<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of
----- the Securities Exchange Act of 1934 for the quarterly
period ended December 31, 1997
or
----- Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 for the transition
period from _____ to _____
Commission File No. 0-8836
------
Starmet Corporation
(Exact name of Registrant as specified in its charter)
Massachusetts 04-2506761
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2229 Main Street,
Concord, Massachusetts 01742
(Address of Principal Executive Offices) (Zip Code)
(978) 369-5410
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---------- ----------
As of February 13, 1998 there were issued and outstanding 4,786,344 shares of
the Registrant's Common Stock.
<PAGE>
STARMET CORPORATION AND SUBSIDIARIES
FORM 10-Q
for the quarterly period ended December 31, 1997
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information 2
Item 1. Financial Statements
Consolidated Balance Sheets:
December 31, 1997 and September 30, 1997 3
Consolidated Statements of Income:
Three Months Ended December 31, 1997
and December 31, 1996 4
Consolidated Statements of Cash Flow:
Three Months Ended December 31, 1997
and December 31, 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II. Other Information 12
Item 1. Legal Proceedings 12
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES
</TABLE>
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
PREPARATION OF FINANCIAL STATEMENTS
The financial statements included herein have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission and are subject to year-end 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 ommitted pursuant to such rules
and regulations. It is suggested that the financial statements be read in
conjunction with the financial statements and notes included in the Company's
most recent Annual Report on Form 10-K.
The information furnished reflects all adjustments, which, in the opinion
of management, are necessary for a fair statement of results for the interim
periods. It should also be noted that results for the interim periods are not
necessarily indicative of the results expected for any other interim period or
the full year.
2
<PAGE>
STARMET CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
1997 1997
------------- -------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents........................ $ 186,000 $ 195,000
Restricted Cash.................................. 73,000 73,000
Accounts receivable, net of allowances
for doubtful accounts of $421,000 at
December 31, 1997 and September 30, 1997....... 6,962,000 5,546,000
Inventories...................................... 11,610,000 11,440,000
Other current assets............................. 387,000 619,000
------------- -------------
Total current assets......................... 19,218,000 17,873,000
------------- -------------
Property, Plant and Equipment...................... 39,880,000 39,083,000
Less accumulated depreciation.................... 24,438,000 24,036,000
------------- -------------
Net property, plant and equipment................ 15,442,000 15,047,000
------------- -------------
Other assets....................................... 2,156,000 1,784,000
------------- -------------
$ 36,816,000 $ 34,704,000
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................ $ 4,022,000 $ 1,885,000
Accounts payable and accrued expenses............ 5,613,000 5,245,000
------------- -------------
Total current liabilities........................ 9,635,000 7,130,000
------------- -------------
------------- -------------
Long term obligations.............................. 387,000 430,000
------------- -------------
Notes payable to Shareholders'..................... 1,932,000 1,048,000
------------- -------------
Stockholders' equity:
Common stock, par value $.10; authorized-
15,000,000 shares; 4,784,244 issued and
outstanding for December 31, 1997
and September 30, 1997........................... 478,000 478,000
Additional paid-in capital......................... 14,033,000 14,033,000
Warrants issued.................................... 687,000 360,000
Retained earnings.................................. 9,664,000 11,225,000
------------- -------------
Total stockholders' equity....................... 24,862,000 26,096,000
------------- -------------
$ 36,816,000 $ 34,704,000
------------- -------------
------------- -------------
</TABLE>
3
<PAGE>
STARMET CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------
<S> <C> <C>
DECEMBER 31, DECEMBER 31,
1997 1996
------------- ------------
Net sales and contract revenues...................... $ 8,079,000 $7,271,000
------------- ------------
Cost and expenses
Cost of sales...................................... 7,101,000 5,270,000
Selling, general and administrative................ 2,247,000 1,188,000
Research and development........................... 158,000 247,000
------------- ------------
9,506,000 6,705,000
------------- ------------
Operating (loss) income.............................. (1,427,000) 566,000
Other income......................................... 1,000 9,000
Interest (expense), net.............................. (135,000) (55,000)
------------- ------------
Income before income taxes........................... (1,561,000) 520,000
Provision for income taxes........................... -- 11,000
------------- ------------
Net income (Loss).................................... $ (1,561,000) $ 509,000
------------- ------------
------------- ------------
Per Share Information
Basic income(loss) per common share.................. $ (0.33) $ 0.11
------------- ------------
------------- ------------
Weighed average shares outstanding................... 4,784,000 4,782,000
Diluted income per common share...................... n/a $ 0.11
------------- ------------
------------- ------------
Weighed average shares outstanding and
dilutive potential common shares................... n/a 4,883,000
</TABLE>
4
<PAGE>
STARMET CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE PERIODS ENDED: (Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------
DECEMBER 31, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (Loss)................................................ $ (1,561,000) $ 509,000
Adjustments to reconcile net income(loss)
to net cash provided (used) by operating
activities:
Depreciation and amortization................................ 435,000 384,000
Changes in assets and liabilities, net
(Increase) decrease in accounts receivable................. (1,416,000) (2,619,000)
(Increase) decrease in inventories......................... (170,000) 1,117,000
Increase (decrease) in accounts payable
and accrued expenses...................................... 368,000 (322,000)
(Increase) decrease in other assets........................ (140,000) 11,000
------------- ------------
Net cash used by operating activities.................... (2,484,000) (920,000)
------------- ------------
Cash flows from investing activities:
Capital expenditures, net........................................ (797,000) (406,000)
------------- ------------
Net cash used in investing activities............................ (797,000) (406,000)
------------- ------------
Cash flows from financing activities:
Principal payments under long-term obligations................... (43,000) (428,000)
Net Proceeds from bank debt...................................... 2,465,000 1,000,000
Proceeds from Notes Payable to Shareholders & Warrants........... 850,000 --
------------- ------------
Net cash provided by financing activities...................... 3,272,000 572,000
------------- ------------
Net increase (decrease) in cash and equivalents.................... (9,000) (754,000)
Cash and equivalents at beginning of the period.................. 268,000 1,301,000
------------- ------------
Cash and equivalents at end of the period........................ $ 259,000 $ 547,000
------------- ------------
------------- ------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest....................................................... $ 68,000 $ 14,000
Income taxes................................................... $ -- $ --
</TABLE>
5
<PAGE>
NOTES
1. The significant accounting policies followed by the Company in preparing
its consolidated financial statements are set forth in Note (2) to such
financial statements included in Form 10-K for the year ended September 30,
1997.
2. Inventories are stated at the lower of cost (first-in, first-out) or
market, and include labor, materials, and overheads for manufacturing and
engineering. Inventories at December 31, 1997 and September 30, 1997 consist
of:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 31,
1997 1997
------------- -------------
<S> <C> <C>
Work-in process.................................................................... $ 2,472,000 $ 2,511,000
Raw materials...................................................................... 8,461,000 8,271,000
Spare parts........................................................................ 677,000 658,000
------------ -----------
$11,610,000 $11,440,000
------------ -----------
------------ -----------
</TABLE>
3. Income per share of common stock
The Company has adopted SFAS No. 128, Earnings per Share, effective
December 15, 1997. Basic income per common share is computed by dividing net
income (loss) by the weighted average number of common shares outstanding
during the period. For diluted income per common share, the denominator also
includes dilutive outstanding stock options and warrants determined using the
treasury stock method.
Common share and common share dilutive potential disclosures are:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
(IN THOUSANDS) DECEMBER 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Weighted average common shares outstanding.............................................. 4,784,000 4,782,000
Dilutive potential common shares........................................................ n/a 101,000
--------- ---------
Diluted common shares................................................................... n/a 4,883,000
--------- ---------
Options and warrants excluded from diluted income per common share as their effect would
be
antidilutive....................................................................... 510,000 202,000
--------- ---------
--------- ---------
</TABLE>
6
<PAGE>
4. Debt
The Company entered into a First Amendment to Credit Agreement with its
lender dated December 9, 1997, which provides for an increase in the credit
facility to $8.05 million. On December 29, 1997, the Company entered into a
Second Amendment to the Credit Agreement which provides for the following;
(a) an increase in the total amount of credit available to the Company from
$8.05 million to $9.55 million consisting of a $6.0 million line of credit
and $3.55 million letters of credit; (b) the terms of repayment for the line
of credit have been revised so that $1.5 million is due July 1, 1998, $1.5
million is due October 1, 1998 and the balance, $3.0 million is due on
February 28, 1999; and (c) all previous events of noncompliance with the
Credit Agreement have been waived and certain financial covenants have been
amended.
In consideration of the Second Amendment to the Credit Agreement, the
Company issued to the lender a warrant to purchase 25,000 shares of its
common stock at the ten-day average of fair market value as of December 29,
1997. These warrants have a seven-year exercise period. These warrants have
been valued at approximately $327,000 and will be amortized as interest
expense over the period ending October 1, 1998. The Company also paid its
lender $15,000 upon execution of the Amendment.
The Company also issued convertible debt in the original principal amount
of $850,000 to certain shareholders on December 23, 1997. (See note 6 of the
notes to consolidated financial statements included in the Company's Annual
Report on Form 10-K for the year ended September 30, 1997 for details of the
Credit Agreement and subordinated debt issued to certain of the Company's
shareholders).
As of December 31, 1997 the Company was out of compliance with certain of
its financial covenants pursuant to its credit agreement. On February 23,
1998 the Company received from the bank a waiver for this event of
non-compliance.
5. 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 "District Court") alleging that
the Company is infringing on a patent (the "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 January 22,
1998, the Company filed in the U.S. Patent and Trademark Office (the "PTO")
a request for re-examination (the "Request") of the Patent. In the Request,
the Company contends, among other things, that there is sufficient "prior
art" in the field of investment castings and castings of beryllium aluminum
alloys teaching the claimed invention of the Patent such that the Patent
should not have issued. If the PTO grants the Request, it will undertake a
process of re-examination of the validity of the Brush Wellman patent that,
the Company anticipates, could last for at least one year and possibly
longer. Although the Company believes that the Request has merit, there can
be no assurance that the PTO will decide to re-examine the Patent. If the
Request were granted, there can be no assurance that the PTO would find the
Patent to be invalid. On January 27, 1998, the Company filed in the District
Court a motion to stay the court case pending the outcome of the
re-examination proceeding. If the 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 Patent. Although the Company believes that its motion
to stay has merit, no assurance can be given that the District Court will
grant the motion.
Even though the Company has been advised by patent counsel that Brush
Wellman's claims are without merit, no assurance can be given as to the
ultimate outcome of the lawsuit. Even if the lawsuit was 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. In the
alternative, 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 or results of
operations.
Even in the event of a successful outcome the Company may incur
significant legal expenses in its defense.
7
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER FISCAL 1998 COMPARED WITH FIRST QUARTER FISCAL 1997
Net sales increased by $808,000 or 11% to $8,079,000 in the first quarter
of fiscal 1998, as compared to the first quarter of the prior year. Sales in
the Depleted Uranium Penetrator segment increased by $1,303,000, or 38%.
Sales in the Specialty Metal Products segment increased by $440,000 or 18%.
Sales in the Uranium Services and Recycle segment decreased by $935,000 or
27%.
The sales increase in the Depleted Uranium Penetrator segment was due to
$2,025,000 in revenue recognized on the remediation of the holding basin at
the Company's Concord facility which is being remediated pursuant to a
government contract, with minimal gross margin. This increase was partially
offset by a reduction in foreign penetrator blanks sales. The sales increase
in the Specialty Metal Products segment was due primarily to increased
customer demand for medical powders. The sales decrease in the Uranium
Services and Recycle segment was due primarily to a delay in expected Atomic
Vapor Laser Isotope Separation (AVLIS) feedstock production orders which were
received in the first quarter of fiscal 1998 and which the Company expects
will result in revenue recognition beginning in the second quarter of fiscal
1998 with most of the revenue expected to be recognized in the third fiscal
quarter. To be prepared for this AVLIS production the workforce at Starmet CMI
was increased significantly during the first quarter.
The production equipment required for this AVLIS contract is in the
process of being refurbished and it is management's view that it will be fully
operational in order to meet its current production requirements in the
second quarter. However, in the event that start-up is delayed it could have
a materially adverse effect on results of operations and financial position.
Gross profit in the first quarter decreased by $1,023,000 or 51% to
$978,000, as compared to the first quarter of fiscal 1997. The decrease in
gross profit for the quarter is attributable in part to changes in product
mix. As a percentage of sales, gross profit was 12% as compared to 28% for
the first quarter of fiscal 1997.
Selling, general and administrative expenses increased by $1,059,000 or
89% as compared to the first quarter of fiscal 1997. This increase was
primarily attributable to increased administrative expenses at the Company's
Starmet CMI subsidiary in anticipation of AVLIS feedstock production
described above and from expenses associated with the reorganization of the
Corporation as a parent corporation with a number of wholly-owned
subsidiaries. As a percentage of sales, these expenses were 28% as compared
to 16% the same period a year earlier.
Other income decreased by $8,000 to $1,000 for the first quarter of
fiscal 1998.
Interest expense increased to $135,000 from $55,000 for the same period a
year earlier. This increase is primarily attributable to interest expense
associated with increased borrowings and the effect of the amortization of
the value associated with warrants issued in conjunction with shareholder
notes.
Income taxes in the first quarter 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.
8
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the end of the first quarter of fiscal 1998, the
Company had working capital of $9,583,000, a decrease of $1,160,000 since the
end of fiscal 1997. At December 31, 1997, the Company's accounts receivable
and inventories increased by $1,416,000 and $170,000, respectively, compared
with September 30, 1997 levels. Cash (less restricted cash) at December 31,
1997 was $186,000. Current indebtedness increased to $4,022,000 from
$1,885,000 as a result of increased borrowings under the Company's bank line
of credit. At the end of the first quarter of fiscal 1998 notes payable
to shareholders increased to $1,932,000 from $1,048,000 as at September 30,
1997.
The Company entered into a First Amendment to Credit Agreement with its
lender dated December 9, 1997, which provides for an increase in the credit
facility to $8.05 million. On December 29, 1997, the Company entered into a
Second Amendment to the Credit Agreement which provides for the following;
(a) an increase in the total amount of credit available to the Company from
$8.05 million to $9.55 million consisting of a $6.0 million line of credit
and $3.55 million letters of credit; (b) the terms of repayment for the line
of credit have been revised so that $1.5 million is due July 1, 1998, $1.5
million is due October 1, 1998 and the balance, $3.0 million is due on
February 28, 1999; and (c) all previous events of noncompliance with the
Credit Agreement have been waived and certain financial covenants have been
amended.
In consideration of the Second Amendment to the Credit Agreement, the
Company issued to the lender a warrant to purchase 25,000 shares of its
common stock at the ten-day average of fair market value as of December 29,
1997. These warrants have a seven-year exercise period. These warrants have
been valued at approximately $327,000 and will be amortized as interest
expense over the period ending October 1, 1998. The Company also paid its
lender $15,000 upon execution of the Amendment.
The Company also issued convertible debt in the original principal amount
of $850,000 to certain shareholders on December 23, 1997. (See note 6 of the
notes to consolidated financial statements included in the Company's Annual
Report on Form 10-K for the year ended September 30, 1997 for details of the
Credit Agreement and subordinated debt issued to certain of the Company's
shareholders).
As of December 31, 1997 the Company was out of compliance with certain of
its financial covenants pursuant to its credit agreement. On February 23,
1998 the Company received a waiver for this event of non-compliance.
These increases in bank borrowings and borrowings from shareholders were
necessary to fund a number of expenses which were incurred in expectation of
future business and revenues from the Company's Beralcast business and its
Starmet CMI facility in Barnwell, South Carolina, which business and revenues
were not realized in the first quarter of fiscal 1998, partially resulting in
the Company's loss for such quarter.
9
<PAGE>
As at December 31, 1997, the Company had $4,349,000, exclusive of the
value of warrants, outstanding under its bank line of credit, with $1,651,000
available thereunder (after subtraction of $3,550,000 in letters of credit
issued thereunder). The Company believes that cash from operations together
with cash available under its line of credit will permit it to sustain
operations at current capacity levels in the near term. Capital spending is
expected to continue in support of facilities both in Concord, Massachusetts
and Barnwell, South Carolina. The Company anticipates that this will require
approximately $2,000,000 capital expenditures during fiscal 1998, inclusive
of approximately $797,000 spent as of December 31, 1997. The Company expects
to fund the balance of currently planned capital expenditures for fiscal 1998
through $1,000,000 in additional long-term borrowing expected to be available
in the second quarter from another bank and the remainder through cash from
operations. In addition, the Company believes that in order to obtain and
perform orders for large scale commercial production of its Beralcast
products, it will be necessary for it to significantly increase capital
expenditures to expand its commercial Beralcast manufacturing capabilities to
meet anticipated customer demand through fixed asset additions, including
furnaces, automated production equipment and facility upgrades. As of
February 20, 1998 the Company had $5,580,000 outstanding under it's line of
credit, $3,550,000 outstanding in letters of credit and $420,000 available.
The Company currently is using its Beralcast technology to develop, among
other things, prototypes and pre-production quantities of disk drive arm sets
and prototypes of golf club heads. These products 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 the Company's 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. The markets for these products are subject to change and volatility
due to a number of factors and 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. Failure of the
Company's Beralcast products to achieve or sustain broad market acceptance
on a timely basis could have a material adverse effect on the Company's
business, result of operations and financial condition. Additionally, while
certain disk drive manufacturers have provided estimates to the Company of
future demand, the Company believes the practice in this industry and other
industries which the Company expects to serve is to place orders for one
quarter only, accompanied by projections of demand for future operations.
Accordingly, if funding becomes available for capital expenditures to
increase-manufacturing capacity, the Company expects to commit to the cost of
expanding its production capacity without firm orders for products.
The Company currently lacks the capital resources to fund such additional
capital expenditures and intends to seek funding for such capital
expenditures through equity or debt financings, borrowings from shareholders,
joint ventures,
10
<PAGE>
strategic relationships with customers or other manufacturers, fees from
technology licensing, or a combination of the foregoing. In recent years the
Company has funded cash shortfalls from operations through its bank line of
credit and borrowings or investments by stockholders. The Company believes
that, while these sources of capital may be available for certain additional
capital requirements, if it is successful in obtaining orders for large
volume commercial production of Beralcast products, funding from additional
sources in material amounts will be required. There can be no assurance that
such funds will be available on a timely basis or that any such funds will be
sufficient to support the Company's business strategy or that, if additional
financing is available, it will be available in amounts and on terms
satisfactory to the Company, if at all. In particular, 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. This may make it difficult for the Company to effect a private
or public equity financing or, if such financing can be affected, it may
adversely impact the terms of such financing and the market for the Company's
Common Stock and result in dilution to current stockholders. Additional debt
financing would add to the financial risks of increased leverage.
The financial covenants and other restrictions contained in agreements
relating to the Company's current bank indebtedness require the Company to
meet certain financial tests and, among other things, prohibit or restrict,
under certain circumstances, the Company from paying cash dividends, making
capital expenditures above $2,000,000, acquiring or disposing of assets, or
borrowing additional funds. A waiver of such covenants would be required in
order to permit planned capital expenditures.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report, including, without limitation,
those concerning (i) the Company's Beralcast business and expansion plans,
(ii) the possible effects on the Company of certain legal proceedings, (iii)
the effects on the Company of changes in the businesses in which it operates
or in economic conditions generally, (iv) the Company's backlog and the
expected timing of orders and revenue recognition, and (v) the Company's
expectations concerning required additional financings to permit expansion,
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 Exhibit 99 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended March 31, 1997. 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.
11
<PAGE>
PART II-OTHER INFORMATION
Item 1. 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 "District Court") alleging that
the Company is infringing on a patent (the "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 January 22,
1998, the Company filed in the U.S. Patent and Trademark Office (the "PTO")
a request for re-examination (the "Request") of the Patent. In the Reguest,
the Company contends, among other things, that there is sufficient "prior
art" in the field of investment castings and castings of beryllium aluminum
alloys teaching the claimed invention of the Patent such that the Patent
should not have issued. If the PTO grants the Request, it will undertake a
process of re-examination of the validity of the Brush Wellman patent that,
the Company anticipates, could last for at least one year and possibly
longer. Although the Company believes that the Request has merit, there can
be no assurance that the PTO will decide to re-examine the Patent. If the
Request were granted, there can be no assurance that the PTO would find the
Patent to be invalid. On January 27, 1998, the Company filed in the District
Court a motion to stay the court case pending the outcome of the
re-examination proceeding. If the 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 Patent. Although the Company believes that its motion
to stay has merit, no assurance can be given that the District Court will
grant the motion.
Even though the Company has been advised by patent counsel that Brush
Wellman's claims are without merit, no assurance can be given as to the
ultimate outcome of the lawsuit. Even if the lawsuit was 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 damanges 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. In the
alternative, 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 or results of
operations.
Even in the event of a successful outcome the Company may incur
significant legal expenses in its defense.
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Item 5. Other Information
On February 9, 1998, the Company announced that a customer of its
wholly-owned subsidiary, Starmet CMI, exercised options for approximately
four million dollars of work to be performed at the Company's Barnwell, South
Carolina facility during fiscal 1998. Substantial costs in preparation for
performance of this contract were incurred during the Company's first fiscal
quarter, but revenue is not expected to be recognized from work on this
contract before the Company's second fiscal quarter, with most of the revenue
expected to be recognized in the Company's third fiscal quarter. All of the
contract work is expected to be completed and taken into revenue in fiscal
year 1998. The contract involves work by the Company to convert depleted and
natural uranium hexaflouride into metal for use as feedstock in nuclear
reactors.
On February 13, 1998, the Company announced that its wholly-owned
subsidiary Starmet CMI, has been awarded a contract add-on valued at
approximately $1.1 million as part of its existing contract with Rocky
Mountain Remediation Services to convert and stabilize depleted uranium metal
into oxide using DUCRETE -Trademark- technology. This brings the total contract
value to approximately $2.2 million.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 10MM: Operating Agreement for Trio Star LLC dated December 31, 1997
by and among Advanced Products Labs, Inc., R-Cubed
Composites, Inc. and Starmet Comcast LLC.
Exhibit 27: Financial Data Schedule
(b) Reports on Form 8-K:
On October 16, 1997, the Company filed a current report on Form 8-K
reporting, under Item 5-Other Events, that on September 29, 1997, the
Company's Stockholders approved a plan of reorganization of the Company.
On December 17, 1997, the Company filed a current report on Form 8-K
reporting, under Item 5-Other Events, that on December 9, 1997, Brush Wellman
had filed a patent infringement suit against the Company. See hereinabove
under Item 1--Legal Proceedings.
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Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
STARMET CORPORATION
By: /s/ Robert E. Quinn
-------------------------
Robert E. Quinn,
President Chief Executive
Officer
Date: February 23, 1998
-----------------------
By: /s/ James M. Spiezio
--------------------------
James M. Spiezio
Vie President, Finance
Chief Financial Officer
Date: February 23, 1998
----------------------
By: /s/ Rebecca L. Perry
--------------------------
Rebecca L. Perry
Controller
Chief Accounting Officer
Date: February 23, 1998
----------------------
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___ = THE MATERIAL HAS BEEN OMITTED
PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT AND SUCH MATERIAL HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION
Exhibit 10MM
OPERATING AGREEMENT
FOR
TRIO STAR LLC
THIS OPERATING AGREEMENT is made and entered into as of December 31,
1997, by and among Advanced Products Labs, Inc., a California corporation
located in Fremont, California ("APL"), R-Cubed Composites, Inc., a
Delaware corporation located in West Jordan, Utah ("RCC") and Starmet
Comcast Corp., a Delaware corporation located in Concord, Massachusetts
("SCC"), and, and each person who shall hereafter be admitted to the Utah
Limited Liability Company of Trio Star LLC (somethimes collectively referred
to as the "Members" and individually as a "Member").
The Members desire to form a limited liability company pursuant to the
laws of the State of Utah. Accordingly, in consideration of the mutual
covenants contained herein, they agree and certify as follows:
ARTICLE 1
DEFINITIONS
The definitions of some of the terms used in this Operating Agreement
are set forth below:
1.1 "Affiliate" means any person or entity which, directly or
indirectly, controls, is controlled by, or is under common control with, a
Member. For purposes of the preceding sentence, "control" means possession,
directly or indirectly, of the power to direct or cause direction of
management and policies through ownership of voting securities, contract,
voting trust or otherwise.
1.2 "Articles of Organization" of the Company means the Articles of
Organization filed with the Division of Corporations and Commercial Code of
the State of Utah, pursuant to the Utah Limited Liability Company Act to form
the Company, as originally executed and as amended, modified, supplemented or
restated from time to time, as the context requires.
1.3 "Capital Contribution" means the gross amount of investment by a
Member, or all Members, as the case may be, which may consist of cash,
property, or services rendered or a promissory note or other obligation to
contribute cash or property or to perform services.
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1.4 "Code" means the Internal Revenue Code of 1986, as amended.
1.5 "Company" means Trio Star LLC.
1.6 "Company Property" means all real, personal and mixed properties,
cash, assets, interests and rights of any type owned by the Company. All
assets acquired with Company funds or in exchange for Company Property shall
be Company Property.
1.7 "Fiscal Year" means a period of twelve (12) calendar months
coinciding with the fiscal year of the Company, except that the first Fiscal
Year of the Company shall be the period from the formation of the Company to
December 31 of the following calendar year, and upon any termination of the
Company on a date other than December 31, the final Fiscal Year of the
Company shall be the period from the end of the immediately preceding Fiscal
Year to the date of such termination. The fiscal year of the Company shall
end on December 31 of each calendar year.
1.8 "Initial Members" means APL, RCC and SCC.
1.9 "Interest" means the proportion that a Member's Units bears to
the aggregate outstanding Units of all Members.
1.10 "Manager" or "Managers" means one or more persons
(individually and together) selected by the Members who are 18 years of age
or older, and who need not be Members, to whom are delegated all or part of
the management duties of the Company's business as provided in Article 6.
1.11 "Member" means each of the parties who has executed this
Operating Agreement and each of the parties who may hereafter become
additional or substitute Members as provided in the Articles of Organization
and in this Operating Agreement.
1.12 "Member Account" means the account maintained for each Member
pursuant to Section 8.1.
1.13 "Members Committee" means an advisory committee that shall
consist of three persons (or such greater or lesser number of persons as the
Members may from time to time unanimously determine), one of whom shall be
designated by each of the Initial Members. The representatives of the Members
Committee shall be: Robert Jarmin, Robert Quinn and Ken C. Smith, until new
representatives are designated by the Members as provided herein. The elected
representatives of the Members Committee shall have the right to appoint a
proxy to represent them at Members Committee meetings.
1.14 "Net Profits and Net Losses" means, for each Fiscal Year or
other period, an
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amount equal to the Company's taxable income or loss for such year or period
determined in accordance with Code Section 703(a) (for this purpose, all
items of income, gain, or loss or deduction required to be stated separately
pursuant to Code Section 703(a)(1) shall be included in taxable income or
loss).
1.15 "Operating Agreement" means this Operating Agreement of Trio
Star LLC, as originally executed and as amended, modified, supplemented or
restated from time to time, as the context requires.
1.16 "Proprietary Information" means all know-how, inventions, trade
secrets, design, product, manufacturing and other specifications, methods,
processes and test data, and technical, marketing and other information or
data, and all copies and reproductions thereof disclosed, directly or
indirectly, by a party hereto to another party which information is of a
nature normally considered to be confidential and proprietary, including,
without limitation, information in writing and marked "Confidential",
"Proprietary" or the like, or, if transmitted orally, confirmed by a
writing so marked within thirty (30) days of its disclosure, unless such
information or know-how: (a) is or becomes public knowledge through no fault
of the receiving party; (b) is legally in the possession of the receiving
party prior to receipt from the other party which fact shall be provable by
documentary evidence only; or (c) is subsequently and lawfully received from
a third party without the receiving party's breach of any non-disclosure
obligation.
1.16 "Treasury Regulations" means any regulations of the Department
of the Treasury under the Code (whether permanent, temporary or proposed), as
such regulations may be lawfully changed from time to time.
1.17 "Unit" means an interest in the Company as described in Section 4.4
1.18 "Utah Act" means the Utah Limited Liability Company Act,
Sections 48-2b-101 et seq. of the Utah Code.
ARTICLE 2
ORGANIZATION AND TERM
2.1 Formation. The Initial Members hereby agree to form a limited
liability company and agree to continue the limited liability company upon
the terms and conditions set forth in the Operating Agreement, in each case,
subject to the provisions of the Utah Act as currently in effect.
2.2 Filing. In connection with the execution of this Operating
Agreement, the
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Initial Members shall cause Articles of Organization that comply with the
requirements of the Utah Act to be properly filed with the Utah Division of
Corporations and Commercial Code, and shall execute such further documents
(including amendments to the articles of organization) and take such further
action as is appropriate to comply with the requirements of law for the
formation or operation of a limited liability company in all states and
counties where the Company may conduct its business.
2.3 Name. The name of the Company shall be Trio Star LLC.
2.4 Registered Office, Registered Agent. The location of the registered
office of the Company shall be c/o R-Cubed Composites, Inc., 3392 West 8600
South, West Jordan, Utah 84088 and thereafter at such other location as the
Members may designate. The Company's registered agent at such address shall
be RCC.
2.5 Principal Place of Business. The principal place of business of the
Company shall be 3392 West 8600 South, West Jordan, Utah 84088. At any time,
the Company may change the location of its principal place of business and
may establish additional offices.
2.6 Term. The Company shall begin on the date the Articles of
Organization are filed with the Utah Division of Corporations and Commercial
Code and continue in full force and effect until December 31, 2027 unless
sooner dissolved by:
(a) the vote of the Members, as provided in Section 5.2;
(b) the withdrawal of RCC or SCC;
(c) any event which makes it unlawful for the business of the
Company to be carried on by the Members; or
(d) any other event causing a dissolution of a limited liability
company under the Utah Act.
2.7 Operating Agreement. Each person who becomes a Member of the
Company agrees to the terms and conditions set forth herein, as such terms
and conditions from time to time may be modified or amended, and each such
Member agrees that the terms and conditions of such Member's membership in
the Company shall be governed by this Operating Agreement, the Articles of
Organization and the Utah Act.
ARTICLE 3
PURPOSE AND POWER OF THE COMPANY
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3.1 Purpose. The purpose of the Company's business is to design,
develop, manufacture, sell, distribute and otherwise conduct business
relating to hybrid metal-composite satellite components. The Company shall
not engage in any activities prohibited by the Utah Act.
3.2 Powers of the Company. In furtherance of the purpose of the Company
as set forth in Section 3.1, the Company shall have the power and authority
to take in its name all actions necessary, useful or appropriate in the
Members' discretion to accomplish its purpose, including such action as are
authorized by Section 48-2b-105 of the Utah Act, as such provision may be
amended from time to time.
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ARTICLE 4
MEMBERS, CAPITAL CONTRIBUTIONS AND UNITS
4.1 Members. All Members of the Company, past and present, and their
last known business, residence or mailing address shall be listed on the
attached Schedule 4.1.
4.2 Initial Contributions. The initial Capital Contributions of each
Member are set forth on the attached Schedule 4.2. Capital Contributions to
the Company shall consist of cah, property or services rendered or a
promissory note or other obligation to contribute cash or property or to
perform services. No Member shall be liable under a judgment, decree or order
of court, or in any other manner for a debt, obligation or liability of the
Company. Additionally, no Member shall be required to lend any funds to the
Company or to pay any contributions, assessments or payments to the Company
except the Capital Contributions provided for in this Article 4; provided
that a Member may be required to repay its Capital Contribution to the
Company as provided in Article 12 below.
4.3 Additional Capital Contributions. If at any time the Members
determine that additional Capital Contributions are necessary to enable the
Company to cause the business of the Company to be properly, operated and
maintained and to discharge its costs, expenses, obligations and liabilities
("Additional Contributions"), they shall give written notice of such fact to
the Managers and the Members specifying the total amount of such Additional
Contributions and the Additional Contribution per Unit. Within thirty (30)
days following such notice, each Member shall either (i) withdraw voluntarily
pursuant to Section 11.5 below, or (ii) make his or her pro rata share of the
Additional Contributions specified in the notice. Additional Units shall be
distributed to each Member making Additional Contributions as indicated in
the notice. If any Member fails to withdraw or to make Additional
Contributions when due, at the election of a majority in interest of the
other Members who have made the required Additional Contributions, the
membership of the non-contributing Member may be terminated, or each of the
Members who have made the required Additional Contributions may make the
Additional Contributions that were not made when due and acquire additional
Units at the price specified in the notice, in proportion to the number of
Units held by each such Member making Additional Contributions to the total
number of Units held by such Members.
4.4 Units. A Member's interest in the Company shall be represented by
the "Unit" or "Units" held by such Member. Each Member's respective Units in
the Company are set forth on the attached Schedule 4.2. By its execution of
this Operating Agreement, each Member hereby votes and agrees that its votes,
consents and actions pursuant to the Articles of Organization, this Operating
Agreement and the Utah Act shall be counted and determined as provided in
this Operating Agreement. The Members hereby agree that each Unit shall
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<PAGE>
entitle the Member possessing such Unit: (a) to one vote on matters on which
the Members may vote under the Article of Organization, this Operating
Agreement and/or the Utah Act; and (b) to an equal proportionate share of the
Company's distributions. Each Member hereby agrees that its interest in the
Company and in its Units shall for all purposes be deemed a personal interest
and shall not be deemed realty or any interest in the Company's real or
personal property or assets of any kind.
ARTICLE 5
RIGHTS AND POWERS OF MEMBERS
5.1 Powers of Members. The powers of the Members shall include but not
be limited to:
(a) the right and power to elect and remove a Manager or Managers
as provided in Article 6;
(b) the power to amend the Articles of Organization and this
Operating Agreement, provided that such amendment complies with the Utah
Act;
(c) as provided in Section 5.3 and Article 11, the power to approve
or disapprove the issuance of additional Units for sale to then existing
Members or new subscribers and the admission of a transferee of some or
all of a Member's Units as a substitute Member; and
(d) as provided in Sections 2.6 and 5.3, the power to dissolve the
Company.
5.2 Majority Votes. An afirmative vote by or on behalf of the Members
possessing more than sixty-six and two thirds percent (66 2/3%) of the Units
of the Company shall be required to approve or disapprove any matter on which
the Members are entitled to decide, except as otherwise provided in the Utah
Act.
5.3 Meetings of and Voting by Members.
(a) Meetings. Meetings of the Members shall be held on ten (10) days'
notice or on such shorter notice as may be mutually agreeable to the Members,
on the call of a Manager or any Member entitled to vote at the meeting.
Notice of the time and place of each meeting shall be given in writing to
each Member by the Manager or the Member calling the meeting.
(b) Waiver of Notice. When any notice is required to be given to any
Member of
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the Company under the provisions of the Utah Act or under the provisions of
the Articles of Organization or this Operating Agreement, a waiver thereof in
writing signed by the person entitled to such notice, wherher before, at, or
after the time state herein, shall be equivalent to the giving of such
notice. By attending a meeting, a Member: (i) waives objection to lack of
notice or defective notice of such meeting unless the Member, at the
beginning of the meeting objects to the holding of the meeting or the
transacting of business at the meeting; and (ii) waives objection to
consideration at such meeting of a particular matter not within the purpose
or purposes described in the meeting notice unless the Member objects to
considering the matter when it is presented.
(c) Action by Members Without a Meeting. Unless the Articles of
Organization or the Utah Act provide otherwise, action required or permitted
by the Utah Act to be taken at a Members' meeting may be taken without a
meeting if the action is evidenced by one or more written consents describing
the action taken, signed by each Member entitled to vote. Action taken under
this Section 5.3(c) is effective when all Members entitled to vote have
signed the consent, unless the consent specifies a different effective date.
Written consent of all of the Members entitled to vote on any matter has the
same force and effect as a unanimous vote of such Members and may be stated
as such in any document.
ARTICLE 6
MANAGEMENT
6.1 Managers
(a) The day-to-day management of the Company's business shall be vested
in a group of Managers elected by the Members. The Members hereby elect Pat
Milne, Kevin R. Raftery and Thomas Wardell to be the initial Managers of the
Company. The names and street addresses of each of the Managers are set forth
on Schedule 6.1 attached hereto.
(b) Any Member that holds more than fifty percent (50%) of the Units,
shall be entitled to elect two Managers, and any Member that holds more than
thirty-three and one-third (33.3%) of the Units, shall be entitled to elect
one Manager. Any additional Managers shall be elected by the affirmative vote
of the Members possessing at least eighty percent (80%) of the Units of the
Company represented and entitled to vote on the subject matter at the annual
meeting of the Members or at a special meeting of the Members called for that
purpose. A Manager shall hold office until his successor has been elected and
qualified.
(c) The Managers may engage in other business activities and shall be
obliged to devote only as much of their time to the Company's business as
shall be reasonably required
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for the efficient operation of the Company's business and objectives. A
Manager shall perform his duties as a Manager in good faith, in a manner he
reasonably believes to be in the best interests of the Company, and with such
care as an ordinarily prudent person in a like position would use under
similar circumstances. A person who so performs his duties shall not have any
liability by reason of being or having been a Manager of the Company.
(d) The number of Managers shall be three (3) who shall be natural
persons 18 years of age or older but who need not be Members of the Company
or residents of Utah.
(e) Every Manager is an agent of the Company for the purpose of its
business, and the act of every Manager, including the execution in the
Company name of any instrument for apparently carrying on in the usual way
the business of the Company, binds the Company, unless such act is in
contravention of the Articles of Organization or this Operating Agreement
(including, without limitation, Section 6.2 hereof) or unless the Manager so
acting otherwise lacks the authority to act for the Company and the person
with whom he is dealing has knowledge of the fact that he has no such
authority.
6.2 Powers of the Managers
(a) The Managers shall have the right and authority to take all actions
that the Managers deem necessary, useful or appropriate for the day-to-day
management and conduct of the Company's business. Any agreement or other
instrument which the Managers are authorized to sign hereunder must be
executed by at least two Managers. Subject to the other limitations set forth
in this Section 6.2, any two Managers shall have the authority to sign
agreements and other instruments on behalf of the Company in the ordinary
course of business without the joinder of the other Managers.
(b) The Managers may exercise all powers of the Company and do all such
lawful acts and things, except: (1) such acts and powers which are to be
exercised by the Members pursuant to Article 5; (2) such other acts which are
by statute, the Utah Act, the Articles of Organization or this Operating
Agreement directed or required to be exercised or done by the Members; (3) no
debt shall be contracted or liability incurred by or on behalf of the Company
except by one or more Managers who has obtained the prior approval of all of
the other Managers; and (4) no Manager shall take any decision which involves
expenses of the Company in excess of ______ except by one or more Managers
who has obtained the prior approval of all of the other Managers.
(c) In addition, the Managers shall obtain the prior written approval of
the Members prior to taking any decision with respect to the following: (1)
the development, sale, lease or other disposition of the Company's Property
in excess of ______; (2) the purchase or other acquisition of other assets of
any kind in excess of ______; (3) the proposal, submission or execution of
any customer order in excess of ______; (4) the assumption of any obligation
or
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expense in excess of ______; or (5) the employment of persons, firms or
corporations for the operation and management of the Company's business.
(d) Notwithstanding anything to the contrary herein, but subject to
Section 5.3 herein, the Members may, at any time, limit or alter the
authority of the Managers set forth herein or overrule any decision taken by
the Managers.
(e) All instruments, contracts, agreements and documents providing for
the acquisition, mortgage or disposition of property of the Company shall be
valid and binding on the Company if executed by two or more Managers as
provided herein.
6.3 Members Committee. The Company shall maintain a Members Committee.
The representatives of the Members Committee need not be directors or
officers of the Members. The Members Committee shall meet from time to time
to formulate marketing and operating policies of the Company and to recommend
such policies to the Members and Managers; provided, however, that, except as
otherwise expressly provided herein or otherwise determined by the Members,
the Members Committee shall have no authority to act on behalf of or bind the
Company.
6.4 Compensation. The Company may pay to any Manager, Member,
representative to the Members Committee or other person, a salary or other
compensation for their services rendered to the Company. Such salaries shall
be treated as expenses of the Company and shall not be deemed to constitute
distributions to the recipient of any profit, loss or capital of the Company.
6.5 No Exclusive Duty. No Manager shall be required to manage the
Company as his or her sole and exclusive function and her or she may have
other business interests and engage in other activities in addition to those
relating to the Company.
6.6 Removal of Managers
(a) Subject to the provisions of the Utah Act and subject to the
satisfaction of the conditions specified in Section 5.2 and this Section 6.6,
the Members may remove all or any lesser number of Managers with or without
cause.
(b) Any removal of a Manager shall become effective on such date as may
be specified by the Members voting in favor thereof and in a notice delivered
to any remaning Managers or the Manager elected to replace the removed
Manager (except that it cannot be effective on a date earlier than the date
such notice is delivered to the remaining or newly-elected Manager). Should a
Manager be removed who is also a Member, such Member will continue to
participate in the Company as a Member and receive his share of the Company's
income, gains, losses, deductions and credits pursuant to this Operating
Agreement.
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6.7 Resignation of Manager. A Manager may resign from his position as a
Manager at any time by notice to all of the Members and the remaining
Managers. Such resignation shall become effective as set forth in such notice.
6.8 Vacancies. Any vacancies occurring in the group of Managers shall
be filled by the Manager. A Manager chosen to fill a vacancy shall be elected
by the Member who elected his predecessor in office.
6.9 Information Relating to Company. Upon request, the Managers shall
supply to any Member information regarding the Company or its activities.
Each Member or his authorized representative shall have access to and may
inspect and copy all books, records and materials in the Managers' possession
regarding the Company or its activities.
6.10 Records at Principal Place of Business. The Managers shall cause
the Company to keep at its principal place of business the following:
(a) a current list of alphabetical order of the full name and last
known business street address of each Member;
(b) a copy of the stamped Articles of Organization and all
certificates of amendment to them, together with executed copies of any
powers of attorney pursuant to which any certificate of amendment has
been executed;
(c) copies of the Company's federal, state and local income tax
returns and reports, if any, for the three most recent years;
(d) copies of any financial statements of the Company, if any, for
the three most recent Fiscal Years; and
(e) unless otherwise set for in the Articles of Organization, a
written statement setting forth:
(1) the amount of cash and a description and statement of the
agreed value of the other property or services contributed by each
Member and which each Member has agreed to contribute;
(2) the time at which, or the events on the happening of
which, any additional contributions agreed to be made by each Member
are to be made;
(3) any right of a Member to receive distributions which
include a return of all or any of the Members' contributions; and
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(4) any event upon the happening of which the Company is to
be dissolved and its affairs wound up.
6.11 Tax Matters Manager. The Members shall designate a tax matters
manager for purposes of federal and state income tax matters. The initial tax
matters manager shall be Thomas Wardell. The tax matters manager shall cause
the preparation and timely filing of all tax returns required to be filed by
the Company pursuant to the Code and all other tax returns deemed necessary
and required in each jurisdiction in which the Company does business.
ARTICLE 7
PROFITS AND LOSSES
7.1 Net Profit and Loss. Net Profits and Net Losses for each Fiscal
Year shall be allocated in accordance with the terms and conditions set forth
in Schedule 7.1 attached hereto.
7.2 Compliance with Code. All of the provisions of this Operating
Agreement relating to allocation of Net Profits and Net Losses are intended
to comply with the Treasury Regulations promulgated under Code Section 704(b)
and shall be interpreted and applied in a manner consistent with such
Treasury Regulations. In particular, the profits and losses of the Company
for U.S. federal income tax purposes will be calculated as required under the
Code and not as described in Section 7.1. The minimum gain chargeback
provisions of Treasury Regulations Section 1.704-2(f), the partner
nonrecourse debt minimum gain provision of Treasury Regulations Section
1.704-2(i)(4), and the qualified income offset provision of Treasury
Regulations Section 1.704-1(b)(2) shall be considered to be part of this
Operating Agreement. If any Member contributes appreciated or depreciated
property to the Company, allocations to Members will be adjusted as required
by Code Section 704(c) solely for tax purposes to take into account the
built-in gain or loss at the time of the contribution. If there are any
"partner nonrecourse deductions" (within the meaning of Treasury
Regulations Section 1.704-2(i)(1)), such deductions will be allocated to the
Member who bears the economic risk of loss for the "partner nonrecourse
liability" (within the meaning of Treasury Regulations Section
1.704-2(b)(4)) to which the deductions are attributable.
ARTICLE 8
MEMBER ACCOUNTS, ALLOCATIONS AND DISTRIBUTIONS
8.1 Maintenance of Member Accounts. A separate Member Account shall be
maintained in the Company's books for each Member and permitted transferee in
accordance
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with the rules of Treasury Regulation Section 1.704-1(b)(2)(iv). Each Member
Account shall be increased by (1) such Member's Capital Contributions; (2)
allocations to such Member of Net Profits; (3) allocations to such Member of
income described in Section 705(a)(1)(B) of the Code; and (4) the amount of
any Company liabilities assumed by such Member or which are secured by any
property distributed to such Member. Each Member Account shall be decreased
by (1) the amount of money distributed by the Company to such Member; (2)
allocations to such Member of Net Losses; (3) the fair market value of
property distributed to such Member by the Company (net of liabilities secured
by such distributed property that such Member is considered to assume or take
subject to under Section 752 of the Code); (4)the amount of any liabilities
of such Member assumed by the Company or which are secured by any property
contributed to such Member to the Company; and (5) allocations to such Member
of expenditures described in Section 705(a)(2)(B) of the Code.
8.2 Compliance With Code. All of the provisions of this Operating
Agreement relating to the maintenance of Member Accounts are intended to comply
with the Code and the Treasury Regulations promulgated under Code Section
704(b) and shall be interpreted and applied in a manner consistent with the
Code and such Treasury Regulations.
8.3 Limitation of Liability. Except as otherwise required in the Act,
no Member shall have any liability to restore all or any portion of a
deficit balance in such Member's Member Account.
8.4 Distributions. No Member shall be entitled to receive property
other than cash hereunder unless the Company elects to distribute any Company
Property in-kind. Any in-kind distributions of Company Property shall be
valued by an established, reputable, independent and qualified appraiser.
8.5 Timing and Allocation of Distributions. Annually, or at more
frequent intervals as Members Committee shall recommend, the Managers shall
distribute available funds to the Members in accordance with this Article 8.
Available funds for this purpose means the Company's gross cash receipts,
less the Company's expenditures, and less the amount that, in the reasonable
judgment of the Members Committee, the Company shall retain in order to
fulfill its business purpose. Any allocation of distributions shall be
allocated and distributed to the Members in accordance with their respective
Interests.
8.6 Limitations on Distribution. A Member may not receive a
distribution from the Company to the extent that, after giving effect to the
distribution, all liabilities of the Company, other than liability to Members
of account of their Capital Contributions, would exceed the fair value of the
Company's assets.
8.7 No Right to Distribution. Notwithstanding anything in this
Operating Agreement or the Act of the contrary, no Member shall be entitled
to receive any distribution of money
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or other property by reason of such entity ceasing to be a Member, except (a)
upon dissolution of the Company, or (b) upon the affirmative vote or
unanimous written consent of all of the remaining Members.
ARTICLE 9
BUSINESS PLAN
9.1 Business Plan. Each year, on or before June 30th, the Managers
shall prepare, and each of the Initial Members shall approve, a business
plan, that will contain projections and certain terms and conditions relating
to sales, costs, profits, capital expenditures, strategies and such other
items as the Members Committee reasonably requires (the "Business Plan"). The
essential terms of the initial Business Plan of the Company are attached as
Exhibit A (the "Essential Terms"). The Members shall, in good faith, prepare
and agree to the terms of an initial business plan by no later than June 30,
1998, that shall contain, among other things, the Essential Terms (the
"Initial Business Plan"). The Business Plan will also provide the specific
products and services to be provided to the Company by each of the Initial
Members and the terms and conditions under which such products and services
will be provided. The Members currently expect that the Company's business
will develop in three distinct phases as commercial orders for the Company's
products and services increase. Each of the three phases shall be further
described in the Initial Business Plan.
9.2 Restrictive Covenant. None of the Members (or any of their
respective Affiliates) shall, as an officer, director, stockholder, employee,
partner, member, manager or in any capacity whatsoever, compete with or
engage in any business or activity that is competitive with the business of
developing, manufacturing, selling and distributing hybrid metal-composite
satellite components (as further described in the Business Plan) as
conducted, or intended to be conducted, by the Company; provided, however,
that each of the Members may continue to conduct its existing business
through customers existing on date hereof, and may sell to other customers
for applications that are not competitive with the hybrid metal-composite
satellite component business as then conducted, or as intended to be
conducted by the Company. The foregoing covenant shall terminate with respect
to each Member (and its Affiliates on the earlier to occur of either of the
following events: (a) termination of this Operating Agreement; or (b) five
(5) years following the withdrawal of such Member from the Company. Each of
the parties hereto specifically acknowledges that in the event of a breach of
the covenant contained in this Section 9.2, money damages to the Company
cannot be determined and that the Company shall therefore be entitled to
injunction relief and that the breaching party shall not assert the defense
that the Company has an adequate remedy at law.
14
<PAGE>
ARTICLE 10
ACCOUNTS
10.1 Books. The Managers shall maintain complete and accurate books of
account of the Company's affairs at the Company's principal place of
business. Such books shall be kept on such method of accounting, and reported
to the Members on a monthly basis, as determined by the Members. The
company's accounting period shall end on December 31 of each year.
10.2 Transfers During Year. To avoid an interim closing of the
Company's books, the share of Net Profits and Net Losses of a Member who
transferred part of all of his Interests in the Company during the Fiscal
Year shall be determined by taking his proportionate share of the amount of
the Net Profits and Net Losses for the Year. The Managers shall make the
proration based on the portion of the Fiscal Year that has elapsed prior to
the transfer. The Managers shall allocate the balance of the Net Profits and
Losses attributable to the transferred Interest to the transferee of such
Interest.
10.3 Reports. The Managers shall close the books of account promptly
after the close of each Fiscal Year, and shall prepare and send to each
Member a statement of such Member's distributive share of income and expense
for federal income tax reporting purposes.
ARTICLE 11
TRANSFERS
11.1 Restrictions on Transfer. None of the Members shall sell,
exchange, assign, transfer, pledge, hypothecate or otherwise dispose of,
whether any such disposition shall be voluntary or involuntary or come about
or be effected by operation of law or pursuant to or in compliance with any
judgment, decree or order, rule or regulation of any administrative body (any
of said acts being a "transfer") any of the Units which such Member now owns
or may hereafter acquire, except with the prior written consent of, and upon
such terms and conditions as may be set by, all of the other Members or in
accordance with the provisions of this Article 11, and the Company will not
transfer or recognize any transfer of Units except in compliance with this
Article. Notwithstanding anything to the contrary, any attempted or purported
transfer of any Unit in violation of the following restrictions shall be void
ab initio and of no effect.
11.2 Permitted Transfers to Affiliates. Transfers of Units to
Affiliates of a Member are permitted without requiring the consent of the
other Members.
15
<PAGE>
11.3 Voluntary Withdrawals. Any Member may withdraw from the Company if:
(a) during the first two years from the date hereof, contracts awarded
to the Company do not aggregate ________________________________________;
(b) during the third and fourth years from the date hereof, contracts
awarded to the Company do not aggregate ________________________________;
(c) in any year thereafter, contracts awarded to the Company do not
aggregate _______________________________; or
(d) in the event of a notice specifying Additional Contributions in
excess of an aggregate of ______________________________________.
ARTICLE 12
MEMBERS' LIABILITY AND GENERAL INDEMNITY
12.1 Members
(a) Except as otherwise specifically set forth in the Utah Act, no
Member, Manager or employee of this Company shall be personally liable under
a judgment, decree or order of a court, or in any manner, for the debts,
obligations or liabilities of the Company. A Member shall have no liability
to any other Member or the Company when acting pursuant to its authority
granted pursuant to the Articles of Organization or this Operating Agreement,
except to the extent such Member's acts or omissions constitute willful
misconduct or gross negligence of such Member. Additionally, a Member shall
be liable to the Company for:
(1) Any difference between its Capital Contribution actually paid
in and the amount promised by any Member as stated in this Operating
Agreement or any writing signed by the Member; and
(2) Any unpaid Capital Contribution which it agreed in this
Operating Agreement or in any writing signed by the Member, to make in
the future at the time and on the conditions stated in this Operating
Agreement or in any other instrument, except that if a Member is unable
to perform for any reason such Member may, at the option of the Company,
contribute cash equal to that portion of the Member's Capital
Contribution which has not been made.
(b) If a Member has received the return of any part of his Capital
Contribution in violation of this Operating Agreement or the Utah Act, he is
liable to the Company for a
16
<PAGE>
period of six (6) years thereafter for the amount of the Capital Contribution
wrongfully returned.
(c) If a Member has received the return in whole or in part of his
Capital Contribution without violation of this Operating Agreement or the
Utah Act, he is liable to the Company for a period of six (6) years
thereafter for the amount of the returned Capital Contribution, but only to
the extent necessary to discharge the liabilities of the Company to those
creditors who extended credit to the Company during the period the Capital
Contribution was held by the Company.
Any liability of a Member to the Company under this Article 12 can be
waived or compromised pursuant to a vote by the Members in accordance with
Section 5.3. A Member who is subject to an obligation to repay any Capital
Contribution to the Company as required by the Articles of Organization or
this Operating Agreement, must make such repayment on demand by the Company.
No Member shall be liable to the Company, its creditors or any other Member
with respect to any amounts paid to such Member as profit sharing, loan
repayment, interest, salary, wage, rental, royalty, fee or payment for value
given which is not paid to such Member as a return of such Member's Capital
Contribution.
12.2 Managers. The Managers do not in any way guarantee the return of
any Member's Capital Contribution or a profit for the Members from the
Company's business. The Managers shall incur no liability to the Company or
to any of the Members as a result of engaging in any other business or
venture regardless of whether such other business or venture competes with
the Company or whether the Managers are active in the management or business
of such other business or venture. Neither the Company nor any of the Members
shall have any rights by virtue of the Articles of Organization, this
Operating Agreement or any applicable law in or to the other business
ventures of the Managers or to the income, gains, losses, deductions and
credits derived therefrom by the Managers.
12.3 Company's Indemnification. The Company shall, to the fullest
extent permitted by the Utah Act, as the same may be amended and
supplemented, indemnify all Members, Managers and any and all other persons
whom it shall have power to indemnify from and against any and all of the
expenses, liabilities or other matters referred to in or covered by said
section, and the indemnification provided for herein shall not be deemed
exclusive of any other rights to which those indemnified may be entitled
under any agreement, vote of the Members or disinterested Managers or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee or agent and shall inure
to the benefit of the heirs, executors and administrators of such a person.
In addition, the Company shall, to the fullest extent permitted by the law of
the State of Utah, as the same may be amended and supplemented, provide its
Managers and officers with mandatory advancement of litigation expenses
reasonably incurred by such persons in defending a civil or criminal action,
suit or
17
<PAGE>
proceeding, brought against them in their capacity as such, in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount
if it shall ultimately be determined that he or she is not entitled to be
indemnified by the Company under this Article or otherwise. The Company may,
by action of its Managers, provide for the payment of such expenses incurred
by employees and agents of the Company as it deems appropriate.
12.4 Force Majeure. Notwithstanding anything in this Operating
Agreement to the contrary, a Member or a Manager, shall not be liable (except
for such Member's or Manager's obligations to contribute or return its
Capital Contributions under the Utah Act or this Operating Agreement) for any
loss or damage to Company Property or operations caused by its failure to
carry out any of the provisions of the Articles of Organization and/or this
Operating Agreement as a result of foreseeable or unforeseeable acts of God
or incidents resulting from outside forces, whether or not beyond the control
of such Member or Manager, such as strikes, labor troubles, riots, fires,
weather, floods, acts of a public enemy, insurrections, breakdown or failure
of machinery, acts, omissions or delays of governmental authorities and
governmental laws, rules, regulations or orders.
12.5 Remedies. The remedies of the Members hereunder are cumulative and
shall not exclude any other remedies to which a Member may be lawfully
entitled. The Members acknowledge that all legal remedies for any breach of
this Operating Agreement may be inadequate, and therefore they consent to any
appropriate equitable remedy; provided, that any failure of a Member to abide
by the terms of this Operating Agreement, including without limitation any
vote or consent that should bind a Member, or any other failure to adhere to
the terms of this Operating Agreement which cost the Company legal and court
costs to enforce same shall render the breaching Member liable to the Company
for any such fees and costs.
12.6 Waiver. The failure of any Member to insist upon strict
performance of a covenant or condition hereunder shall not be a waiver of its
right to demand strict compliance therewith in the future.
ARTICLE 13
DISSOLUTION AND TERMINATION
13.1 Final Accounting. In case of the Company's dissolution, a proper
accounting shall be made from the date of the last previous accounting to the
date of dissolution.
13.2 Liquidation. Upon the Company's dissolution, the Managers or, if
none, some person selected by a majority in number of the Members shall act
as liquidator to wind up the
18
<PAGE>
Company. Except as provided in Section 13.3 below, the liquidator shall have
full power and authority to sell, assign and encumber any or all of the
Company's assets and to wind up and liquidate the Company's affairs in an
orderly and prudent manner. The liquidator shall distribute all proceeds from
the liquidation to the Members in proportion to their Member Accounts in the
Company.
13.3 Distribution in Kind. If the liquidator shall determine that a
portion of the Company's assets should be distributed in kind to the Members,
he shall distribute such assets to them in undivided interests as tenants in
common in proportion to their Interests in the Company.
13.4 Cancellation of Articles. Upon the completion of the distribution
of Company assets, the Company shall be terminated and the Members shall
cause the Company to execute articles of dissolution and take such other
actions as may be necessary to terminate the Company pursuant to any
applicable statute, the Utah Act or this Operating Agreement.
ARTICLE 14
CONFIDENTIALITY
14.1 Obligation. All Proprietary Information shall remain the property
of the Member disclosing such information, and, except as otherwise provided
in this Agreement, the other Members shall not acquire any proprietary rights
or other interests therein. Except in connection with the Company's business,
none of the parties hereto shall disclose to third parties or otherwise use
or exploit any Proprietary Information of any other party. Notwithstanding
the foregoing, any Member may disclose Proprietary Information of another
Member to the extent required by order of any governmental authority, or by
final judicial order or to any third party to the extent reasonably necessary
for a Member to perform its obligations under the Business Plan; provided
that in connection with any such disclosure, to the extent possible, the
Member disclosing such information shall give the other Members reasonable
prior notice of the disclosure of any such Proprietary Information pursuant
to this exception.
14.2 Return of Materials. Upon any expiration or termination of this
Agreement, each Member will promptly return to the other Members all
documents or other tangible materials, representing such other Members'
Proprietary Information.
14.3 Survival. The terms of this Article 14 will survive any termination
or expiration of this Agreement.
14.4 Injunctive Relief. The parties expressly acknowledge and agree that
any breach
19
<PAGE>
or threatened breach of this Article 14 will cause immediate and irreparable
harm to the non-breaching parties that may not be adequately compensated by
damages. Each Member therefore expressly agrees that in the event of such
breach or threatened breach and in addition to any and all remedies available
at law, the non-breaching Member will have the right to secure equitable and
injunctive relief in connection with such breach or threatened breach.
14.5 Publicity. Except as provided below, any public disclosure of the
transactions contemplated hereby and the terms hereof (including but not
limited to press releases or other statements made available generally by a
party hereto to the public) will be reviewed and consented to be each Initial
Member prior to such disclosure. Such consent shall not be untimely or
unreasonable withheld by any Initial Member hereto. Notwithstanding the
foregoing, any Initial Member may, without the prior consent of the other
Initial Members: (a) disclose (i) the existence of the Agreement, (ii) the
general subject matter hereof (other than material business, technical and
commercial terms thereof or related thereto); and (iii) the identity of the
parties hereto; or (b) make public disclosure of this Agreement and of the
transactions contemplated hereby, to the extent that such public disclosure
is required by any law, or rule or regulation of any agency, including
without limitation, the United States Securities and Exchange Commission or
any securities exchange on which securities of the disclosing party are then
listed (and may thereafter disclose without consent the information so
disclosed); provided, however, that in the case of any disclosure under
clause (b) above, the disclosing Member shall endeavor to obtain confidential
treatment of information to be disclosed, including, without limitation, the
information contained in the Business Plan, the Capital Contributions and the
terms of Section 11.5 and such other information as may be reasonably
requested by the other Initial Members.
ARTICLE 15
GENERAL PROVISIONS
15.1 Appointment of Managers. Each Member by his execution hereof does
irrevocably constitute and appoint each Manager, with full power of
substitution, as his true and lawful attorney, in his name, place and stead
to file Articles of Organization with the appropriate depositories and to
execute, acknowledged, swear to and file (a) all amendments to this Operating
Agreement or to the Articles of Organization required by all or authorized or
required by the provisions of this Operating Agreement or the articles of
organization; (b) all certificates and other instruments necessary to qualify
or continue the Company as a limited liability company wherein the Members
have limited liability in the states where the Company may be doing business;
and (c) all conveyances and other instruments necessary to effect the
Company's dissolution and termination.
20
<PAGE>
15.2 Arbitration. Any dispute, controversy or claim arising out of or
relating to this Agreement, or the breach, termination or invalidity hereof,
shall be settled by arbitration in Salt Lake City, Utah, before a panel of
three (3) arbitrators in accordance with the Commercial Arbitration Rules of
the American Arbitration Association. The parties agree that the arbitrators
shall have the powers to award damages, injunctive relief and reasonable
attorneys' fees and expenses to any party in such arbitration. The decision
reached by such arbitrators in any such proceeding shall be final and binding
upon the parties thereto. Without prejudice to the procedure set forth in
this Section 15.2, each of the parties shall remain free to seek a
preliminary injunction or other provisional judicial relief if in such
party's sole judgment such action is necessary to avoid irreparable damage or
to preserve the status quo.
15.3 Entire Agreement. This Operating Agreement (a) contains the entire
agreement among the parties, (b) except as provided in Article 5, may not be
amended nor may any rights hereunder be waived except by an instrument in
writing signed by the party sought to be charged with such amendment or
waiver, (c) shall be construed in accordance with, and governed by, the laws
of Utah, and (d) shall be binding upon respective personal representatives,
successors and assigns, except as above set forth.
15.4 Construction Principles. Words in any gender shall be deemed to
include the other genders. The singular shall be deemed to include the plural
and vice versa. The headings and underlined paragraph titles are for guidance
only and shall have no significance in the interpretation of this Operating
Agreement.
15.5 Invalidity. The Invalidity of any portion of this Operating
Agreement shall not affect the validity of the remainder of this Operating
Agreement.
15.6 Counterparts. This Operating Agreement may be executed in any number
of counterparts with the same effect as if all parties hereto had signed the
same document. All counterparts shall be construed together and shall
constitute the Operating Agreement.
IN WITNESS WHEREOF, the Members have signed this Operating Agreement on
the respective dates set forth below to be effective as of the date first
above written.
MEMBERS:
ADVANCED PRODUCTS LABS, INC.
/s/ Robert A. Jarmin
----------------------------
By: Robert A. Jarmin
Title: President
Date: 12/31/97
21
<PAGE>
R-CUBED COMPOSITES, INC.
/s/ Thomas Wardell
----------------------------
By: Thomas Wardell
Title: President
Date: 12/30/97
22
<PAGE>
STARMET COMCAST CORPORATION
/s/ Kevin R. Raftery
----------------------------
By: Kevin Raftery
Title: President
Date: 12/31/97
23
<PAGE>
OPERATING AGREEMENT
FOR
TRIO STAR LLC
24
<PAGE>
SCHEDULES TO OPERATING AGREEMENT FOR TRIO STAR LLC
Schedule 4.1 Members
Schedule 4.2 Capital Contributions and Units
Schedule 6.1 Managers
Schedule 7.1 Allocation of Net Profits and Net Losses
Exhibit A Business Plan
25
<PAGE>
Schedule 4.1
Members
All Members, Past Business, Residence
and Present or Mailing Address
----------------- -------------------
Advanced Products Labs, Inc. 43152 Christy Street
Fremont, California 94538
R-Cubed Composites, Inc. 3392 West 8600 South
West Jordan, Utah 84088
Starmet Comcast Corporation 2229 Main Street
Concord, Massachusetts 01742
26
<PAGE>
Schedule 4.2
Capital Contributions and Units
<TABLE>
<CAPTION>
Initial Capital Number of
Members Contribution Units
- - ------- --------------- ---------
<S> <C> <C>
Advanced Products Labs, Inc. $_______ 500
R-Cubed Composites, Inc. $_______ 5,100
Starmet Comcast Corporation $_______ 4,400
----------- ------
TOTAL $_______ 10,000
</TABLE>
27
<PAGE>
Schedule 6.1
Managers
Business, Residence
Managers or Mailing Address
-------- -------------------
Pat Milne c/o R-Cubed Composites, Inc.
3392 West 8600 South
West Jordan, Utah 84088
Kevin R. Raftery c/o Starmet Comcast Corporation
2229 Main Street
Concord, Massachusetts 01742
Thomas Wardell c/o R-Cubed Composites, Inc.
3392 West 8600 South
West Jordan, Utah 84088
28
<PAGE>
Schedule 7.1
Allocation of Net Profits and Net Losses
1. Initially, __________________________ of the Net Profits and Net Losses
of the Company shall be allocated pro rata in accordance with the Interests
of the Members, as such Interests may vary from time to time.
2. When the Company enters Phase II (as defined in Exhibit A);
(a) _____________________________ of the Net Profits and Net Losses of
the Company shall be allocated pro rata in accordance with the Interests of
the Members, as such Interests may vary from time to time; and
(b) ____________________________ of the Net Profits and Net Losses of
the Company shall be allocated based on the hours charged to the Company by
each of the Members for services performed or goods provided as determined in
accordance with the terms of the Business Plan.
29
<PAGE>
Exhibit A
Essential Terms for Business Plan
The Company will develop in three principal phases:
1. Phase I: organization and development of the Initial Business Plan,
joint preparation of proposals for third party to develop, design, fabricate
and deliver the Company's fully assembled satellite components, including the
Teledesic Satellite Bus Structure.
2. Phase II: commences when the Company has received commercial orders from
third parties of at least ________.
3. Phase III: commences when the Company has achieved annual net sales of
_____________.
The Business Plan shall provide the specific products and services to be
provided to the Company by each of the Initial Members and the terms and
conditions under which such products and services will be provided. Each of
the Initial Members shall have responsibility for providing the Company with
the following services:
A. RCC. RCC shall design and fabricate composite components and do the
final assembly and testing of the deliverable structure. The components
include such things as honeycomb panels, tubing and molded structures. The
Company will issue an RFQ for the work to be done by RCC and RCC will provide
a firm fixed price proposal to the Company. _____________________________
_________________________________ RCC shall be responsible for any cost
overruns that may occur that are not due to legitimate design changes from
the Company's final customer. The Company will also reside within RCC's
facility.
B. SCC. SCC shall design and fabricate Beryllium-Aluminum castings and
extrusions. The components shall include such things as cast fittings,
extruded bar or tubing and other types of Beryllium-Aluminum structures. The
Company will issue an RFQ for the work to be done by SCC and SCC will provide
a firm fixed price proposal to the Company. _____________________________
_________________________________ SCC shall be responsible for any cost
overruns that may occur that are not due to legitimate design changes from
the Company's final customer.
C. APL. APL shall design and fabricate Beryllium-Aluminum hardware that
requires brazing, welding or special coatings. The components shall include
such things as fittings, brackets and enclosures. The Company will issue an
RFQ for the work to be done by APL and APL will provide a firm fixed price
proposal to the Company. _________________________________________________
______________ APL shall be responsible for any cost overrun that may occur
that are not due to legitimate design changes from the Company's final
customer.
30
<PAGE>
Each of the Members shall indemnify, defend and hold the Company and its
Members harmless from and against any and all liabilities, claims, damages,
suits, judgments, losses, costs, and expenses (including reasonable attorneys'
fees) arising from such services provided to the Company, including without
limitation, products liability and intellectual property infringement claims.
When the Company enters Phase II, ________________________________________
_____________________________________________________________________________
for the products and services described above. All direct variable and all
direct fixed costs refers to such costs which are directly associated with
producing the products and services described above. The Initial Members
intend to develop a more detailed definition of Fully Loaded Costs in the
Initial Business Plan. Examples of Fully Loaded Costs (as further defined in
the Initial Business Plan) are the following:
Direct variable costs:
Direct labor costs including benefits, direct material costs (the actual
amount paid for the purchased materials or services including the benefit of
any price reductions or reimbursements), packaging material and electricity
and other utility costs for production machinery.
Direct fixed costs:
Engineering costs, design costs, QA/QC costs, purchasing costs, floor space
utilized for manufacturing, tooling and other non-recurring costs and capital
costs incurred in connection with services and products supplied to the
Company, including (a) ________________ on accounts receivable, (b) ______
_______ on inventory (raw materials, work in process, finished goods and
tooling), (c) _________________________________ on fixed assets and net
carried investment in tools used to manufacture products supplied to the
Company (in proportion to the utilization of the fixed assets).
Fully Loaded Costs shall not include the following:
Except as specifically provided above, interest and other financing expenses;
or Indirect costs, including: (a) corporate overhead charges and general and
administrative expenses, (b) sales and marketing expenses, and (c) research
and development expenses, and (d) all other fixed and variable costs not
directly connected to manufacturing of the products and services described
above.
Each Member shall furnish all available information reasonably requested by
any other Member that is relevant to the determination of Fully Loaded Costs
and permit the other Members to review and audit their records. To the extent
the Managers disagree in good faith with the determination of Fully Loaded
Costs, the Company shall not be required to pay such amount and the disputed
amount shall be determined in accordance with the procedure
31
<PAGE>
set forth in Section 15.2 of the Operating Agreement.
The Members shall made sure that the Company and the products and services
provided by the Company are covered by products liability insurance. Premiums
paid for the products liability insurance shall be included in all offers
made to customers by the Company. If the premiums are paid by the Initial
Members, thay shall be included in the Fully Loaded Costs defined above and
charged to the Company.
Each Member guarantees that there is no legal or other restriction in using
all the know-how and patents needed and required to produce the services and
products described above for each such Member. If such problem should occur,
in addition to the indemnity provided above, the Member subject to such
restriction shall compensate the other Members for incurred costs, including
but not limited to legal costs.
32
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 259,000
<SECURITIES> 0
<RECEIVABLES> 6,962,000
<ALLOWANCES> 421,000
<INVENTORY> 11,610,000
<CURRENT-ASSETS> 19,218,000
<PP&E> 39,880,000
<DEPRECIATION> 24,438,000
<TOTAL-ASSETS> 36,816,000
<CURRENT-LIABILITIES> 9,635,000
<BONDS> 0
0
0
<COMMON> 478,000
<OTHER-SE> 24,384,000
<TOTAL-LIABILITY-AND-EQUITY> 24,862,000
<SALES> 8,079,000
<TOTAL-REVENUES> 8,079,000
<CGS> 7,101,000
<TOTAL-COSTS> 9,506,000
<OTHER-EXPENSES> (1,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 135,000
<INCOME-PRETAX> (1,561,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,561,000)
<EPS-PRIMARY> (0.33)
<EPS-DILUTED> 0
</TABLE>
