Castings, LLC, Starmet NMI Corporation,
Starmet CMI Corporation, Starmet Holdings Corporation, NMI Foreign Sales Corporation and State
Street Bank & Trust Company. (2)
10(z) Patent Assignment of Security dated October 1, 1997 between the Company and State Street Bank &
Trust. (2)
10(aa) Employment Agreement, effective October 1, 1997 between the Company and William T. Nachtrab. (2)
</TABLE>
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<TABLE>
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<C> <S>
10(bb) Employment Agreement, effective October 1, 1997 between the Company and Douglas F. Grotheer. (2)
10(cc) Employment Agreement, effective October 1, 1997 between the Company and Kevin R. Raftery. (2)
10(dd) First Amendment to Credit Agreement dated as of December 9, 1997 among the Company, Starmet
Powders, LLC, Starmet Aerocast, LLC, Starmet Commercial Castings, LLC, Starmet NMI Corporation,
Starmet CMI Corporation, Starmet Holdings Corporation, NMI Foreign Sales Corporation and State
Street Bank & Trust Company. (2)
10(ee) Third Amendment to Credit Agreement dated August 7, 1997 among Nuclear Metals, Inc., Carolina
Metals, Inc. and State Street Bank & Trust Company. (2)
10(ff) Amendment to Employment Agreement dated October 1, 1997 between the Company and Robert E. Quinn.
(2)
10(gg) Letter agreement with Roger M. Marino dated September 22, 1997 between the registrant and Roger M.
Marino. (2)
10(hh) 10% Subordinated Debenture dated September 22, 1997 payable to Roger Marino in the amount of
$500,000. (2)
10(ii) Letter agreement dated December 23, 1997 regarding issuance of subordinated convertible debentures
among the Company Melvin Chrein, WIAF Investors Co., Marshall Chrein, Joshua Feibusch and George J.
Matthews. (2)
10(jj) 10% Convertible Subordinated Debenture dated December 23, 1997 payable to Wiaf Investors Co. in
amount of $500,000 and schedule of similar debentures. (2)
10(kk) Second Amendment to Credit Agreement dated as of December 29, 1997 among the Company, Starmet
Powders, LLC, Starmet Aerocast, LLC, Starmet Commercial Castings, LLC, Starmet NMI Corporation,
Starmet CMI Corporation, Starmet Holdings Corporation, NMI Foreign Sales Corporation and State
Street Bank & Trust Company. (2)
10(ll) Second Additional Revolving Credit Note dated December 29, 1997 among the Company, Starmet Powders,
LLC, Starmet Aerocast, LLC, Starmet Commercial Castings, LLC, Starmet NMI Corporation, Starmet CMI
Corporation, Starmet Holdings Corporation, NMI Foreign Sales Corporation and State Street Bank &
Trust Company. (2)
10(mm) Operating Agreement for Trio Star LLC dated December 31, 1997 among Starmet Commercial Castings
Corp., Advanced Products Labs, Inc. and R-Cubed Composites, Inc. (Confidential treatment requested
as to certain portions) (14)
10(nn) Warrant Agreement dated as of December 29, 1997 between the Company and SSB Investments, Inc. **
10(oo) Common Stock Purchase Warrant dated as of December 29, 1997 issued to SSB Investments, Inc. **
10(pp) Promissory Note dated March 20, 1998 payable to Palmetto Federal Savings Bank of South Carolina
from Starmet CMI Corporation in the amount of $495,000. **
10(qq) Promissory Note dated March 20, 1998 payable to Lower Savannah Regional Development Corporation
from Starmet CMI Corporation in the amount of $500,000. **
10(rr) Mortgage, Security Agreement and Financing Statement dated March 20, 1998 from Starmet CMI
Corporation to Palmetto Federal Savings Bank of South Carolina. **
</TABLE>
<PAGE>
<TABLE>
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10(ss) Mortgage, Security Agreement and Financing Statement dated March 20, 1998 from Starmet CMI
Corporation to Lower Savannah Regional Development Corporation. **
10(tt) Letter Agreement between Starmet CMI Corporation, Palmetto Federal Savings Bank of South Carolina
and Lower Savannah Regional Development Corporation dated March 20, 1998. **
10(uu) Guaranty by the Company in favor of Palmetto Federal Savings Bank of South Carolina dated March 20,
1998. **
10(vv) Guaranty by the Company in favor of Lower Savannah Regional Development Corporation dated March 20,
1998. **
10(ww) Letter Agreement dated April 1, 1998 between the Company, State Street Bank & Trust Company and SSB
Investment, Inc. regarding the First and Second Warrants. **
10(xx) Holding Basin Remediation and Waste Disposal Agreement dated as of May 8, 1997, by and between the
Company and Zhagrus Enviromental Inc. (Confidential treatment requested as to certain portions.)
(15)
10(yy) Loan Agreement dated as of May 28, 1998 among the Company, Starmet Powders, LLC, Starmet Aerocast,
LLC, Starmet Commercial Castings, LLC, Starmet NMI Corporation, Starmet CMI Corporation, Starmet
Holdings Corporation, NMI Foreign Sales Corporation and State Street Bank & Trust Company. *
10(zz) Revolving Credit Agreement dated May 28, 1998, among the Company, Starmet Powders, LLC, Starmet
Aerocast, LLC, Starmet Commercial Castings, LLC, Starmet NMI Corporation, Starmet CMI Corporation,
Starmet Holdings Corporation, NMI Foreign Sales Corporation and State Street Bank & Trust Company.
*
10(aaa) Third Amendment to Credit Agreement dated as of June 11, 1998 among the Company, Starmet Powders,
LLC, Starmet Aerocast, LLC, Starmet Commercial Castings, LLC, Starmet NMI Corporation, Starmet CMI
Corporation, Starmet Holdings Corporation, NMI Foreign Sales Corporation and State Street Bank &
Trust Company. *
11(a) Computation re: per share earnings. ***
21 Subsidiaries of the Company. **
23(a) Consent of Independent Public Accountants. *
23(b) Consent of Peabody & Arnold LLP (Included as part of Exhibit 5(a))*
23(c) Consent of Iandiorio & Teska **
24(a) Power of Attorney **
99(a) Memorandum of Decision dated September 13, 1996 from the United States Army Contract Adjustment
Board. (16)
</TABLE>
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* Filed as exhibit herewith.
** Previously filed.
*** Not applicable.
(1) Incorporated by reference to Annex A to Company's proxy statement for
special meeting held on September 29, 1997.
(2) Incorporated by reference to similarly numbered Exhibit filed with the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
1997.
(3) Incorporated by reference to the similarly numbered Exhibit filed with the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
1992.
<PAGE>
(4) Incorporated by reference to the similarly numbered Exhibit filed with the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
1995.
(5) Incorporated by reference to the similarly numbered Exhibit filed with the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
1996.
(6) Incorporated by reference to Exhibit 4.2 to the Company's Registration
Statement on Form S-8 filed on May 7, 1998.
(7) Incorporated by reference to the similarly numbered Exhibit filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992.
(8) Incorporated by reference to Exhibit 10 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1993.
(9) Incorporated by reference to Exhibit 10A to the Company's Form 10-Q for the
Quarter ended March 31, 1995.
(10) Incorporated by reference to Exhibit 10(c) to the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 1995.
(11) Incorporated by reference to Exhibit 10A to Company's Form 10-Q for the
quarter ended March 31, 1997.
(12) Incorporated by reference to Exhibit 10B to Company's Form 10-Q for the
quarter ended March 31, 1997.
(13) Incorporated by reference to Exhibit 10 to Company's Form 10-Q for the
quarter ended June 30, 1997.
(14) Incorporated by reference to similarly numbered Exhibit filed with the
Company's Form 10-Q for the quarter ended December 31, 1997.
(15) Incorporated by reference to Exhibit 10(A) filed with the Company's Form
10-Q for the quarter ended March 31, 1998.
(16) Incorporated by reference to Exhibit 99 filed with the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1996.
<PAGE>
3,000,000 Shares of Common Stock
STARMET CORPORATION
UNDERWRITING AGREEMENT
__________, 1998
BEAR, STEARNS & CO. INC.
FURMAN SELZ LLC
as Representatives of the
several Underwriters named in
Schedule I attached hereto
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, N.Y. 10167
Dear Sirs:
Starmet Corporation, a corporation organized and existing under the
laws of Massachusetts (the "Company"), proposes, subject to the terms and
conditions stated herein, to issue and sell to the several underwriters named in
Schedule I hereto (the "Underwriters") an aggregate of 2,250,000 shares of its
common stock, par value $.10 per share (the "Common Stock"), and the persons
named in Schedule II hereto (the "Selling Stockholders") propose, subject to the
terms and conditions stated herein, to sell to the Underwriters an aggregate of
750,000 shares of Common Stock, which aggregate of 3,000,000 shares of Common
Stock is herein referred to as the "Firm Shares". In addition, for the sole
purpose of covering over-allotments in connection with the sale of the Firm
Shares, the Company proposes, subject to the terms and conditions stated herein,
to issue and sell to the Underwriters, at the option of the Underwriters, up to
an additional 450,000 shares (the "Additional Shares") of Common Stock. The Firm
Shares and any Additional Shares purchased by the Underwriters are referred to
herein as the "Shares". The Shares are more fully described in the Regis tration
Statement referred to below. George J. Matthews and Wilson B. Tuffin are
referred to herein as the "Executive Selling Stockholders", and the Selling
Stockholders
<PAGE>
other than the Executive Selling Stockholders are referred to herein as the
"Non-Executive Selling Stockholders".
1. Representations and Warranties of the Company and the Selling
Stockholders.
(a) The Company represents and warrants to, and agrees with, the
Underwriters that:
(i) The Company has filed with the Securities and Exchange Commission
(the "Commission") a registration statement, and may have filed an
amendment or amendments thereto, on Form S-1 (No. 333-49629), for the
registration of the Shares under the Securities Act of 1933, as amended
(the "Act"). Such registration statement, including the prospectus,
financial statements and schedules, exhibits and all other documents filed
as a part thereof, as amended at the time of effectiveness of the
registration statement, including any information deemed to be a part
thereof as of the time of effectiveness pursuant to paragraph (b) of Rule
430A or Rule 434 of the Rules and Regulations of the Commission under the
Act (the "Regulations") is herein called the "Registration Statement". Any
registration statement filed pursuant to Rule 462(b) of the Regulations is
herein referred to as the "Rule 462(b) Registration Statement," and after
such filing the term "Registration Statement" shall include the Rule
462(b) Registration Statement. The prospectus, in the form first filed
with the Commission pursuant to Rule 424(b) of the Regulations or filed as
part of the Registration Statement at the time of effectiveness if no Rule
424(b) or Rule 434 filing is required, is herein called the "Prospectus".
The term "preliminary prospectus" as used herein means a preliminary
prospectus as described in Rule 430 of the Regulations.
(ii) At the time of the effectiveness of the Registration Statement,
any Rule 462(b) Registration Statement or any post-effective amendment to
the Registration Statement, when the Prospectus is first filed with the
Commission pursuant to Rule 424(b) or Rule 434 of the Regulations, when
any supplement to or amendment of the Prospectus is filed with the
Commission and at the Closing Date and the Additional Closing Date, if
any, (as hereinafter respectively defined), the Registration Statement,
the Rule 462(b) Registration Statement, the Prospectus and any amendments
thereof and supplements thereto complied or will comply in all material
respects with the applicable provisions of the Act and the Regulations and
do not or will not contain an untrue statement of a material fact and do
not or will not omit to state any material fact required to be stated
therein or necessary in order to make the statements therein (a) in the
case of the Registration Statement,
2
<PAGE>
not misleading and (b) in the case of the Prospectus, in light of the
circumstances under which they were made, not misleading. When any related
preliminary prospectus was first filed with the Commission (whether filed
as part of the registration statement for the registration of the Shares
or any amendment thereto or pursuant to Rule 424(a) of the Regulations)
and when any amendment thereof or supplement thereto was first filed with
the Commission, such preliminary prospectus and any amendments thereof and
supplements thereto complied in all material respects with the applicable
provisions of the Act and the Regulations and did not contain an untrue
statement of a material fact and did not omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein in light of the circumstances under which they were made not
misleading. No representation and warranty is made in this subsection
(ii), however, with respect to any information contained in or omitted
from the Registration Statement or the Prospectus or any related
preliminary prospectus or any amendment thereof or supplement thereto in
reliance upon and in conformity with information furnished in writing to
the Company by or on behalf of any Underwriter through you as herein
stated expressly for use in connection with the preparation thereof. If
Rule 434 is used, the Company will comply with the requirements of Rule
434.
(iii) Arthur Andersen LLP, who have certified the financial
statements and supporting schedules included in the Registration
Statement, are independent public accountants as required by the Act and
the Regulations.
(iv) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as set
forth in the Registration Statement and the Prospectus, there has been no
material adverse change or any development involving a prospective
material adverse change in the business, prospects, properties,
operations, condition (financial or other) or results of operations of the
Company and its subsidiaries, taken as a whole, whether or not arising
from transactions in the ordinary course of business (a "Material Adverse
Effect"), and since the date of the latest balance sheet presented in the
Registration Statement and the Prospectus, neither the Company nor any of
its subsidiaries has incurred or undertaken any liabilities or
obligations, direct or contingent, which are material to the Company and
its subsidiaries, taken as a whole, except for liabilities or obligations
which are reflected in the Registration Statement and the Prospectus.
(v) This Agreement and the transactions contemplated herein have been
duly and validly authorized by the Company and this Agreement has been
duly and validly executed and delivered by the Company.
3
<PAGE>
(vi) The execution, delivery, and performance of this Agreement and
the consummation of the transactions contemplated hereby do not and will
not (a) conflict with or result in a breach of any of the terms and
provisions of, or constitute a default (or an event which with notice or
lapse of time, or both, would constitute a default) under, or result in
the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or any of its subsidiaries pursuant to,
any agreement, instrument, franchise, license or permit to which the
Company or any of its subsidiaries is a party or by which any of such
corporations or their respective properties or assets may be bound or (b)
violate or conflict with any provision of the charter, by-laws or other
organizational instrument of the Company or any of its subsidiaries or any
judgment, decree, order, statute, rule or regulation of any court or any
public, governmental or regulatory agency or body having jurisdiction over
the Company or any of its subsidiaries or any of their respective
properties or assets. No consent, approval, authorization, order,
registration, filing, qualification, license or permit of or with any
court or any public, governmental or regulatory agency or body having
jurisdiction over the Company or any of its subsidiaries or any of their
respective properties or assets is required for the execution, delivery
and performance of this Agreement or the consummation of the transactions
contemplated hereby, including the issuance, sale and delivery of the
Shares to be issued, sold and delivered by the Company and the Selling
Stockholders hereunder, except the registration under the Act of the
Shares and such consents, approvals, authorizations, orders,
registrations, filings, qualifications, licenses and permits as may be
required under state securities or Blue Sky laws in connection with the
purchase and distribution of the Shares by the Underwriters.
(vii) All of the outstanding shares of Common Stock, including the
Shares to be purchased by the Underwriters from the Selling Stockholders,
are duly and validly authorized and issued, are fully paid and
nonassessable and were not issued and are not now in violation of or
subject to any preemptive rights. The Shares to be purchased by the
Underwriters from the Company have been duly and validly authorized and,
when issued and delivered by the Company in accordance with this
Agreement, will be duly and validly issued, fully paid and nonassessable
and will not have been issued in violation of or be subject to any
preemptive rights. The Company has an authorized and outstanding
capitalization as set forth in the Registration Statement and the
Prospectus. The Common Stock, the Firm Shares and the Additional
Shares conform to the descriptions thereof contained in the Registration
Statement and the Prospectus.
4
<PAGE>
(viii) Each of the Company and its subsidiaries has been duly
organized and is validly existing as a corporation or a limited liability
company, as the case may be, in good standing under the laws of its
jurisdiction of incorporation or formation, as the case may be. Each of
the Company and its subsidiaries is duly qualified and in good standing as
a foreign corporation or a foreign limited liability company, as the case
may be, in each jurisdiction in which the character or location of its
properties (owned, leased or licensed) or the nature or conduct of its
business makes such qualification necessary, except for those failures to
be so qualified or in good standing that would not in the aggregate have a
Material Adverse Effect. All of the issued and outstanding capital stock
or the limited liability company interests, as the case may be, of each
subsidiary of the Company is owned directly by the Company, free and clear
of any lien, encumbrance, claim, security interest, restriction on
transfer, shareholders' agreement, voting trust or other defect of title
whatsoever. The only subsidiaries of the Company are the subsidiaries
listed on Exhibit 21 to the Registration Statement.
(ix) Each of the Company and its subsidiaries has all requisite power
and authority, and all necessary consents, approvals, authorizations,
orders, registrations, qualifications, licenses and permits (collectively,
"Governmental Licenses") of and from the appropriate federal, state, local
or foreign regulatory or governmental agencies and bodies, to own, lease
and operate its properties and to conduct its business as now being
conducted and as described in the Registration Statement and the
Prospectus, and no such Governmental License contains a materially
burdensome restriction not adequately disclosed in the Registration
Statement and the Prospectus. The Company and its subsidiaries are in
compliance with the terms and conditions of all such Governmental
Licenses, except where the failure so to comply would not, individually or
in the aggregate, have a Material Adverse Effect; all of the Governmental
Licenses are valid and in full force and effect; and neither the Company
nor any of its subsidiaries has received any notice of proceedings
relating to the revocation or modification of any Governmental License.
(x) Neither the Company nor any of its subsidiaries is in violation
of its charter, by-laws or other organizational instrument or in default
in the performance or observance of any material obligation, agreement,
covenant or condition contained in any indenture, mortgage, deed of trust,
loan agreement, lease or other agreement or instrument to which it is a
party or by which it or any of its properties or assets may be bound,
except as described in the Prospectus with respect to violations or
defaults that have been waived in writing by the Company's lenders.
5
<PAGE>
(xi) Except as described in the Prospectus, there is no litigation or
governmental proceeding to which the Company or any of its subsidiaries
is a party or to which any property of the Company or any of its
subsidiaries is subject or which is pending or, to the knowledge of the
Company, contemplated against the Company or any of its subsidiaries which
might result in a Material Adverse Effect or which is required to be
disclosed in the Registration Statement and the Prospectus.
(xii) The Company and its subsidiaries have good and valid title
in fee simple to all real property and good title to all personal property
owned by them, in each case free and clear of all liens, encumbrances and
defects except such as are described in the Registration Statement and the
Prospectus or such as do not materially affect the value of such property
and do not interfere with the use made and proposed to be made of such
property by the Company and its subsidiaries. Any real property and
buildings held under lease by the Company and its subsidiaries are held by
them under valid, subsisting and enforceable leases with such exceptions
as are not material and do not interfere with the use made and proposed to
be made of such property and buildings by the Company and its
subsidiaries. The Company and its subsidiaries are in compliance with all
applicable zoning laws and regulations, with such exceptions as do not
or would not have a Material Adverse Effect.
(xiii) Except as described in the Prospectus and except as would not,
in dividually or in the aggregate, result in a Material Adverse Effect,
(a) neither the Company nor any of its subsidiaries is in violation of any
federal, state, local or foreign statute, law, rule, regulation,
ordinance, code, policy or rule of common law or any judicial or
administrative interpretation thereof, including any judicial or
administrative order, consent, decree or judgment, relating to pollution
or protection of human health, the environment (including, without
limitation, ambient air, surface water, groundwater, land surface or
subsurface strata) or wildlife, including, without limitation, laws and
regulations relating to the release or threatened release of chemicals,
pollutants, contaminants, wastes, toxic substances, hazardous substances,
petroleum or petroleum products (collectively, "Hazardous Materials") or
to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Materials (collectively,
"Environmental Laws"), (b) the Company and its subsidiaries have all
permits, authorizations and approvals required under any applicable En
vironmental Laws and are each in compliance with their requirements, (c)
there are no pending or threatened administrative, regulatory or judicial
actions, suits, demands, demand letters, claims, liens, notices of
noncompliance or violation, investigation or proceedings relating to any
Environmental Law against the Company or any of its subsidiaries and (d)
there are no events or circumstances
6
<PAGE>
that might reasonably be expected to form the basis of an order for
clean-up or remediation, or an action, suit or proceeding by any private
party or governmental body or agency, against or affecting the Company or
any of its subsidiaries relating to Hazardous Materials or any
Environmental Laws.
(xiv) The Company and its subsidiaries own or possess, or can acquire
on reasonable terms, adequate patents, patent rights, licenses,
inventions, copyrights, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information,
systems or procedures), trademarks, service marks, trade names or other
intellectual property (collectively, "Intellectual Property") necessary to
carry on the business now operated by them, and, except as described in
the Prospectus, neither the Company nor any of its subsidiaries has
received any notice or is otherwise aware of any infringement of or
conflict with asserted rights of others with respect to any Intellectual
Property or of any facts or circumstances which would render any
Intellectual Property invalid or inadequate to protect the interest of the
Company or any of its subsidiaries therein.
(xv) No labor dispute with the employees of the Company or any of its
subsidiaries exists or, to the best knowledge of the Company, is imminent,
and the Company is not aware of any existing or imminent labor disturbance
by the employees of any of its or any subsidiary's principal suppliers,
manufacturers, customers or contractors, that, in either case, would
result in a Material Adverse Effect.
(xvi) The Company and its subsidiaries are insured by insurers of
recognized financial responsibility against losses and risks and in
amounts as are prudent and customary in the businesses in which they are
engaged. The Company has no reason to believe that it will not be able to
renew its and its subsidiaries' existing insurance coverage as and when
such coverage expires or to obtain similar coverage from similar insurers
as may be necessary to continue its and its subsidiaries' businesses at a
cost that would not have a Material Adverse Effect.
(xvii) The Company has not taken and will not take, directly or
indirectly, any action designed to cause or result in, or which
constitutes or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of the shares of Common Stock
to facilitate the sale or resale of the Shares.
(xviii) The financial statements, including the notes thereto, and
supporting schedules included in the Registration Statement and the
Prospectus present fairly the financial position of the Company as of the
dates indicated and the results of its
7
<PAGE>
operations for the periods specified; said financial statements have been
prepared in conformity with generally accepted accounting principles
applied on a consistent basis; and the supporting schedules included in
the Registration Statement present fairly the information required to be
stated therein.
(xix) Except as described in the Prospectus, (i) no holder of
securities of the Company has any rights to the registration of securities
of the Company because of the filing of the Registration Statement or
otherwise in connection with the sale of the Shares contemplated hereby
and (ii) there are no outstanding options, warrants or other rights
calling for the issuance of, and no commitments, plans or arrangements to
issue, any shares of capital stock of the Company or any security
convertible into or exchangeable for capital stock of the Company.
(xx) The Company is not, and upon consummation of the transactions
con templated hereby will not be, subject to registration as an
"investment company" under the Investment Company Act of 1940.
(b) Each of the Selling Stockholders severally represents and
warrants to, and agrees with, the Underwriters that:
(i) Such Selling Stockholder is not prompted to sell the Shares to be
sold by such Selling Stockholder hereunder by any information concerning
the Company or any subsidiary of the Company which is not set forth in the
Prospectus.
(ii) Such Selling Stockholder has the full right, power and authority
to enter into this Agreement and a Power of Attorney and Custody Agreement
(the "Power of Attorney and Custody Agreement") and to sell, transfer and
deliver the Shares to be sold by such Selling Stockholder hereunder. The
execution and delivery of this Agreement and the Power of Attorney and
Custody Agreement and the sale and delivery of the Shares to be sold by
such Selling Stockholder and the consummation by such Selling Stockholder
of the transactions contemplated herein and compliance by such Selling
Stockholder with its obligations hereunder have been duly authorized by
each Selling Stockholder and do not and will not, whether with or without
the giving of notice or passage of time or both, conflict with or
constitute a breach of, or a default under or result in the creation or
imposition of any tax, lien, charge or encumbrance upon the Shares to be
sold by such Selling Stockholder or any property or assets of such Selling
Stockholder pursuant to, any contract, indenture, mortgage, deed of trust,
loan or credit agreement, note, license, lease or other agreement or
instrument to which such Selling Stockholder is a party or by which such
Selling Stockholder is bound, or to which any of the
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property or assets of such Selling Stockholder is subject, nor will such
action result in any violation of the provisions of the charter, by-laws
or other organizational instrument of such Selling Stockholder, if
applicable, or any applicable law, rule, regulation, judgment, order or
decree of any government, government instrumentality or court having
jurisdiction over such Selling Stockholder or any of such Selling
Stockholder's properties.
(iii) Such Selling Stockholder has and will at the Closing Date have
good and valid title to the Shares to be sold by such Selling Stockholder
hereunder, free and clear of any security interest, pledge, lien, charge,
claim, equity or encumbrance of any kind, other than pursuant to this
Agreement; and upon delivery of such Shares, assuming each such
Underwriter has no notice of any adverse claim, each of the Underwriters
will receive good and valid title to the Shares purchased by it from such
Selling Stockholder, free and clear of any security interest, pledge,
lien, charge, claim, equity or encumbrance of any kind.
(iv) Such Selling Stockholder has duly executed and delivered, in the
forms heretofore furnished to you, the Power of Attorney and Custody
Agreement with [specify attorneys-in-fact], or any of them, as
attorneys-in-fact (the "Attorneys-in-Fact") and Boston EquiServe LP, as
custodian (the "Custodian"); the Custodian is authorized to deliver the
Shares to be sold by such Selling Stockholder hereunder and to accept
payment therefor; and each Attorney-in-Fact is authorized to execute and
deliver this Agreement and the certificate referred to in Section 6(f) on
behalf of such Selling Stockholder, to sell, assign and transfer to the
Underwriters the Shares to be sold by such Selling Stockholder hereunder,
to determine the purchase price to be paid by the Underwriters to such
Selling Stockholder, as provided in Section 2 hereof, to authorize the
delivery of the Shares to be sold by such Selling Stockholder hereunder,
to accept payment therefor, and otherwise to act on behalf of such Selling
Stockholder in connection and in accordance with this Agreement.
(v) Such Selling Stockholder has not taken, and will not take,
directly or indirectly, any action which is designed to or which has
constituted or which might reasonably be expected to cause or result in
stabilization or manipulation of the price of any security of the Company
to facilitate the sale or resale of the Shares.
(vi) No filing with, or consent, approval, authorization, order,
registration, qualification or decree of, any court or governmental
authority or agency is necessary or required by such Selling Stockholder
for the performance by such Selling Stockholder of its obligations
hereunder or in the Power of Attorney and Custody Agreement, or in
connection with the offer, sale or delivery of the Shares
9
<PAGE>
by such Selling Stockholder hereunder, except such as may have previously
been made or obtained or as may be required under the Act or the
Regulations or state securities laws.
(vii) During the period of 180 days from the date of the Prospectus,
such Selling Stockholder will not, directly or indirectly, without the
prior written consent of Bear, Stearns & Co. Inc., offer, sell, offer or
agree to sell, grant any option to purchase or otherwise transfer or
dispose (or announce any offer, sale, grant of an option to purchase or
other transfer or disposition) of any shares of Common Stock (or any
securities convertible into, exercisable for or exchangeable for shares of
Common Stock).
(viii) Certificates for all of the Shares sold by such Selling
Stockholder pursuant to this Agreement, in suitable form for transfer by
delivery or accompanied by duly executed instruments of transfer or
assignment in blank, or, in the case of uncertificated stock, duly
executed stock powers, in each case with signatures guaranteed, have been
placed in custody with the Custodian with irrevocable conditional
instructions to deliver such Shares or stock powers to the Underwriters
pursuant to this Agreement.
(ix) Neither such Selling Stockholder nor any of its affiliates
directly, or indirectly through one or more intermediaries, controls, or
is controlled by, or is under common control with, or has any other
association with (within the meaning of Article I, Section 1(m) of the
By-laws of the National Association of Securities Dealers, Inc. (the
"NASD")), any member firm of the NASD.
2. Purchase, Sale and Delivery of the Shares.
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company and each Selling Stockholder, severally and not jointly,
agree to sell to each Underwriter and each Underwriter, severally and not
jointly, agrees to purchase from the
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Company and each Selling Stockholder, at a purchase price per share of $_______,
the number of Firm Shares determined by multiplying the aggregate number of Firm
Shares to be sold by the Company or such Selling Stockholder, as the case may
be, as set forth opposite their respective names in Schedule II hereto by a
fraction, the numerator of which is the aggregate number of Firm Shares to be
purchased by such Underwriter as set forth opposite the name of such Underwriter
in Schedule I hereto (or such number increased as set forth in Section 9 hereof)
and the denominator of which is the total number of Firm Shares being purchased
by all of the Underwriters from the Company and all of the Selling Stockholders
hereunder, subject, however, to such adjustments to eliminate any fractional
shares as you in your sole discretion shall make.
(b) Payment of the purchase price for, and delivery of, the Shares
shall be made at the office of Debevoise & Plimpton, 875 Third Avenue, New York,
New York, or at such other place as shall be agreed upon by you and the Company,
at 9:00 A.M. on the third or fourth business day (as permitted under Rule 15c6-1
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"))
(unless postponed in accordance with the provisions of Section 9 hereof)
following the date of the effectiveness of the Registration Statement (or, if
the Company has elected to rely upon Rule 430A of the Regulations, the third or
fourth business day (as permitted under Rule 15c6-1 under the Exchange Act)
after the determination of the initial public offering price of the Shares), or
such other time not later than ten business days after such date as shall be
agreed upon by you and the Company (such time and date of payment and delivery
being herein called the "Closing Date"). Payment shall be made to the Company
and the Selling Stockholders by wire transfer in same day funds to bank accounts
designated by the Company and the Custodian pursuant to each Selling
Stockholder's Power of Attorney and Custody Agreement, as the case may be,
against delivery to you for the respective accounts of the Underwriters through
the facilities of The Depository Trust Company ("DTC") of the Shares to be
purchased by them. The Shares shall be registered in such name or names and in
such authorized denominations as you may request in writing at least two full
business days prior to the Closing Date. The Company will permit you to examine
and package for delivery certificates representing the Shares at least one full
business day prior to the Closing Date.
(c) In addition, the Company hereby grants to the Underwriters the
option to purchase up to 450,000 Additional Shares at the same purchase price
per share to be paid by the Underwriters to the Company for the Firm Shares as
set forth in this Section 2, for the sole purpose of covering over-allotments in
the sale of Firm Shares by the Underwriters. This option may be exercised at any
time, in whole or in part, on or before the thirtieth day following the date of
the Prospectus, by written notice by you to the Company. Such notice shall set
forth the aggregate number of Additional
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Shares as to which the option is being exercised and the date and time, as
reasonably determined by you, when the Additional Shares are to be delivered
(such date and time being herein sometimes referred to as the "Additional
Closing Date"); provided, however, that the Additional Closing Date shall not be
earlier than the Closing Date or earlier than the second full business day after
the date on which the option shall have been exercised nor later than the eighth
full business day after the date on which the option shall have been exercised
(unless such time and date are postponed in accordance with the provisions of
Section 9 hereof). The Additional Shares shall be registered in such name or
names and in such authorized denominations as you may request in writing at
least two full business days prior to the Additional Closing Date. The Company
will permit you to examine and package for delivery certificates representing
the Additional Shares at least one full business day prior to the Additional
Closing Date.
The number of Additional Shares to be sold to each Underwriter shall
be the number which bears the same ratio to the aggregate number of Additional
Shares being purchased as the number of Firm Shares set forth opposite the name
of such Underwriter in Schedule I hereto (or such number increased as set forth
in Section 9 hereof) bears to the total number of Firm Shares being purchased
from the Company and the Selling Stockholders, subject, however, to such
adjustments to eliminate any fractional shares as you in your sole discretion
shall make.
Payment for the Additional Shares shall be made by wire transfer in
same day funds to the bank account designated by the Company, against delivery
to you for the respective accounts of the Underwriters through the facilities of
DTC of the Shares to be purchased by them.
3. Offering. Upon your authorization of the release of the Firm
Shares, the Underwriters propose to offer the Shares for sale to the public upon
the terms set forth in the Prospectus.
4. Covenants of the Company. The Company covenants and agrees with
the Underwriters that:
(a) If the Registration Statement has not yet been declared effective
the Company will use its best efforts to cause the Registration Statement and
any amend ments thereto to become effective as promptly as possible, and if Rule
430A is used or the filing of the Prospectus is otherwise required under Rule
424(b) or Rule 434, the Company will file the Prospectus (properly completed if
Rule 430A has been used) pursuant to Rule 424(b) or Rule 434 within the
prescribed time period and will provide
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<PAGE>
evidence satisfactory to you of such timely filing. If the Company elects to
rely on Rule 434, the Company will prepare and file a term sheet that complies
with the requirements of Rule 434.
The Company will notify you immediately (and, if requested by you,
will confirm such notice in writing) (i) when the Registration Statement and any
amend ments thereto become effective, (ii) of any request by the Commission for
any amend ment of or supplement to the Registration Statement or the Prospectus
or for any additional information, (iii) of the mailing or the delivery to the
Commission for filing of any amendment of or supplement to the Registration
Statement or the Prospectus, (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or any
post-effective amendment thereto or of the initiation, or the threatening, of
any proceedings therefor, (v) of the receipt of any comments from the
Commission, and (vi) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the Shares for sale in any
jurisdiction or the initiation or threatening of any proceeding for that
purpose. If the Commission shall propose or enter a stop order at any time, the
Company will make every reasonable effort to prevent the issuance of any such
stop order and, if issued, to obtain the lifting of such order as soon as
possible. The Company will not file any amendment to the Registration Statement
or any amendment of or supplement to the Prospectus (including the prospectus
required to be filed pursuant to Rule 424(b)or Rule 434) that differs from the
prospectus on file at the time of the effectiveness of the Registration
Statement before or after the effective date of the Registration Statement to
which you shall reasonably object in writing after being timely furnished in
advance a copy thereof.
(b) If at any time when a prospectus relating to the Shares is
required to be delivered under the Act any event shall have occurred as a
result of which the Pro spectus as then amended or supplemented would, in the
judgment of the Underwriters or the Company include an untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it shall be
necessary at any time to amend or supplement the Prospectus or Registration
Statement to comply with the Act or the Regulations, the Company will notify
you promptly and prepare and file with the Commission an appropriate
amendment or supplement (in form and substance satisfactory to you) which
will correct such statement or omission and will use its best efforts to have
any amendment to the Registration Statement declared effective as soon as
possible.
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<PAGE>
(c) The Company will promptly deliver to you two signed copies of the
Registration Statement, including exhibits and all amendments thereto, and the
Com pany will promptly deliver to each of the Underwriters such number of copies
of any preliminary prospectus, the Prospectus, the Registration Statement, and
all amendments of and supplements to such documents, if any, as you may
reasonably request.
(d) The Company will endeavor in good faith, in cooperation with you,
at or prior to the time of effectiveness of the Registration Statement, to
qualify the Shares for offering and sale under the securities laws relating to
the offering or sale of the Shares of such jurisdictions as you may designate
and to maintain such qualification in effect for so long as required for the
distribution thereof; except that in no event shall the Company be obligated in
connection therewith to qualify as a foreign corporation or to execute a general
consent to service of process.
(e) The Company will make generally available (within the meaning of
Section 11(a) of the Act) to its security holders and to you as soon as
practicable, but not later than 45 days after the end of its fiscal quarter in
which the first anniversary date of the effective date of the Registration
Statement occurs, an earning statement (in form complying with the provisions of
Rule 158 of the Regulations) covering a period of at least twelve consecutive
months beginning after the effective date of the Registration Statement.
(f) During the period of 180 days from the date of the Prospectus,
the Company will not, directly or indirectly, without the prior written consent
of Bear, Stearns & Co. Inc., issue, sell, offer or agree to sell, grant any
option to purchase or otherwise transfer or dispose (or announce any offer,
sale, grant of an option to purchase or other transfer or disposition) of any
shares of Common Stock (or any securities convertible into, exercisable for or
exchangeable for shares of Common Stock), and the Company will obtain the
undertaking of each of its officers and directors and such of its stockholders
as have been heretofore designated by you and listed on Schedule III attached
hereto not to engage in any of the aforementioned transactions on their own
behalf, other than the Company's sale of Shares hereunder and the Company's
issuance of Common Stock upon the exercise of presently out standing stock
options.
(g) During a period of three years from the effective date of the
Registration Statement, the Company will furnish to you copies of (i) all
reports to its shareholders; and (ii) all reports, financial statements and
proxy or information statements filed by the Company with the Commission or the
Nasdaq National Market.
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<PAGE>
(h) The Company will apply the proceeds from the sale of the Shares
as set forth under "Use of Proceeds" in the Prospectus.
(i) The Company will use its best efforts to cause the Shares to be
approved for quotation on the Nasdaq National Market.
5. Payment of Expenses. Whether or not the transactions contemplated
in this Agreement are consummated or this Agreement is terminated, the Company
and the Selling Stockholders hereby agree to pay all costs and expenses incident
to the per formance of their obligations hereunder, including those in
connection with (i) preparing, printing, duplicating, filing and distributing
the Registration Statement, as originally filed and all amendments thereof
(including all exhibits thereto), any preliminary prospectus, the Prospectus and
any amendments or supplements thereto (including, without limitation, fees and
expenses of the Company's and the Selling Stockholders' respective accountants
and counsel), the underwriting documents (including this Agreement, the
Agreement Among Underwriters and the Selling Agreement) and all other documents
related to the public offering of the Shares (including those supplied to the
Underwriters in quantities as hereinabove stated), (ii) the issuance, transfer
and delivery of the Shares to the Underwriters, including any transfer or other
taxes payable thereon, (iii) the qualification of the Shares under state or
foreign securities or Blue Sky laws, including the costs of printing and mailing
a preliminary and final "Blue Sky Survey" and the fees of counsel for the
Underwriters and such counsel's disbursements in relation thereto, (iv)
quotation of the Shares on the Nasdaq National Market, (v) filing fees of the
Commission and the NASD, (vi) the cost of printing certificates representing the
Shares, (vii) the costs and charges of any transfer agent or registrar and
(viii) all costs and expenses, including the out-of-pocket expenses of the
representatives of the Underwriters, incurred in connection with presentations
to prospective purchasers of the Shares. It is understood, however, that,
except as provided in this Section 5, the Underwriters will pay all of their
own costs and expenses.
6. Conditions of Underwriters' Obligations. The obligations of the
Underwriters to purchase and pay for the Firm Shares and the Additional Shares,
as provided herein, shall be subject to the accuracy of the representations and
warranties of the Company and the Selling Stockholders herein contained, as of
the date hereof and as of the Closing Date (for purposes of this Section 6
"Closing Date" shall refer to the Closing Date for the Firm Shares and any
Additional Closing Date, if different, for the Additional Shares), to the
absence from any certificates, opinions, written statements or letters furnished
to you or to Debevoise & Plimpton ("Underwriters' Counsel") pursuant to this
Section 6 of any misstatement or omission, to the performance by the Company and
the Selling Stockholders of its obligations hereunder, and to the following
additional conditions:
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<PAGE>
(a) The Registration Statement, including any Rule 462(b)
Registration Statement, shall have become effective not later than 5:30 P.M.,
New York time, on the date of this Agreement, or at such later time and date as
shall have been consented to in writing by you; if the Company shall have
elected to rely upon Rule 430A or Rule 434 of the Regulations, the Prospectus
shall have been filed with the Commission in a timely fashion in accordance with
Section 4(a) hereof; and, at or prior to the Closing Date no stop order
suspending the effectiveness of the Registration Statement or any post-effective
amendment thereof shall have been issued and no proceedings therefor shall have
been initiated or threatened by the Commission.
(b) At the Closing Date, you shall have received the opinion of
Peabody & Arnold, counsel for the Company, dated the Closing Date, addressed to
the Underwriters, and in form and substance satisfactory to Underwriters'
Counsel, to the effect that:
(i) Each of the Company and its subsidiaries has been duly organized
and is validly existing as a corporation or a limited liability company,
as the case may be, in good standing under the laws of its jurisdiction of
incorporation or formation, as the case may be. Each of the Company and
its subsidiaries is duly qualified and in good standing as a foreign
corporation or a foreign limited liability company, as the case may be, in
each jurisdiction in which the character or location of its properties
(owned, leased or licensed) or the nature or conduct of its business makes
such qualification necessary, except for those failures to be so qualified
or in good standing that would not in the aggregate have a Material
Adverse Effect. Each of the Company and its subsidiaries has all requisite
power and authority to own, lease and operate its properties and to
conduct its business as now being conducted and as described in the
Registration Statement and the Prospectus. All of the issued and
outstanding capital stock or the limited liability company interests, as
the case may be, of each subsidiary of the Company is owned directly by
the Company, free and clear of any lien, encumbrance, claim, security
interest, restriction on transfer, shareholders' agreement, voting trust
or other defect of title whatsoever.
(ii) The Company has an authorized capital stock as set forth in the
Registration Statement and the Prospectus. All of the outstanding shares
of Common Stock, including the Shares to be purchased by the Underwriters
from the Selling Stockholders, are duly and validly authorized and issued,
are fully paid and nonassessable and were not issued and are not now in
violation of or subject to any preemptive rights. The Shares to be
purchased by the Underwriters from the Company have been duly and validly
authorized and, when issued and delivered by
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the Company in accordance with this Agreement, will be duly and validly
issued, fully paid and nonassessable and will not have been issued in
violation of or subject to any preemptive rights. The Common Stock, the
Firm Shares and the Additional Shares conform in all material respects
to the descriptions thereof contained in the Registration Statement and
the Prospectus.
(iii) The Common Stock currently outstanding is quoted, and the
Shares to be sold under this Agreement to the Underwriters are duly
authorized for quotation, on the Nasdaq National Market.
(iv) This Agreement has been duly and validly authorized, executed
and delivered by the Company.
(v) To the best of such counsel's knowledge, there is no litigation
or governmental proceeding or other action, suit, proceeding or
investigation before any court or before or by any public, regulatory or
governmental agency or body pending or threatened against, or involving
the properties or business of, the Company or any of its subsidiaries,
which is of a character required to be disclosed in the Registration
Statement and the Prospectus which has not been properly disclosed
therein.
(vi) The execution, delivery, and performance of this Agreement and
the consummation of the transactions contemplated hereby by the Company do
not and will not (A) conflict with or result in a breach of any of the
terms and provisions of, or constitute a default (or an event which with
notice or lapse of time, or both, would constitute a default) under, or
result in the creation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company or any of its subsidiaries
pursuant to, any agreement, instrument, franchise, license or permit known
to such counsel to which the Company or any of its subsidiaries is a party
or by which any of such corporations or their respective properties or
assets may be bound or (B) violate or conflict with any provision of the
charter, by-laws or other organizational instrument of the Company or any
of its subsidiaries, or, to the best knowledge of such counsel, any
judgment, decree, order, statute, rule or regulation of any court or any
public, governmental or regulatory agency or body having jurisdiction over
the Company or any of its subsidiaries or any of their respective
properties or assets. No consent, approval, authorization, order,
registration, filing, qualification, license or permit of or with any
court or any public, governmental, or regulatory agency or body having
jurisdiction over the Company or any of its subsidiaries or any of their
respective properties or assets is required for the execution, delivery
and performance of this Agreement or the
17
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consummation of the transactions contemplated hereby, except for (1) such
as may be required under state securities or Blue Sky laws in connection
with the purchase and distribution of the Shares by the Underwriters (as
to which such counsel need express no opinion) and (2) such as have been
made or obtained under the Act.
(vii) To the best of such counsel's knowledge, neither the Company
nor any of its subsidiaries is in violation of its charter, by-laws or
other organizational instrument or in default in the performance or
observance of any material obligation, agreement, covenant or condition
contained in any indenture, mortgage, deed of trust, loan agreement, lease
or other agreement or instrument to which it is a party or by which it or
any of its properties may be bound except (other than with respect to
any such charter, by-laws or other organizational document) for such
violations or defaults that would not (a) have a Material Adverse
Effect or (b) impair the Company's ability to perform its obligations
under this Agreement.
(viii) The Registration Statement and the Prospectus and any
amendments thereof or supplements thereto (other than the financial
statements and schedules and other financial data included therein, as to
which no opinion need be rendered) comply as to form in all material
respects with the requirements of the Act and the Regulations.
(ix) The Registration Statement is effective under the Act, and, to
the best knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement or any post-effective
amendment thereof has been issued and no proceedings therefor have been
initiated or threatened by the Commission and all filings required by Rule
424(b) of the Regulations have been made.
(x) The Company is not, and upon consummation of the transactions con
templated hereby will not be, subject to registration as an "investment
company" under the Investment Company Act of 1940.
In addition, such opinion shall also contain a statement that
although such counsel does not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the Registration
Statement or the Prospectus, in the course of the preparation of the
Registration Statement and the Prospectus such counsel has participated in
conferences with officers and representatives of the Company, representatives
of the independent public accountants for the Company and the Underwriters at
which the contents and the Prospectus and related matters were discussed and,
without any independent investigation, check or verification of facts for the
purpose of rendering such opinion, on the basis of such counsel's
participation in such conferences and examination of the Registration
Statement and the Prospectus, no facts have come to the attention of such
counsel which would lead such counsel to believe that either the Registration
Statement at the time it became effective (including the information deemed
to be part of the Registration Statement at the time of effectiveness
pursuant to Rule 430A(b) or Rule 434, if applicable), or any amendment
thereof made prior to the Closing Date as of the date of such amendment,
contained an untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus as of its date (or
any amendment thereof or supplement thereto made prior
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to the Closing Date as of the date of such amendment or supplement) and as of
the Closing Date contained or contains an untrue statement of a material fact or
omitted or omits to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading (it being understood that such counsel need
express no belief or opinion with respect to the financial statements and
schedules and other financial data included therein).
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States and
jurisdictions in which they are admitted, to the extent such counsel deems
proper and to the extent specified in such opinion, if at all, upon an opinion
or opinions (in form and substance reasonably satisfactory to Underwriters'
counsel) of other counsel reasonably acceptable to Underwriters' counsel,
familiar with the applicable laws; and (B) as to matters of fact, to the extent
they deem proper, on certificates of responsible officers of the Company and
certificates or other written statements of officers of departments of various
jurisdictions having custody of documents respecting the corporate existence or
good standing of the Company and its subsidiaries, provided that copies of any
such statements or certificates shall be delivered to Underwriters' Counsel. The
opinion of such counsel for the Company shall state that the opinion of any such
other counsel is in form satisfactory to such counsel and, in their opinion, you
and they are justified in relying thereon. Such opinion may contain such
qualifications, exceptions and limitations that are reasonably satisfactory to
Underwriters' counsel.
(c) At the Closing Date, you shall have received the opinion of
Peabody & Arnold, counsel for the Selling Stockholders, dated the Closing Date,
addressed to Underwriters, and in form and substance satisfactory to
Underwriters' Counsel, to the effect that:
(i) No filing with, or consent, approval, authorization, order,
registration, qualification or decree of, any court or governmental
authority or agency (other than the issuance of the order of the
Commission declaring the Registration Statement effective and such
authorizations, approvals or consents as may be necessary understate
securities laws, as to which such counsel need express no opinion) is
necessary or required by any Selling Stockholder for the performance by
such Selling Stockholder of its obligations under this Agreement or in the
Power of Attorney and Custody Agreement, or in connection with the offer,
sale or delivery of the Shares by such Selling Stockholder under this
Agreement.
(ii) Each Power of Attorney and Custody Agreement has been duly
executed and delivered by each Selling Stockholder and constitutes the
legal, valid and
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binding agreement of such Selling Stockholder. Each Attorney-in-Fact has
been duly authorized by the Selling Stockholders to deliver the Shares on
behalf of the Selling Stockholders in accordance with the terms of this
Agreement.
(iii) The Underwriting Agreement has been duly authorized, executed
and delivered by or on behalf of each Selling Stockholder.
(iv) The execution and delivery of this Agreement and the Power of
Attorney and Custody Agreement and the sale and delivery of the Shares to
be sold by each Selling Stockholder and the consummation by such Selling
Stockholder of the transactions contemplated in this Agreement and
compliance by such Selling Stockholder with its obligations under this
Agreement have been duly authorized by such Selling Stockholder and, to
the best of such counsel's knowledge, do not and will not, whether with
or without the giving of notice or passage of time or both, conflict
with or constitute a breach of, or default under or result in the
creation or imposition of any tax, lien, charge or encumbrance upon the
Shares to be sold by such Selling Stockholder or any property or assets
of such Selling Stockholder pursuant to, any contract, indenture,
mortgage, deed of trust, loan or credit agreement, note, license, lease
or other agreement or instrument to which such Selling Stockholder is a
party or by which such Selling Stockholder is bound, or to which any of
the property or assets of such Selling Stockholder is subject, nor will
such action result in any violation of the provisions of the charter,
by-laws or other organizational instrument of such Selling Stockholder,
if applicable, or, to the best of such counsel's knowledge, any
applicable law, rule, regulation, judgment, order or decree of any
government, governmental instrumentality or court having jurisdiction
over any such Selling Stockholder or any of its properties.
(v) To the best of such counsel's knowledge, each Selling Stockholder
has good and valid title to the Shares to be sold by such Selling
Stockholder pursuant to this Agreement, free and clear of any security
interest, pledge, lien, charge, claim, equity or encumbrance of any kind,
and has the full right, power and authority to sell, transfer and deliver
such Shares pursuant to this Agreement. Upon delivery of such Shares, such
Selling Stockholder will transfer to the Underwriters who have purchased
such Shares pursuant to this Agreement (without notice of any adverse
claim) good and valid title to such Shares, free and clear of any security
interest, pledge, lien, charge, claim, equity or encumbrance of any kind.
Such opinion may contain such qualifications, exceptions and limitations
that are reasonably satisfactory to Underwriters' counsel.
(d) All proceedings taken in connection with the sale of the Firm
Shares and the Additional Shares as herein contemplated shall be satisfactory in
form and substance to you and to Underwriters' Counsel, and the Underwriters
shall have received from said Underwriters' Counsel a favorable opinion, dated
as of the Closing Date with
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respect to the issuance and sale of the Shares, the Registration Statement and
the Prospectus and such other related matters as you may reasonably require, and
the Company and the Selling Stockholders shall have furnished to Underwriters'
Counsel such documents as they request for the purpose of enabling them to pass
upon such matters.
(e) At the Closing Date, you shall have received a certificate of the
Chief Executive Officer and the Vice President, Finance and Administration of
the Company, dated the Closing Date, to the effect that (i) the condition set
forth in subsection (a) of this Section 6 has been satisfied, (ii) as of the
date hereof and as of the Closing Date the representations and warranties of the
Company set forth in Section 1 hereof are accurate, (iii) as of the Closing Date
the obligations of the Company to be performed hereunder on or prior thereto
have been duly performed and (iv) subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus, the
Company and its subsidiaries have not sustained any material loss or
interference with their respective businesses or properties from fire, flood,
hurricane, accident or other calamity, whether or not covered by insurance, or
from any labor dispute or any legal or governmental proceeding, and there has
not been any material adverse change, or any development involving a material
adverse change, in the business prospects, properties, operations, condition
(financial or otherwise), or results of operations of the Company and its
subsidiaries taken as a whole, except in each case as described in or
contemplated by the Prospectus.
(f) At the Closing Date, you shall have received a certificate of an
Attorney-in-Fact on behalf of each Selling Stockholder, dated the Closing Date,
to the effect that (i) as of the date hereof and as of the Closing Date the
representations and warranties of each Selling Stockholder contained in Section
1 hereof are accurate and (ii) as of the Closing Date the obligations of each
Selling Stockholder to be performed hereunder on or prior thereto have been duly
performed.
(g) At the time this Agreement is executed and at the Closing Date,
you shall have received a letter, from Arthur Andersen LLP, independent public
accountants for the Company, dated, respectively, as of the date of this
Agreement and as of the Closing Date addressed to the Underwriters and in form
and substance satisfactory to you, to the effect that: (i) they are independent
certified public accountants with respect to the Company within the meaning of
the Act and the Regulations and stating that the answer to Item 10 of the
Registration Statement is correct insofar as it relates to them; (ii) stating
that, in their opinion, the financial statements and schedules of the Company
included in the Registration Statement and the Prospectus and covered by their
opinion therein comply as to form in all material respects with the applicable
accounting
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requirements of the Act and the applicable published rules and regulations of
the Commission thereunder; (iii) on the basis of procedures consisting of a
reading of the latest available unaudited interim consolidated financial
statements of the Company, and its subsidiaries, a reading of the minutes of
meetings and consents of the share holders and boards of directors of the
Company and its subsidiaries and the committees of such boards subsequent to
September 30, 1997, inquiries of officers and other employees of the Company and
its subsidiaries who have responsibility for financial and accounting matters of
the Company and its subsidiaries with respect to transactions and events
subsequent to September 30, 1997 and other specified procedures and inquiries to
a date not more than five days prior to the date of such letter, nothing has
come to their attention that would cause them to believe that: (A) the unaudited
consolidated financial statements and schedules of the Company presented in the
Registration Statement and the Prospectus do not comply as to form in all
material respects with the applicable accounting requirements of the Act and, if
applicable, the Exchange Act and the applicable published rules and regulations
of the Commission thereunder or that such unaudited consolidated financial
statements are not fairly presented in conformity with generally accepted
accounting principles applied on a basis substantially consistent with that of
the audited consolidated financial statements included in the Registration
Statement and the Prospectus; (B) with respect to the period subsequent to
March 31, 1998 there were, as of the date of the most recent available
monthly consolidated financial statements of the Company and its subsidiaries,
if any, and as of a specified date not more than five days prior to the date of
such letter, any changes in the capital stock or long-term indebtedness of the
Company or any decrease in the net current assets or stockholders' equity of the
Company, in each case as compared with the amounts shown in the most recent
balance sheet presented in the Registration Statement and the Prospectus, except
for changes or decreases which the Registration Statement and the Prospectus
disclose have occurred or may occur or which are set forth in such letter; or
(C) that during the period from March 31, 1998 to the date of the most recent
available monthly consolidated financial statements of the Company and its
subsidiaries, if any, and to a specified date not more than five days prior to
the date of such letter, there was any decrease, as compared with the
corresponding period in the prior fiscal year, in total revenues, or total or
per share net income, except for decreases which the Registration Statement and
the Prospectus disclose have occurred or may occur or which are set forth in
such letter; and (iv) stating that they have compared specific dollar amounts,
numbers of shares, percentages of revenues and earnings, and other financial
information pertaining to the Company and its subsidiaries set forth in the
Registration Statement and the Prospectus, which have been specified by you
prior to the date of this Agreement, to the extent that such amounts, numbers,
percentages, and information may be derived from the general accounting and
financial records of the Company and its subsidiaries
22
<PAGE>
or from schedules furnished by the Company, and excluding any questions
requiring an interpretation by legal counsel, with the results obtained from the
application of specified readings, inquiries, and other appropriate procedures
specified by you set forth in such letter, and found them to be in agreement.
(h) Prior to the Closing Date, the Company and the Selling
Stockholders shall have furnished to you such further information, certificates
and documents as you may reasonably request.
(i) You shall have received from each person who is a director or
officer of the Company and such stockholders as have been heretofore designated
by you and listed on Schedule III hereto an agreement to the effect that such
person will not, directly or indirectly, without the prior written consent of
Bear, Stearns & Co. Inc., offer, sell, offer or agree to sell, grant any option
to purchase or otherwise transfer or dispose (or announce any offer, sale, grant
of an option to purchase or other transfer or disposition) of any shares of
Common Stock (or any securities convertible into, exercisable for or
exchangeable for shares of Common Stock) for a period of 180 days after the date
of the Prospectus.
(j) At the Closing Date, the Shares shall have been approved for
quotation on the Nasdaq National Market.
If any of the conditions specified in this Section 6 shall not have
been fulfilled when and as required by this Agreement, or if any of the
certificates, opinions, written statements or letters furnished to you or to
Underwriters' Counsel pursuant to this Section 6 shall not be in all material
respects reasonably satisfactory in form and substance to you and to
Underwriters' Counsel, all obligations of the Underwriters hereunder may be
canceled by you at, or at any time prior to, the Closing Date and the
obligations of the Underwriters to purchase the Additional Shares may be
canceled by you at, or at any time prior to, the Additional Closing Date. Notice
of such cancellation shall be given to the Company in writing, or by telephone,
telex or telecopy, confirmed in writing.
7. Indemnification.
(a) The Company and the Selling Stockholders, jointly and severally,
agree to indemnify and hold harmless each Underwriter and each person, if any,
who controls any Underwriter within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, against any and all losses, liabilities,
claims, damages and expenses whatsoever as incurred (including but not limited
to attorneys' fees and any and all
23
<PAGE>
expenses whatsoever incurred in investigating, preparing or defending against
any litigation, commenced or threatened, or any claim whatsoever, and any and
all amounts paid in settlement of any claim or litigation), joint or several,
to which they or any of them may become subject under the Act, the Exchange
Act or otherwise, insofar as such losses, liabilities, claims, damages or
expenses (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact contained in
the registration statement for the registration of the Shares, as originally
filed or any amendment thereof, or any related preliminary prospectus or the
Prospectus, or in any supplement thereto or amendment thereof, or arise out
of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, that the Company and
the Selling Stockholders will not be liable in any such case to the extent
but only to the extent that any such loss, liability, claim, damage or
expense arises out of or is based upon any such untrue statement or alleged
untrue statement or omission or alleged omission made therein in reliance
upon and in conformity with written information furnished to the Company by
or on behalf of any Underwriter through you expressly for use therein. The
obligations of the Company and each Selling Stockholder pursuant to this
Section 7(a) are joint and several; provided, however, that each Selling
Stockholder's aggregate liability under this Section 7(a) shall be limited to
an amount equal to the proceeds (net of underwriting discounts and
commissions but before deducting expenses) received by such Selling
Stockholder from the sale of Shares pursuant to this Agreement. This
indemnity agreement will be in addition to any liability which the Company or
any Selling Stockholder may otherwise have, including under this Agreement.
(b) Each of the Selling Stockholders, severally and not jointly,
agrees to indemnify and hold harmless each Underwriter and each person, if
any, who controls any Underwriter within the meaning of Section 15 of the Act
or Section 20(a) of the Exchange Act, against any and all losses,
liabilities, claims, damages and expenses whatsoever as incurred (including
but not limited to attorneys' fees and any and all expenses whatsoever
incurred in investigating, preparing or defending against any litigation,
commenced or threatened, or any claim whatsoever, and any and all amounts
paid in settlement of any claim or litigation), joint or several, to which
they or any of them may become subject under the Act, the Exchange Act or
otherwise, insofar as such losses, liabilities, claims, damages or expenses
(or actions in respect thereof) arise out of or are based upon any breach or
alleged breach by such Selling Stockholder of its representations and
warranties contained in Section 1 hereof; provided, however, that each
Selling Stockholder's aggregate liability under this Section 7(b) shall be
limited to an amount equal to the proceeds (net of underwriting discounts
24
<PAGE>
and commissions but before deducting expenses) received by such Selling
Stockholder from the sale of Shares pursuant to this Agreement.
(c) Each Underwriter severally, and not jointly, agrees to indemnify
and hold harmless the Company, each of the directors of the Company, each of the
officers of the Company who shall have signed the Registration Statement, and
each other person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, against any losses,
liabilities, claims, damages and expenses whatsoever as incurred (including but
not limited to attorneys' fees and any and all expenses whatsoever incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever, and any and all amounts paid in settlement
of any claim or litigation), jointly or several, to which they or any of them
may become subject under the Act, the Exchange Act or otherwise, insofar as such
losses, liabilities, claims, damages or expenses (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of a material fact contained in the registration statement for the registration
of the Shares, as originally filed or any amendment thereof, or any related
preliminary prospectus or the Prospectus, or in any amendment thereof or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that any such loss, liability, claim, damage or
expense arises out of or is based upon any such untrue statement or alleged
untrue statement or omission or alleged omission made therein in reliance upon
and in conformity with written information furnished to the Company by or on
behalf of any Underwriter through you expressly for use therein; provided,
however, that in no case shall any Underwriter be liable or responsible for any
amount in excess of the underwriting discount applicable to the Shares purchased
by such Underwriter hereunder. The Company and the Selling Stockholders
acknowledge that the statements set forth in the last paragraph of the cover
page and in the third, sixth and seventh paragraphs under the caption
"Underwriting" in the Prospectus constitute the only information furnished in
writing by or on behalf of any Underwriter expressly for use in the
registration statement relating to the Shares as originally filed or in any
amendment thereof, any related preliminary prospectus or the Prospectus or in
any amendment thereof or supplement thereto, as the case may be.
(d) Promptly after receipt by an indemnified party under subsection
(a), (b) or (c) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify each party against whom
indemnification is to be sought in writing of the commencement thereof (but the
failure so to notify an indemnifying
25
<PAGE>
party shall not relieve it from any liability which it may have under this
Section 7). In case any such action is brought against any indemnified party,
and it notifies an indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein, and to the extent it
may elect by written notice delivered to the indemnified party promptly after
receiving the aforesaid notice from such indemnified party, to assume the
defense thereof with counsel satisfactory to such indemnified party.
Notwithstanding the foregoing, the indemnified party or parties shall have the
right to employ its or their own counsel in any such case, but the fees and
expenses of such counsel shall be at the expense of such indemnified party or
parties unless (i) the employment of such counsel shall have been authorized in
writing by one of the indemnifying parties in connection with the defense of
such action, (ii) the indemnifying parties shall not have employed counsel to
have charge of the defense of such action within a reasonable time after notice
of commencement of the action, or (iii) such indemnified party or parties shall
have reasonably concluded that there may be defenses available to it or them
which are different from or additional to those available to one or all of the
indemnifying parties (in which case the indemnifying parties shall not have the
right to direct the defense of such action on behalf of the indemnified party or
parties), in any of which events such fees and expenses shall be borne by the
indemnifying parties. Anything in this subsection to the contrary not
withstanding, an indemnifying party shall not be liable for any settlement of
any claim or action effected without its written consent; provided, however,
that such consent was not unreasonably withheld.
8. Contribution. In order to provide for contribution in
circumstances in which the indemnification provided for in Section 7 hereof is
for any reason held to be unavailable from any indemnifying party or is
insufficient to hold harmless a party indemnified thereunder, the Company and
the Selling Stockholders on the one hand and the Underwriters on the other hand
shall contribute to the aggregate losses, claims, damages, liabilities and
expenses of the nature contemplated by such indemnification provision (including
any investigation, legal and other expenses incurred in connection with, and any
amount paid in settlement of, any action, suit or proceeding or any claims
asserted, but after deducting in the case of losses, claims, damages,
liabilities and expenses suffered by the Company any contribution received by
the Company from persons, other than the Underwriters, who may also be liable
for contribution, including persons who control the Company within the meaning
of Section 15 of the Act or Section 20(a) of the Exchange Act, officers of the
Company who signed the Registration Statement and directors of the Company) as
incurred to which the Company, the Selling Stockholders and one or more of the
Underwriters may be subject, in such proportions as is appropriate to reflect
the relative benefits received by the Company and the Selling Stockholders on
the one hand and the Underwriters on the
26
<PAGE>
other hand from the offering of the Shares or, if such allocation is not
permitted by applicable law or indemnification is not available as a result of
the indemnifying party not having received notice as provided in Section 7
hereof, in such proportion as is appropriate to reflect not only the relative
benefits referred to above but also the relative fault of the Company and the
Selling Stockholders on the one hand and the Underwriters on the other hand in
connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative benefits received by the Company and the
Selling Stockholders on the one hand and the Underwriters on the other hand
shall be deemed to be in the same proportion as (x) the total proceeds from the
offering (net of underwriting discounts and commissions but before deducting
expenses) received by the Company and the Selling Stockholders and (y) the
underwriting discounts and commissions received by the Underwriters,
respectively, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault of the Company and the Selling Stockholders on
the one hand and of the Underwriters on the other hand shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or the Selling Stockholders or by
the Underwriters and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company, the Selling Stockholders and the Underwriters agree that it would
not be just and equitable if contribution pursuant to this Section 8 were
determined by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above. Notwithstanding
the provisions of this Section 8, (i) in no case shall any Underwriter be liable
or responsible for any amount in excess of the underwriting discount applicable
to the Shares purchased by such Underwriter hereunder, (ii) in no case shall any
Selling Stockholder be liable or responsible for any amount in excess of the
proceeds (net of underwriting discounts and commissions but before deducting
expenses) received by such Selling Stockholder from the sale of Shares
pursuant to this Agreement, and (iii) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. Notwithstanding the provisions of this Section
8 and the preceding sentence, no Underwriter shall be required to contribute
any amount in excess of the amount by which the total price at which the
Shares underwritten by it and distributed to the public were offered to the
public exceeds the amount of any damages that such Underwriter has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. For purposes of this Section 8, each person, if
any, who controls an Underwriter within the meaning of Section 15 of the
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Act or Section 20(a) of the Exchange Act shall have the same rights to
contribution as such Underwriter, and each person, if any, who controls the
Company or any Selling Stockholder within the meaning of Section 15 of the Act
or Section 20(a) of the Exchange Act, each officer of the Company who shall have
signed the Registration Statement and each director of the Company shall have
the same rights to contribution as the Company or such Selling Stockholder,
subject in each case to clauses (i) and (ii) of this Section 8. Any party
entitled to contribution will, promptly after receipt of notice of commencement
of any action, suit or proceeding against such party in respect of which a claim
for contribution may be made against another party or parties, notify each party
or parties from whom contribution may be sought, but the omission to so notify
such party or parties shall not relieve the party or parties from whom
contribution may be sought from any obligation it or they may have under this
Section 8 or otherwise. No party shall be liable for contribution with respect
to any action or claim settled without its consent; provided, however, that such
consent was not unreasonably withheld.
9. Default by an Underwriter.
(a) If any Underwriter or Underwriters shall default in its or their
obligation to purchase Firm Shares or Additional Shares hereunder, and if the
Firm Shares or Additional Shares with respect to which such default relates do
not (after giving effect to arrangements, if any, made by you pursuant to
subsection (b) below) exceed in the aggregate 10% of the number of Firm Shares
or Additional Shares, the Shares to which the default relates shall be
purchased by the non-defaulting Underwriters in proportion to the respective
proportions which the numbers of Firm Shares set forth opposite their
respective names in Schedule I hereto bear to the aggregate number of Firm
Shares set forth opposite the names of the non-defaulting Underwriters.
(b) In the event that such default relates to more than 10% of the
Firm Shares or Additional Shares, as the case may be, you may in your discretion
arrange for yourself or for another party or parties (including any
non-defaulting Underwriter or Underwriters who so agree) to purchase such Firm
Shares or Additional Shares, as the case may be, to which such default relates
on the terms contained herein. In the event that within 5 calendar days after
such a default you do not arrange for the purchase of the Firm Shares or
Additional Shares, as the case may be, to which such default relates as provided
in this Section 9, this Agreement or, in the case of a default with respect to
the Additional Shares, the obligations of the Underwriters to purchase and of
the Company to sell the Additional Shares shall thereupon terminate, without
liability on the part of the Company or the Selling Stockholders with respect
thereto (except in each case as provided in Section 5, 7(a), 7(b) and 8 hereof)
or the Underwriters, but
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nothing in this Agreement shall relieve a defaulting Underwriter or Underwriters
of its or their liability, if any, to the other Underwriters and the Company or
the Selling Stockholders for damages occasioned by its or their default
hereunder.
(c) In the event that the Firm Shares or Additional Shares to which
the default relates are to be purchased by the non-defaulting Underwriters, or
are to be purchased by another party or parties as aforesaid, either (i) you or
(ii) the Company and the Selling Stockholders shall have the right to postpone
the Closing Date or the Additional Closing Date, as the case may be, for a
period, not exceeding five business days, in order to effect whatever changes
may thereby be made necessary in the Registration Statement or the Prospectus or
in any other documents and arrangements, and the Company agrees to file promptly
any amendment or supplement to the Registration Statement or the Prospectus
which, in the opinion of Underwriters' Counsel, may thereby be made necessary or
advisable. The term "Underwriter" as used in this Agreement shall include any
party substituted under this Section 9 with like effect as if it had originally
been a party to this Agreement with respect to such Firm Shares and Additional
Shares.
10. Default by One or More of the Selling Stockholders or the
Company.
(a) If a Selling Stockholder shall fail at the Closing Date to sell
and deliver the number of Shares which such Selling Stockholder or Selling
Stockholders are obligated to sell hereunder, and the remaining Selling
Stockholders do not exercise the right hereby granted to increase, pro rata or
otherwise, the number of Shares to be sold by them hereunder to the total number
to be sold by all Selling Stockholders as set forth in Schedule II hereto, then
the Underwriters may, at your option, by notice from you to the Company and the
non-defaulting Selling Stockholders, either (i) terminate this Agreement without
any liability on the fault of any non-defaulting party except that the
provisions of Sections 1, 5, 7, 8, 11 and 12(d) shall remain in full force and
effect or (ii) elect to purchase the Shares which the non-defaulting Selling
Stockholders and the Company have agreed to sell hereunder. No action taken
pursuant to this Section 10 shall relieve any Selling Stockholder so defaulting
from liability, if any, in respect of such default.
In the event of a default by any Selling Stockholder as referred to
in this Section 10, each of you, the Company and the non-defaulting Selling
Stockholders shall have the right to postpone the Closing Date for a period not
exceeding seven days in order to effect any required change in the Registration
Statement or Prospectus or in any other documents or arrangements.
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(b) If the Company shall fail at the Closing Date to sell the number
of Shares that it is obligated to sell hereunder, then this Agreement shall
terminate without any liability on the part of any nondefaulting party except
that the provisions of Sections 1, 5, 7, 8, 11 and 12(d) shall remain in full
force and effect. No action taken pursuant to this Section 10 shall relieve the
Company from liability, if any, in respect of such default.
11. Survival of Representations and Agreements. All representations
and warranties, covenants and agreements of the Underwriters, the Company and
the Selling Stockholders contained in this Agreement, including the agreements
contained in Section 5, the indemnity agreements contained in Section 7 and the
contribution agreements contained in Section 8, shall remain operative and in
full force and effect regardless of any investigation made by or on behalf of
any Underwriter or any controlling person thereof, by or on behalf of the
Company, any of its officers and directors or any controlling person thereof or
by or on behalf of any Selling Stockholder, and shall survive delivery of and
payment for the Shares to and by the Underwriters. The representations
contained in Section 1 and the agreements contained in Sections 5, 7, 8 and
12(d) hereof shall survive the termination of this Agreement, including
termination pursuant to Section 9, 10 or 12 hereof.
12. Effective Date of Agreement; Termination.
(a) This Agreement shall become effective, upon the later of when (i)
you and the Company shall have received notification of the effectiveness of the
Registration Statement or (ii) the execution of this Agreement. If either the
initial public offering price or the purchase price per Share has not been
agreed upon prior to 5:00 P.M., New York time, on the fifth full business day
after the Registration Statement shall have become effective, this Agreement
shall thereupon terminate without liability to the Company, the Selling
Stockholders or the Underwriters except as herein expressly provided. Until this
Agreement becomes effective as aforesaid, it may be terminated by the Company by
notifying you or by you notifying the Company. Notwithstanding the foregoing,
the provisions of this Section 12 and of Sections 1, 5, 7 and 8 hereof shall at
all times be in full force and effect.
(b) You shall have the right to terminate this Agreement, by notice
to the Company, at any time prior to the Closing Date or the obligations of the
Underwriters to purchase the Additional Shares at any time prior to the
Additional Closing Date, as the case may be, if (i) any domestic or
international event or act or occurrence has materially disrupted, or in your
opinion will in the immediate future materially disrupt, the market for the
Company's securities or securities in general; or (ii) if trading in any
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securities of the Company has been suspended or materially limited by the
Commission or the Nasdaq National Market, or if trading on the New York or
American Stock Exchanges or on the Nasdaq National Market shall have been
suspended or materially limited, or minimum or maximum prices for trading shall
have been fixed, or maximum ranges for prices for securities shall have been
required, by the New York or American Stock Exchanges or by the Nasdaq National
Market or by order of the Commission, the NASD or any other governmental
authority having jurisdiction; or (iii) if a banking moratorium has been
declared by a state or federal authority or if any new restriction materially
adversely affecting the distribution of the Firm Shares or the Additional
Shares, as the case may be, shall have become effective; or (iv) (a) if the
United States becomes engaged in hostilities or there is an escalation of
hostilities involving the United States or there is a declaration of a national
emergency or war by the United States or (b) if there shall have been such
change in political, financial or economic conditions, if the effect of any such
event in (a) or (b) as in your judgment makes it impracticable or inadvisable to
proceed with the offering, sale and delivery of the Firm Shares or the
Additional Shares, as the case may be, on the terms contemplated by the
Prospectus.
(c) Any notice of termination pursuant to this Section 12 shall be by
telephone, telex, or telecopy, confirmed in writing by letter.
(d) If this Agreement shall be terminated pursuant to any of the
provisions hereof (otherwise than pursuant to (i) notification by you as
provided in Section 12(a) hereof or (ii) Section 9(b) or 12(b) hereof), or if
the sale of the Shares provided for herein is not consummated because any
condition to the obligations of the Underwriters set forth herein is not
satisfied or because of any refusal, inability or failure on the part of the
Company or the Selling Stockholders to perform any agreement herein or comply
with any provision hereof, the Company and the Selling Stockholders will,
subject to demand by you, reimburse the Underwriters for all out-of-pocket
expenses (including the fees and expenses of their counsel), incurred by the
Underwriters in connection herewith.
13. Notices. All communications hereunder, except as may be otherwise
specifically provided herein, shall be in writing and, if sent to any
Underwriter, shall be mailed, delivered, or telexed or telecopied and confirmed
in writing, to such Underwriter c/o Bear, Stearns & Co. Inc., 245 Park Avenue,
New York, N.Y. 10167, Attention: Equity Syndicate; if sent to the Company, shall
be mailed, delivered, or telecopied and confirmed in writing to the Company,
2229 Main Street, Concord, MA, Attention: ____________; and if sent to any
Selling Stockholder, shall be mailed,
31
<PAGE>
delivered, or telecopied and confirmed in writing to such Selling Stockholder
c/o ______________, Attention: ______________.
14. Parties. This Agreement shall insure solely to the benefit of,
and shall be binding upon, the Underwriters, the Company and the Selling
Stockholders and the controlling persons, directors, officers, employees and
agents referred to in Section 7 and 8, and their respective successors and
assigns, and no other person shall have or be construed to have any legal or
equitable right, remedy or claim under or in respect of or by virtue of this
Agreement or any provision herein contained. The term "successors and assigns"
shall not include a purchaser, in its capacity as such, of Shares from any of
the Underwriters.
15. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York, but without regard to
principles of conflicts of law.
32
<PAGE>
If the foregoing correctly sets forth the understanding between you,
the Company and the Selling Stockholders, please so indicate in the space
provided below for that purpose, whereupon this letter shall constitute a
binding agreement among us.
Very truly yours,
STARMET CORPORATION
By ________________________
[Attorney-in-Fact]
By
As Attorney-in-Fact acting on behalf of
the Selling Stockholders named in
Schedule II hereto
Accepted as of the date first above written
BEAR, STEARNS & CO. INC.
FURMAN SELZ LLC
By
On behalf of themselves and the other
Underwriters named in Schedule I hereto.
33
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Number of Firm
Name of Underwriter Shares-to-be-Purchased
- ------------------------------------------------------------------------
<S> <C>
Bear, Stearns & Co. Inc.
Furman Selz LLC
Total...............
</TABLE>
<PAGE>
SCHEDULE II
<TABLE>
<CAPTION>
Maximum Number
Number of Firm Shares of Additional Shares
to be Sold to be Sold
---------------------- --------------------
<S> <C> <C>
Starmet Corporation
Wiaf Investors Co.
Melvin B. Chrein
Meryl J. Chrein
George J. Matthews
Wilson B. Tuffin
Eleanor Donelan
Total.................................................
</TABLE>
2
<PAGE>
SCHEDULE III
[Names of stockholders subject to the lock-up provision]
<PAGE>
Exhibit 5(a)
June 11, 1998
Starmet Corporation
2229 Main Street
Concord, MA 01742
Re: Registration Statement on Form S-1 (Registration No. 333-49629)
---------------------------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to Starmet Corporation, a Massachusetts
corporation (the "Company"), in connection with the preparation and filing
with the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Securities Act"), of a Registration
Statement on Form S-1 (Registration No. 333-49629) (the "Registration
Statement"), relating to (i) 2,250,000 shares of the Company's common stock,
$.10 par value per share (the "Common Stock"), being offered by the Company,
and an additional 450,000 shares solely to cover over-allotments and
(ii) 750,000 shares of Common Stock being offered by certain stockholders of
the Company (collectively, the "Shares").
In so acting, we have examined and relied upon the originals, or copies
certified or otherwise identified to our satisfaction, of such records,
documents, certificates and other instruments as in our judgment are
necessary or appropriate to enable us to render the opinion expressed below.
Based upon the foregoing, we are of the opinion that, upon issuance and
delivery of the Shares and payment therefor in the manner described in the
Registration Statement and in accordance with the terms of the underwriting
agreement (the form of which is being filed as Exhibit 1(a) to the
Registration Statement), the Shares will be duly authorized, validly issued
and outstanding, and fully paid and non-assessable.
Our opinion expressed above is limited to the laws of the Commonwealth of
Massachusetts and the Federal laws of the United States of America.
<PAGE>
Starmet Corporation
June 11, 1998
Page 2
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the use of our name under the caption "LEGAL
MATTERS" in the Registration Statement and any amendments thereto. In giving
such consent, we do not thereby concede that we are within the category of
persons whose consent is required under Section 7 of the Securities Act or
the Rules and Regulations of the Commission promulgated thereunder.
Very truly yours,
/S/ Peabody & Arnold LLP
-------------------------
Peabody & Arnold LLP
<PAGE>
Exhibit 10.YY
------------------------------------------------------------
LOAN AGREEMENT
Dated as of May 28, 1998
AMONG
STARMET CORPORATION
STARMET POWDERS, LLC
STARMET AEROCAST, LLC
STARMET COMMERCIAL CASTINGS, LLC
STARMET NMI CORPORATION
STARMET CMI CORPORATION
STARMET HOLDINGS CORPORATION
NMI FOREIGN SALES CORPORATION
AND
STATE STREET BANK AND TRUST COMPANY
-------------------------------------------------------------
<PAGE>
LOAN AGREEMENT
THIS LOAN AGREEMENT is made as of May 28, 1998, among STARMET
CORPORATION, a Massachusetts corporation, STARMET POWDERS, LLC, a Delaware
limited liability company, STARMET AEROCAST, LLC, a Delaware limited liability
company, STARMET COMMERCIAL CASTINGS, LLC, a Delaware limited liability company,
STARMET NMI CORPORATION, a Delaware corporation, STARMET HOLDINGS CORPORATION, a
Massachusetts corporation, and NMI FOREIGN SALES CORPORATION, a U.S. Virgin
Islands corporation, each having its principal place of business and chief
executive office at 2229 Main Street, Concord, Massachusetts 01742, and STARMET
CMI CORPORATION, a Delaware corporation having its principal place of business
and chief executive office at Highway 80, Barnwell, South Carolina 29812,
(individually, a "Borrower" and collectively, the "Borrowers"), and STATE STREET
BANK AND TRUST COMPANY (the "Lender"), a Massachusetts trust company with its
head office at 225 Franklin Street, Boston, Massachusetts 02110.
SECTION 1. DEFINITIONS.
1.1 Definitions. As used herein, the following terms shall have the
following meanings:
"Affiliate" means, with reference to any person, (including an
individual, a corporation, a partnership, a trust, any trade or business and any
governmental agency or instrumentality), (i) any director, officer or employee
of that person, (ii) any other person controlling, controlled by or under direct
or indirect common control of that person, (iii) any other person directly or
indirectly holding 10% or more of any class of the capital stock or other equity
interests (including options, warrants, convertible securities and similar
rights) of that person and (iv) any other person with respect to which such
person holds, directly or indirectly, 10% or more of any class of capital stock
or other equity interests (including options, warrants, convertible securities
and similar rights). For purposes of Section 5.1(v) hereof, "Affiliate" means,
within the meaning of Section 414 of the Code, (i) any member of a controlled
group of corporations which includes a Borrower, (ii) any trade or business,
whether or not incorporated, under common control with the Borrower, (iii) any
member of an affiliated service group which includes a Borrower, and (iv) any
member of a group treated as a single employer by regulation.
"Agreement" means this Loan Agreement, including the Exhibits hereto,
as originally executed, or if this Agreement is amended, varied or supplemented
from time to time, as so amended, varied or supplemented.
"Business Day" means any day on which the head office of the Lender is
open for transactions of all of its normal and customary business, and with
respect to Libor Loans, any day which is also a day for trading by and between
banks in United States dollar deposits in the London interbank market in which
the Lender customarily participates.
1
<PAGE>
"Closing Date" means the first date on which all of the conditions set
forth in Section 4 have been satisfied and any Loans are to be made hereunder.
"Code" means the Internal Revenue Code of 1986 and the rules and
regulations thereunder, as amended.
"Consolidated" shall have the meaning ascribed to it under GAAP.
"Default" means an event or condition that, but for the requirement
that time elapse or notice be given, or both, would constitute an Event of
Default.
"EBIT" means in relation to the Borrowers for any period, an amount
equal to Net Income determined in accordance with GAAP (with inventory being
determined on a "first-in, first-out" basis) for such period, plus the following
to the extent deducted in computing such Net Income for such period: (i)
Interest Charges for such period, and (ii) taxes on income for such period.
"Encumbrances" shall have the meaning set forth in Section 5.6.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and the rules and regulations thereunder.
"Event of Default" shall have the meaning set forth in Section 6.1.
"GAAP" means generally accepted accounting principles consistently
applied.
"Indebtedness" with respect to any person means and includes, without
duplication, (i) all items which, in accordance with GAAP, would be included as
a liability on the balance sheet of such person, (ii) the face amount of all
banker's acceptances and of all letters of credit issued by any bank for the
account of such person and all drafts drawn thereunder, (iii) the total amount
of all indebtedness secured by any Encumbrance to which any property or asset of
such person is subject, whether or not the indebtedness secured thereby shall
have been assumed, and (iv) the total amount of all indebtedness and obligations
of others which such person has directly or indirectly guaranteed, endorsed
(otherwise than for collection or deposit in the ordinary course of business),
discounted with recourse or agreed (contingently or otherwise) to purchase or
repurchase or otherwise acquire, including, without limitation, any agreement to
advance or supply funds to such other person to maintain working capital, equity
capital, net worth or solvency.
"Initial Financial Statement" shall have the meaning set forth in
Section 3.5.
"Insolvent" or "Insolvency" means that there shall have occurred one or
more of the following events with respect to a person: death; dissolution;
liquidation; termination
2
<PAGE>
of existence; "insolvent" or "insolvency" within the meaning of the United
States Bankruptcy Code or other applicable statute; such person's inability to
pay its debts as they come due or failure to have adequate capital to conduct
its business; such person's failure to have assets having a fair saleable value
net of any cost to dispose of such assets in excess of the amount required to
pay the probable liability on its then existing debts (including unmatured,
unliquidated and contingent debts); appointment of a receiver of any part of the
property of, execution of a trust mortgage or an assignment for the benefit of
creditors by, or the filing of a petition in bankruptcy or the commencement of
any proceedings under any bankruptcy or insolvency laws or any laws relating to
the relief of debtors, readjustment of indebtedness or reorganization of debtors
by or against such person, or the offering of a plan to creditors of such person
for composition or extension, except for an involuntary proceeding commenced
against such person which is dismissed within 60 days after the commencement
thereof without the entry of an order for relief or the appointment of a
trustee.
"Interest Expense" means, for any period, interest expense as presented
on the Borrowers' Consolidated financial statements delivered pursuant to
Section 5.1, all amortization of debt discount and deferred debt expense and
other non-cash interest charges, all as determined in accordance with GAAP.
"Interest Period" means, as to any Libor Loan, the period, the
commencement and duration of which shall be determined in accordance with
Section 2.4.1, provided that if any such Interest Period would otherwise end on
a day which is not a Business Day for Libor Rate purposes, such Interest Period
shall end on the Business Day next preceding or next succeeding such day as
determined by the Lender in accordance with its usual practices and notified to
the Borrowers at the beginning of such Interest Period.
"Letters of Credit" means letters of credit in the form customarily
issued by the Lender as standby letters of credit, issued by the Lender at the
request and for the account of the Borrowers.
"Libor Loan Rate" means an annual rate of interest for an Interest
Period equal to the Libor Rate in effect on the first day of such Interest
Period plus the fixed rate spread set forth below which is applicable to the
Borrowers on the day of any Notice of Borrowing or Conversion (based upon the
Borrowers' Consolidated Net Income for the fiscal quarter immediately preceding
such Interest Period, as evidenced by the financial statements required to be
delivered by the Borrowers pursuant to Section 5.1(ii)):
<TABLE>
<CAPTION>
Libor Loan
Quarterly Net Income Fixed Rate Spread
------------------------ -----------------
<S> <C>
less than or equal to $0 2.50%
less than or equal to
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
$250,000 but greater than $0 2.00%
less than or equal to
$500,000 but greater than
$250,000 1.75%
less than or equal to
$750,000 but greater than
$500,000 1.50%
greater than $750,000 1.25%
</TABLE>
"Libor Loans" means, in relation to any Interest Period, any portion of
the principal amount of any Revolving Loans on which the Borrowers elect
pursuant to Section 2.4 to pay interest at a rate determined by reference to the
Libor Rate.
"Libor Rate" means, with respect to any Interest Period, in the case of
any Libor Loan, the annual rate of interest determined by the Lender, at or
before 10:00 a.m. (Boston time) (or as soon thereafter as practicable) on the
second Business Day prior to the first day of such Interest Period, to be the
annual rate of interest at which deposits of U.S. dollars are offered to the
Lender by prime banks in whatever London interbank market may be selected by the
Lender in its sole discretion, acting in good faith, at or about the time of
determination and in accordance with the usual practice in such market for
delivery on the first day of such Interest Period in immediately available funds
and having a maturity equal to such Interest Period in an amount equal (as
nearly as may be) to the amount of such Libor Loan. Each such determination by
the Lender shall be conclusive.
"Loan" means a loan made to the Borrowers by the Lender pursuant to
Section 2 hereof, and "Loans" means all of such loans, collectively.
"Loan Documents" means, collectively, this Agreement (including,
without limitation, the agreements and other instruments listed or described in
the Closing Checklist attached hereto as Exhibit E), the Note, the Letters of
Credit (and all letter of credit applications relating thereto) and any other
agreements, instruments or documents referred to herein or therein and/or
delivered in connection herewith, and all schedules, exhibits and annexes
thereto.
"Maturity Date" means February 28, 2000.
"Net Income" means the pre-tax income from continuing operations as
presented on the Borrowers' Consolidated statement of operations delivered
pursuant to Section 5.1, as determined for the period in question in accordance
with GAAP, but in any event
4
<PAGE>
without giving effect to any non-cash stock compensation charges and excluding
from Net Income (without duplication): (i) any gain or loss, amortization or
deduction arising from any write-up of assets or any subsequent amortization to
the extent of such write-up, except to the extent inclusion thereof shall be
approved in writing by the Lender; (ii) earnings or loss of any Subsidiary
accrued prior to the date it became a Subsidiary; (iii) the net earnings of any
business entity (other than a Subsidiary) in which a Borrower or any of its
Subsidiaries has an ownership interest, except to the extent such net earnings
shall have actually been received by such Borrower or such Subsidiaries in the
form of cash distributions; (iv) any gains or losses on the sale or other
disposition of fixed or capital assets; and (v) the proceeds of any life
insurance policy.
"Net Proceeds" means, with respect to the Offering, cash proceeds
received by Starmet Corporation after payment of any reasonable underwriting
commissions and reasonable expenses.
"Note" means the Revolving Credit Note.
"Notice of Borrowing, Continuation or Conversion" shall have the
meaning set forth in Section 2.4.1.
"Obligations" means any and all obligations of the Borrowers to the
Lender of every kind and description, direct or indirect, absolute or
contingent, primary or secondary, due or to become due, now existing or
hereafter arising, regardless of how they arise or by what agreement or
instrument they may be evidenced or whether evidenced by any agreement or
instrument, and includes obligations to perform acts and to refrain from acting
as well as obligations to pay money.
"Offering" means the offering of equity securities made pursuant to the
Offering Prospectus.
"Offering Prospectus" means the registration statement on Form S-1 with
respect to the Offering of shares of the common stock of Starmet Corporation as
originally filed on April 8, 1998 with the SEC and subsequently amended.
"Permitted Acquisition". An acquisition by a Borrower which meets all
of the following criteria:
(i) is an acquisition of all or some of the capital stock or
assets of a Person engaged in a substantially similar or
complementary business as that in which the Borrowers are
engaged on the Closing Date or a reasonable expansion or
extension thereof;
(ii) the properties and assets acquired by such Borrower in
connection with such acquisition shall be free from all liens,
charges and encumbrances whatsoever, except Encumbrances
permitted under Section 5.5;
5
<PAGE>
(iii) no Indebtedness shall be assumed by such Borrower in
connection with such acquisition, except Indebtedness
permitted under Section 5.5;
(iv) immediately prior to, and after giving effect to such
acquisition, no Default or Event of Default shall exist; and
(v) prior to such acquisition, the Lender shall have received
computations from the Borrowers (based upon a compliance
certificate in the form of Exhibit D hereto) showing pro forma
compliance with the financial covenants set forth in Sections
5.18 through 5.21, inclusive, as of the date of, and after
giving effect to, such acquisition.
"Person" or "person" means any individual, corporation, limited
liability company, partnership, limited liability partnership, trust, trade,
business and governmental agency and instrumentality.
"Plans" means, collectively, each "employee pension benefit plan" and
each "employee welfare benefit plan" (each as defined in ERISA) maintained by a
Borrower.
"Prime Rate" means the annual rate of interest announced by the Lender
from time to time, at the principal office of the Lender, as its prime rate.
"Prime Rate Loans" means any Revolving Loans (or any portion thereof)
as to which the interest rate is the Prime Rate.
"Restricted Payments" means (i) any cash or property dividend,
distribution, or other payment, direct or indirect, to any Person who now or in
the future may hold an equity interest in a Borrower, whether evidenced by a
security or not; and (ii) any payment on account of the purchase, redemption,
retirement or other acquisition of any capital stock of a Borrower, or any other
payment or distribution made in respect thereof, either directly or indirectly
(though excluding any stock options granted to officers, employees or
directors).
"Revolving Credit Maximum Amount" means $10,000,000.
"Revolving Credit Note" shall have the meaning set forth in
Section 2.1.1.
"Revolving Loan" shall have the meaning set forth in Section 2.1.1.
"Revolving Loan Account" means the account on the books of the Lender
in which will be recorded Revolving Loans made by the Lender to the Borrowers
pursuant to this Agreement, payments made on such Revolving Loans and other
appropriate debits and credits as provided by this Agreement.
6
<PAGE>
"Stated Amount" means, with respect to each Letter of Credit
outstanding at any given time, the maximum amount then available to be drawn
thereunder (without regard to whether any conditions to drawing could then be
met).
"Subsidiary" means any corporation, association, joint stock company,
business trust or other similar organization of which 50% or more of the
ordinary voting power for the election of a majority of the members of the board
of directors or other governing body of such entity is held or controlled by a
Borrower or a Subsidiary of a Borrower; or any other such organization the
management of which is directly or indirectly controlled by a Borrower or a
Subsidiary of a Borrower through the exercise of voting power or otherwise; or
any joint venture, whether incorporated or not, in which a Borrower has a 50%
ownership interest or any other entity which would be consolidated with the
Borrower in presenting its financial statements in accordance with GAAP.
"Tangible Net Worth" means the amount which is equal to the
Consolidated net worth of the Borrowers computed in accordance with GAAP and
with inventory and cost of goods sold determined on a "first in, first out"
basis, and minus (i) the book value, net of applicable reserves, of all
intangible assets of the Borrowers, including, without limitation, goodwill,
trademarks, trade names, copyrights, patents and any similar rights and deferred
debt expense, (ii) intercompany accounts with Affiliates (including receivables
due from Affiliates), unless existing on the date of the Initial Financial
Statement, or created thereafter in the ordinary course of business, consistent
with past practices, and (iii) to the extent not otherwise approved in advance
by Lender, any write up in the book value of any asset of a Borrower resulting
from revaluation thereof after the date of the Initial Financial Statement.
"Taxes" means, any and all taxes (including, without limitation,
income, receipts, franchise, ad valorem or excise taxes, transfer or gains taxes
or fees, use taxes, withholding, payroll or minimum taxes) imposed on, or
otherwise payable by, or for which responsibility for payment, withholding or
collection lies with, a Borrower by any governmental authority, federal, state
or otherwise, including any taxes imposed on any of a Borrower's Subsidiaries or
other Affiliates for which a Borrower may be liable under applicable law or by
agreement to which a Borrower is a party or by which it is bound or subject to,
and including, but not limited to, any interest, penalties or additions to tax
with respect thereto.
"Total Liabilities" means, at any date as of which the amount thereof
shall be determined, all obligations of the Borrowers that should, as determined
in accordance with GAAP, be classified as liabilities on the Consolidated
balance sheet of the Borrowers.
"Unused Commitment" for any period of time means the difference for
each day during such period between the Revolving Credit Maximum Amount in
effect and the sum of the principal amount of Revolving Loans actually
outstanding hereunder and the Stated Amount of all outstanding Letters of
Credit.
7
<PAGE>
"Year 2000 Problem" means any significant risk that computer hardware
or software used in the business or operations of any Borrower will not, in the
case of dates or time periods occurring after December 31, 1999, function at
least as effectively as in the case of dates or time periods occurring prior to
January 1, 2000.
SECTION 2. REVOLVING LOANS.
2.1 Revolving Loans.
2.1.1 Upon the terms and subject to the conditions of this
Agreement, and in reliance upon the representations, warranties and covenants of
the Borrowers made herein, the Lender agrees to make loans ("Revolving Loans")
to the Borrowers at the Borrowers' request from time to time, from and after the
date hereof and prior to the Maturity Date, provided that the principal amount
of Revolving Loans outstanding at any time, plus the aggregate Stated Amount of
Letters of Credit outstanding at such time, plus the aggregate amount of any
unreimbursed draws under outstanding Letters of Credit, shall not exceed the
Revolving Credit Maximum Amount, and provided, further, that at the time the
Borrowers request a Revolving Loan and after giving effect to the making thereof
there has not occurred and is not continuing any Default or Event of Default.
The Borrowers agree that it shall be an Event of Default hereunder if at any
time the debit balance of the Revolving Loan Account, plus the aggregate Stated
Amount of Letters of Credit outstanding at any time, plus the aggregate amount
of unreimbursed draws under outstanding Letters of Credit at such time, shall
exceed the Revolving Credit Maximum Amount unless the Borrowers shall, upon
notice of such excess from the Lender, promptly pay cash to the Lender to be
credited to the Revolving Loan Account in such amount as shall be necessary to
eliminate the excess. Each Revolving Loan shall be in a minimum amount of
$100,000 or an integral multiple thereof. The Revolving Loans shall be evidenced
by a Revolving Credit Note (the "Note") in the form of Exhibit A hereto.
2.1.2 Subject to the provisions of Section 2.5, the Borrowers
may prepay outstanding Revolving Loans and the Note in whole or in part at any
time without premium or penalty. Amounts so paid in respect of the Revolving
Loans and the Note and other amounts may be borrowed and reborrowed from time to
time as provided in Section 2.1.1. On the Revolving Credit Maturity Date, the
Borrowers shall repay all outstanding Revolving Loans and the Note, together
with all unpaid interest thereon and all fees and other amounts due hereunder.
2.2. Letters of Credit. Upon the terms and subject to the
conditions of this Agreement, and in reliance upon the representations,
warranties and covenants of the Borrowers made herein, the Lender agrees to
issue, to the extent permitted by law and the Uniform Customs Practices of the
International Chamber of Commerce governing Letters of Credit (Publication No.
500 or any successor thereto), Letters of Credit upon the
8
<PAGE>
application of the Borrowers during the period from the date hereof to the
Maturity Date; provided that the aggregate Stated Amount of Letters of Credit
outstanding at any time, plus the aggregate amount of all unreimbursed draws
under such outstanding Letters of Credit, shall not at any time (i) exceed
$4,000,000, or (ii) cause the principal amount of Revolving Loans outstanding at
such time (after taking into account such Stated Amount and all such
unreimbursed draws) to exceed the Revolving Credit Maximum Amount; and provided,
further, that at the time the Borrowers request the issuance of a Letter of
Credit and after giving effect to the issuance thereof, there has not occurred
and is not continuing any Default or Event of Default. All Letters of Credit
shall expire not later than the date which is one (1) month prior to the
Maturity Date. Amounts drawn under the Letters of Credit shall become
immediately due and payable by the Borrowers to the Lender and shall bear
interest at the rate then applicable to Revolving Loans unless, to the extent
there is availability under the Revolving Credit Maximum Amount, such amounts
shall be added to the Revolving Loan Account as Revolving Loans and shall be
immediately due and payable upon the maturity of the Revolving Credit Note.
Without limiting the foregoing, if any Letter of Credit would by its terms
expire after the Maturity Date, the Borrowers shall, on the Maturity Date, cause
another letter of credit issued by another bank satisfactory to the Lender to be
substituted therefor or cause another bank satisfactory to the Lender to
indemnify the Lender to its satisfaction against any and all liabilities and
obligations in respect to such Letter of Credit and, in such event, this
Agreement and the other Loan Documents shall continue in full force and effect
until all of the Obligations under any such Letters of Credit have been paid in
full to the Lender. In order to evidence such Letters of Credit, the Borrowers
shall enter into, with the Lender, such agreements and execute such instruments
and documents as the Lender customarily requires in like transactions.
2.3 Interest and Fees.
2.3.1 Interest on any Revolving Loans shall be calculated and
due and payable based upon the following interest rate alternatives:
(i) In the absence of any election by the Borrowers under clause
(ii) below, either initially with respect to any Revolving
Loan or at the expiration of the applicable Interest Period
under such clause (ii) below, such Revolving Loans shall bear
interest at a rate per annum equal to the Prime Rate in effect
from time to time, with interest thereon being payable monthly
in arrears on the last Business Day of each month. Any change
in the Prime Rate shall result in a change on the same day in
the rate of interest to accrue from and after such day on the
unpaid balance of principal of the Revolving Loans bearing
interest with reference to the Prime Rate.
(ii) In the manner and subject to the provisions set forth in
Sections 2.1, 2.4 and 2.5, so long as no Default or Event of
Default has occurred and is then continuing, the Borrowers may
elect from time to time prior to the Maturity Date to have all
or a portion of the unpaid principal amount of
9
<PAGE>
any Revolving Loan bear interest during any particular
Interest Period applicable to Libor Loans at the Libor Loan
Rate and be treated as a Libor Loan, with interest, in all
cases, being due and payable on the last day of the applicable
Interest Period relating to such Libor Loan (but in any event,
no less frequently than quarterly), provided, that any such
portion of any Loan shall be in an amount not less than
$100,000 or an integral multiple thereof.
The rates of interest set forth above shall apply before an Event of Default.
After an Event of Default pursuant to Section 6 of this Agreement, interest
shall accrue on the balance hereof at Lender's sole discretion at a rate equal
to four percent (4%) per annum above the highest rate that would otherwise apply
to amounts outstanding hereunder.
2.3.2 The Borrowers shall pay to the Lender a commitment fee,
payable quarterly in arrears on the last Business Day of each quarter, equal in
the aggregate to one-quarter of one percent (0.25%) per annum of the Unused
Commitment during the preceding quarter.
2.3.3 The Borrowers authorize the Lender to charge to the
Revolving Loan Account or to any deposit account which the Borrowers may
maintain with the Lender the principal, interest, fees, charges, taxes and
expenses provided for in this Agreement or any other document executed or
delivered in connection herewith.
2.3.4 If, after the date hereof, the Lender shall have
determined that the adoption of any applicable law, rule, regulation, guideline,
directive or request (whether or not having the force of law) regarding capital
requirements for banks or bank holding companies, or any change therein, or any
change in the interpretation or administration thereof by any governmental
authority, central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by the Lender with any of the foregoing
imposes or increases a requirement by the Lender to allocate capital resources
to the Lender's commitment to make Revolving Loans or issue Letters of Credit
which has or would have the effect of reducing the return on the Lender's
capital to a level below that which the Lender could have achieved (taking into
consideration the Lender's then existing policies with respect to capital
adequacy and assuming full utilization of the Lender's capital) but for such
adoption, change or compliance by any amount deemed by the Lender to be
material, then: (i) the Lender shall promptly after its determination of such
occurrence give notice thereof to the Borrowers; and (ii) to the extent that the
costs of such increased capital requirements are not reflected in the Prime
Rate, the Borrowers and the Lender shall thereafter attempt to negotiate in good
faith, within 30 days following the date the Borrowers receive such notice, an
adjustment payable hereunder that will adequately compensate the Lender in light
of the circumstances. If the Lender and the Borrowers are unable to agree to
such adjustment within 30 days following the date upon which the Borrowers
receive such notice, then commencing on the date of such notice (but no earlier
than the effective date of any such increased capital requirement), the fees
payable hereunder shall increase by an amount that will, in the Lender's
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reasonable determination, provide adequate compensation. The provisions of this
Section 2.3.5 shall be applied to the Borrowers so as not to discriminate
against the Borrowers vis-a-vis other customers of the Lender.
2.3.5 Anything hereinbefore to the contrary notwithstanding,
if any present or future applicable law (which expression, as used in this
Agreement, includes statutes and rules and regulations thereunder and
interpretations thereof by any competent court or by any governmental or other
regulatory body or official charged with the administration or the
interpretation thereof and requests, directives, instructions and notices at any
time or from time to time heretofore or hereafter made upon or otherwise issued
to the Lender by any central bank or other fiscal, monetary or other authority,
whether or not having the force of law) shall (i) subject the Lender to any tax,
levy, impost, duty, charge, fee, deduction or withholding of any nature with
respect to this Agreement, the maximum amount of the Revolving Loans or Letters
of Credit or the payment to the Lender of any amounts due to it hereunder, or
(ii) materially change the basis of taxation of payments to the Lender of the
principal or the interest on or any other amounts payable to the Lender
hereunder, or (iii) impose or increase or render applicable any special or
supplemental special deposit or reserve or similar requirements or assessment
against assets held by, or deposits in or for the account of, or any liabilities
of, or loans by an office of the Lender in respect of the transactions
contemplated herein, or (iv) impose on the Lender any other conditions or
requirements with respect to this Agreement, the Revolving Credit Maximum
Amount, the Letters of Credit or any Revolving Loan, and the result of any of
the foregoing is (A) to increase the cost to the Lender of making, funding or
maintaining all or any part of the Revolving Loans or the Letters of Credit, or
(B) to reduce the amount of principal, interest or other amount payable to the
Lender hereunder, or (C) to require the Lender to make any payment or to forego
any interest or other sum payable hereunder, the amount of which payment or
foregoing interest or other sum is calculated by reference to the gross amount
of any sum receivable or deemed received by the Lender from the Borrowers
hereunder, then, and in each such case not otherwise provided for hereunder, the
Borrowers will, upon demand made by the Lender accompanied by calculations
thereof in reasonable detail, pay to the Lender such additional amounts as will
be sufficient to compensate the Lender for such additional cost, reduction,
payment or foregoing interest or other sum, provided that the foregoing
provisions of this sentence shall not apply in the case of any additional cost,
reduction, payment or foregoing interest or other sum resulting from any taxes
charged upon or by reference to the overall net income, profits or gains of the
Lender.
2.4 Loan Requests.
2.4.1 All requests under this Agreement for Revolving Loans or
for a conversion of the interest rate applicable to any Revolving Loan (or
portion thereof) under Section 2.3 above to a rate of a different type or for a
continuation of a Revolving Loan (or a portion thereof) at an interest rate of
the same type for an additional Interest Period, shall be made by the Borrowers
in writing (or by telephone and then promptly confirmed in writing) (each such
request to be irrevocable), substantially in the form
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attached hereto as Exhibit C (each a "Notice of Borrowing, Continuation or
Conversion"), specifying (a) the amount of the requested advance or portion of
outstanding principal into which the type of interest rate requested is to be
converted or continued, (b) the requested borrowing or interest rate conversion
or continuation date, (c) whether the requested advance or affected principal
portion is to be treated as a Libor Loan, and (d) if the requested advance or
affected principal portion is to be in whole or in part a Libor Loan, the length
of the requested Interest Period for such advance or principal portion as
applicable (which must be, in the case of Libor Loans and subject to
availability, for one, two, three or six months), provided, however, that no
Interest Period shall extend beyond the Maturity Date.
2.4.2 Each Notice of Borrowing, Continuation or Conversion
must be delivered to an officer of the Lender no later than 11:00 a.m. Boston
time, (a) 2 Business Days prior to the requested advance, continuation or
conversion date, in the case of Libor Loans, or (b) on the requested advance,
continuation or conversion date, in the case of Prime Rate Loans. If the
Borrower does not request that an existing Libor Loan be maintained as a Libor
Loan at least 2 Business Days prior to the end of the Interest Period applicable
to such Loan, in accordance with the procedure set forth herein, then the
Borrowers shall be deemed to have requested that such Loan be converted into a
Prime Rate Loan.
2.5 Libor Loan Provisions.
2.5.1 The Lender shall promptly notify the Borrowers upon
determining any Libor Rate. Each such notice shall be conclusive and binding
upon the Borrowers. If, with respect to any Interest Period, the Lender is
unable to determine the Libor Rate relating thereto, or adverse or unusual
conditions in or changes in applicable law relating to the London interbank
market make it illegal or, in the reasonable judgment of the Lender,
impracticable, to fund therein the amount of the requested Libor Loan or make
the projected Libor Rate unreflective of the actual costs of funds therefor to
the Lender, or if it shall become unlawful for the Lender to charge interest on
the Loans on a Libor Rate basis, then in any of the foregoing events the Lender
shall so notify the Borrowers and interest will be calculated and payable in
respect of such projected Interest Period (and thereafter for so long as the
conditions referred to in this sentence shall continue) by reference to the
Prime Rate in accordance with Section 2.3.1(i).
2.5.2 In the event the Lender shall incur any loss, cost or
expense as a result of:
(i) any payment, prepayment of or election to change the interest
rate applicable to any principal of a Libor Loan on a date
other than the last day of any Interest Period applicable
thereto, or
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(ii) any failure by the Borrowers to borrow or convert into any
Libor Loan on the date or in the amount specified in a Notice
of Borrowing, Continuation or Conversion, or
(iii) any increase in the cost to the Lender of making Libor Loans
(including without limitation costs associated with increases
in taxes, with reserves required by law or regulation, or with
any other governmental assessments, in connection with Libor
Loans),
then in any such event the Borrowers shall pay to the Lender such amount or
amounts as shall be sufficient (in the reasonable opinion of the Lender) to
compensate the Lender fully for such loss, cost or expense, such compensation to
include, without limitation, an amount equal to the excess, if any, of (a) the
amount of interest that would have accrued on the principal amount so paid,
prepaid or converted or not borrowed for the period from the date of such
payment, prepayment or conversion to the last day of the Interest Period for
such Revolving Loan or, in the case of a failure to borrow, for the entire
Interest Period for such Revolving Loan, commencing on the date of such failure
to borrow, at the applicable rate of interest for such Revolving Loan provided
for herein, over (b) the amount of interest (as reasonably determined by the
Lender) the Lender would have been offered in the London interbank market for
dollar deposits of amounts comparable to such principal amount at a maturity
comparable to said period.
SECTION 3. REPRESENTATIONS AND WARRANTIES.
The Borrowers hereby jointly and severally represent, warrant and
covenant as follows:
3.1 Organization and Qualification. Each Borrower (i) is a corporation
or limited liability company duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or formation as
indicated on Exhibit B hereto; (ii) has all requisite corporate or limited
liability company (as applicable) power and authority to own its property and
conduct its business as now conducted and as presently contemplated; and (iii)
is duly qualified and in good standing in each jurisdiction (which jurisdictions
are listed on Exhibit B hereto) where the nature of its properties or its
business requires such qualification. Since the date of the Initial Financial
Statement, each Borrower has continued to engage in substantially the same
business as that in which it was then engaged and is engaged in no unrelated
business.
3.2 Corporate and Limited Liability Company Authority; Valid
Obligations; Approvals. The execution, delivery and performance of the Loan
Documents and the transactions and other documents contemplated hereby and
thereby are within each Borrower's corporate or limited liability company (as
applicable) authority, have been authorized by all necessary corporate or
limited liability company (as applicable) proceedings on the part of such
Borrower, and do not and will not contravene any
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provision of law, its charter document, operating agreement or its by-laws (as
applicable), or contravene any provisions of, or constitute a Default or Event
of Default hereunder or a default under any other agreement, instrument,
judgment, order, decree, permit, license or undertaking binding upon or
applicable to such Borrower or any of its properties, or result in the creation,
other than in favor of the Lender, of any mortgage, pledge, security interest,
lien, encumbrance or charge upon any of the properties or assets of such
Borrower. The Loan Documents have been duly executed and delivered and
constitute the legal, valid and binding obligations of each Borrower enforceable
in accordance with their terms. The execution, delivery and performance of the
Loan Documents and the transactions and other documents contemplated hereby and
thereby do not require any approval or consent of, or filing or registration
with, any person.
3.3 Title to Properties; Absence of Liens. Each Borrower has good and
marketable title to all of its properties, assets and rights of every name and
nature now purported to be owned by it, which properties, assets and rights
include all those necessary to permit such Borrower to conduct its business as
such business was conducted on the date of the Initial Financial Statement, free
from all liens, charges and encumbrances whatsoever except for insubstantial and
immaterial defects in title and liens, charges or encumbrances permitted under
Section 5.6.
3.4 Compliance. Except as set forth on Exhibit B hereto, each Borrower
(i) has all necessary permits, approvals, authorizations, consents, licenses,
franchises, registrations and other rights and privileges (including without
limitation patents, trademarks, trade names and copyrights) to allow it to own
and operate its business without any violation of law or the rights of others,
(ii) is duly authorized, qualified and licensed under and in compliance with all
applicable laws, regulations, authorizations and orders of public authorities
(including, without limitation, laws relating to hazardous materials, hazardous
waste, oil, and protection of the environment and laws relating to ERISA or to
employee benefit plans generally), and (iii) has performed all obligations
required to be performed by it under, and is not in default under or in
violation of, its charter, operating agreement or by-laws (as applicable), or
any agreement, lease, mortgage, note, bond, indenture, license or other
instrument or undertaking to which it is a party or by which any of it or any of
its properties are bound, except for any such violations or failures to comply
under clauses (i) through (iii) above which, individually or in the aggregate,
would not have a material adverse effect on the business, condition (financial
or otherwise), results of operations or assets of any Borrower, and no Borrower
has received any notice by any governmental authority or third party with
respect to the generation, storage, or disposal or release or threat of release
of hazardous substances, hazardous materials, or oil, or with respect to any
violation of any federal, state or local environmental, health or safety statute
or regulation.
3.5 Financial Statements. The Borrowers have furnished to the Lender
the audited Consolidated balance sheet of the Borrowers as of September 30, 1997
and the related audited Consolidated statements of operations and stockholders'
(or members') equity and cash flows for the year then ended, which were prepared
in accordance with
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GAAP, certified by independent certified public accountants acceptable to the
Lender (the present accountants Arthur Andersen LLP being acceptable to the
Lender) and fairly present the Consolidated financial position of the Borrowers
as at the close of business on such date and the results of its operations for
the year then ended. The Borrowers have also furnished to the Lender the
unaudited Consolidated balance sheet of the Borrowers as of March 31, 1998 and
the unaudited Consolidated statements of operations, stockholder's (or members')
equity and cash flow of the Borrowers for the fiscal quarter then ended,
certified by the chief financial officer of the Borrowers, which are subject to
normal, recurring year-end adjustments that shall not in the aggregate be
material in amount (the "Initial Financial Statement"). The Borrowers have also
furnished to the Lender the unaudited pro forma Consolidated balance sheet of
the Borrowers as of March 31, 1998, prepared as if the Offering had been
completed as of the Closing Date. At the date hereof, no Borrower has any
material Indebtedness or other liabilities, whether accrued, absolute,
contingent or otherwise, and whether due or to become due, that are not set
forth on the Initial Financial Statement or on Exhibit B hereto. Since the
Initial Financial Statement there have been no material adverse changes,
individually or in the aggregate, in the assets, liabilities, financial
condition or business of any Borrower, except as set forth on Exhibit B hereto.
3.6 Events of Default; Solvency. As of the date of this Agreement, no
Default or Event of Default exists and no Borrower is, or immediately after
giving effect to the consummation of the Revolving Loans will be, Insolvent.
3.7 Taxes. Each Borrower has filed all federal, state and other tax
returns required to be filed for all Taxes (or has filed appropriate
extensions), and has paid (or has established adequate reserves in accordance
with GAAP for the payment of) all Taxes, assessments and other such governmental
charges due from such Borrower. No Borrower has executed any waiver that would
have the effect of extending the applicable statute of limitations in respect of
any Tax.
3.8 Labor Relations; Litigation. No Borrower is engaged in any unfair
labor practice and, except as set forth on Exhibit B attached hereto, there is
no litigation, proceeding, governmental investigation (administrative or
judicial) or labor dispute, pending or, to the best knowledge of the Borrowers,
threatened against any Borrower, which, if decided adversely to such Borrower,
could have a materially adverse effect on the business, properties or condition
(whether financial or otherwise) of any Borrower or on the ability of any
Borrower to perform its obligations under this Agreement or any other agreement
or document contemplated hereby, nor is any substantial basis for any such
litigation or labor dispute known to exist.
3.9 Restrictions on the Borrowers. No Borrower is party to or bound by
any contract, agreement or instrument, nor subject to any charter or other
corporate restriction which will, under current or foreseeable conditions,
materially and adversely affect its business, property, assets, operations or
conditions, financial or otherwise.
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3.10 Contracts with Affiliates, Etc. Except as disclosed on Exhibit B
attached hereto, and except for agreements or transactions (in each case) in the
ordinary course of business and on an arm's-length basis, no Borrower is a party
to or otherwise bound by any agreements, instruments or contracts (whether
written or oral) with any Affiliate, except for any such agreement, instrument
or contract (other than an agreement, instrument or contract with respect to
Indebtedness for borrowed money) as would not materially and adversely affect
the condition (financial or otherwise), properties, business or results of
operations of any Borrower.
3.11 Disclosure. No representations and warranties made by any Borrower
in this Agreement, any other Loan Document or in any other agreement,
instrument, document, certificate, statement or letter furnished to the Lender
by or on behalf of any Borrower, and no other factual information heretofore or
contemporaneously furnished by or on behalf of any Borrower to the Lender, in
connection with any of the transactions contemplated by any of the Loan
Documents contains (as of the date given) any untrue statement of fact or omits
to state a fact necessary in order to make the statements contained therein not
misleading in any material respect in light of the circumstances in which they
are made. Except as disclosed herein or in the Initial Financial Statement or in
the other Loan Documents, there is no fact known to any Borrower which
materially adversely affects, or which would in the future materially adversely
affect, the business, condition (financial or otherwise), results of operations
or assets of any Borrower.
3.12 Subsidiaries. As of the date hereof, no Borrower has any
Subsidiaries, except as disclosed on Exhibit B attached hereto.
3.13 Offering.
(i) A registration statement on Form S-1 (File No. 333-49629) with
respect to the common stock of Starmet Corporation (the "Registration
Statement") has been prepared by the Borrowers in conformity with the
requirements of the Securities Act of 1933, as amended (the "Act"), and the
rules and regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "SEC" or the "Commission") thereunder; and has been
filed with the Commission. There has been delivered to the Lender copies of such
registration statement, together with copies of all exhibits requested by the
Lender. The Borrowers have also prepared a related preliminary prospectus, a
copy of which has also been provided to the Lender.
(ii) The Commission has not issued any order preventing or suspending
the use of the preliminary prospectus, and the preliminary prospectus has
conformed in all material respects to the requirements of the Act and the Rules
and Regulations and, as of its date, has not included any untrue statement of a
material fact or omitted to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; as of the Closing Date, the registration statement will
have become effective and the registration statement and the prospectus, and any
amendments or supplements thereto, will contain all material statements and
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information required to be included therein by the Act and the Rules and
Regulations and in all material respects conform to the requirements of the Act
and the Rules and Regulations, and neither the registration statement nor the
prospectus, nor any amendment or supplement thereto, will include any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading.
SECTION 4. CONDITIONS OF LOANS.
4.1 Conditions to Initial Revolving Loan. Notwithstanding the execution
of this Agreement by the parties hereto on May 28, 1998, it is understood and
agreed that the effectiveness of this Agreement and of any of the obligations of
the Lender hereunder (including specifically, but without limitation, the
obligation of the Lender to make the initial Revolving Loan) is subject to the
fulfillment to the satisfaction of the Lender on or prior to the Closing Date of
the following conditions precedent:
4.1.1 Receipt by the Lender of all of the agreements,
documents, instruments, certificates and opinions listed or described on the
Closing Checklist attached hereto as Exhibit E, in form and substance
satisfactory to the Lender, and duly executed and delivered by the parties
thereto, along with such additional instruments, certificates, opinions and
other documents as the Lender shall reasonably request.
4.1.2 The representations and warranties contained herein
shall be true and accurate on and as of the Closing Date, the Borrowers shall
have performed and complied with all covenants and conditions required herein to
be performed or complied with by them prior to the making of such Revolving
Loan, and no Default or Event of Default shall be continuing or result from the
Revolving Loans to be made on the Closing Date or the transactions contemplated
hereby.
4.1.3 The Offering shall have been successfully completed and
become effective on or prior to the Closing Date upon the terms set forth in the
Offering Prospectus (in the form delivered to the Lender), and Starmet
Corporation shall have received Net Proceeds therefrom of at least $40,000,000,
it being understood and agreed that if the Offering shall not have been
successfully completed and such Net Proceeds received by September 30, 1998,
then this Agreement shall be terminated and deemed incapable of thereafter
becoming effective, notwithstanding the execution hereof on May 28, 1998.
4.2 Conditions to all Loans. The obligation of the Lender to make any
Revolving Loan is subject to the fulfillment to the satisfaction of the Lender
immediately prior to or contemporaneously with each such Loan of each of the
following conditions: (i) the representations and warranties contained herein or
otherwise made in writing by or on behalf of the Borrowers pursuant hereto or in
connection with the transactions contemplated hereby shall be true and correct
in all material respects at the time of each such Loan (except for
representations and warranties limited as to time or with respect to
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a specific event) with and without giving effect to the Loan to be made at such
time and the application of the proceeds thereof, (ii) no Default or Event of
Default shall be continuing or result from such Loan, (iii) no material adverse
change in the condition (financial or otherwise), business or properties of any
Borrower shall have occurred since the date of the Initial Financial Statement,
and (iv) no change in applicable law or regulation shall have occurred as a
consequence of which it shall have become and continue to be unlawful for the
Lender or any Borrower to perform any of its respective agreements or
obligations under any Loan Document to which it is a party.
SECTION 5. COVENANTS.
During the term of this Agreement and so long as any Obligation of any
Borrower in respect of any Loan remains outstanding, the Borrowers hereby
jointly and severally covenant to the Lender that:
5.1 Financial Statements and Other Reporting Requirements. The
Borrowers shall furnish to the Lender:
(i) as soon as available to the Borrowers, but in any event
within 120 days after each fiscal year-end, the Consolidated balance
sheet of the Borrowers as at the end of, and related Consolidated
statements of operations, stockholders' equity and cash flow for, such
year, prepared in accordance with GAAP applied in a manner consistent
with the Borrowers' past practices, and audited and certified without
qualification by independent certified public accountants satisfactory
to the Lender; and concurrently with such financial statements, if in
the opinion of such accountants a Default or Event of Default exists
with respect to accounting matters, a written statement by such
accountants that, in the making of the audit necessary for their report
and opinion upon such financial statements, they have obtained
knowledge of such Default or Event of Default, and they shall disclose
in such written statement the nature and status thereof;
(ii) as soon as available to the Borrowers, but in any event
within 60 days after the end of each fiscal quarter of each fiscal year
of the Borrowers, the Consolidated balance sheet of the Borrowers as at
the end of, and related Consolidated statements of operations,
stockholders' equity and cash flow for, the portion of the year then
ended and for the quarter then ended, prepared in accordance with GAAP
(with the exception of footnotes) applied in a manner consistent with
the audited financial statements required by clause (i) above (subject
to normal year-end audit adjustments, none of which shall be materially
adverse) and certified pursuant to the report to be delivered to the
Lender under clause (iv) of this Section 5.1;
(iii) promptly as they become available, copies of all such
financial statements, proxy material and reports as any Borrower shall
send to or make generally available to stockholders and of all regular
and periodic reports filed by
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any Borrower or any of its Subsidiaries with any securities exchange or
with the Commission or any governmental authority succeeding to any or
all of the functions of said Commission, and promptly as they become
available, a copy of each report (including any so-called management
letters) submitted to the Borrowers by independent certified public
accountants in connection with each annual audit of the books of the
Borrowers by such accountants or in connection with any interim audit
thereof pertaining to any phase of the business of any Borrower;
(iv) concurrently with each delivery of financial statements
pursuant to clause (i) and clause (ii) of this Section 5.1, a chief
financial officer's report in substantially the form of Exhibit D
hereto, and including, without limitation, computations in reasonable
detail evidencing compliance with the covenants contained in Sections
5.18 through 5.21, inclusive;
(v) at least 30 days prior to the first day of each fiscal
year of the Borrowers, projections of the quarterly balance sheet,
income and cash flow statements of the Borrowers for such fiscal year
in form acceptable to the Lender, and certified by the chief financial
officer of the Borrowers (it being recognized by the Lender that
projections as to future results are not to be viewed as facts and that
the actual results for the period or periods covered by the projections
may materially differ from the projected results);
(vi) concurrently with the delivery of each financial
statement pursuant to subsection (ii) of this Section 5.1, a detailed
aged trial balance of all accounts receivable as of the last day of
such quarter, along with a detailed inventory breakdown setting forth
an analysis of the value of such inventory by location and
classification as of the last day of such quarter and otherwise in form
and substance satisfactory to the Lender;
(vii) promptly after obtaining knowledge of the existence
thereof, notice of (a) the occurrence of any event which constitutes a
Default or Event of Default, together with the nature and duration
thereof and the action proposed to be taken with respect thereto, (b)
the occurrence of any condition or event with respect to any Borrower
or any Affiliate which could be expected to constitute a material
adverse change in or to have a material adverse effect on the business,
properties or condition (financial or otherwise) of any Borrower,
together with the nature and duration thereof and the action proposed
to be taken with respect thereto, (c) any litigation or any
investigative proceedings of a governmental agency or authority
commenced or threatened against any Borrower, any Affiliate or any Plan
which could be expected to have a material adverse effect on the
business, properties or condition (financial or otherwise) of any
Borrower, or the issuance of any judgment, award, decree, order or
other determination in or relating to any such litigation or
proceedings, (d) the occurrence of a reportable event (as defined in
ERISA) or any communications to, or receipt of communications from, the
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PBGC, the United States Department of Labor or the IRS by any Borrower
or any Affiliate relating to any Plan, along with copies of all such
communications, (e) the adoption by any Borrower of any stock option or
executive compensation plan, whether or not subject to ERISA, and any
Plan subject to ERISA, or the substantial modification of any such
plan, along with the vesting and funding schedules and other principal
provisions thereof, and (f) any unprivileged communications given or
received by any Borrower in any way relating to compliance with, any
violation or potential violation of, or any potential liability under,
any environmental law or regulation (including those relating to
pollution control, hazardous materials and hazardous wastes), along
with copies of all such communications; and
(viii) from time to time, such other financial data and
information about any Borrower as the Lender may reasonably request.
5.2 Conduct of Business. Each Borrower will maintain its corporate or
limited liability company (as applicable) existence, continue to have a fiscal
year ending on September 30 of each year and notify the Lender in advance of any
change in such fiscal year (whereupon the Lender shall have the right to require
modifications to the financial covenants hereunder in order to correspond to any
such change in fiscal year), and remain or engage in substantially the same,
similar or complementary business as that in which it is now engaged or a
reasonable expansion or extension thereof, and will duly observe and comply with
all applicable laws and all requirements of any governmental authorities
relative to it, its assets or to the conduct of its business, including laws
relating to the environment, pollution control, hazardous materials and
hazardous waste (except where the failure to observe and comply with such laws
or requirements would not materially and adversely affect the condition
(financial or otherwise), properties, business, or results of operations of any
Borrower or the ability of any Borrower to perform its obligations to the
Lender) and will maintain and keep in full force and effect all licenses and
permits necessary to the proper conduct of its business.
5.3 Maintenance and Insurance. Each Borrower will maintain and keep its
properties in good repair, working order and condition so that its business may
be properly and advantageously conducted at all times, and will comply with the
provisions of all material leases to which it is a party or under which it
occupies property so as to prevent any material loss or forfeiture thereof or
thereunder. Each Borrower at all times will maintain insurance with such
insurance companies, in such amounts against such hazards and liabilities and
for such purposes as is customary in the industry for companies of established
reputation engaged in the same or similar businesses and owning or operating
similar properties. Upon request of the Lender from time to time, the Borrowers
shall furnish to the Lender certificates or other evidence satisfactory to the
Lender of compliance with the foregoing insurance provisions.
5.4 Taxes. Each Borrower will pay or cause to be paid all taxes,
assessments or governmental charges on or against it or its properties prior to
such taxes becoming
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delinquent, except for any tax, assessment or charge which is being contested in
good faith by proper legal proceedings and with respect to which adequate
reserves have been established and are being maintained, provided that no
enforcement action to enforce a lien has been commenced against such Borrower
with respect to any such tax, assessment or charge which is material in amount.
5.5 Limitation of Indebtedness. Except with the prior written consent
of the Lender, no Borrower will create, incur, assume or suffer to exist, or in
any manner become or be liable directly or indirectly with respect to, any
Indebtedness except: (i) the Obligations; (ii) Indebtedness for borrowed money
existing on the date of this Agreement and described on Exhibit B hereto or in
the Initial Financial Statement; (iii) Indebtedness on open account for the
purchase price of services, materials and supplies incurred by such Borrower in
the ordinary course of business, or consisting of open account transactions
between the Borrowers in the ordinary course of business, (in any such case not
as a result of borrowing), so long as all of such open account Indebtedness
shall be promptly paid and discharged when due or in conformity with customary
trade terms and practices, except for any such open account Indebtedness which
is being contested in good faith by such Borrower and as to which adequate
reserves required by GAAP have been established and are being maintained; and
(iv) Indebtedness in respect of capital leases and purchase money security
interests of any Borrower representing obligations permitted to be incurred by
the terms of this Agreement and (except in the case of any such liabilities
assumed by a Borrower in connection with an acquisition permitted by Section
5.7(ii)) incurred in the ordinary course of business and consistent with past
practices; provided, that the aggregate principal amount of Indebtedness
permitted by this clause (iv) shall not exceed $10,000,000 at any one time
outstanding.
5.6 Restrictions on Liens. Without the Lender's prior written consent,
no Borrower will create, incur, assume or suffer to exist any mortgage, pledge,
security interest, lien or other charge or encumbrance, including the lien or
retained security title of a conditional vendor, ("Encumbrances") upon or with
respect to any property or assets, real or personal, of such Borrower, or assign
or otherwise convey any right to receive income, except:
(i) Encumbrances existing on the date of this Agreement and
set forth on Exhibit B hereto;
(ii) Encumbrances in favor of the Lender;
(iii) liens for taxes, fees, assessments and other
governmental charges to the extent that payment of the same is not
required in accordance with the provisions of Section 5.4;
(iv) liens incurred or deposits made in the ordinary course of
such Borrower's business in connection with workers' compensation,
unemployment insurance, social security and other similar laws, or
liens of mechanics, laborers,
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materialmen, carriers and warehousemen arising by operation of law to
secure payment for labor, materials, supplies or services incurred in
the ordinary course of such Borrower's business, but only if the
payment thereof is not at the time required and such liens do not,
individually or in the aggregate, materially detract from the value or
limit the use of any property subject thereto; or
(v) Encumbrances in respect of the purchase money obligations
permitted to be incurred under Section 5.5(iv), provided that (i) each
such Encumbrance is given solely to secure the purchase price of such
property, does not extend to any other property and is given at the
time of the acquisition of the property, and (ii) the Indebtedness
secured thereby does not exceed the lesser of the cost of such property
or its fair market value at the time such security interest attaches.
5.7 Mergers, Acquisitions and Purchases and Sales of Assets. No
Borrower will (i) consolidate or merge with or into any other corporation or
other entity, provided that any Borrower (other than Starmet Corporation) may
merge or consolidate into or with another Borrower if no Default or Event of
Default has occurred and is continuing or would result from such merger or
consolidation, (ii) acquire the assets or stock of any entity, other than in
connection with acquisitions of interests in other corporations or business
entities engaged in a similar or complementary business as that in which such
Borrower is now engaged or in a reasonable extension or expansion thereof
(either through the purchase of assets or capital stock or otherwise), provided
that (a) each such acquisition is a Permitted Acquisition, and (b) in the case
of a Permitted Acquisition all or a portion of which is paid for in cash, the
aggregate amount of any single such acquisition shall not exceed $7,500,000, and
the aggregate amount of all such acquisitions for all Borrowers shall not exceed
$15,000,000, or (iii) sell, lease, transfer or otherwise dispose of or discount
any portion of its assets (including any note, instrument or account), other
than (a) the sale of finished goods and the disposition of scrap, waste and
obsolete items in the ordinary course of business, and (b) the sale or
disposition of less than 49% of the capital stock of one of its wholly-owned
Subsidiaries for fair market value, provided that prior to such sale or
disposition, the Lender shall have received computations from the Borrowers
(based upon a compliance certificate in the form of Exhibit D hereto) showing
pro forma compliance with the financial covenants set forth in Sections 5.18
through 5.21, inclusive, as of the date of, and after giving effect to, such
sale or disposition, and certifying that immediately prior to, and after giving
effect to such sale or disposition, no Default or Event of Default exists. For
purposes of this Section 5.7, the transfer of assets between the Borrowers shall
not be deemed to be a sale, lease, transfer, disposition or discount of assets.
Notwithstanding the foregoing, each Borrower has the ability to purchase capital
assets in the ordinary course for the expansion of such Borrower's lines of
business.
5.8 Investments and Loans. No Borrower will make or have outstanding at
any time any investments in or loans to any other person, whether by way of
advance, guaranty, extension of credit, capital contribution, purchase of
stocks, notes, bonds or
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<PAGE>
other securities or evidences of Indebtedness, or acquisition of limited or
general partnership interests or interests in any limited liability company,
other than: (i) in direct obligations of the United States of America, maturing
within one year of their issuance; (ii) in time certificates of deposit or
repurchase agreements, maturing within one year of their issuance, from banks or
other financial institutions in the United States having capital, surplus and
undivided profits in excess of $200,000,000; (iii) in short-term commercial
paper carrying the highest rating by Moody's or Standard and Poor's rating
services and issued by corporations headquartered in the United States, in
currency of the United States; (iv) in shares of money-market mutual funds
having assets in excess of $100,000,000 and substantially all of the assets of
which consist of investments referred to in clauses (i) through (iii),
inclusive, above; (v) advances to employees for business related expenses to be
incurred in the ordinary course of business and consistent with past practices
in an amount not to exceed $300,000 in the aggregate outstanding at any one
time, provided that no such advances to any single employee shall exceed
$100,000 in the aggregate; (vi) investments by a Borrower in an Affiliate,
provided that (a) no such investments shall exceed $10,000,000 in the aggregate
for all Borrowers, of which only $5,000,000 in the aggregate may consist of
investments in any one Affiliate, and (b) immediately prior to and after giving
effect to such investment, no Default or Event of Default shall exist; and (vii)
investments in addition to those permitted by this Section 5.8 and disclosed on
Exhibit B attached hereto.
5.9 Restricted Payments No Borrower will, directly or indirectly
(through any Affiliate or otherwise), declare, pay or make any Restricted
Payment. Notwithstanding the foregoing, (a) each Borrower may make payments of
regular compensation and bonuses to employees of such Borrower in the ordinary
course of business and consistent with past practices, (b) each Borrower may
make payments under subsisting management contracts with Affiliates set forth on
Exhibit B, or any renewals or replacements of such contracts, (c) each Borrower
may (i) make distributions to its shareholders and (ii) repurchase shares of its
capital stock, in each case in an amount not to exceed 50% of its Net Income (as
determined in accordance with GAAP) for the preceding fiscal year, provided that
(x) at the time of the declaration of and payment of any such distribution or
repurchase of Shares, and after giving effect thereto, no Default or Event of
Default shall exist, and (y) prior to the declaration of and payment of any such
distribution or repurchase of Shares, the Lender shall have received
computations from the Borrowers (based upon a compliance certificate in the form
of Exhibit D hereto) showing pro forma compliance with the financial covenants
set forth in Sections 5.18 and 5.21, respectively, as of the date of, and after
giving effect to, such distribution or repurchase, and (d) Starmet Corporation
may repay on or after the Closing Date the Debentures (as defined in Section 3.5
of Exhibit B hereto) in an aggregate principal amount not exceeding $2,250,500,
provided that (x) immediately prior to and after giving effect to such
repayment, no Default or Event of Default shall exist, and (y) such repayment is
made with Net Proceeds from the Offering.
5.10 ERISA Compliance.
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<PAGE>
None of the Borrowers, any Plan and any fiduciary thereof shall (i)
engage in any "prohibited transaction" or incur, whether or not waived, any
"accumulated funding deficiency" (both as defined in ERISA and the Code), (ii)
fail to satisfy any additional funding requirements set forth in Section 412 of
the Code and Section 302 of ERISA, or (iii) terminate or withdraw from
participation in any Plan in a manner which could result in the imposition of a
lien on any property of, or impose a substantial withdrawal liability on, any
Borrower. Each Borrower and each Plan shall comply in all material respects with
ERISA.
5.11 Inspection by the Lender; Books and Records. Each Borrower will
permit the Lender or its designees, at any reasonable time and from time to
time, to visit and inspect the properties of such Borrower, to examine and make
copies of the books and records of such Borrower and to discuss the affairs,
finances and accounts of such Borrower with appropriate officers. Without
limitation of the foregoing, the Lender will be permitted to conduct field
examinations from time to time in its discretion, provided that the cost to the
Borrowers of any single field examination shall not exceed $2,500. Each Borrower
will keep adequate books and records of account in which true and complete
entries will be made reflecting all of its business and financial transactions,
and such entries will be made in accordance with GAAP and applicable law.
5.12 Use of Proceeds. The Borrowers will use the proceeds of the Loans
solely for their respective working capital needs and the issuance of Letters of
Credit. No portion of any Loans shall be used for the purpose of purchasing or
carrying any "margin security" or "margin stock" as such terms are used in
Regulations G, U or X of the Board of Governors of the Federal Reserve System.
5.13 Transactions with Affiliates. No Borrower will, directly or
indirectly, enter into any transaction with any Affiliate except in the ordinary
course of business on terms that are no less favorable to such Borrower than
those which might be obtained at the time in a comparable arm's-length
transaction with any person who is not an Affiliate.
5.14 No Amendments to Certain Documents. No Borrower will at any time
cause or permit any of the charter or other incorporation documents or operating
agreement or by-laws of such Borrower (as applicable) to be modified, amended or
supplemented in any material respect whatever, without the express prior written
agreement, consent or approval of the Lender, which consent will not be
unreasonably withheld.
5.15 Subsidiaries. The Borrowers will give the Lender written notice of
the formation after the date hereof of any Subsidiary, and agree that they will
cause any such Subsidiary to engage in the business of conducting branches or
divisions of the business now conducted by the Borrowers or holding any of the
property of the Borrowers, or in reasonable extensions or expansions thereof.
The Borrowers will, at the direction of the Lender, and if such Subsidiary is
wholly owned by a Borrower, cause such Subsidiary to
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<PAGE>
become a party to this Agreement and to such of the other Loan Documents as the
Lender shall require.
5.16 Operating Accounts. The Borrowers will maintain their primary
operating, deposit and disbursement accounts with the Lender.
5.17 Year 2000. Each Borrower will take all action necessary to assure
its computer based systems are able to effectively process data, including
dates, on and after January 1, 2000. The Borrowers will, upon their knowledge
thereof, promptly notify the Lender in writing of any Year 2000 Problem and, at
the request of the Lender, the Borrowers will provide the Lender with assurance
reasonably acceptable to the Lender of the Borrowers' Year 2000 capability.
5.18 Leverage. The Borrowers will not permit the ratio of (i) Total
Liabilities to (ii) Tangible Net Worth as of any fiscal quarter-end to be more
than 0.60 to 1.0.
5.19 Profitability. The Borrowers will not permit their Net Income to
be less than $750,000 as of the end of each fiscal quarter ending on or after
September 30, 1998.
5.20 Interest Coverage. The Borrowers will not permit the ratio of (i)
EBIT to (ii) the aggregate Interest Charges on all Indebtedness of the Borrowers
to be less than 2.0 to 1.0 for each fiscal year of the Borrowers, commencing
with the fiscal year ending September 30, 1999.
5.21 Tangible Net Worth. The Borrowers will not permit their Tangible
Net Worth to be less than the sum of (i) $60,000,000 plus, (ii) on a cumulative
basis, an amount equal to 75% of the Borrowers' positive Net Income earned in
each of their fiscal quarters (commencing with the fiscal quarter ending June
30, 1998). Any quarterly or annual losses incurred by the Borrowers shall not
reduce the amount of Tangible Net Worth required to be maintained from time to
time pursuant to this Section 5.21.
SECTION 6. EVENTS OF DEFAULT; ACCELERATION.
6.1 The following shall constitute events of default (individually, an
"Event of Default"):
(i) default in the payment, when due or payable, of any Obligation for
the payment of money; or
(ii) default in the performance or observance of or compliance with (i)
any of the provisions of Sections 2 (other than the payment of principal and
interest), 5.1, 5.5 through 5.9, inclusive, 5.11 through 5.21, inclusive, of
this Agreement, or (ii) any term or condition of the Note (other than the
payment of principal and interest on the Note), or (iii) any other covenant or
condition of this Agreement, any other Loan Document or any
25
<PAGE>
other Obligation not listed previously in this Section, and such default
continues for more than 15 days; or
(iii) any representation or warranty at any time made by or on behalf
of any Borrower in any Loan Document or otherwise shall prove to have been false
in any material respect upon the date when made or deemed to have been made; or
(iv) the occurrence of any default under any agreement, note or other
instrument evidencing or relating to any obligation of any Borrower to any other
person or entity for the payment of $500,000 or more; or
(v) issuance of an injunction which might have a material adverse
effect on the condition (financial or otherwise), properties, business or
results of operations of any Borrower, or attachment which in the aggregate
exceeds $500,000 in value, against any Borrower, any property of any Borrower or
any endorser, guarantor or surety for any Obligation which is not dismissed or
bonded, to the satisfaction of the Lender, within 30 days after its issuance;
(vi) calling of a meeting of creditors, formation or appointment of a
committee of creditors or liquidating agents or offering of a composition or
extension to creditors by, for or with the consent or acquiescence of any
Borrower or any endorser, guarantor or surety for any Obligation;
(vii) Insolvency of any Borrower or any endorser, guarantor or surety
for any Obligation;
(viii) any money judgment or judgments aggregating in excess of
$1,000,000 are entered against any Borrower or any endorser, guarantor or surety
for any Obligation (except to the extent fully covered by insurance and the
insurance carrier has not reserved the right to disallow such claim), and shall
continue unsatisfied and in effect for a period of 30 days, provided that the
total cost of any bond applied in order to procure a stay of execution in any
such litigation shall not exceed $100,000; or
(ix) any Loan Document, or any covenant, agreement or obligation
contained therein or evidenced thereby, shall cease in any material respect to
be legal, valid, binding or enforceable in accordance with its terms, or shall
be cancelled, terminated, revoked or rescinded; or
(x) any action at law, suit in equity or other legal proceeding to
cancel, revoke or rescind any Loan Document shall be commenced by or on behalf
of any Borrower or any other person bound thereby, or by any court or any other
governmental or regulatory authority or agency of competent jurisdiction; or any
court or any other governmental or regulatory authority or agency of competent
jurisdiction shall make a determination that, or shall issue a judgment, order,
decree or ruling to the effect that, any one or more of the Loan Documents, or
any one or more of the obligations of any Borrower or any other
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<PAGE>
person under any one or more of the Loan Documents, are illegal, invalid or
unenforceable in any material respect in accordance with the terms thereof; or
(xi) at any time after the date hereof, more than 50% of the
outstanding shares of any class of voting equity securities of Starmet
Corporation is beneficially owned (as defined in Rule 13d-3 promulgated under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) by any
"person" or any "group" (as defined in Section 13(d)(3) of the Exchange Act)
other than the person or group owning such percentage of shares on the Closing
Date (after giving effect to the Offering); or
(xii) except as otherwise permitted by Section 5.7(iii), any change in
equity ownership of any Borrower other than Starmet Corporation; or
(xiii) either of the following two persons shall cease to hold their
respective offices as specified or shall cease to perform substantially all of
his duties and responsibilities as such officer for a period of more than thirty
(30) days (exclusive of vacations not in excess of such officer's normal annual
vacation allowance): (A) Robert E. Quinn shall cease to be the President, or (B)
James M. Spiezio shall cease to be the Vice President of Finance or Treasurer,
as the case may be, and Chief Financial Officer, of each Borrower and its
Subsidiaries, unless the Lender has determined in its sole discretion that the
occurrence of such event will not have a material adverse effect on the
business, properties or condition (financial or otherwise) of any Borrower.
6.2 If an Event of Default shall occur and be continuing, the Lender
may, at its option, (i) declare any or all of the Obligations of the Borrowers
to the Lender to be immediately due and payable without further notice or
demand, whereupon the same shall become immediately due and payable without
presentment, demand, protest or other notice of any kind, all of which are
hereby waived by the Borrowers, (ii) limit, suspend or terminate the Borrowers'
right to borrow hereunder, and (iii) exercise any rights and remedies under this
Agreement and law; provided that in the event of any Event of Default specified
in Sections 6.1(vi) or 6.1(vii), all Obligations shall become immediately due
and payable automatically and without any requirement of notice from the Lender
or action by the Lender.
SECTION 7. SET OFF.
Any deposits or other sums at any time credited by or due from the
Lender to any Borrower may, without notice (any such notice being expressly
waived hereby) and to the fullest extent permitted by law and without regard to
any source of payment whatsoever, at any time during the continuance of an Event
of Default, be applied to or set off against Obligations on which such Borrower
is primarily liable and may at or after the maturity thereof be applied to or
set off against Obligations on which such Borrower is secondarily liable.
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SECTION 8. GENERAL.
8.1 Written Notices. Any notices, expressly required by this Agreement
to be in writing, to any party hereto shall be deemed to have been given when
delivered by hand, when sent by telecopier, when delivered to any overnight
delivery service freight pre-paid or 3 days after deposit in the mails, postage
prepaid, and addressed to such party at its address given at the beginning of
this Agreement or at any other address specified in writing. Written notices to
the Borrowers shall be sent to the attention of James M. Spiezio, Vice President
of Finance, with a copy to Thomas A. Wooters, Esq., Peabody & Arnold, 50 Rowes
Wharf, Boston, Massachusetts 02110, and written notices to the Lender shall be
sent to the attention of William R. Dewey IV, Vice President, with a copy to
Philip A. Herman, Esq., Goulston & Storrs, P.C., 400 Atlantic Avenue, Boston,
Massachusetts 02110-3333. Any notice, unless otherwise specified, may be given
orally or in writing.
8.2 No Waivers. No failure or delay by the Lender in exercising any
right, power or privilege hereunder shall operate as a waiver thereof; nor shall
any single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The rights and
remedies herein provided are cumulative and not exclusive of any rights or
remedies otherwise provided by law.
8.3 Further Assurances. The Borrowers shall do, make, execute and
deliver all such additional and further acts, things, assurances, and
instruments as the Lender may reasonably require more completely to vest in
and assure to the Lender its rights hereunder and under the other Loan
Documents and to carry into effect the provisions and intent of this
Agreement and the other Loan Documents.
8.4 Governing Law. This Agreement and the other Loan Documents shall be
deemed to be contracts made under seal and shall be construed in accordance with
and governed by the laws of The Commonwealth of Massachusetts (without regard to
conflicts of laws rules). Any legal action or proceeding arising out of or
relating to this Agreement or any Obligation may be instituted in the courts of
The Commonwealth of Massachusetts or of the United States of America for the
District of Massachusetts, and each Borrower hereby irrevocably submits to the
jurisdiction of each such court in any such action or proceeding; provided,
however, that the foregoing shall not limit the Lender's rights to bring any
legal action or proceeding in any other appropriate jurisdiction.
8.5 Expenses, Taxes and Indemnification.
(a) The Borrowers will pay and indemnify and hold the Lender harmless
against all taxes (other than taxes on the income of the Lender), charges and
expenses of every kind or description, including without limitation attorneys'
fees and expenses and the costs and expenses of field audits and commercial
finance exams, reasonably incurred or
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<PAGE>
expended by the Lender in connection with or in any way related to the Lender's
relationship with the Borrowers, whether hereunder or otherwise.
(b) The Borrowers shall absolutely and unconditionally indemnify and
hold the Lender harmless against any and all claims, demands, suits, actions,
causes of action, damages, losses, settlement payments, obligations, costs,
expenses and all other liabilities whatsoever which shall at any time or times
be incurred or sustained by the Lender or by any of its shareholders, directors,
officers, employees, subsidiaries, affiliates or agents (except any of the
foregoing incurred or sustained as a result of the gross negligence or willful
misconduct of the Lender) on account of, or in relation to, or in any way in
connection with, associated with or ancillary to this Agreement, the other Loan
Documents and the other documents executed or delivered in connection herewith,
and the arrangements or transactions contemplated therein, whether or not all or
any of the transactions contemplated by, associated with or ancillary to this
Agreement or any of such documents are ultimately consummated.
8.6 Amendments, Waivers, Etc. This Agreement, the Note and the other
Loan Documents and any provision hereof or thereof may be waived, discharged or
terminated only by an instrument in writing signed by the Lender and may be
amended only by an instrument in writing signed by the Borrowers and the Lender.
8.7 Binding Effect of Agreement. This Agreement shall be binding upon
and inure to the benefit of the Borrowers and the Lender and their respective
successors and assigns. The Lender may sell, assign or otherwise transfer all or
any portion of its right, title and interest in, and its obligations under, this
Agreement, the Loans made and to be made hereunder, or grant participations in
its right, title and interest herein and therein. The Borrowers may not assign
or transfer their rights or obligations hereunder.
8.8 Computation of Interest and Fees, Etc. Interest, fees and charges
shall be computed daily on the basis of a year of 360 days and paid for the
actual number of days for which due. If the due date for any payment of
principal is extended by operation of law, interest shall be payable for such
extended time. If any payment required by this Agreement becomes due on a day on
which banks in Boston, Massachusetts are required or permitted by law or an
appropriate authority to remain closed, such payment may be made on the next
succeeding day on which such banks are open, and such extension shall be
included in computing interest in connection with such payment. All payments
required of the Borrowers hereunder or under the Note shall be made in lawful
money of the United States of America in federal or other funds immediately
available to the recipient thereof at the prescribed place of payment.
8.9 Entire Agreement; Miscellaneous. This Agreement, including the
exhibits hereto, sets forth the entire agreement and understanding of the
parties hereto in respect of the subject matter contained herein, and supersedes
all prior agreements, promises, covenants, arrangements, communications,
representations, warranties, whether oral or written, by any officer, employee
or representative of any party hereto. The captions for
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the sections of this Agreement are for ease of reference only and are not an
integral part of this Agreement. This Agreement may be signed in any number of
counterparts with the same effect as if the signatures hereto and thereto were
upon the same instrument. The provisions of this Agreement are severable, and if
any of these provisions shall be held by any court of competent jurisdiction to
be unenforceable, such holdings shall not affect or impair any other provision
hereof.
8.10 Use of Term "Borrowers". Each Borrower expressly acknowledges and
agrees that the Obligations constitute the obligations of the Borrowers jointly
and severally, and, as used herein (unless the context clearly indicates
otherwise), the term "Borrowers" shall mean, on a joint and several basis, each
and every Borrower, and, accordingly, each covenant, representation, warranty,
obligation or requirement applicable to the Borrowers hereunder or under any
other Loan Document shall be independently applicable to each and every
Borrower.
In connection with the foregoing, each Borrower (other than Starmet
Corporation) hereby appoints Starmet Corporation as its true and lawful
attorney-in-fact for any and all purposes relating to the Agreement, the other
Loan Documents or the Obligations. Each Borrower (other than Starmet
Corporation) acknowledges to each of Starmet Corporation and the Lender that the
foregoing appointment is irrevocable and coupled with an interest. Each Borrower
represents and warrants to the Lender that the Lender shall be entitled to rely
on any action, notice, communication of Starmet Corporation as being the act,
notice, or communication, as the case may be, of each Borrower, unless expressly
instructed in writing by Starmet Corporation to the contrary.
8.11 WAIVER OF JURY TRIAL. EACH BORROWER HEREBY IRREVOCABLY WAIVES
TRIAL BY JURY IN ANY JURISDICTION AND IN ANY COURT WITH RESPECT TO, IN
CONNECTION WITH, OR ARISING OUT OF THIS AGREEMENT, THE OBLIGATIONS, OR ANY
INSTRUMENT OR DOCUMENT DELIVERED PURSUANT HERETO OR THERETO, OR ANY CLAIM OR
DISPUTE HOWSOEVER ARISING, BETWEEN THE BORROWERS AND THE LENDER. THIS WAIVER
SHALL BE EFFECTIVE FOR EACH DOCUMENT EXECUTED BY THE BORROWERS OR THE LENDER AND
DELIVERED TO THE LENDER OR THE BORROWERS, AS THE CASE MAY BE, WHETHER OR NOT
SUCH DOCUMENT SHALL CONTAIN A WAIVER OF JURY TRIAL. EACH BORROWER FURTHER
ACKNOWLEDGES THAT ALL DOCUMENTS DELIVERED BY THE LENDER OR THE BORROWERS ARE
SUBJECT TO THIS WAIVER OF JURY TRIAL AS TO ANY ACTION THAT MAY BE BROUGHT AS TO
ANY OF SUCH DOCUMENTS, AND CONFIRMS THAT THE FOREGOING WAIVERS ARE INFORMED AND
FREELY MADE.
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WITNESS the execution hereof under seal on the day and year first above
written.
STARMET CORPORATION
By: /s/ James M. Spiezio
----------------------
Name: James M. Spiezio
Title: CFO
STARMET POWDERS, LLC
By: /s/ James M. Spiezio
----------------------
Name: James M. Spiezio
Title: Treasurer
STARMET AEROCAST, LLC
By: /s/ James M. Spiezio
----------------------
Name: James M. Spiezio
Title: Treasurer
STARMET COMMERCIAL CASTINGS, LLC
By: /s/ James M. Spiezio
----------------------
Name: James M. Spiezio
Title: Treasurer
STARMET NMI CORPORATION
By: /s/ James M. Spiezio
----------------------
Name: James M. Spiezio
Title: Treasurer
STARMET CMI CORPORATION
By: /s/ James M. Spiezio
----------------------
Name: James M. Spiezio
Title: Treasurer
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STARMET HOLDINGS CORPORATION
By: /s/ James M. Spiezio
----------------------
Name: James M. Spiezio
Title: Treasurer
NMI FOREIGN SALES CORPORATION
By: /s/ James M. Spiezio
----------------------
Name: James M. Spiezio
Title: Treasurer
STATE STREET BANK AND TRUST COMPANY
By: /s/ William R. Dewey IV
------------------------
Name: William R. Dewey IV
Title: Vice President
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Exhibit A
REVOLVING CREDIT NOTE
$10,000,000.00 Date: May 28, 1998
FOR VALUE RECEIVED, the undersigned (hereinafter, together with their
respective successors in title and assigns, collectively called the
"Borrowers"), by this promissory note (hereinafter, together with the Schedule
annexed hereto, called "this Note"), absolutely and unconditionally, and jointly
and severally, promise to pay to the order of State Street Bank and Trust
Company (hereinafter, together with its successors in title and assigns, called
the "Lender"), the principal sum of Ten Million and 00/100 Dollars
($10,000,000.00), or so much thereof as shall have been advanced by the Lender
to the Borrowers by way of Revolving Loans under the Loan Agreement (as
hereinafter defined) and shall remain outstanding, such payment to be made as
hereinafter provided, and to pay interest on the principal sum outstanding
hereunder from time to time from the date hereof until the said principal sum or
the unpaid portion thereof shall have become due and payable as hereinafter
provided.
Capitalized terms used herein without definition shall have the meaning
set forth in the Loan Agreement.
The unpaid principal (not at the time overdue) under this Note shall
bear interest at the rate or rates from time to time in effect under the Loan
Agreement. Accrued interest on the unpaid principal under this Note shall be
payable on the dates specified in the Loan Agreement.
On February 28, 2000, the date of the final maturity of this Note,
there shall become absolutely due and payable by the Borrowers hereunder, and
the Borrowers hereby jointly and severally promise to pay to the Lender, the
balance (if any) of the principal hereof then remaining unpaid, all of the
unpaid interest accrued hereon and all (if any) other amounts payable on or in
respect of this Note or the indebtedness evidenced hereby.
Each overdue amount (whether of principal, interest or otherwise)
payable on or in respect of this Note or the indebtedness evidenced hereby shall
(to the extent permitted by applicable law) bear interest at the rates and on
the terms provided by the Loan Agreement. The unpaid interest accrued on each
overdue amount in accordance with the foregoing terms of this paragraph shall
become and be absolutely due and payable by the Borrowers to the Lender on
demand by the Lender. Interest on each overdue amount will continue to accrue as
provided by the foregoing terms of this paragraph, and will (to the extent
permitted by applicable law) be compounded daily until the obligations of the
Borrowers in respect of the payment of such overdue amount shall be discharged
(whether before or after judgment).
A-1
<PAGE>
Each payment of principal, interest or other sum payable on or in
respect of this Note or the indebtedness evidenced hereby shall be made by the
Borrowers directly to the Lender in United States dollars, at the address of the
Lender set forth in the Loan Agreement, on the due date of such payment, and in
immediately available and freely transferable funds. All payments on or in
respect of this Note or the indebtedness evidenced hereby shall be made without
set-off or counterclaim and free and clear of and without any deductions,
withholdings, restrictions or conditions of any nature.
This Note is made and delivered by the Borrowers to the Lender pursuant
to the Loan Agreement, dated as of May 28, 1998, by and among the Borrowers and
the Lender (hereinafter, as originally executed, and as now or hereafter varied
or supplemented or amended and restated, called the "Loan Agreement"). This Note
evidences the joint and several obligations of the Borrowers (a) to repay the
principal amount of the Revolving Loans made by the Lender to the Borrowers
pursuant to the Loan Agreement; (b) to pay interest, as herein and therein
provided, on the principal amount hereof remaining unpaid from time to time; and
(c) to pay other amounts which may become due and payable hereunder or
thereunder as herein and therein provided.
The Borrowers will have the right to prepay the unpaid principal of
this Note in full or in part upon the terms contained in the Loan Agreement. The
Borrowers will have an obligation to prepay principal of this Note from time to
time if and to the extent required under, and upon the terms contained in, the
Loan Agreement. Any partial payment of the indebtedness evidenced by this Note
shall be applied in accordance with the terms of the Loan Agreement.
Pursuant to and upon the terms contained in Section 6 of the Loan
Agreement, the entire unpaid principal of this Note, all of the interest accrued
on the unpaid principal of this Note and all (if any) other amounts payable on
or in respect of this Note or the indebtedness evidenced hereby may be declared
to be immediately due and payable, whereupon the entire unpaid principal of this
Note, all of the interest accrued on the unpaid principal of this Note and all
(if any) other amounts payable on or in respect of this Note or the indebtedness
evidenced hereby shall (if not already due and payable) forthwith become and be
due and payable to the Lender without presentment, demand, protest or any other
formalities of any kind, all of which are hereby expressly and irrevocably
waived by the Borrowers, excepting only for notice expressly provided for in the
Loan Agreement.
All computations of interest payable as provided in this Note shall be
computed by the Lender daily on the basis of a 360 day year and paid for the
actual number of days for which due. The interest rate in effect from time to
time shall be determined in accordance with the terms of the Loan Agreement.
A-2
<PAGE>
Should all or any part of the indebtedness represented by this Note
be collected by action at law, or in bankruptcy, insolvency, receivership or
other court proceedings, or should this Note be placed in the hands of
attorneys for collection after default, the Borrowers hereby jointly and
severally promise to pay to the holder of this Note, upon demand by the
holder hereof at any time, in addition to principal, interest and all (if
any) other amounts payable on or in respect of this Note or the indebtedness
evidenced hereby, all court costs and attorneys' fees and all other
collection charges and expenses reasonably incurred or sustained by the
holder of this Note.
The Borrowers hereby irrevocably waive notice of acceptance,
presentment, notice of nonpayment, protest, notice of protest, suit and all
other conditions precedent in connection with the delivery, acceptance,
collection and/or enforcement of this Note or any collateral or security
therefor, except for notices expressly provided for in the Loan Agreement. The
Borrowers hereby absolutely and irrevocably consent and submit to the
jurisdiction of the courts of the Commonwealth of Massachusetts and of any
federal court located in Suffolk County in the said Commonwealth in connection
with any actions or proceedings brought against the Borrowers by the holder
hereof arising out of or relating to this Note.
This Note is intended to take effect as a sealed instrument. This Note
and the obligations of the Borrowers hereunder shall be governed by and
interpreted and determined in accordance with the laws of the Commonwealth of
Massachusetts without regard to its law relating to choice of law.
Each of the Borrowers shall be jointly and severally liable for the
full amount owing under this Note.
IN WITNESS WHEREOF, this REVOLVING CREDIT NOTE has been duly executed
by the undersigned on the day and in the year first above written in Boston,
Massachusetts.
STARMET CORPORATION
By:
---------------------------------
Name:
Title:
STARMET POWDERS, LLC
By:
---------------------------------
Name:
Title:
A-3
<PAGE>
STARMET AEROCAST, LLC
By:
---------------------------------
Name:
Title:
STARMET COMMERCIAL CASTINGS, LLC
By:
---------------------------------
Name:
Title:
STARMET NMI CORPORATION
By:
---------------------------------
Name:
Title:
STARMET CMI CORPORATION
By:
---------------------------------
Name:
Title:
STARMET HOLDINGS CORPORATION
By:
---------------------------------
Name:
Title:
NMI FOREIGN SALES CORPORATION
By:
---------------------------------
Name:
Title:
A-4
<PAGE>
SCHEDULE TO REVOLVING CREDIT NOTE
<TABLE>
<CAPTION>
DATE AMOUNT TYPE OF LOAN INTEREST INTEREST AMOUNT PAID NOTATION
OF LOAN (PRIME RATE RATE* PERIOD** MADE BY
OR LIBOR)
- ----------- ---------- -------------- ------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
- ----------------------------
* For Prime Rate Loans, insert "Prime Rate"
For Libor Loans, insert "Libor Loan Rate"
- -- For Libor Loans only
A-5
<PAGE>
Exhibit B
DISCLOSURE
[To be inserted by Borrowers]
B-1
<PAGE>
Exhibit B
Disclosure Schedule
Section 3.1
Organization and Qualification
FSC is not in good standing in the U.S. Virgin Islands.
<TABLE>
<CAPTION>
Entity Qualified In
<S> <C>
Starmet Corporation (MA Corporation) MA
Starmet NMI Corporation (MA Corporation) MA
Starmet CMI Corporation (DE Corporation) DE, SC
Starmet Commercial Castings, LLC (DE LLC) DE, MA
Starmet Aerocast, LLC (DE LLC) DE, MA
Starmet Powders, LLC (DE LLC) DE, MA
Starmet Holdings Corporation (MA Corporation) MA
NMI Foreign Sales Corporation (U.S. Virgin Islands
Corporation)
</TABLE>
<PAGE>
Exhibit B
Disclosure Schedule
Section 3.3
Title to Properties
<TABLE>
<CAPTION>
Leases: Contract Value Date Term
<S> <C> <C> <C> <C>
ALCO Capital Purchase Order #100717 $76,260.00 06/22/94 5 yr lease
RESOURCE INC.
AT&T Equipment Lease #0004721 $77,101.91 05/13/97 5 yr lease
IKON Purchase Order #100990 $129,000.00 12/30/96 5 yr lease
</TABLE>
Liens:
1. The CMI IRB (defined in Section 3.5) is secured by a lien on the South
Carolina real property.
2. The Palmetto Loans (defined in Section 3.5) are secured by mortgages on
CMI's property, subordinated to the CMI IRB lien.
<PAGE>
Exhibit B
Disclosure Schedule
Section 3.4
Compliance
1. StarMet Corporation ("Starmet" or the "Company") is named as a
Potentially Responsible Party in regard to the Maxey Flats, Kentucky,
Superfund Site.
2. StarMet has received a notice of responsibility letter from the state
of Massachusetts in regards to a closed holding basin facility on its
property in Concord, Massachusetts. The basin facility and the Concord
property have been classified as a priority disposal site, requiring
remediation. Pursuant to a Supplemental Memorandum of Decision, the
U.S. Army agreed to pay the Company for the removal of the holding
basin material. StarMet has entered into a sub-contract with Zhagrus
Environmental, Inc. for the disposal of any hazardous waste at the
basin facility. By letter dated May 11, 1998 the Company was notified
by Zhagrus that Zhagrus expected to incur additional costs in
connection with its work under the disposal contract, and a request by
Zhagrus that the Company pay Zhagrus for such additional costs. Without
admitting liability, the Company (i) has requested further information
from Zhagrus regarding this issue in order to determine if it is liable
and (ii) intends to request a contract price modification for any
liability for such additional cost under its contract with the U.S.
Army.
3. As part of the five-year relicensing process under the federal Nuclear
Regulatory Commission (NRC), StarMet was reissued NRC licenses for both
the Concord and Barnwell facilities. The relicensing program is now
being administered in Massachusetts by the Massachusetts Department of
Public Health ("DPH"), and in the State of South Carolina by the South
Carolina Department of Health and Environmental Control ("DHEC").
StarMet has approached both DPH and DHEC regarding (i) the transfer of
the Concord license to StarMet NMI Corporation and (ii) changing the
name of the Barnwell license to reflect CMI's change of name.
StarMet has had ongoing discussions with the these agencies regarding
Decontamination and Decommissioning funding and financial assurance
plans. At present, StarMet has posted letters of credit with each of
DPH and DHEC in the respective amounts of (i) $750,000 for DPH and (ii)
$2,800,000 and $73,024 for DHEC as security for Decontamination and
Decommissioning expenses.
4. The Company is currently in default of various financial covenants of
its existing credit facility with State Street.
<PAGE>
Exhibit B
Disclosure Schedule
Section 3.5
Financials
Other Indebtedness
- - $3,200,000 Barnwell County, South Carolina Industrial Development
Revenue Note, September 27, 1984 (Carolina Metals, Inc.) (the "CMI
IRB")
- - $500,000.00 Loan to Palmetto Federal Savings Bank of South Carolina
("Palmetto"), November 29, 1995, and a separate letter of credit in the
amount of $73,024, as well as a $995,000 Loan from Palmetto and Lower
Savannah Regional Development Corporation dated March 20, 1998 (Starmet
CMI as Obligor and StarMet as Guarantor) (collectively, the "Palmetto
Loans")
- - StarMet Corporation has issued subordinated debentures to the following
individuals (collectively, the "Debentures"):
<TABLE>
<CAPTION>
Date of Maturity
Name Issue Date Amount
<S> <C> <C> <C>
Melvin Chrein 10-Jan-96 30-Sep-98 $ 83,500
WIAF Investors 10-Jan-96 30-Sep-98 334,000
George Matthews 10-Jan-96 30-Sep-98 83,000
Marshall Chrein 16-Sep-96 30-Sep-98 25,000
Charles Alpert 16-Sep-96 30-Sep-98 225,000
Meryl Chrein 16-Sep-96 30-Sep-98 100,000
Roger Marino 09-Sep-97 22-Sep-00 500,000
WIAF Investors 23-Dec-97 31-Dec-99 500,000
Melvin Chrein 23-Dec-97 31-Dec-99 150,000
Marshall Chrein 23-Dec-97 31-Dec-99 50,000
George Matthews 23-Dec-97 31-Dec-99 50,000
Joshua Feibusch 23-Dec-97 31-Dec-99 150,000
------------
$ 2,250,500
------------
------------
</TABLE>
This information is also set forth on the Initial Financial Statement.
<PAGE>
Exhibit B
Disclosure Schedule
Section 3.8
Litigation
On December 9, 1997, Brush Wellman, Inc. filed a patent infringement
suit against Starmet Corporation in the United States District Court for the
District of Massachusetts, alleging patent infringement of its process patent
for investment casting of beryllium aluminum alloys and seeking an injunction
and monetary damages. On March 28, 1998 the U.S. Patent and Trademark Office
granted the Company's request for reexamination of the previously issued Brush
Wellman patent which served as the basis for its complaint. This matter is set
forth in further detail in the Registration Statement.
<PAGE>
Exhibit B
Disclosure Schedule
Section 3.10
Contracts With Affiliates
1. Starmet Corporation expects to license or assign various intellectual
property that it owns to its operating subsidiaries.
2. Each of Starmet Corporation, Starmet Powders, Starmet Commercial
Castings and Starmet Aerocast lease a portion of space at the Concord
facility from Starmet NMI Corporation pursuant to a lease dated
October 1, 1997.
3. Agreement, effective March 1, 1993, between Starmet and Matthews
Associates Limited.
4. Agreement, effective March 1, 1993, between Starmet and Wilson B.
Tuffin.
<PAGE>
Exhibit B
Disclosure Schedule
Section 3.11
Disclosure
The following document, and all Exhibits thereto, relating to Starmet
Corporation, which was previously filed with the SEC, is hereby incorporated
by reference to this Exhibit B for the purposes of additional disclosure:
1. The Registration Statement.
Any disclosure set forth in any section of this Exhibit B will be
sufficient to disclose such item notwithstanding any other section which, by its
terms, would require the item to be disclosed there.
<PAGE>
Exhibit B
Disclosure Schedule
Section 3.12
Subsidiaries
1. Trio Star, LLC, a joint venture with R-Cubed Composites, Inc. and
Advanced Product Labs.
<PAGE>
Exhibit C
STARMET CORPORATION AND SUBSIDIARIES
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
Re: Loan Agreement dated as of May 28, 1998 (the "Agreement")
Ladies and Gentlemen:
Pursuant to Section 2.4 of the Agreement, the undersigned hereby
confirms its request made on _______________, 19__ for a [Prime Rate] [Libor]
Loan in the amount of $_______________ on _______________, 19__.
[The Interest Period applicable to said Loan will be [one] [two]
[three] [six] months.]*
[Said Loan represents a [conversion] [continuation] of a [Prime Rate]
[Libor] Loan in the same amount made on ____________________.]**
The representations and warranties contained or referred to in
Section 3 of the Agreement are true and accurate in all material respects on
and as of the effective date of the Loan (or continuation or conversion) as
though made on and as of such date (except to the extent that such
representations and warranties expressly relate to an earlier date); and no
Default or Event of Default has occurred and is continuing or will result
from the Loan (or continuation or conversion) to be made pursuant to this
request.
STARMET CORPORATION
STARMET POWDERS, LLC
STARMET AEROCAST, LLC
STARMET COMMERCIAL CASTINGS, LLC
STARMET NMI CORPORATION
STARMET CMI CORPORATION
STARMET HOLDINGS CORPORATION
NMI FOREIGN SALES CORPORATION
By:
------------------------------------
In his capacity as Treasurer of
each of the above-named
Borrowers and hereunto duly
authorized by each of the
above-named Borrowers
- -----------------------------------
* To be inserted in any request for a Libor Loan.
** To be inserted in any request for a conversion or continuation
C-1
<PAGE>
Exhibit D
CERTIFICATE OF CHIEF FINANCIAL OFFICER
STARMET CORPORATION, STARMET POWDERS, LLC, STARMET AEROCAST, LLC,
STARMET COMMERCIAL CASTINGS, LLC, STARMET NMI CORPORATION, STARMET CMI
CORPORATION, STARMET HOLDINGS CORPORATION and NMI FOREIGN SALES CORPORATION
(collectively, the "Borrowers") HEREBY CERTIFY THAT:
This Certificate is furnished pursuant to Section 5.1(iv) of the Loan
Agreement dated as of May 28, 1998 among the Borrowers and State Street Bank and
Trust Company (the "Agreement"). Unless otherwise defined herein, the terms used
in this Certificate and Schedule 1 attached hereto have the meanings described
in the Agreement.
As required by Section 5.1(i) or (ii) of the Agreement, Consolidated
financial statements of the Borrowers for the (year) (quarter) ended _________,
19__ (the "Financial Statements") prepared in accordance with GAAP (subject, in
the case of quarterly statements, to normal year-end audit adjustments, none of
which are or will be materially adverse) accompany this Certificate. The
Financial Statements present fairly the Consolidated financial position of the
Borrowers as at the date thereof and the Consolidated results of operations of
the Borrowers for the period covered thereby.
Schedule 1 attached hereto sets forth financial data and computations
evidencing the Borrowers' compliance with the covenants of the Agreement set
forth in Sections 5.18 through 5.21, inclusive, all of which data and
computations, to the best of the knowledge and belief of the chief financial
officer ("Chief Financial Officer") executing and delivering this Certificate on
behalf of the Borrowers, are true, complete and correct.
The activities of the Borrowers during the period covered by the
Financial Statements have been reviewed by the Chief Financial Officer and by
employees or agents under his immediate supervision. Based on such review, to
the best knowledge and belief of the Chief Financial Officer, during the period
covered by the Financial Statements, and as of the date of this Certificate, (a)
the Borrowers have, or have caused to have, kept, observed, performed and
fulfilled each and every covenant and condition of the Agreement (except to the
extent waived by Lender and noted on Schedule 1 attached hereto) and the Note,
and (b) no Default or Event of Default has occurred or is occurring.
Witness my hand this ____ day of ____________, 19__.
STARMET CORPORATION
STARMET POWDERS, LLC
D-1
<PAGE>
STARMET AEROCAST, LLC
STARMET COMMERCIAL CASTINGS, LLC
STARMET NMI CORPORATION
STARMET CMI CORPORATION
STARMET HOLDINGS CORPORATION
NMI FOREIGN SALES CORPORATION
By:______________________________________
In his capacity as Chief
Financial Officer of each of
the above-named Borrowers and
hereunto duly authorized by
each of the above-named
Borrowers
D-2
<PAGE>
Exhibit E
CLOSING AGENDA
STATE STREET BANK AND TRUST COMPANY ("SSB")
$10,000,000 REVOLVING CREDIT FACILITY
TO
STARMET CORPORATION AND SUBSIDIARIES
_____________ __, 1998
------------------------------------------------------------------------
LENDER: State Street Bank and Trust Company ("SSB")
225 Franklin Street
Boston, Massachusetts 02110
William R. Dewey IV, Vice President
Tel.: (617) 664-3851
Fax: (617) 654-4500
BORROWERS: Starmet Corporation and Subsidiaries ("Borrowers")
2229 Main Street
Concord, Massachusetts 01742
Robert E. Quinn, President
James M. Spiezio, Vice President of Finance
Phone: ( )
Fax: ( )
LENDER'S COUNSEL: Goulston & Storrs ("G&S")
400 Atlantic Avenue
Boston, Massachusetts 02110
Philip A. Herman, Esq.
Tel.: (617) 482-1776
Fax: (617) 574-4112
BORROWERS' Peabody & Arnold ("P&A")
COUNSEL: 50 Rowes Wharf
E-1
<PAGE>
Boston, MA 02110
Robert D. Keough, Esq.
Tel.: (617) 951-2100
Fax: (617) 951-2125
E-2
<PAGE>
RESPONSIBILITY DOCUMENT
A) FINANCING DOCUMENTS
G&S 1. Loan Agreement
P&A/BORROWER a. Disclosure Schedule
G&S 2. Revolving Credit Note ($10,000,000)
Borrower 3. Miscellaneous
(a) Notice of Borrowing
(b) Wire Instructions
(c) Financial Statements
(d) Offering Documents
(e) Evidence of Insurance
P&A 4. UCC-11 (tax and UCC) searches for
each Borrower (MA, SC, others?)
P&A 5. UCC-3 termination statements to be
filed with appropriate filing
offices
B) CORPORATE PROCEEDINGS
P&A/(G&S Form) 6. Officers'/Manager's Certificate for
each Borrower
(a) Certified Articles of
Organization/Certified
Certificate of Incorporation
/Certificate of Formation
(b) By-Laws/Operating Agreement
(c) Borrowing Resolutions
(d) Incumbency
P&A 7. Long-form Legal Existence and Good
Standing Certificates for each
Borrower from MA, DEL and SC
(as applicable)
P&A [8. Foreign Qualification Certificates
for each Borrower
from __________]
C) LEGAL OPINION
P&A/(G&S Form) 9. Opinion of P&A, as counsel to each
Borrower, as to Due Authorization,
Execution, Delivery,
E-3
<PAGE>
Enforceability, Etc., delivered to
SSB (including with respect to the
Offering)
D) POST-CLOSING
10. Tax Good Standing Certificate for
each Borrower from MA, DEL and SC
(as applicable)
E-4
<PAGE>
FORM OF LEGAL OPINION OF
PEABODY & ARNOLD
[To be modeled on Boston Acoustics Opinion, with appropriate modifications]
<PAGE>
Exhibit 10 (zz)
REVOLVING CREDIT NOTE
$10,000,000.00 Date: _________ __, 1998
FOR VALUE RECEIVED, the undersigned (hereinafter, together with their
respective successors in title and assigns, collectively called the
"Borrowers"), by this promissory note (hereinafter, together with the Schedule
annexed hereto, called "this Note"), absolutely and unconditionally, and jointly
and severally, promise to pay to the order of State Street Bank and Trust
Company (hereinafter, together with its successors in title and assigns, called
the "Lender"), the principal sum of Ten Million and 00/100 Dollars
($10,000,000.00), or so much thereof as shall have been advanced by the Lender
to the Borrowers by way of Revolving Loans under the Loan Agreement (as
hereinafter defined) and shall remain outstanding, such payment to be made as
hereinafter provided, and to pay interest on the principal sum outstanding
hereunder from time to time from the date hereof until the said principal sum or
the unpaid portion thereof shall have become due and payable as hereinafter
provided.
Capitalized terms used herein without definition shall have the meaning set
forth in the Loan Agreement.
The unpaid principal (not at the time overdue) under this Note shall bear
interest at the rate or rates from time to time in effect under the Loan
Agreement. Accrued interest on the unpaid principal under this Note shall be
payable on the dates specified in the Loan Agreement.
On February 28, 2000, the date of the final maturity of this Note, there
shall become absolutely due and payable by the Borrowers hereunder, and the
Borrowers hereby jointly and severally promise to pay to the Lender, the balance
(if any) of the principal hereof then remaining unpaid, all of the unpaid
interest accrued hereon and all (if any) other amounts payable on or in respect
of this Note or the indebtedness evidenced hereby.
Each overdue amount (whether of principal, interest or otherwise) payable
on or in respect of this Note or the indebtedness evidenced hereby shall (to the
extent permitted by applicable law) bear interest at the rates and on the terms
provided by the Loan Agreement. The unpaid interest accrued on each overdue
amount in accordance with the foregoing terms of this paragraph shall become and
be absolutely due and payable by the Borrowers to the Lender on demand by the
Lender. Interest on each overdue amount will continue to accrue as provided by
the foregoing terms of this paragraph, and will (to the extent permitted by
applicable law) be compounded daily until the obligations of the Borrowers in
respect of the payment of such overdue amount shall be discharged (whether
before or after judgment).
1
<PAGE>
Each payment of principal, interest or other sum payable on or in respect
of this Note or the indebtedness evidenced hereby shall be made by the Borrowers
directly to the Lender in United States dollars, at the address of the Lender
set forth in the Loan Agreement, on the due date of such payment, and in
immediately available and freely transferable funds. All payments on or in
respect of this Note or the indebtedness evidenced hereby shall be made without
set-off or counterclaim and free and clear of and without any deductions,
withholdings, restrictions or conditions of any nature.
This Note is made and delivered by the Borrowers to the Lender pursuant to
the Loan Agreement, dated as of __________ __, 1998, by and among the Borrowers
and the Lender (hereinafter, as originally executed, and as now or hereafter
varied or supplemented or amended and restated, called the "Loan Agreement").
This Note evidences the joint and several obligations of the Borrowers (a) to
repay the principal amount of the Revolving Loans made by the Lender to the
Borrowers pursuant to the Loan Agreement; (b) to pay interest, as herein and
therein provided, on the principal amount hereof remaining unpaid from time to
time; and (c) to pay other amounts which may become due and payable hereunder or
thereunder as herein and therein provided.
The Borrowers will have the right to prepay the unpaid principal of this
Note in full or in part upon the terms contained in the Loan Agreement. The
Borrowers will have an obligation to prepay principal of this Note from time to
time if and to the extent required under, and upon the terms contained in, the
Loan Agreement. Any partial payment of the indebtedness evidenced by this Note
shall be applied in accordance with the terms of the Loan Agreement.
Pursuant to and upon the terms contained in Section 6 of the Loan
Agreement, the entire unpaid principal of this Note, all of the interest accrued
on the unpaid principal of this Note and all (if any) other amounts payable on
or in respect of this Note or the indebtedness evidenced hereby may be declared
to be immediately due and payable, whereupon the entire unpaid principal of this
Note, all of the interest accrued on the unpaid principal of this Note and all
(if any) other amounts payable on or in respect of this Note or the indebtedness
evidenced hereby shall (if not already due and payable) forthwith become and be
due and payable to the Lender without presentment, demand, protest or any other
formalities of any kind, all of which are hereby expressly and irrevocably
waived by the Borrowers, excepting only for notice expressly provided for in the
Loan Agreement.
All computations of interest payable as provided in this Note shall be
computed by the Lender daily on the basis of a 360 day year and paid for the
actual number of days for which due. The interest rate in effect from time to
time shall be determined in accordance with the terms of the Loan Agreement.
Should all or any part of the indebtedness represented by this Note be
collected by action at law, or in bankruptcy, insolvency, receivership or other
court proceedings, or should this Note be placed in the hands of attorneys for
collection after default, the
2
<PAGE>
Borrowers hereby jointly and severally promise to pay to the holder of this
Note, upon demand by the holder hereof at any time, in addition to principal,
interest and all (if any) other amounts payable on or in respect of this Note or
the indebtedness evidenced hereby, all court costs and attorneys' fees and all
other collection charges and expenses reasonably incurred or sustained by the
holder of this Note.
The Borrowers hereby irrevocably waive notice of acceptance, presentment,
notice of nonpayment, protest, notice of protest, suit and all other conditions
precedent in connection with the delivery, acceptance, collection and/or
enforcement of this Note or any collateral or security therefor, except for
notices expressly provided for in the Loan Agreement. The Borrowers hereby
absolutely and irrevocably consent and submit to the jurisdiction of the courts
of the Commonwealth of Massachusetts and of any federal court located in Suffolk
County in the said Commonwealth in connection with any actions or proceedings
brought against the Borrowers by the holder hereof arising out of or relating to
this Note.
This Note is intended to take effect as a sealed instrument. This Note and
the obligations of the Borrowers hereunder shall be governed by and interpreted
and determined in accordance with the laws of the Commonwealth of Massachusetts
without regard to its law relating to choice of law.
Each of the Borrowers shall be jointly and severally liable for the full
amount owing under this Note.
IN WITNESS WHEREOF, this REVOLVING CREDIT NOTE has been duly executed by
the undersigned on the day and in the year first above written in Boston,
Massachusetts.
STARMET CORPORATION
By:
------------------------------
Name:
Title:
STARMET POWDERS, LLC
By:
------------------------------
Name:
Title:
3
<PAGE>
STARMET AEROCAST, LLC
By:
------------------------------
Name:
Title:
STARMET COMMERCIAL CASTINGS, LLC
By:
------------------------------
Name:
Title:
STARMET NMI CORPORATION
By:
------------------------------
Name:
Title:
STARMET CMI CORPORATION
By:
------------------------------
Name:
Title:
STARMET HOLDINGS CORPORATION
By:
------------------------------
Name:
Title:
NMI FOREIGN SALES CORPORATION
By:
------------------------------
Name:
Title:
4
<PAGE>
SCHEDULE TO REVOLVING CREDIT NOTE
<TABLE>
<CAPTION>
DATE AMOUNT TYPE OF LOAN INTEREST INTEREST AMOUNT PAID NOTATION
OF LOAN (PRIME RATE RATE* PERIOD** MADE BY
OR LIBOR)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
- --------
* For Prime Rate Loans, insert "Prime Rate"
For Libor Loans, insert "Libor Loan Rate"
** For Libor Loans only
5
<PAGE>
Exhibit 10(aaa)
THIRD AMENDMENT TO CREDIT AGREEMENT
Agreement is made as of this 11th day of June, 1998 among STARMET
CORPORATION, a Massachusetts corporation (f/k/a Nuclear Metals, Inc.)
("StarMet"), STARMET POWDERS, LLC, a Delaware limited liability company
("Powders"), STARMET AEROCAST, LLC, a Delaware limited liability company
("AeroCast"), STARMET COMCAST, LLC, a Delaware limited liability company
("ComCast"), STARMET NMI CORPORATION, a Massachusetts corporation ("NMI"),
STARMET CMI CORPORATION, a Delaware corporation (f/k/a Carolina Metals, Inc.)
("CMI"), STARMET HOLDINGS CORPORATION, a Massachusetts corporation ("Holdings"),
NMI FOREIGN SALES CORPORATION, a U.S. Virgin Islands corporation ("FSC", and
together with StarMet, Powders, AeroCast, ComCast, NMI, CMI and Holdings, the
"Borrowers") and STATE STREET BANK AND TRUST COMPANY, a Massachusetts chartered
trust company ("Bank").
WHEREAS, the Borrowers and the Bank are parties to an Amended and Restated
Credit Agreement dated as of October 1, 1997 (the "Credit Agreement"); and
WHEREAS, the parties have agreed to certain modifications;
NOW THEREFORE, the parties agree as follows:
1. Section 1.02(a). Amount. Section 1.02(a) of the Credit Agreement is
hereby amended by deleting the proviso at the end of Section 1.02(a) and
substituting therefor the following:
"provided that the aggregate of all Advances outstanding at any time less
the maximum aggregate liability of the Borrowers under any outstanding
letters of credit issued prior to the date hereof or pursuant to this
Credit Agreement shall not exceed (i) $9,550,000 through September 30, 1998,
(ii) $8,050,000 from October 1, 1998 through December 31, 1998, and
(iii) $6,550,000 on January 1, 1999 and thereafter (such amount as in effect
from time to time may be referred to as the "Maximum Credit")."
2. Section 4.22. Net Income. Section 4.22 of the Credit Agreement, as
amended by the Second Amendment to Credit Agreement dated December 29, 1997
among the Borrowers and the Bank (the "Second Amendment"), is hereby amended
by deleting the section in its entirety and substituting therefor the
following:
"The Net Income of the Borrowers shall be not less than ($500,000)
for the quarter ending June 30, 1998 and not less than $750,000
for the quarter ending September 30, 1998 and each quarter
thereafter."
<PAGE>
3. Effectiveness. This Third Amendment to Credit Agreement shall become
effective upon (a) execution of this Third Amendment by the Borrowers and the
Bank and (b) receipt by the Bank of evidence satisfactory to the Bank that
the Borrowers are authorized to execute this Third Amendment.
4. Miscellaneous.
(a) The Borrowers hereby confirm to the Bank that the representations
and warranties of the Borrowers set forth in Article II of the Credit
Agreement are true and correct as of the date hereof, as if set forth
herein in full.
(b) There is no Event of Default, and no condition which, with
the passage of time or giving of notice or both, would constitute an Event
of Default under the Credit Agreement except as amended or waived in this
Third Amendment.
(c) Except as set forth above and in the First Amendment dated
as of December 9, 1997, and the Second Amendment, the Credit Agreement
remains in full force and effect.
-2-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Third Amendment to
Credit Agreement under seal as of the date first above written.
STARMET CORPORATION
By: /s/ James M. Spiezio
-------------------------
Name: James M. Spiezio
Title: Vice President Finance
and Administration
STARMET POWDERS, LLC
By: /s/ James M. Spiezio
-------------------------
Name: James M. Spiezio
Title: Treasurer
STARMET AEROCAST, LLC
By: /s/ James M. Spiezio
-------------------------
Name: James M. Spiezio
Title: Treasurer
STARMET COMCAST, LLC
By: /s/ James M. Spiezio
-------------------------
Name: James M. Spiezio
Title: Treasurer
STARMET NMI CORPORATION
By: /s/ James M. Spiezio
-------------------------
Name: James M. Spiezio
Title: Treasurer
-3-
<PAGE>
STARMET CMI CORPORATION
By: /s/ James M. Spiezio
-------------------------
Name: James M. Spiezio
Title: Treasurer
STARMET HOLDINGS CORPORATION
By: /s/ James M. Spiezio
-------------------------
Name: James M. Spiezio
Title: Treasurer
NMI FOREIGN SALES CORPORATION
By: /s/ James M. Spiezio
-------------------------
Name: James M. Spiezio
Title: Treasurer
STATE STREET BANK AND TRUST
COMPANY
By: /s/ William R. Dewey, IV
-------------------------
Name: William R. Dewey, IV
Title: Vice President
<PAGE>
Exhibit 23(a)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports dated November 14, 1997 (except with respect to the matters discussed
in Notes 6 and 11 as to which the date is December 29, 1997) and to all
references to our Firm included in or made a part of this registration
statement.
/s/ Arthur Andersen LLP
- -----------------------
Arthur Andersen LLP
Boston, Massachusetts
June 11, 1998
