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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
(Amendment No. 2)
(Mark One)
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (Fee Required) for the fiscal year ended September 30, 1997
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required) for the transition period
from to
Commission File No. 0-8836
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STARMET CORPORATION
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(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
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
15,000,000 shares of Common Stock ($.10 Par Value)
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (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
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Indicate by check mark if the disclosure of delinquent filers pursuant to
item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in a definitive proxy or information
statement incorporated in Part III of this Form 10-K or any amendments to this
Form 10-K. / /
The aggregate market value of the Common Stock of the Registrant held by
non-affiliates was approximately $27,324,328 as of December 18, 1997.
As of December 18, 1997, there were issued and outstanding 4,786,344 shares
of the Registrant's Common Stock, $.10 par value.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Registrant's Annual Report to Stockholders for the fiscal year ended
September 30, 1997 (Items 5,6,7,8 and 14)
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STARMET CORPORATION
Securities and Exchange Commission
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Item Numbers and Description PAGE
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PART I
ITEM 1. Business......................................................................................... 3
ITEM 2. Properties....................................................................................... 17
ITEM 3. Legal Proceedings................................................................................ 18
ITEM 4. Submission of Matters to a Vote of Security Holders............................................... 18
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder Matters......................... 19
ITEM 6. Selected Financial Data........................................................................... 19
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 19
ITEM 8. Financial Statements and Supplementary Data....................................................... 19
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............. 19
PART III
ITEM 10. Directors and Executive Officers of the Registrant............................................... 20
ITEM 11. Executive Compensation........................................................................... 22
ITEM 12. Security Ownership of Certain Beneficial Owners and Management................................... 27
ITEM 13. Certain Relationships and Related Transactions................................................... 28
PART IV
ITEM 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K................................... 29
SIGNATURES................................................................................................ 35
INDEX TO AUDITORS REPORT AND FINANCIAL STATEMENT SCHEDULE................................................. 36
</TABLE>
Inasmuch as the calculation of shares of the registrant's voting stock held
by non-affiliates requires a calculation of the number of shares held by
affiliates, such figure, as shown on the cover page hereof, represents the
registrant's best good faith estimate for purposes of this annual report on Form
10-K, and the registrant disclaims that such figure is binding for any other
purpose. The closing price of the Company's Common Stock as reported by NASDAQ
for trading on December 18, 1996 was $21.50. All outstanding shares beneficially
owned by executive officers and directors of the registrant or by any
shareholder beneficially owning more than 5% of registrant's common stock, as
disclosed herein, were considered solely for purposes of this disclosure to be
held by affiliates.
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PART I
ITEM 1. BUSINESS
GENERAL
Starmet Corporation (the "Company" or "Starmet"), formerly known as Nuclear
Metals Inc., changed its name on October 1, 1997. The Company also reorganized,
forming four new wholly-owned subsidiaries, effective for fiscal year 1998. The
new subsidiaries are: Starmet NMI Corporation, Starmet Powders, LLC, Starmet
Comcast, LLC and Starmet Aerocast, LLC. Additionally, Carolina Metals Inc., the
Company's wholly-owned subsidiary in Barnwell, South Carolina, has been renamed
Starmet CMI, Inc. The Company's new NASDAQ stock trading symbol is STMT.
Unless the context otherwise requires, references to the Company herein are
intended to refer to the Company and its subsidiaries.
The Company is engaged in manufacturing a wide variety of specialty metal
products using sophisticated metallurgical technology and metalworking
processes. The Company operates in three industry segments: (1) uranium services
and recycling of low-level contaminated steel; (2) fabrication of a large
assortment of specialty metal products using foundry, extrusion, and machining
capabilities; including the manufacture of high-purity, spherically shaped metal
powders; and (3) manufacture of depleted uranium penetrators.
As of September 30, 1997 the Company had 235 employees.
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INDUSTRY SEGMENT FINANCIAL INFORMATION
The following table sets forth certain information regarding the revenue,
operating profit (loss) and identifiable assets attributable to the three
industry segments in which the Company operates.
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YEAR ENDED
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SEPT. 30, SEPT. 30, SEPT. 30,
1997 1996 1995
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(as restated) (as restated)
<S> <C> <C> <C>
(IN THOUSANDS)
Net Sales and Contract Revenues:
Uranium Services & Recycle............................................ $ 4,965 $ 6,189 $ 4,969
Specialty Metal Products.............................................. 13,170 13,730 12,102
Depleted Uranium Penetrators.......................................... 9,927 8,775 1,713
Operating Profit(Loss):
Uranium Services & Recycle............................................ $ 195 $ (2,050) $ (996)
Specialty Metal Products.............................................. 391 1,432 (341)
Depleted Uranium Penetrators.......................................... 575 (942) (237)
Identifiable Assets:
Uranium Services & Recycle............................................ $ 14,499 $ 14,399 $ 16,609
Specialty Metal Products.............................................. 6,155 6,195 5,140
Depleted Uranium Penetrators.......................................... 7,965 8,441 12,158
</TABLE>
See Notes 1 and 14 of Notes to Consolidated Financial Statements.
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The Company has no foreign operations. The Company has export sales,
which accounted for 25% of net sales for the fiscal year ended September 30,
1997. In the prior two fiscal years, 1996 and 1995, export sales were 28% and
33%, respectively.
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INDUSTRY SEGMENTS
The following is a general description of the Company's three business
segments. For additional information concerning developments in these
business segments during fiscal 1997, reference is made to the Company's 1997
Annual Report, which is incorporated herein by reference and is included as
Exhibit 13.
URANIUM SERVICES & RECYCLE
The Company's Uranium Services and Recycle business segment has the
technical capabilities and facilities to manufacture depleted uranium metal,
convert a chemical, uranium hexaflouride (UF6) to uranium tetrafluoride
(UF4), recycle various low-level radioactive metals, produce DUCRETE-TM-
shielding, repair depleted uranium and tungsten counterweights for military
and commercial aircraft, and supply depleted and natural uranium alloy
material for use in United States Enrichment Company's (USEC) Atomic Vapor
Laser Isotope Separation (AVLIS) program. The sales and marketing team
supporting the Uranium Services and Recycle business segment has been
significantly expanded during 1997 from one local office at Starmet CMI
located in Barnwell, SC to additional sales offices in Oak Ridge, TN, Idaho
Fall, ID, Aiken, SC, Washington, DC, and Concord, MA.
Recycle of Low-Level Radioactive Metals
The Company demonstrated the technical feasibility and economic soundness of
recycling radioactively contaminated steel into storage drums and boxes for
containment of various radioactive wastes at Department of Energy (DoE) sites.
The DoE facilities have millions of tons of radioactively contaminated carbon
steel and stainless steel in the form of structural components and various types
of processing equipment. Through beneficial reuse of contaminated steel scrap,
the DoE will be able to reduce the volume of low-level radioactive waste in a
cost effective manner. In addition to the DoE facilities, it is estimated that
several million tons of low-level contaminated steel will be generated as a
result of decommissioning the more than 100 currently operating commercial
nuclear power plants over the next 30 years. The Company continues to pursue
additional contracts in this product area using a unique spray casting technique
in partnership with a foreign company.
During fiscal 1997, the Company continued its teaming arrangement with
ALARON Corporation in Cayce, SC offering services to remelt slightly
contaminated steel at the Company's Starmet CMI location. The resultant metal is
used in shielding applications
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through an interlocking shield called the RAM-LOC-TM- shielding block.
Radioactively contaminated steel remelt services are offered at only two other
facilities in the United States.
The Company competes in this market with Scientific Ecology Group and
British Nuclear Fuels Limited.
Production of DUCRETE-TM-
The Company has licensed the exclusive commercial production rights for a
DOE patented process known as DUCRETE-TM- shielding. DUCRETE-TM- shielding
was developed by the Idaho National Engineering Laboratory as a potential
shielding for spent fuel and high level radioactive waste casks. Starmet
Corporation has exclusive rights to market this technology in the commercial
sector. DUCRETE-TM- consists of uranium oxide aggregate combined with
concrete to form a stable and economical shielding for spent fuel and other
high level radioactive waste products. The Company is actively pursuing a
contract with the DoE for conversion of its 55,000 metric tons of Uranium
Hexaflouride into DU aggregate for DUCRETE shielding production. Spent fuel
containers produced from DUCRETE-TM- will offer the advantages of portability
and being 3-5 times more effective than standard concrete. DUCRETE shielding
has the added advantage of being rail transportable, and, therefore,
re-useable, unlike conventional concrete, which must be disposed of when
spent fuel is moved to alternative repositories. Pilot facilities were
installed during 1997 to convert DU oxides into high density DUCRETE-TM-
shielding aggregate.
Supply of Depleted Uranium Alloy
The Company supplies DU and Natural Uranium (NU) alloy material to USEC
for use as AVLIS feed material. AVLIS is expected to replace the current
gaseous diffusion process for separating the fissionable isotope, U(235),
from natural uranium within the next ten years. The Company currently is
performing conversion services for USEC, in converting Depleted Uranium
Hexaflouride (UF(6)) to Uranium feed materials for the AVLIS prove-out
program. The Company believes that USEC has a need for conversion of
approximately 15-20 million pounds annually. The Company continues to be the
primary supplier of AVLIS feed material. However, other companies are
expected to compete for future business.
Refurbishment of Counterweights
DU is used in production of commercial shielding and counterweight products
requiring the unique properties of DU which include density and ease of
fabrication. Starmet NMI and Starmet CMI are the only FAA approved facilities in
the United States to repair DU aircraft counterweights. The Company refurbishes
DU counterweights for essentially all of commercial and domestic carriers flying
wide body, i.e. DC-10, L-1011, and Boeing 747 aircraft, and has begun work on
military aircraft as well. The Company also has the capability to produce
counterweights. The Company competes primarily for business in North America
with Cameco of Canada.
Significant Customers
United States Enrichment Corporation (USEC) is a significant customer of the
Uranium Services & Recycle segment. In fiscal 1997, sales to USEC accounted for
14% of net sales. If USEC were lost as a customer, this would have a material
adverse effect on the Company.
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SPECIALTY METAL PRODUCTS
The Company has several specialty metal products, including: beryllium
products; specialty, medical, and aerospace powders; and a variety of advanced
metal products and services for aerospace, energy, and commercial applications.
Beryllium Products--General
Beralcast -Registered Trademark- is the Company's patented investment
cast beryllium aluminum alloy, an engineering material designed for use in
electronic and secondary structural applications for a variety of aerospace,
avionics and commercial applications. Cost and weight pressures on today's
design engineers demand a transition to lightweight, strong, and high
stiffness materials such as Beralcast -Registered Trademark-. This alloy
offers 3 1/2 times the stiffness of aluminum with 22 percent less weight and
is investment castable to net and near net shapes.
The Company's patents on the alloy compositions for Beralcast -registered
trademark- materials have approximately 15 years remaining and certain
process details are trade secrets. Prototypes of a variety of aerospace
components have been produced and the Company also has produced volume
quantities of battery cases and navigational components for satellites. Sales
of Beralcast -Registered Trademark- products at present are made directly to
manufacturers of assemblies and systems. However, the Company is seeking
partnering arrangements to enable manufacturing and distribution through
sites other than its Concord, MA facility. The Company's Beralcast
- -Registered Trademark- sales and marketing organization has been expanded
greatly during 1997 through establishment of sales offices in Concord, MA,
Wilmington, MA, Los Angeles, CA, San Jose, CA, Ft. Walton Beach, FL,
Washington, DC, and Canton, CT, and sales representatives in Europe and Japan.
The Company competes with Brush Wellman Inc. in the production of beryllium
products. Beryllium alloys also compete with less expensive materials such as
stainless steel and other alloys.
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Beryllium Products--Defense Applications
High performance defense applications for Beralcast -Registered
Trademark- include: the Comanche (Advanced Attack Helicopter), the F-22
(Advanced Tactical Fighter), the PAC-3 (updated Patriot missile), the French
Rafael (Advanced Fighter Aircraft), and a number of other advanced design
programs. Lockheed Martin's Apache helicopter work is expected to include
upgrades to the night vision system. This system, referred to as "B-Kit", is
part of the advanced system being used on the Comanche program. All
components are distributed directly to customers who generally are prime
Government contractors. Beralcast -Registered Trademark- investment castings
compete directly with aluminum A356 aerospace materials, magnesium, and
aluminum silicon composites. Other competing materials are titanium and
stainless steel. Use of Beralcast -Registered Trademark- depends largely on
the customer's weight, stiffness, and vibration damping needs, in combination
with a willingness to pay a premium for the materials performance benefits.
Lockheed Martin Corporation will use some 58 Beralcast -Registered
Trademark- components for its Electro Optic Sensor System (EOSS), the night
vision system and target acquisition system on the Comanche helicopter, the
Army's most advanced reconnaissance helicopter. This material has the highest
priority for provision of Comanche program funding and is in the high growth
stage of its development as a product.
Beryllium Products--Commercial
Advanced commercial products are brought to the market much faster than
aerospace and Government products, i.e. 1-2 years instead of 5-10 years. All
of the Company's current products are sold to OEM's and are distributed
through its Concord, Massachusetts facility. The Company believes that there
are additional commercial applications for this unique and patented material
within the commercial marketplace where a modest cost premium over aluminum
can yield significant improvements in end product performance. The Company has
produced prototype quantities of golf club heads and disc drive armatures.
The Company also produces seamless beryllium tubes for satellite
applications. The Company can produce extruded Beralcast -Registered Trademark-
tubing for satellites, intended to supplant expensive graphite composites. The
Company's extrusion technology has been demonstrated successfully in the recent
manufacture of tubing struts for the Comanche EOSS.
Sources of Beryllium
Because the Company is able to use relatively low grade beryllium as
input metal, the Company has more than one source of beryllium (Be) input
material. Foreign sources of supply have adequate inventories to support the
Company's production needs for at least three years. Longer term, the
Company's strategic objective to become self-sufficient, producing its own
low cost Be using new conversion technologies.
Advanced Metal Products and Services
Since the early 1960's, the Company has produced bi-metallic transition
joints for joining titanium fuel tanks to stainless steel plumbing in
satellites. These joints are made by a proprietary co-extrusion process
resulting in a bond stronger than the parent metals of the joint. Other
bi-metallic bonding processes compete with our co-extruded products in markets
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where bond integrity is not as critical, i.e. cryogenic systems for
refrigerants. This business segment also produces powder metallurgy bearing
steel which is used by customers to fabricate fuel linkage bearings in jet
engines. The Company is a sole source supplier of this product which is in a
declining market, however, sales of this product are not material to the
success of the business unit. The Company also provides extrusion services to
various superconductor and research firms using the Company's 1400 ton, 300
ton, and 100 ton extrusion presses. Generally, local companies take advantage
of the Company's extrusion services. All of the foregoing products and
services are provided directly to a large base of Original Equipment
Manufacturers (OEM's) and there is no dependency on a single customer. Raw
materials for these products and services are readily available in the metals
industry requiring no special processing or long lead times.
Metal Powders
The Company manufactures metal powders by proprietary processes called the
Rotating Electrode Process-TM- (REP) and the Plasma Rotating Electrode
Process-TM- (PREP), which produce spherical metal particles within a relatively
controllable size range. The Company supports its Powders business unit with a
sales office in Concord, Massachusetts, and a representative in Japan.
The metal powders produced by the Company include steel, titanium alloy
and several nickel and cobalt-base alloys generally known in the industry as
specialty powders. The Company is in the process of seeking strategic
alliances to assist the Company in moving ahead with its plans to produce not
only metal powders, but also components made from the consolidation of these
powders.
The principal markets for the Company's metal powders are medical
applications (titanium and cobalt-based alloy powders), which use the powder as
a porous coating on medical prostheses, and original equipment manufacturers
(steel, titanium alloy and specialty powders), which fabricate metal parts from
the powder through various processes. In addition, the Company continues to
produce steel powders for the photocopy industry, as a carrier for toner in copy
machines and in high-performance laser printers.
Management believes that the metal powders produced by its manufacturing
processes offer significant advantages for certain product applications
compared with metal powders produced by other processes. In particular, the
processes result in inherently "cleaner" powders, more uniformly spherical
particles and a higher percentage of particles within the desired size range
from a given amount of raw material.
Key competitive factors in the metal powders market are price and the
ability to meet exact dimensional, metallurgical and other specifications.
The steel powder marketed by the Company for photocopy applications competes
with less expensive powders produced by larger manufacturers. The Company
believes that the quality of its powder used in the photocopy processes helps
to offset any price advantage that may exist for competing powders in this
price sensitive market.
Sources of Raw Materials
The principal raw material for the Company's steel powder is cold-rolled
steel bars, which are readily available. Other metal powders are manufactured to
customer specifications,
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and the metals for these powders are generally available for purchase in job
lots from specialty metal suppliers.
Patents
The Company holds three U.S. patents relating to developments in Rotating
Electrode Process production equipment, which provide patent rights through the
year 2001. These patents also are filed and effective in the principal
industrialized European countries, Canada, Israel and Japan. Management believes
that, although the original patent on the Rotating Electrode Process machine
expired in July 1980, the development patents continue to benefit the Company's
competitive position in the Metal Powders market. It is also the opinion of
management that the technical expertise which has evolved from the development
and manufacture of metal powders is of equal importance in maintaining the
Company's competitive position.
Significant Customers
Lockheed Martin Corporation (LMC) is a significant customer of the Company's
Specialty Metal Products segment. In fiscal 1997, sales to LMC accounted for 7%
of sales (See Note 1 of Notes to Consolidated Financial Statements). The Company
currently is under several contracts with LMC to provide
Beralcast-Registered Trademark- hardware for the Comanche Helicopter Program.
The loss of LMC as a customer would have a material adverse effect on the
Company.
Lockheed Idaho Technology Company (LITCO) is another significant customer of
the Company's Specialty Metal Products segment. In fiscal 1997, sales to LITCO
accounted for 5% of net sales. The Company currently is under contract with
Lockheed Idaho Technology Company to produce, from furnished DU recycle metal,
DU castings for the U.S. Army's heavy armor tank program. This contract
continues to have options for several additional years. The loss of LITCO as a
customer would have a material adverse effect on the Company.
DEPLETED URANIUM PENETRATORS
The Company believes it is a technological leader in the manufacture of
depleted uranium penetrators. Depleted uranium (DU) is a dense, heavy metal that
is 68% heavier than lead. Because of its density and workability, DU is an
effective low-cost material for anti-armor ammunition and is used in numerous
United States Government and foreign government weapons systems. DU is a
low-level radioactive material which is a by-product of the production of
enriched uranium for nuclear fuel and weapons.
The Company competes with Aerojet Ordnance, a division of GenCorp Inc.,
as one of two domestic DU penetrator manufacturers. The principal DU products
manufactured by the Company, referred to as penetrators, have application in
various military gun systems. The Company generally sells penetrators
directly to prime ammunition contractors. The U.S. Government has funded and
owns a portion of the manufacturing machinery and equipment used by the
Company for producing penetrators.
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Company continues to produce M829A2 penetrators under a production
contract with options extending production to the year 1999. This contract is
subject to appropriations by the Government. The Company currently is in
production on the third option of this contract. Management strongly believes
the Government will exercise the remaining option on the contract. The
Company will continue to pursue both domestic and foreign military depleted
uranium penetrator production requirements, however, the market for DU
ordnance is declining, and near term orders are not expected.
During December 1998, the Company will complete an order for DU products
from a UK customer to support its UK based manufacture of tank ammunition
containing DU penetrators. This material will complete the customer's near
term requirements for this type of ammunition and follow-on orders are not
anticipated within the next 5 years. None of the business practices used in
this business segment are considered proprietary.
The Company plans to move its DU operations to its Barnwell, South
Carolina facility as DU products reach the point where the volume of such
operations are no longer practical at the Concord, MA facility.
Significant Customers
Royal Ordnance, a U.K. defense contractor, is a significant customer of
the Company's Depleted Uranium Penetrator segment. In fiscal 1997, sales to
Royal Ordnance accounted for 19% of net sales. The Company currently is under
contract to manufacture penetrator blanks for Royal Ordnance with a
completion date of December, 1998.
Primex Technologies is also a significant customer of the Company's
Depleted Uranium Penetrator segment. In fiscal 1997, sales to Primex
Technologies accounted for 12% of net sales. The Company currently is under
contract to provide Primex Technologies with 120mm penetrators for the U.S.
Army's ABRAMS Tank program with options extending another three years.
If Royal Ordnance and Primex Technologies were lost as customers in the
short term, this would have a material adverse effect on the Company. Both
customers have finite contracts with the conracts with the Company and
additional contract requirements from these customers are considered
unlikely. Management believes that expansion of its Beralcast-Registered
Trademark-product lines as well as growth in its uranium services and recycle
industry segment over the next few years will minimize the effect on the
Company of these probable reductions in contract requirements from these
customers.
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The following table sets forth certain information with respect to the
backlog of the Company's business segments at September 30, 1997 and
September 30, 1996 including the portions thereof represented by orders from
the Company's principal customers, Lockheed Martin, Lockheed Idaho, Prime
Technologies and United States Enrichment Corporation. The backlog for the
Company is affected by the timing of orders from these customers. The Company
believes all orders in backlog are firm.
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<CAPTION>
BACKLOG 1997 1996
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(IN THOUSANDS)
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Uranium Services
United States Enrichment Corp......................................................... 424 1,261
Other................................................................................. 1,028 $ 566
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Total............................................................................... 1,452 1,827
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Specialty Metal Products
Lockheed Martin....................................................................... $ 4,237 $ 4,664
Lockheed Idaho........................................................................ 2,519 1,970
Other................................................................................. 3,861 5,868
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Total............................................................................... $ 10,617 12,502
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Depleted Uranium Penetrators
Primex Technologies................................................................... $ 5,474 $ 8734
Royal Ordnance........................................................................ 4,278 --
Other................................................................................. 5,833 181
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Total............................................................................... $ 15,585 $ 8,919
Company Total........................................................................... $ 27,654 $ 23,248
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</TABLE>
Marketing
The Company relies on a variety of marketing strategies, including
advertising and direct sales. Technical papers given at industry symposia,
presented both by Starmet and in conjunction with customers, also are used as
marketing vehicles for the Company's advanced metal products and services.
Strategic alliances are being developed with several key customers
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to strengthen the Company's customer and product base into the future and to
reduce costs through joint research and development costs and marketing
efforts.
Understanding the importance of Design-To-Cost principles, especially
those of Lockheed Martin Corporation, is essential to strategic teaming with
our Beralcast-Registered Trademark- customers. Concentrated efforts on cost
reduction in the form of Concurrent Engineering, low cost Beryllium metal
production, facility expansion, and other efforts, add value for future sales
volumes. Starmet has introduced Nucast, our Beralcast-Registered
Trademark-teammate, to these cost reduction ideas which is expected to form
the basis for improved cost competitiveness in the future. Direct marketing
efforts are increasing.
The Company is committed to expanding its product and customer base for
metal powders. Market demands for fine metal powders, for re-consolidation or
incorporation into metal matrix composites, are on the rise and the Company is
positioning itself to exploit these opportunities. Novel product requirements
for our advanced metal products and services will continue to receive the
utmost attention for expansion of the Company's product base. A significant
portion of the Company's business is dependent on the award of contracts or
subcontracts for the supply of products and materials to governmental
departments and agencies. Payment to the Company of all or a portion of the
amounts called for under such contracts or subcontracts, is often subject to
legislative funding appropriations, government agency purchasing requirements
and other conditions and factors beyond the Company's control. Accordingly,
the Company's performance under such contracts may be delayed or may not
commence at all, in which case the payments thereunder may be recognized
later than anticipated at the time of the contract award or not at all in
cases in which the Company is not called upon to perform. As a result, the
timing and amount of revenues under such government contracts is uncertain
and subject to change, which may result in fluctuations in the Company's
operating results and cash flows.
RESEARCH AND DEVELOPMENT ACTIVITIES
The Company engages in research activities to develop new products or
enhance existing products for new applications. Research and development is
funded both by the Company and through customer sponsored programs. During
the past fiscal year, funded research and development has been sponsored by
the Department of Defense, Department of Energy, and various commercial
customers.
The Company's is involved in research covering a variety of product areas
for applications of Beralcast-Registered Trademark- (beryllium aluminum)
castings, Dmetal powders, and uranium processing technology. The highlights of
R&D activities in the Uranium Services & Recycle Product segment include
recycling processes for radioactively contaminated steel scrap, uranium
production technology for AVLIS feedstock, removal of uranium from MgF(2) slag,
conversion of UF to uranium oxide, and the manufacture of DUCRETE-TM- as a
means of incorporating depleted uranium oxide aggregate in a cement matrix to
make shielded concrete structures. The Company built a pilot plant to
manufacture uranium oxide aggregate for DUCRETE-TM- and is developing the
process knowledge required to support large scale production. R&D activities
in the Specialty Metal Products segment included development of new casting
processes and alternative methods and forming and manufacturing of
Beralcast-Registered Trademark- alloys. The Company expects that this
research will lead to products suitable for commercial mass
production markets and extend the application of Beralcast-Registered
Trademark- products in the aerospace and military markets. The Company has
developed a method for producing fine titanium metal powders
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as an extension of our PREP-Registered Trademark- method for making for
making spherical powders form reactive metals such as titanium, and the
Company is exploring new methods for utilizing titanium powder in the
manufacture of metal parts.
The Company also participates in certain cooperative research and
development activities through arrangements with selected customers and
Government agencies where there is potential for utilizing proprietary
technology or specialized resources not directly available to the Company.
The Company employs a staff of six Ph.D. technologists with backgrounds in
chemistry, mechanical and metallurgical engineering to conduct research and
new product development. In addition, the Company has on the R&D staff a
former Government scientist who invented the DUCRETETM technology. The cost
for Company-sponsored research and development activities was $1,309,000 in
fiscal 1997, $876,000 in fiscal 1996, and $439,000 in fiscal 1995. Total
revenues from customer-funded research and development were $793,000 in
fiscal 1997, $1,812,000 in fiscal 1996 and $557,000 in fiscal 1995. These
revenues are included in the revenues of the industry segment to which the
research and development relates.
ENVIRONMENTAL, SAFETY AND REGULATORY MATTERS
In General
Two of the materials regularly processed by the Company, depleted uranium
and beryllium, have characteristics considered to be health or safety hazards
by various federal, state or local regulatory agencies. Processing of these
materials requires a high level of safety consciousness, personnel monitoring
devices and special equipment. Depleted uranium is a low-level radioactive
material, and the Company is subject to regulation by the United States
Nuclear Regulatory Commission (NRC). Depleted uranium in the finely divided
state, such as grinding dust or machine turnings, is combustible at room
temperature and requires special handling for safe operations and disposal of
process wastes. Beryllium is known to cause lung disease following
significant exposure by inhalation of airborne particles. Processing this
material requires use of extensive ventilation and dust collecting systems.
Management believes that the experience gained in its many years of working
with these metals has resulted in capabilities for dealing effectively with
their special characteristics.
The presence and use in the Company's operations of materials with
hazardous characteristics subjects the Company to regulation and scrutiny by
various governmental agencies. Management believes that the Company is
presently in compliance in all material respects with existing federal, state
and local regulations and has no knowledge of any threatened actions against
the Company for violations of any such laws, statutes or regulations, except
as described below under "Concord Site Remediation and Decommissioning
Planning Requirements" and in Item 3 below. However, the potential effects of
evolving legislation and regulations affecting the Company's business cannot
be predicted.
In the process of manufacturing depleted uranium products, the Company
generates low-level radioactive waste materials that must be disposed of at
sites licensed by federal, state, and local governments. With the closing of
the Barnwell, South Carolina, low-level radioactive waste repository to
out-of-region generators in July 1994, the Company began storing waste on
site in Concord and Barnwell. Interim storage is permitted under the
Company's licenses. At present, the Barnwell repository remains available for
use by the Company's Starmet CMI facility. The Company has made provisions to
accommodate an extended period of interim
14
<PAGE>
storage of waste within existing buildings in Concord as the state government
works toward a regional solution. At the same time, the Company has made
significant progress in developing and instituting alternatives to disposal
of its waste. The Company intends to continue the development of technologies
and processes aimed at eliminating the generation of waste materials
associated with its manufacturing process.
For a number of years, ending in 1985, the Company deposited spent acid
and associated depleted uranium waste and other residual materials by
neutralizing with lime and discharging the neutralized mixture to a holding
basin on its premises in Concord, Massachusetts. In 1986, the holding basin
was covered with Hypalon, an impervious material used to prevent rain and
surface run-off water from leaching through the holding basin. The Company
now uses a proprietary "closed loop" process that it developed to discontinue
such discharges. The Company believes that both practices were and are in
compliance with all applicable regulations. The Company now is in the process
of removing and disposing of the material in the holding basin. For a
discussion of the status of remediation of the holding basin at the Company's
Concord facility, see "Concord Site Remediation and Decommissioning Planning
Requirements" elsewhere herein.
Concord Site Remediation and Decommissioning Planning Requirements
The Company is required to maintain certain licenses issued by the
Massachusetts Department of Public Health ("DPH") and the South Carolina
Department of Health and Environmental Control ("DHEC") in order to possess
and process depleted uranium materials at its facilities in Massachusetts and
South Carolina, respectively. Under applicable licensing regulations
pertaining to decommissioning and disposal of certain hazardous materials
("D&D") at licensed sites, the Company submitted to the Nuclear Regulatory
Commission ("NRC") and the applicable state agencies a Decommissioning
Funding Plan ("DFP") to provide for possible future decommissioning of its
facilities. The Concord Facility DFP estimated cost is $11.7 million and the
Barnwell Facility DFP estimate is $2.9 million. The Company is required to
provide financial assurance for such decommissioning pursuant to applicable
regulations. The Company has satisfied these requirements and as a result,
the site licenses for both locations have been renewed.
Substantially all of the depleted uranium materials to which the DFP
requirements apply were processed by the Company for the United States
Government. Based on the terms of certain contracts that the Company entered
into with the United States Government to process such depleted uranium
materials, the Company believes that such materials continue to be owned by
the United States Government and that the United States Government is
obligated, under applicable law, to pay for its percentage of eventual D&D.
The Company's DFP's reflect its position that it is obligated to provide
financial assurance only with respect to the portion of the materials which
are attributable to the Company's commercial production for parties other
than the United States Government, and that this obligation, has been
satisfied by a letter of credit to each geographic locations regulatory
agency.
The United States Army, in a memorandum of Decision dated September 13,
1996, determined pursuant to Public Law 85-804, that it should fund
remediation of the Concord holding basin site as well as D&D related to the
Concord facility, based in part on the Army's determination that the
Company's activities are essential to the national defense. The United States
Army has issued to the Company a fixed price subcontract for remediation of
the holding basin and the Company entered into a fixed price subcontract with
a contractor to perform this remediation. This work is expected to continue
into the first half of fiscal 1998. The Company's contract with the
contractor is fixed price based on a specified volume of waste to be removed
from the basin and delivered to a burial site. If the volume of the material
removed exceeds the specified level then the Company is obligated to pay an
additional fee per cubic yard of excess material removed. The Army has
provided written assurances (subject to funding appropriations) of its
intention to provide funding for D&D costs at the Concord facility under
future contracts or, in the event that no future contracts were awarded
(which the Army has indicated is unlikely in view of its current
15
<PAGE>
plans), under an existing contract. D&D costs for the Company's CMI facility
are covered by the existing letter of credit. The Company has no written
assurance that the Army will accept responsibility for the share of the
estimated cost of D&D at its South Carolina facility which directly resulted
from production work under U.S. government contracts on government supplied
materials. However, based on the advice of legal counsel, management believes
that the Army is responsible for its estimated share of D&D.
Update Relative to Concord Site Remediation Status
Subsequent to the filing of the Company's Amended Form 10-K on January
28, 1998, the following changes in the foregoing discussion of Concord Site
Remediation and Decommissioning Planning Requirements have occurred. A
discussion of the Company's environmental, health and safety matters is set
forth in "Risk Factors -- Environmental, Health and Regulatory Matters,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Environmental, Health and Safety Matters," "Business --
Environmental, Safety and Regulatory Matters" and "Business -- Concord Site
Remediation and Decommissioning Planning Requirements" of the Company's
Registration Statement. The aforementioned sections of the Registration
Statement are incorporated by reference in this Form 10-K. In addition to the
disclosures set forth in such sections regarding the remediation of the
holding basin at the Company's Concord, Massachusetts facility, for the
quarter ended June 30, 1998, the Company will make a provision for between
$1.0 million and $1.3 million related to the amount by which the estimated
costs of remediating the holding basin is expected to exceed the amounts
covered by the Company's fixed price contract which the U.S. Army (the "Army
Contract") pursuant to which the holding basin clean-up is being done. The
exact amount of excess costs is presently unknown, but the Company believes
the potential range of such costs is between $1.0 million and $3.4 million.
The Company believes that such costs, subject to confirmation, are
recoverable as allowable overheads on future government contracts which the
Company expects to be awarded. Alternatively, the Company believes that all
or a certain portion of such excess costs may also be recoverable pursuant to
a contract modification request or pursuant to an additional application for
relief under Public Law 85-804, pursuant to which the contract with the Army
was granted. See also Notes 11 and 15 to the Consolidated Financial
Statements contained herein.
Forward Looking and Cautionary Statements
Except for the historical information and discussions contained herein,
statements contained in this Form 10-K, including, without limitation,
statements incorporated herein by reference, may constitute "forward looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995. The Company may also make forward looking statements in other
reports filed with the Securities and Exchange Commission, in materials
delivered to stockholders and in press releases. In addition, the Company's
representatives may from time to time make oral forward looking statements.
Without limiting the generality of the foregoing, the words "believes, "
"anticipates," "plans," "expects," and similar expressions are intended to
identify forward-looking statements. Such forward-looking statements are
based on a number of assumptions and involve a number of risks and
uncertainties, and, accordingly, actual results could differ materially from
those projected in the forward-looking statements. Factors that may cause
such differences include, but are not limited to, the factors described in
Exhibit 99 to the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---------------------------------------------------- ----- ----------------------------------------------------
<S> <C> <C>
George J. Matthews.................................. 67 Chairman of the Board of Directors (1)
Wilson B. Tuffin.................................... 66 Vice Chairman of the Board of Directors
Robert E. Quinn..................................... 44 President, CEO and Treasurer (1)
Kevin R. Raftery.................................... 39 President, Starmet Comcast & Aerocast
Douglas F. Grotheer................................. 39 President, Starmet CMI
William T. Nachtrab................................. 44 Vice President, Technology & Engineering
James M. Spiezio.................................... 49 Vice President, Finance & Administration
James H. Scarboro................................... 58 Vice President, Marketing
Frank J. Vumbaco.................................... 44 Vice President, Health/Safety and Corporate Communications
Bruce E. Zukauskas.................................. 47 Vice President, Operations
</TABLE>
(1) On January 20, 1998, Mr. Matthews resigned as CEO and Treasurer and the
Company elected Mr. Quinn as the New CEO and Treasurer.
The term of office for each executive officer of the Company is one year
or until a successor is chosen and qualified. The executive officers are
elected by the directors at their first meeting following the annual meeting
of stockholders. There are no family relationships among the directors and
executive officers.
GEORGE J. MATTHEWS has been Chairman of the Board of Directors since
1972. He is employed by Matthews Associates Limited, a Massachusetts
corporation. Matthews Associates Limited is engaged in the business of
investing in and providing management consultation and assistance to small
and medium sized businesses. Mr. Matthews devotes approximately 75% of his
time to the Company's affairs. From November 30, 1994 to January 20, 1998,
Mr. Matthews held the positions of CEO and Treasurer.
WILSON B. TUFFIN has been Vice Chairman of the Board of Directors since
November 1994. From 1972 to November 1994, he held the positions of
President, Chief Executive Officer and Treasurer of the Company.
16
<PAGE>
ROBERT E. QUINN was elected President of the Company on November 30, 1994
and CEO and Treasurer on January 20, 1998. Prior to November 30, 1994 he held
the position of Vice President, Sales with the Company for over five years.
KEVIN R.RAFTERY became President of Starmet Comcast, LLC and Starmet
Aerocast, LLC in December 1997. Prior to December 1997 he was the Manager of
the Beralcast business unit, prior to August 1996 he was Program Manager for
Beralcast, prior to November 1994 he was Program Engineer for over five years.
DOUGLASS F. GROTHEER became President of Starmet CMI Corporation in 1997.
He served as Vice-President of Engineering and Program from 1994 to 1997, as
Manager of Engineering and Program from 1992 to 1994, as Manager of Ordinance
Programs from 1986 to 1992, as Program Manager from 1982 to 1986, and as
Project Engineer from 1980-1982.
WILLIAM T. NACHTRAB, Ph.D. has held the position of Vice President,
Technology with the Company since May 1993. Prior to May 1993 he was Manager,
Research & Development for the prior five years.
JAMES M. SPIEZIO has been the Vice President, Finance and Administration
since October 1993. Prior to October 1993, he was Controller, and prior to
April 1989, he served as Manager of Business Planning.
JAMES H. SCARBORO became Vice-President in December 1997. Prior to
December 1997, he was Marketing Manager for over five years.
FRANK J. VUMBACO has held the position of Vice President, Health/Safety
with the Company since November 1993. Prior to November 1993, he was Manager
of Health/Safety for over five years.
BRUCE E. ZUKAUSKAS has held the position of Vice President, Operations
since October 1994. Prior to October 1994, he was Quality Manager for over
five years.
ITEM 2. PROPERTIES
CONCORD, MASSACHUSETTS--The majority of the Company's activities are
conducted at a Company-owned site which comprises approximately 46.4 acres
and includes a 180,000 square feet building used for manufacturing
activities, offices and warehousing.
BARNWELL, SOUTH CAROLINA--Starmet CMI, the Company's wholly-owned
subsidiary, is located on 321 acres of land which includes:
109,000 square foot facility housing two manufacturing units: one unit
provides the capability of converting chemical gas (UF(6)) to chemical
salt (UF(4)) and a second unit houses a reduction process to convert
chemical salt (UF(4)) to metallic depleted uranium.
70,000 square foot DU Recycle Technology Center adjacent to the
manufacturing facility which provides the technology and facilities
required to provide recovery and recycle of depleted uranium and
other useful materials.
A full scale analytical laboratory.
For a discussion of the current underutilization of the CMI facility, see
"Management's Discussion and Analysis of Operations" contained on page 12 of
the Company's 1997 Annual Report to Stockholders, which is incorporated
herein by reference and included in this Report as Exhibit 13.
17
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is named as a Potentially Responsible Party (PRP) in regard
to the Maxey Flats, Kentucky, Superfund Site. This site was used until 1977
as a licensed and approved low level radioactive waste disposal site. A
committee of PRP's, including the Company, has submitted a remedial
investigation and feasibility study report to the Environmental Protection
Agency. The agreement signed by the settling parties in July 1995, outlines
the responsibilities of all parties and states that the PRP's will undertake
the initial remedial phase (IRP) of the site remediation at an estimated cost
of $60 million. The Company's liability is not expected to exceed
approximately $80,000 over 10 years. For a discussion of proceedings related
to the recent renewal of the Company's nuclear regulatory licenses, see Part
I, Item 1 "Business - Environmental, Safety and Regulatory Matters--Concord
Site Remediation and Decommissioning Planning Requirements"' elsewhere herein.
On December 9, 1997, Brush Wellman, Inc. ("Brush Wellman") filed a patent
infringement suit against Starmet Corporation in United States District Court
for the District of Massachusetts (Case No. 97-12705-RCO) alleging that the
Company is infringing a patent awarded to Brush Wellman for the investment
casting of aluminum beryllium alloys. Brush Wellman currently holds U.S.
Patent No. 5,642,773 entitled "Aluminum Alloys Containing Beryllium and
Investment Casting of Such Alloys." Brush Wellman is seeking an injunction of
the Company's alleged patent infringement, monetary damages (including treble
damages) and attorney fees. The Company has been advised by patent counsel
that Brush Wellman's claims are without merit and that Brush Wellman's patent
is invalid. The Company's answer to Brush Wellman's complaint is due December
30, 1997, unless the date for filing an answer is extended, and the Company
intends to challenge the validity of Brush Wellman's patent, deny any patent
infringement by the Company and assert counterclaims against Brush Wellman.
Update Relative to Legal Proceedings
Subsequent to the filing of the Company's Amended Form 10-K on
January 28, 1998, the following changes in the foregoing discussion of Legal
Proceedings have occurred. A discussion of the Company's material legal
proceedings is set forth in "Risk Factors -- Pending Beralcast Patent
Litigation; Patents and Other Intellectual Property," "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Legal Proceedings" and "Business -- Legal Proceedings" in the Company's
Amendment No. 2 to Registration Statement on Form S-1 filed with the
Securities and Exchange Commission on June 12, 1998 (File No. 333-49629) (the
"Registration Statement"). The aforementioned sections of the Registration
Statement are incorporated by reference in this Form 10-K. In addition to the
disclosures set forth in such sections of the Company's Registration
Statement, on July 8, 1998, the Company submitted a reply to Brush Wellman's
response to the U.S. Patent and Trademark Office's ("PTO") order granting the
reexamination. Also, on July 30, 1998, in response to a motion to stay the
court case pending the outcome of the re-examination proceeding which was
filed by the Company on Janaury 27, 1998, the United States District Court
for the District of Massachusetts dismissed the suit without prejudice to
either party's moving to restore it to the docket upon the decision of the
PTO relative to the reexamination. See also Notes 11 and 15 to the
Consolidated Financial Statements contained herein.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 29, 1997, the Company held a special meeting of stockholders
and approved the following proposals:
(1) To change the name of the Company to "Starmet Corporation," the name
of Carolina Metals, Inc. to "Starmet CMI" and the Company's ticker symbol
on Nasdaq to "STMT."
<TABLE>
<CAPTION>
*VOTE: FOR AGAINST ABSTAIN BROKER NON-VOTES
- ---------- --------- ----------- ------------- ----------------
<S> <C> <C> <C> <C>
2,545,974 5,398 350 0
</TABLE>
18
<PAGE>
(2) To approve a Plan of Reorganization, dated June 24, 1997
(incorporated herein by reference and is included as Exhibit 2), whereby
the Company has the authority to reorganize into four new subsidiaries to
operate in the following lines of business: depleted uranium products,
specialty powders, specialty metals, Beralcast-Registered Trademark-
products for aerospace use, and Beralcast-Registered Trademark- products
for commercial use. The Company also has the authority to (i) transfer
some or all of the assets, debts and obligations related to each business
activity to the respective subsidiary in exchange for 100% of such
subsidiary's issued and outstanding stock and (ii) transfer the remaining
assets used at Starmet CMI's South Carolina facility to Starmet CMI in
consideration of the assumption of the debts, obligations and liabilities
of such assets.
<TABLE>
<CAPTION>
*VOTE: FOR AGAINST ABSTAIN BROKER NON-VOTES
- ---------- --------- ----------- ------------- ----------------
<S> <C> <C> <C> <C>
2,203,531 3,300 1,798 343,093
</TABLE>
- ------------------------
* Note: Of the 4,785,344 shares outstanding as of the record date for the
stockholder's meeting, only 3,035,299 were eligible to vote. The remaining
1,750,045 shares were sterilized because of the application of the
Massachusetts Control Share Acquisition Act (ch. 110 D of the Massachusetts
General Laws).
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to the
Section entitled "Common Stock Information" in the Registrant's 1997 Annual
Report to Stockholders, which is included in this Report as Exhibit 13.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated by reference to the
section entitled "Selected Financial Data" in the Registrant's 1997 Annual
Report to Stockholders, which is included in this Report as Exhibit 13.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
The information required by this item is incorporated by reference to the
section entitled "Management's Discussion and Analysis of Operations" in the
Registrant's 1997 Annual Report to Stockholders, which is included in this
Report as Exhibit 13.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference to the
Consolidated Financial Statements as of September 30, 1997 and notes thereto
in the Registrant's 1997 Annual Report to Stockholders, which is included in
this Report as Exhibit 13.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
19
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) of Form 10-K and instruction 3 to Item
401(b), the information required by this item concerning executive officers is
set forth in Part I, Item 1 under the heading "Executive Officers of the
Registrant".
The following table sets forth certain information concerning the directors
of the Company:
<TABLE>
<CAPTION>
PRESENT PRINCIPAL EMPLOYMENT
NAME AGE AND PRIOR BUSINESS EXPERIENCE DIRECTOR SINCE
- --------------------------------------------- --- --------------------------------------------- ---------------
<S> <C> <C> <C>
George J. Matthews 67 Chairman of the Board of Directors since 1972
1972. Chairman of Matthews Associates
Limited, which is engaged in the business of
investing in and providing management
consulting and assistance to small and medium
sized businesses, including the Company.
Robert E. Quinn 44 President of the Company since December 1, 1994
1994 and Treasurer and Chief Executive
Officer of the Company since January 20,
1998. Prior to becoming President, served
as Vice President, Sales for over five years.
Elected as a Director on November 17, 1994 to
fill a vacancy created by the enlargement of
the Board of Directors by vote of the
Directors.
Wilson B. Tuffin 66 Vice Chairman since November 1994. From 1972 1972
to November 30, 1994, President, Chief
Executive Officer and Treasurer of the
Company.
Kenneth A. Smith 61 Professor of Chemical Engineering at 1985
Massachusetts Institute of Technology since
1971.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
PRESENT PRINCIPAL EMPLOYMENT
NAME AGE AND PRIOR BUSINESS EXPERIENCE DIRECTOR SINCE
- --------------------------------------------- --- --------------------------------------------- ---------------
<S> <C> <C> <C>
Frank H. Brenton 72 Principal of Frank H. Brenton Associates a 1986
business consulting firm. From 1984 to 1986,
Chairman of the Board of Directors of
Marshall's Incorporated, an off-price
retailer and division of Melville, Inc.
</TABLE>
Each director is elected for a term of one year. There are no family
relationships among any of the Company's directors and officers.
INFORMATION ABOUT THE BOARD OF DIRECTORS AND COMMITTEES
The Board of Directors met seven times during the fiscal year ended
September 30, 1997. There was no director who during the fiscal year attended
fewer than 75 percent of the aggregate of all board meetings and all meetings
of committees on which he served.
The Board of Directors has an Audit Committee which is reconstituted at the
first meeting of the Board following the annual meeting of stockholders. The
Audit Committee, which met two times during fiscal 1997, meets with the
Company's independent auditors and principal financial personnel to review the
scope and results of the annual audit and the Company's financial reports. The
Audit Committee also reviews the scope of audit and non-audit services performed
by the independent public accountants, and reviews the adequacy and
effectiveness of internal accounting controls. The present members of the Audit
Committee are Messrs. Brenton and Smith.
The Board of Directors has a Stock Option Committee which was formed during
fiscal 1997. The Stock Option Committee, which met once during fiscal 1997,
determines the recipients, number of shares and terms of stock options granted
to the Company's employees, directors and consultants. The present members of
the Stock Option Committee are Messrs. Matthews, Tuffin and Quinn.
The Board of Directors does not have any standing committees on compensation
or nomination.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires directors,
executive officers and stockholders who own more than 10% of the outstanding
common stock of the Company to file with the Securities and Exchange Commission
and NASDAQ reports of ownership and changes in ownership of voting securities of
the Company and to furnish copies of such reports to the Company. To the
Company's knowledge, based solely on review of the copies of such reports
furnished to the Company, during the fiscal year ended September 30, 1997 or
written representations in certain cases, all Section 16(a) filing requirements
were complied with except Messrs. Quinn (a director and executive officer)
and Spiezio (an executive officer) each failed to timely report one grant of
options on November 20, 1995 through inadvertence.
21
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table discloses for the periods presented the compensation for
the person who served as the Company's Chief Executive Officer and for each of
the four most highly compensated executive officers of the Company, other than
the Chief Executive Officer, whose total compensation exceeded $100,000 for the
Company's fiscal year ended September 30, 1997 (collectively, "the Named
Executive Officers"):
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
--------------------------------------------- ---------------------------- ------------
RESTRICTED SECURITIES
OTHER STOCK UNDERLYING LTP
NAME AND ANNUAL AWARD(S) OPTIONS/ PAYOUTS
PRINCIPAL POSITION YEAR(1) SALARY ($) BONUS($) COMPENSATION($)(2) $ SARS (#)(6) $
- ----------------------- ----------- ----------- ----------- ------------------- ---------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
George J. Matthews(4)
Chairman of Board of 1997 350,000 -- -- -- -- --
Directors, CEO and 1996 350,000 -- -- -- -- --
Treasurer(5) 1995 350,000 -- -- -- 20,000 --
Robert E. Quinn 1997 200,000 15,000 -- -- 25,000 --
President(3)(5) 1996 173,769 -- -- -- 20,000 --
1995 151,673 200 35,000 -- 60,000 --
James M. Spiezio
Vice President, 1997 131,616 13,250 -- -- 8,000 --
Finance & 1996 121,058 -- -- -- 10,000 --
Administration 1995 113,270 10,930 -- -- 12,000 --
William T. Nachtrab 1997 131,616 9,050 -- -- 8,000 --
Vice President, 1996 114,847 -- -- -- -- --
Technology 1995 108,703 10,830 -- -- 12,000 --
Douglas F. Grotheer 1997 121,934 6,700 -- -- 5,000 --
President, Starmet 1996 100,252 -- -- -- -- --
CMI Corporation 1995 95,002 10,830 -- -- 5,000 --
<CAPTION>
NAME AND ALL OTHER
PRINCIPAL POSITION COMPENSATION($)
- ----------------------- -------------------
<S> <C>
George J. Matthews(4)
Chairman of Board of --
Directors, CEO and --
Treasurer(5) --
Robert E. Quinn --
President(3)(5) --
--
James M. Spiezio
Vice President, --
Finance & --
Administration --
William T. Nachtrab --
Vice President, --
Technology --
Douglas F. Grotheer --
President, Starmet --
CMI Corporation --
</TABLE>
(1) The Company's fiscal year ends on September 30th of each year.
(2) Excludes perquisites in amounts less than the threshold level required for
reporting.
(3) Mr. Quinn's compensation for the fiscal year ended September 30, 1997 was
determined pursuant to his Employment Agreement. See "Executive Agreements."
(4) Mr. Matthews is assigned as a consultant to the Company pursuant to a
management agreement between Matthews Associates Limited and the Company.
All compensation under the agreement is paid by the Company to Matthews
Associates Limited. See "Executive Agreements."
(5) On January 20, 1998, Mr. Matthews resigned as Chief Executive Officer and
Treasurer of the Company and the Company elected Mr. Quinn as Chief
Executive Officer and Treasurer.
(6) Options have been adjusted to reflect the Company's two for one stock
dividend paid on April 7, 1997.
22
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information regarding options granted
during the fiscal year ended September 30, 1997 by the Company to the Named
Executive Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------
PERCENT
OF TOTAL POTENTIAL REALIZABLE
OPTIONS VALUE AT ASSUMED
NUMBER OF GRANTED ANNUAL RATES OF STOCK
SECURITIES TO EXERCISE OR PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES IN BASE PRICE OPTION TERM(4)
OPTIONS FISCAL ($/ EXPIRATION ----------------------
NAME GRANTED (#) YEAR SHARE)(3) DATE 10%($) 5%($)
----------- ------------- --------------- ----------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
George J. Matthews......................... -- -- -- -- -- --
Robert E. Quinn............................ 15,000(1) $ 15.563 8/5/2007 $ 146,812 $ 372,051
10,000(2) 20.8% 7.38 11/19/2006 46,412 117,618
James M. Spiezio........................... 4,000(1) 15.563 8/5/2007 39,150 99,214
4,000(2) 6.7% 7.38 11/19/2006 18,565 47,047
William T. Nachtrab........................ 4,000(1) 15.563 8/5/2007 39,150 99,214
4,000(2) 6.7% 7.38 11/19/2006 18,565 47,047
Douglas F. Grotheer........................ 3,000(1) 15.563 8/5/2007 29,362 74,410
2,000(2) 4.2% 7.38 11/19/2006 9,282 23,524
</TABLE>
- ------------------------
(1) These options are first exercisable on August 5, 1998 at which time the
options will be one-third vested with options vesting in additional
one-third increments in two annual installments commencing on August 5,
1999.
(2) These options were first exercisable on November 19, 1997 at which time the
options were one-third vested with options vesting in additional one-third
increments in two annual installments commencing on November 19, 1998.
(3) The exercise price per share is the market price of the underlying Common
Stock on the date of grant. The exercise price reflects a 2-for-1 stock
dividend paid on April 7, 1997.
(4) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based upon assumed rates of share price appreciation set by the
Securities and Exchange Commission of five percent and ten percent
compounded annually from the date the respective options were granted to
their expiration date. The gains shown are net of the option exercise price,
but do not include deductions for taxes of the options exercise price or
other expenses associated with the exercise. Actual gains, if any, are
dependent on the performance of the Common Stock and the date on which the
option is exercised. There can be no assurance that the amounts reflected
will be achieved.
23
<PAGE>
AGGREGATED OPTION EXERCISED IN LAST FISCAL YEAR AND FISCAL
YEAR-END OPTION VALUES
The following table sets forth certain information concerning options
exercised during the fiscal year ended September 30, 1997 by the Named Executive
Officers, as well as the aggregate value of unexercised options held by such
executive officers on September 30, 1997. The Company has no outstanding stock
appreciation rights, either freestanding or in tandem with options.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED
OPTIONS AT FY-END (#)
--------------------------
<S> <C> <C> <C> <C>
SHARES
ACQUIRED ON VALUE (1)
NAME EXERCISE (#) REALIZED($) EXERCISABLE UNEXERCISABLE
- ----------------------------------------- ----------------- ----------------- ----------- -------------
George J. Matthews....................... 0 0 13,334 6,666
Robert E. Quinn.......................... 0 0 46,667 58,333
James M. Spiezio......................... 0 0 16,333 18,667
William T. Nachtrab...................... 0 0 13,000 12,000
Douglas F. Grotheer...................... 0 0 8,334 6,666
<CAPTION>
VALUE OF
UNEXERCISED
IN-THE-MONEY
OPTIONS AT FY-END(2)
----------------------------
NAME EXERCISABLE UNEXERCISABLE
- ----------------------------------------- ----------- -------------
George J. Matthews....................... $ 148,274 $ 74,126
Robert E. Quinn.......................... 509,003 487,202
James M. Spiezio......................... 193,679 162,599
William T. Nachtrab...................... 157,449 90,129
Douglas F. Grotheer...................... 83,324 43,327
</TABLE>
- ------------------------
(1) Value realized equals fair market value on the date of exercise, less the
exercise price, times the number of shares acquired, without deducting taxes
or commissions paid by employee.
(2) Value of unexercised options equals fair market value of the shares
underlying in-the-money options on September 30, 1997 ($17.25 per share),
less the exercise price, times the number of options outstanding. All such
options were "in of the money" as of September 30, 1997.
PENSION PLAN
The following table sets forth the aggregate annual benefit payable upon
retirement at normal retirement age for each level of remuneration specified at
the listed years of service.
<TABLE>
<CAPTION>
YEARS OF SERVICE
----------------------
<S> <C> <C> <C> <C>
REMUNERATION 15 20 25 30 OR MORE
- ------------- --------- --------- --------- -----------
$100,000..... 23,520 31,360 39,220 47,040
150,000..... 38,520 51,360 64,200 77,040
200,000..... 53,520 71,360 89,200 107,040
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
YEARS OF SERVICE
----------------------
<S> <C> <C> <C> <C>
REMUNERATION 15 20 25 30 OR MORE
- ------------- --------- --------- --------- -----------
300,000..... 83,520 111,360 139,200 167,040
400,000..... 113,520 151,360 189,200 227,040
500,000..... 143,520 191,360 239,200 287,040
</TABLE>
The Company has a defined benefit plan (the "Pension Plan") designed to
provide retirement benefits for employees and ancillary benefits to their
beneficiaries, joint annuitants and spouses. All employees of the Company become
participants in the Pension Plan after attaining the later of age 21 or a year
of service with the Company. The Pension Plan provides retirement benefits based
on years of service and compensation. An employee's benefits under the Pension
Plan generally become fully vested after five years of service. At normal
retirement (the later of age 65 and five years of Plan participation),
participants are entitled to a monthly benefit for the remainder of their life
in an amount equal to one-twelfth of the sum of their "Annual Credits" for their
last 30 years or lesser period of employment with the Company and its
predecessors. An employee's "Annual Credit" is 1.25% of the portion of his
annual compensation that is subject to Social Security tax and two percent (2%)
of the balance of his annual compensation. Participants with five years of
service are entitled to retirement at age 55, but the monthly benefit payable
under the Pension Plan is reduced by 0.5% for each month that early retirement
precedes normal retirement but not to less than $100 per month if the
Participant has ten or more years of service. The surviving spouse of a
retiree under the Plan is entitled to receive benefits equal to one-half the
amount the retiree had been receiving. Alternative benefit payments that are
equivalent to the benefit described above are also available to participants.
Benefits payable under the plan are not reduced by Social Security payments
to the retiree. Amounts shown assume benefits commence at age 65. Benefit
amounts shown are straight-life annuities. The executive officers named in
the Summary Compensation Table have the following years of credited service
for pension plan purposes: Robert E. Quinn-21 years; James M. Spiezio-11
years; William T. Nachtrab-7 years; and Douglas Grotheer-17 years. Mr.
Matthews does not participate in the Pension Plan.
DIRECTORS' COMPENSATION AND STOCK OPTION PLAN
Each outside director of the Company receives an annual fee of $15,000
and is elegible to receive options under the Company's Director Option Plan.
Messrs. Brenton and Smith, the Company's two non-employee directors, were
each granted options to purchase 3,000 shares of Common Stock at an exercise
price of $15.563 per share in the previous fiscal year.
During fiscal year 1997, Matthews Associates Limited, of which Mr. Matthews
is sole owner, received compensation from the Company in connection with
consulting services provided to the Company pursuant to a management agreement
between the Company and Matthews Associates Limited. See "Executive
Compensation" and "Executive Agreements."
The Company entered into an employment and consulting agreement with Mr.
Tuffin in November 1994, which shall continue in force until February 1999.
Pursuant to such agreement, Mr. Tuffin receives annual compensation of $105,000
for his services as a consultant to the Company. During the term of the
agreement and for a period of two (2) years after its expiration, or the
termination of Mr. Tuffin's employment with the Company, whichever occurs later,
Mr. Tuffin may not compete directly or indirectly with the Company within the
continental United States.
EXECUTIVE AGREEMENTS
EMPLOYMENT AGREEMENT WITH MR. QUINN
In October 1997, the Company entered into an amended employment agreement
with Mr. Quinn. Pursuant to the agreement, Mr. Quinn will receive initial
compensation at the annual rate of $200,000, subject to such annual increases
and bonuses as the Board of Directors may from time to time determine. The
25
<PAGE>
agreement shall continue in force until February 28, 2002, unless terminated by
either party in accordance with its terms, and is subject to annual renewals as
described in the agreement. During the term of the agreement and for a period of
two (2) years after its expiration, or after the termination of Mr. Quinn's
employment with the Company, whichever occurs later, Mr. Quinn may not compete
directly or indirectly with the Company within the continental United States.
The Company shall require any successor to a majority of its business activities
to assume its obligations under this agreement.
EMPLOYMENT AGREEMENTS WITH MESSRS. SPIEZIO, NACHTRAB AND GROTHEER
In October 1997, the Company entered into employment agreements with Messrs.
Spiezio, Nachtrab and Grotheer (each an "Executive"). Under the terms of their
respective agreements, Messrs. Spiezio, Nachtrab and Grotheer are entitled to an
annual base salary of $142,000, $136,000, and $135,000, respectively, subject to
such annual increases and bonuses as the Board of Directors may from time to
time determine. Each of the agreements shall continue in force for an initial
period of three (3) years, unless such agreement is terminated by the Company or
the Executive in accordance with its terms. Annually, the Board of Directors, in
its discretion, may extend the term of each agreement for an additional year.
During the term of each Agreement and for a period of eighteen (18) months after
any termination of employment, each Executive may neither i) compete directly or
indirectly with the Company within the continental United States nor ii) solicit
any of the Company's customers or employees. Each of the agreements may be
terminated by the Company prior to a change in control (as defined in the
agreements) and upon twelve months written notice.
MANAGEMENT AGREEMENT WITH MR. MATTHEWS
The Company has entered into a management agreement with Matthews Associates
Limited, a Massachusetts corporation ("MAL"), of which Mr. George J. Matthews,
Director and Chairman of the Board of Directors of the Company, is sole owner.
The agreement provides MAL with a minimum compensation of $350,000 per annum for
all services under the agreement. The agreement expires on February 28, 2002,
subject to annual renewals as described in the agreement. In the event of
termination of MAL by the Company, the Company is obligated to pay to MAL all of
the amounts due under the agreement for the remaining term.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended September 30, 1997, the Board of Directors of
the Company was responsible for establishing executive compensation (other than
stock option compensation). Messrs. Quinn and Matthews participated in
deliberations of the Company's Board of Directors concerning executive officer
compensation. Neither participated in setting his own compensation. No executive
officer of the Company served as a director or member of a compensation
committee, or its equivalent, of another entity, one of whose executive officers
served as director of the Company.
26
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of January 21, 1998, certain
information with respect to the beneficial ownership of the Common Stock by
(i) each person known by the Company to be a beneficial owner of more than
five percent (5%) of the Common Stock, (ii) each director of the Company,
(iii) each Named Executive Officer and (iv) all directors and executive
officers of the Company as a group. Except as otherwise noted, each party
included in the table has sole voting and investment power with respect to
the shares beneficially owned.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE
OF BENEFICIAL OWNER OF BENEFICIAL
CHARLES ALPERT OWNERSHIP PERCENT OWNED
- ----------------------- ----------------------- ---------------
<S> <C> <C>
Charles Alpert 2,481,837(1)(2) 50.33%
Joseph Alpert
WIAF Investors Co.
466 Arbuckle Avenue
Lawrence, NY 11516
and
Melvin B. Chrein, M.D.
Meryl J. Chrein
Marshall J. Chrein
Michael Chrein
21 Copper Beech Lane
Lawrence, NY 11559
George J. Matthews 415,764(3) 8.63%
Chairman of the Board of
Directors
Director & Consultant
c/o Matthews Assocaites
Limited
100 Corporate Place
Peabody, MA 01960
Wilson B. Tuffin 401,982(4) 8.39%
Vice Chairman and Director
23 Arlington Street
Acton, MA 01720
Dimensional Fund
Advisors, Inc. 338,000(5) 7.1%
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401
Robert E. Quinn 85,479(6) 1.76%
President, CEO, Treasurer
and Director
James M. Spiezio 23,665(7) *
Vice President, Finance and
Administration
William T. Nachtrab
Vice President, Technology 16,999(8) *
Kenneth A. Smith, Director 14,000(9) *
Frank H. Brenton, Director 14,000(9) *
Douglas F. Grotheer 11,075(10) *
President of CMI Corporation
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE
OF BENEFICIAL OWNER OF BENEFICIAL
CHARLES ALPERT OWNERSHIP PERCENT OWNED
- ----------------------- ----------------------- ---------------
<S> <C> <C>
All directors and 982,964(11) 19.87%
executive officers as a
group (8 persons)
</TABLE>
- ------------------------
(1) Does not reflect the effect on voting rights of the Massachusetts Control
Share Acquisition Act. The Company is subject to Chapter 110D of the
Massachusetts General Laws which governs "control share acquisitions," which
are acquisitions of beneficial ownership of shares which would raise the
voting power of the acquiring person above any one of three thresholds:
one-fifth, one-third or one-half of the total voting power. All shares
acquired by the person making the control share acquisition
within 90 days before or after any such threshold is crossed obtain voting
rights only upon the authorization from a majority of the stockholders other
than the person acquiring such shares, officers of the Company and those
directors of the Company who also are employees. Based on certain filings
made with the SEC, the Company believes that certain control share
acquisitions have occurred and that the members of the group which effected
such control share acquisitions, namely WIAF Investors Co., Charles Alpert,
Joseph Alpert, Melvin B. Chrein, Meryl J. Chrein, Marshall J. Chrein and
Michael Chrein (collectively the "Investor Group") are the holders of
1,749,598 shares (the "Affected Shares") which were acquired in control
share acquisitions (within the meaning of Chapter 110D) and accordingly
will have no voting rights as to the Affected Shares unless or until such
voting rights are authorized as described above.
(2) Derived from Schedules 13DA, dated October 3, 1994, submitted to the
Company. The seven persons named are described as a group in such Schedules
13DA. The persons named reported ownership of the following shares: WIAF
Investors Co. 1,724,856; Melvin B. Chrein 202,300; Meryl J. Chrein 245,500;
Charles Alpert 50,000; Joseph Alpert 50,000; Michael Chrein 16,200; and
Marshall J. Chrein 48,200. Each person reported sole voting and dispositive
power with respect to the shares owned by such person. Also includes 21,021,
79,435 and 2,325 shares which Melvin B. Chrein, WIAF Investors Co. and
Marshall Chrein, respectively, have the right to acquire upon conversion of
outstanding 10% Convertible Subordinated Debentures and 27,000, 12,000 and
3,000 shares which Charles Alpert or nominee, Melvin B. Chrein and Marshall
J. Chrein, respectively, have the right to acquire under outstanding
Warrants.
(3) Includes (i) 13,334 shares which may be purchased upon the exercise of
currently exercisable options, (ii) 2,325 shares which may be acquired upon
the conversion of an outstanding 10% Convertible Debenture, (ii) 13,961
shares which Mr. Matthews' wife has the right to acquire upon the conversion
of an outstanding 10% Convertible Subordinated Debenture, as to which Mr.
Matthews disclaims beneficial ownership, and (iii) 990 shares owned by Mr.
Matthews' wife.
(4) Includes 6,666 shares which may be purchased upon the exercise of options.
(5) The officers of Dimensional Fund Advisors, Inc. also serve as officers of
DFA Investment Dimensions Group, Inc. (the "Fund") and The DFA Investment
Trust Company (the "Trust"), each an open-end management investment company
registered under the Investment Company Act of 1940. In their capacity as
officers of the Fund and the Trust, these persons vote 128,600 shares which
are owned by the Fund and 13,000 shares which are owned by the Trust.
(6) Includes 63,333 shares which may be purchased upon the exercise of currently
exercisable options.
(7) Includes 21,665 shares which may be purchased upon the exercise of currently
exercisable options.
(8) Includes 14,999 shares which may be purchased upon the exercise of currently
exercisable options.
(9) Includes 8,000 shares which may be purchased upon the exercise of currently
exercisable options.
(10) Includes 9,001 shares which may be purchased upon the exercise of currently
exercisable options.
(11) See notes (3), (4), (6), (7), (8), (9) and (10) above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1997, the Company entered into an employment agreement with Mr.
Raftery at an initial base salary of $100,000 and on terms similar to Messrs.
Spiezio, Nachtrab and Grotheer. (See "Executive Agreements").
In December 1997, the Company sold $900,000 worth of 10% Convertible
Subordinated Debentures due on December 31, 1999 to WIAF Investors Co.
($500,000), Melvin Chrein ($150,000), Joshua Feibusch ($150,000), Marshall
Chrein ($50,000) and George Matthews ($50,000) Such debentures are convertible
into shares of Common Stock at an exercise price of $21.50 per share. WIAF
Investors Co., Melvin Chrein and Marshall Chrein have filed Schedules 13DA
identifying themselves as part of an investor group which holds more than five
percent of the Company's outstanding Common Stock and Mr. Matthews is currently
a director of the Company and at the time of the transaction was the Company's
Chief Executive Officer and Treasurer. Mr. Feibusch is not affiliated with the
Company.
28
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following consolidated financial statements of the Company, included
in the Company's 1997 Annual Report are filed as part of this report:
Auditors' Report
Consolidated Balance Sheets--September 30, 1997 and September 30, 1996.
Consolidated Statements of Operations for the years ended September 30,
1997, September 30, 1996 and September 30, 1995.
Consolidated Statements of Stockholders' Equity for the years ended
September 30, 1997, September 30, 1996 and September 30, 1995.
Consolidated Statements of Cash Flows for the years ended September 30,
1997, September 30, 1996 and September 30, 1995.
Notes to Consolidated Financial Statements
2. Financial Statement Schedule for the Three Years Ended September 30, 1997
Auditors' Report on Schedule II-Valuation and Qualifying Accounts
29
<PAGE>
3. Exhibits:
<TABLE>
<CAPTION>
ITEM NO.* DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------------
<S> <C>
2 Plan of Reorganization, dated June 24, 1997. (12)
3(a) Articles of Organization, as amended, of the Registrant.**
3(b) By-laws, as amended, of the Registrant, incorporated by reference to File No. 2-62266, Part II, Exhibit
3(b).
4(a) Financing Agreement, dated May 11, 1982, among Barnwell County, South Carolina, Registrant and Carolina
Metals, Inc. (a wholly-owned subsidiary) relating to Barnwell County, South Carolina Industrial
Development Revenue Bond (Nuclear Metals, Inc. project) 1982, incorporated by reference to File No.
2-70044, Part II, Exhibit 4(d).
4(b) Financing Agreement, dated September 27, 1984 among Barnwell County, South Carolina, Registrant and
Carolina Metals, Inc. (a wholly owned-subsidiary) relating to Barnwell County, South Carolina Industrial
Development Revenue Bond (Nuclear Metals, Inc. project) 1984, incorporated by reference to File No.
0-8836, Part II, Exhibit 4(e).
4(c) Financing Agreement, dated June 1, 1985 among Massachusetts Industrial Finance Agency and the Registrant
relating to Massachusetts Industrial Development Revenue Bond (NMI-- 1985 Concord Issue) incorporated by
reference to File No. 0-8836, Part II, Exhibit 4(f)
4(d) Nuclear Metals, Inc. Non-Qualified Stock Option Plan as amended.(1)
4(e) Nuclear Metals, Inc. Restated Employees' Stock Option Plan as amended. (1)
4(f) Nuclear Metals, Inc. Directors' Stock Option Plan as amended. (6)
4(h) Warrant to Purchase 25,000 shares of the Company's Common Stock issued to State Street Bank and Trust
Company. (6)
4(i) Common Stock Purchase Warrant dated September 16, 1996 issued to Melvin B. Chrein and schedule of
similar warrants. (7)
4(j) Common stock purchase warrant dated September 22, 1997 issued to Roger M. Marino for 60,000 shares.**
10(a) Agreement, effective March 1, 1993, between the Registrant and Matthews Associates Limited. (2)
10(b) Agreement, effective March 1, 1993, between the Registrant and Wilson B. Tuffin, as amended November 17,
1994. (2)
10(c) Employment Agreement, effective February 8, 1995 between the Registrant and Robert E. Quinn. (7)
30
<PAGE>
10(d) Agreement with Olin Corporation regarding large caliber penetrators. (Confidential treatment has been
granted for certain portions of this Exhibit). (3)
10(e) Credit Agreement dated March 31, 1995 among the Company, Carolina Metals, Inc. and State Street Bank and
Trust Company.(4)
10(f) First Amendment to Credit Agreement dated as of June 30, 1995 among the Company, Carolina Metals, Inc.
and State Street Bank and Trust Company. (5)
10(g) Amended and Restated Revolving Credit Note dated March 31, 1995 (as amended December 24, 1996 ) of the
Registrant and Carolina Metals, Inc. (7)
10(h) Second Amendment to Credit Agreement dated as of December 24, 1996 among the Registrant, Carolina
Metals, Inc. and State Street Bank and Trust Company. (7)
10(i) 10% Convertible Subordinated Debenture dated January 10, 1996 payable to WIAF Investors Co. in amount of
$334,000.00 and schedule of similar debentures. (7)
10(j) 10% Subordinated Debenture dated September 16, 1996 payable to Melvin B. Chrein in the amount of
$100,000.00 and schedule of similar debentures. (7)
10(k) Letter Agreement dated as of September 16, 1996 with Kathleen Matthews and schedule similar letter
agreements. (7)
10(l) Joint Security Agreement dated as of March 31, 1995 among the Registrant, Carolina Metals,
Inc. and State Street Bank and Trust Company. (6)
10(m) First Amendment to Joint Security Agreement dated September 26, 1995 among the Registrant, Carolina
Metals, Inc. and State Street Bank and Trust Company.(6)
10(n) Patent Assignment of Security dated September 26, 1995 between the Registrant and State Street Bank and
Trust Company.(6)
10(o) Trademark Assignment of Security dated September 26, 1995 between the Registrant and State Street Bank
and Trust Company. (6)
10(p) Purchase order dated August 23, 1995 between the Registrant and Olin Corporation. (Confidential
treatment requested as to certain portions) (6)
10(q) Forbearance and Amendment Agreement dated as of January 11, 1996 between the Registrant, Carolina
Metals, Inc. and State Street Bank and Trust Company. (6)
10(r) Waiver of Breach of Covenant, by and among the Registrant, Carolina Metals, Inc. and State Street Bank
and Trust Company.(7)
31
<PAGE>
10(s) Envirocare of Utah Inc. Low-Activity Radioactive Waste Disposal Agreement. (Confidential treatment has
been granted for certain portions of this Exhibit). (9)
10(t) Amendment of Solicitation/Modification of Contract dated March 10, 1997 issued by Department of the
Army. (10)
10(u) Securities Pledge Agreement dated July 3, 1997 between Khosrow B. Semnoni and Nuclear Metals, Inc. (11)
10(v) Employment Agreement, effective October 1, 1997 between the Registrant and James M. Spiezio.**
10(w) Amended and Restated Revolving Credit Note dated October 1, 1997 among the Company, Starmet Powders,
LLC, Starmet Aerocast, LLC, Starmet Comcast, LLC, Starmet NMI Corporation, Starmet CMI Corporation,
Starmet Holdings Corporation, NMI Foreign Sales Corporation and State Street Bank and Trust Company.**
10(x) Amended and Restated Credit Agreement dated October 1, 1997 among the Company, Starmet Powders, LLC,
Starmet Aerocast, LLC, Starmet Comcast, LLC, Starmet NMI Corporation, Starmet CMI Corporation, Starmet
Holdings Corporation, NMI Foreign Sales Corporation and State Street Bank and Trust Company.**
10(y) Amended and Restated Joint Security Agreement dated October 1, 1997 among the Company, Starmet Powders,
LLC, Starmet Aerocast, LLC, Starmet Comcast, LLC, Starmet NMI Corporation, Starmet CMI Corporation,
Starmet Holdings Corporation, NMI Foreign Sales Corporation and State Street Bank and Trust Company.**
10(z) Patent Assignment of Security dated October 1, 1997 between the Company and State Street Bank and Trust.**
10(aa) Employment Agreement, effective October 1, 1997 between the Registrant and William T. Nachtrab.**
10(bb) Employment Agreement, effective October 1, 1997 between the Registrant and Douglas F. Grotheer. **
10(cc) Employment Agreement, effective October 1, 1997 between the Registrant and Kevin R. Raftery. **
10(dd) First Amendment to Credit Agreement dated as of December 9, 1997 among the Company, Starmet
Powders, LLC, Starmet Aerocast, LLC, Starmet Comcast, LLC, Starmet NMI Corporation, Starmet CMI
Corporation, Starmet Holdings Corporation, NMI Foreign Sales Corporation and State Street Bank and Trust
Company.**
10(ee) Third Amendment to Credit Agreement dated August 7, 1997 among Nuclear Metals, Inc., Carolina Metals,
Inc. and State Street Bank and Trust Company.**
</TABLE>
32
<PAGE>
<TABLE>
<S> <C>
10(ff) Amendment to Employment Agreement dated October 1, 1997 between the Registrant and Robert E. Quinn.**
10(gg) Letter agreement with Roger M. Marino dated September 22, 1997 between the registrant and Roger M.
Marino.**
10(hh) 10% Subordinated Debenture dated September 22, 1997 payable to Roger Marino in the amount of $500,000.00.**
10(ii) Letter agreement dated December 23, 1997 regarding issuance of subordinated convertible
debentures among the Registrant Melvin Chrein, WIAF Investors Co., Marshall Chrein, Joshua Feibusch and
George J. Matthews.**
10(jj) 10% Convertible Subordinated Debenture dated December 23, 1997 payable to WIAF Investors Co. in amount of $500,000.00
and schedule of similar debentures.**
10(kk) Second Amendment to Credit Agreement dated as of December 29, 1997 among the Company, Starmet Powders, LLC,
Starmet Aerocast, LLC, Starmet Comcast, LLC, Starmet NMI Corporation, Starmet CMI Corporation, Starmet Holdings
Corporation, NMI Foreign Sales Corporation and State Street Bank and Trust Company.**
10(ll) Second Additional Revolving Credit Note dated December 29, 1997 among the Company, Starmet Powders, LLC, Starmet
Aerocast, LLC, Starmet Comcast, LLC, Starmet NMI Corporation, Starmet CMI Corporation, Starmet Holdings Corporation,
NMI Foreign Sales Corporation and State Street Bank and Trust Company.**
13 Starmet Corporation 1997 Annual Report to Stockholders. ***
21 Subsidiaries of the Registrant. **
23(a) Consent of Independent Public Accountants.***
27 Financial Data Schedule.**
99(a) Memorandum of Decision dated September 13, 1996 from the United States Army Contract Adjustment Board.
(8)
99(b) Amendment No. 2 to Registration Statement on Form S-1 (File No. 333-49629) (13)
</TABLE>
- ------------------------
* Item numbers correspond to Exhibit Table, Item 601, Regulation S-K
** Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1997
*** Indicates an exhibit filed herewith
(1) Incorporated by reference to the similarly numbered Exhibit filed with the
Registrant's Annual Report on Form 10-K for the fiscal year ended September
30, 1992.
(2) Incorporated by reference to the similarly numbered Exhibit filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
1992.
(3) Incorporated by reference to Exhibit 10 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1993.
(4) Incorporated by reference to Exhibit 10A to the Registrant's Form 10-Q for
the Quarter ended March 31, 1995.
(5) Incorporated by reference to Exhibit 10(c) to the Registrant's Annual Report
on Form 10-K for the fiscal year ended September 30, 1995.
(6) Incorporated by reference to the similarly numbered Exhibit filed with the
Registrant's Annual Report on Form 10-K for the fiscal year ended September
30, 1995.
(7) Incorporated by reference to the similarly numbered Exhibit filed with the
Registrant's Annual Report on Form 10-K for the fiscal year ended September
30, 1996.
33
<PAGE>
(8) Incorporated by reference to Exhibit 99 filed with the Registrant's Annual
Report on Form 10-K for the fiscal year ended September 30, 1996.
(9) Incorporated by reference to Exhibit 10A to Registrant's Form 10-Q for the
quarter ended March 31, 1997.
(10) Incorporated by reference to Exhibit 10B to Registrant's Form 10-Q for the
quarter ended March 31, 1997.
(11) Incorporated by reference to Exhibit 10 to Registrant's Form 10-Q for the
quarter ended June 30, 1997.
(12) Incorporated by reference to Annex A to Registrant's proxy statement for
special meeting held on September 29, 1997.
(13) Incorporated by reference to the Registrant's Amendment No. 2 to
Registration Statement on Form S-1 (File No. 333-49629)
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
STARMET CORPORATION
By: /s/ Robert E. Quinn
____________________________________________
Robert E. Quinn, President and Chief Executive
Officer (principal executive officer and director)
Date: August 11, 1998
__________________________________________
By: /s/ James M. Spiezio
____________________________________________
James M. Spiezio, Vice President Finance and
Administration (principal financial and accounting officer)
Date: August 11, 1998
__________________________________________
By: /s/ George J. Matthews
____________________________________________
George J. Matthews, Chairman of the Board of
Directors
Date: August 11, 1998
__________________________________________
By: /s/ Wilson B. Tuffin
____________________________________________
Wilson B. Tuffin, Vice Chairman
Date: August 11, 1998
__________________________________________
By: /s/ Frank H. Brenton
____________________________________________
Frank H. Brenton, Director
Date: August 11, 1998
__________________________________________
By: /s/ Kenneth A. Smith
____________________________________________
Kenneth A. Smith, Director
Date: August 11, 1998
__________________________________________
By: /s/ William J. Shea
____________________________________________
William J. Shea, Director
Date: August 11, 1998
__________________________________________
35
<PAGE>
INDEX TO FINANCIAL STATEMENT SCHEDULES
Independent Auditors' Report
Schedule II--Valuation and Qualifying Accounts
36
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Starmet Corporation:
We have audited the accompanying consolidated balance sheets of Starmet
Corporation (formerly Nuclear Metals, Inc.) (a Massachusetts Corporation) and
subsidiaries as of September 30, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended September 30, 1997. These financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Starmet Corporation and subsidiaries as of September 30, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years
in the period ended September 30, 1997, in conformity with generally accepted
accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
the financial statements is presented for purposes of complying with the
Securities and Exchange Commission rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required
to be set forth therein in relation to the basic financial statements taken
as a whole.
The consolidated financial statements and schedule referred to above as of
September 30, 1996 and 1997, and for the years then ended, have been restated
(see Note 1).
ARTHUR ANDERSEN LLP
Boston, Massachusetts
August 7, 1998
37
<PAGE>
NUCLEAR METALS, INC. AND SUBSIDIARIES
Schedule II- Valuation and Qualifying
Accounts For the Three Years Ended September 30, 1997
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING COSTS AND END
CLASSIFICATION OF YEAR EXPENSES DEDUCTIONS OF YEAR
- ---------------------------------------------- -------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30, 1997:
Allowance for doubtful accounts............... $ 821,000 $ -- $ 400,000 $ 421,000
-------------- ------------ ------------ ------------
-------------- ------------ ------------ ------------
Inventory Reserves (as restated)(a)........... $ 4,212,000 $ -- $ -- $ 4,212,000
-------------- ------------ ------------ ------------
-------------- ------------ ------------ ------------
YEAR ENDED SEPTEMBER 30, 1996:
Allowance for doubtful accounts............... $ 883,000 $ 100,000 $ 162,000 $ 821,000
-------------- ------------ ------------ ------------
-------------- ------------ ------------ ------------
Inventory Reserves (as restated)(a)........... $ 1,522,000 $ 2,690,000 $ -- $ 4,212,000
-------------- ------------ ------------- ------------
-------------- ------------ ------------- ------------
YEAR ENDED SEPTEMBER 30, 1995:
Allowance for doubtful accounts............... $ 1,290,000 $ 400,000 $ 807,000 $ 883,000
-------------- ------------ ------------ ------------
-------------- ------------ ------------ ------------
Inventory Reserves............................ $ 1,522,000 $ -- $ -- $ 1,522,000
-------------- ------------ ------------ ------------
-------------- ------------ ------------ ------------
</TABLE>
(a) See Note 1 of Notes to Consolidated Financial Statements
38
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS 1997* 1996* OUR BUSINESS
- ---------------------------------------- ------------- ------------- -----------------------------
(as restated) (as restated)
<S> <C> <C> <C>
Net Sales............................... $ 28,062,000 $ 28,694,000 Starmet Corporation
Net Income (loss)....................... $ 482,000 $ (2,387,000) develops & manufactures
Earnings (loss) per share............... $ 0.10 $ (0.50) a variety of advanced
Weighted Average Number of Shares of metal products serving a
Common Stock Outstanding.............. 4,783,000 4,779,000 diverse customer base.
Number of Employees at Year-end......... 235 190
Total Assets............................ $ 34,354,000 $ 35,768,000
Working Capital......................... $ 4,542,000 $ 4,048,000
Stockholders' Equity.................... $ 25,746,000 $ 25,020,000
</TABLE>
CONTENTS
- ------------------------------------------------------------------
President's Letter................................................ 1
Market Profile.................................................... 4
Selected Financial Data........................................... 16
Management's Discussion and Analysis of Operations................ 18
Consolidated Balance Sheets....................................... 27
Consolidated Statements of Operations............................. 28
Consolidated Statements of Stockholders' Equity................... 29
Consolidated Statements of Cash Flows............................. 30
Notes to Consolidated Financial Statements........................ 31
Report of Independent Public Accountants.......................... 52
Corporate Directory
* See Note 1 of Notes to Consolidated Financial Statements
<PAGE>
PRESIDENT'S LETTER
Dear Stockholder:
Fiscal 1997 was a good year for Starmet Corporation (formerly Nuclear
Metals, Inc.). While sales revenues were essentially level with Fiscal 1996,
net income of $0.5 Million in Fiscal 1997 compared favorably with a $2.4
million loss in the prior year. In November 1997 Starmet CMI, our wholly
owned subsidiary, announced new orders and options valued at $5.5 million for
work to be performed in Fiscal 1998 with revenues beginning in the second
quarter. This unique facility for uranium conversion had been without a major
customer since the fourth quarter of Fiscal 1996, resulting in negative cash
flow during this period. The new orders to restart our uranium conversion
process and further expand our Department of Energy licensed DUCRETE-TM-
stabilization technology should result in Starmet CMI returning to revenue
growth.
FINANCIAL HIGHLIGHTS
Revenues in Fiscal 1997 of $28.1 million compared to $28.7 million in
Fiscal 1996. Net income of $0.5 million compared favorably to a loss of $2.4
million the prior year. Year-end backlog increased to $27.7 million from
$23.3 million the prior year. Capital expenditures of $1.8 million compared
to $1.4 million the prior year. Research and development spending of $1.3
million compared to $0.9 million the prior year.
The Fiscal 1997 year-end balance sheet showed an increase in the current
ratio (current assets / current liabilities) to 1.6 : 1 from 1.4 : 1 in the
prior year. Our Quick ratio (current assets less inventory / current
liabilities) increased to 0.9 : 1 from 0.7 : 1 the prior year. Year-end cash
and cash equivalents decreased to $0.27 million from $1.30 million the prior
year. Long term debt increased to $3.4 million from $1.9 million in the prior
year. State Street Bank & Trust Company, our commercial bank, increased the
Company's line of credit to $6.0 million in December 1997.
NAME CHANGE AND NEW SUBSIDIARIES
In late September 1997 shareholders voted to change the name of the
company to Starmet Corporation and to create several wholly owned
subsidiaries. This name change and new organizational structure should help
us grow our business more rapidly by providing greater flexibility to create
strategic alliances and otherwise finance the growth of our diverse
technologies and markets.
1
<PAGE>
STARMET CMI & NMI
The company's uranium processing technology, used primarily for shielding
applications and feed rod for advanced laser enrichment, is the foundation of
the new Starmet CMI and NMI subsidiaries. Restart of our uranium hexafluoride
(UF(6)) conversion process beginning in the second quarter of Fiscal 1998
will dramatically improve plant utilization and is expected to provide the
basis for profitability for Starmet CMI. Growing customer acceptance of
DUCRETE-TM- as a commercially viable stabilization technology with beneficial
reuse of the depleted uranium as a shielding material for high level wastes
should result over the longer term in significant new business from the
Department of Energy and commercial power companies.
STARMET POWDERS
The PREP-TM- powder technology for producing spherical powder of a
uniform size which is free of ceramic contamination is the cornerstone of
this subsidiary. There are several niche markets for high-quality spherical
powders, particularly in the medical products area, such as porous coatings
for implants. Additionally, the company is developing new innovative
technology to produce finer size spherical powders that can be consolidated
into fully dense parts. We are targeting commercial parts made from our
titanium powders due to the growing commercial interest in this aerospace
metal.
STARMET AEROCAST & COMCAST
Over the past six years, ongoing development efforts on our patented
Beralcast-Registered Trademark- technology for producing lightweight,
precision castings for aerospace applications have resulted in a significant
cost reduction using present equipment; and installation of automated
production equipment will result in further cost reductions that are expected
to be significant. This has significantly improved this exciting material's
economic viability in numerous applications. Our Beralcast-Registered
Trademark- hardware is now in demonstration and prototype manufacture on its
way to production for several new aerospace programs. Having our patented
alloys selected and proven as a reliable "bill of material" on specific
military programs is of the utmost importance and a good indicator of future
performance.
Commercial applications for Beralcast-Registered Trademark- components
have a much faster but shorter product life cycle. Commercial applications
require materials that are cost effective and are reliably manufactured. New
computer disc drive armatures designed in Beralcast-Registered Trademark- now
are being evaluated by four leading disc drive manufacturers. In commercial
applications, the ramp from demonstration quantities to production quantities
is generally only 18 months vs. 10 years for most military application. Now
that substantial manufacturing cost savings have been demonstrated by
aerospace applications we are rapidly
2
<PAGE>
approaching sizable production opportunities for several commercial
applications.
COMMITMENT TO QUALITY
During Fiscal 1997 the company became the first small business in the
United States to qualify for the U. S. Army's highest Quality Certification.
This ISO 9002 based quality system which the Army has called its Contractor
Performance Certification Program required a two and a half year total
company effort. Broad-based employee teams have worked together to improve
and document processes and procedures and then to develop charts and graphs
to monitor ongoing performance. Extensive employee participation in the
measurement and review process has been essential to our success. This
never-ending process has a single goal of continuously increasing customer
satisfaction. In addition to receiving Army certification, the company has
been recommended for ISO 9002 Certification by an international registrar. We
expect to receive the formal ISO 9002 certification in early Calendar 1998.
THE FUTURE
The name change, creation of several new subsidiaries, the Army funding
to remove a holding basin on our Concord, Massachusetts property, the
increasing Beralcast-Registered Trademark- requirements including a growing
number of commercial applications and the return to meaningful production
volumes at Starmet CMI beginning in the second quarter of Fiscal 1998, all
position the Company well to continue growth and diversification. We have
outstanding employees who very much join in the excitement of meeting our
customers' needs today and tomorrow.
We are committed to following a growth strategy and taking demonstrative
actions that will enhance shareholder value.
Thank you for your continued support and confidence.
/s/ Robert E. Quinn /s/ George J. Matthews
-------------------------- -----------------------
Robert E. Quinn George J. Matthews
President Chairman of the Board
3
<PAGE>
STARMET
The ability of a Company to adapt to a changing marketplace while
maintaining strong customer relationships defines success. Starmet
Corporation's dedication to solving customers' material related issues is the
foundation of our ability to adapt and innovate. Our company has been
transformed over the past three years from principally a manufacturer of
depleted uranium for Government defense applications to a manufacturer
offering a broad range of metal products and services. Our capabilities offer
product solutions to complex issues in the aerospace, energy, medical,
defense, sporting goods, and computer industries. These products range from
Beralcast-Registered Trademark- computer disc drive armatures, enabling
significantly improved data storage and retrieval, to uranium feed material
for the Atomic Vapor Laser Isotope Separation process, the most advanced
uranium isotope separation process currently being deployed for nuclear fuel
production. Starmet Corporation's primary mission is to support its newly
formed business units with research and development, customer and financial
support, and operational capabilities consistent with the needs of our
customers. The Company's business units include Starmet NMI, Starmet CMI,
Starmet Aerocast, Starmet Comcast and Starmet Powders. Starmet Corporate also
provides advanced material products and services directly to customers in
aerospace-related industries consistent with Nuclear Metals' legacy of
advanced metalworking processes.
STARMET CORPORATION'S DEDICATION TO SOLVING CUSTOMERS' MATERIAL RELATED
ISSUES IS THE FOUNDATION OF OUR ABILITY TO ADAPT AND INNOVATE.
SOLUTIONS
4
<PAGE>
5
<PAGE>
STARMET NMI
"Transition" describes our status in support of the Armed Forces for
Depleted Uranium (DU) ammunition. Starmet NMI has provided DU ammunition to
all branches of the United States Armed Forces. We are proud of our role in
providing our soldiers with the best ammunition in the world. When we were
visited by two Desert Storm tank commanders this past year we were told
emphatically that lives are saved when our soldiers are able to rely
completely on the quality, consistency, and performance of DU ammunition.
However, events in the former Soviet Union, combined with the effectiveness
of the ammunition deployed in Desert Storm, led the Army to the conclusion
that fewer rounds needed to be stockpiled. As we produce 120MM DU rounds for
the M1A2 Abrams tank at a tenth of previous rates, the need to transition
from the ordnance marketplace to the commercial marketplace is evident. A
versatile material, DU is used in commercial applications ranging from
shielding devices for the medical industry to counterweight materials in wide
body aircraft. While facilities in Concord, MA previously used for DU
penetrator manufacture are being cleaned and readied for production expansion
of our patented Beryllium Aluminum alloy, Beralcast-Registered Trademark-,
Starmet will continue to support the Army's DU ammunition needs with
consolidation of facilities and technical expertise to CMI in Barnwell, SC.
6
<PAGE>
7
<PAGE>
STARMET CMI
Novel technologies for difficult issues are the trademark of this unique
business unit of Starmet. CMI is the only fully integrated DU processing
facility in the United States. Customer needs for uranium and related
materials are served by utilizing our patented technologies and a team of
engineering specialists. Whether it involves transforming radioactive scrap
metals into useable shielding products, refurbishing commercial and military
aircraft counterweights, or producing feed materials for the Atomic Vapor
Laser Isotope Separation process, CMI brings value to customers through
technical excellence and proven technologies. The answer to the question of
how to manage the growing inventory of uranium hexafluoride may be found in
DUCRETE-TM- shielding, a patented form of ultra dense concrete using uranium
oxide briquettes as aggregate in concrete. We have formed a partnership which
ensures exclusive rights to DUCRETE-TM- shielding containers and barriers for
use by nuclear utilities for mandated above-ground storage of spent fuel.
Respect for the environment, innovative technologies, a skilled workforce and
room to grow on 340 acres in South Carolina position CMI for success in the
future.
CMI BRINGS VALUE TO CUSTOMERS THROUGH TECHNICAL EXCELLENCE AND PROVEN
TECHNOLOGIES
8
<PAGE>
9
<PAGE>
STARMET AEROCAST
Imagine the potential of an affordable aerospace material that is 22
percent lighter than aluminum, 300% stiffer, with strength comparable to A356
aluminum aerospace castings, and has six to ten times better vibration
damping characteristics. Optical structures, electronic boxes, stable
members, battery cases, navigational housings, satellite structures, tubular
struts, and a seemingly endless number of additional possibilities are
candidates for use of Starmet's patented Beralcast-Registered Trademark-.
Investment castings are designed to meet volume demand at a competitive price
for the customer. Starmet's engineering staff works closely with all of our
customers to ensure that delivered product meets their needs for long-term
production of low cost hardware. The value of this new material is in the
flexibility now afforded the design engineer to increase the performance of
new and existing hardware for tomorrow's aerospace needs.
Working closely with customers' engineers as products are designed
assures future production costs are as low as possible. Teaming with our
customers also ensures that we not only understand their needs, but share in
their future.
INVESTMENT CASTINGS ARE DESIGNED TO MEET VOLUME DEMAND AT A COMPETITIVE
AFFORDABLE PRICE FOR THE CUSTOMER
10
<PAGE>
11
<PAGE>
STARMET COMCAST
Cost-effective, light, durable, and flexible are words that can be used
to describe Beralcast -Registered Trademark-'s advantageous use for aerospace
components. The commercial marketplace is equally demanding of such qualities
in engineering materials. Where production of commercial products advance at
dizzying rates, engineers are increasingly pressured to design with smaller
and lighter components manufactured by innovative suppliers. Today's premium
golf club heads are investment cast or forged from Titanium and its alloys.
Titanium is twice the density of Beralcast -Registered Trademark- and offers
less flexibility in its manufacture. Some golfers tell us Beralcast
- -Registered Trademark- is the Titanium of the future. In the computer
hardware market Beralcast -Registered Trademark- offers significantly better
performance characteristics than conventional materials. For example,
Beralcast -Registered Trademark- will allow a vast increase in the data
storage capacity and retrieval of tomorrow's computer disc drives. Prototypes
using Starmet's Beralcast -Registered Trademark- are currently being
qualified for this use. Other commercial applications for this material
include those where a small premium can be paid for significantly enhanced
performance and design flexibility.
Imagine using Beralcast -Registered Trademark- instead of aluminum to
enhance high speed assembly and inspection devices where Beralcast
- -Registered Trademark-'s vibration damping qualities can result in a five to
ten fold performance improvement.
12
<PAGE>
13
<PAGE>
VISION
STARMET POWDERS
Metal powders can be used effectively in a variety of applications where
exacting sizes, shapes, and cleanliness are important. Clean cobalt chrome
and titanium powders, made by our patented Plasma Rotating Electrode Process
(PREP -TM-), are used in medical implants to effectively bond prosthetic
devices to bone and tissue. Uniform steel powders are used not only in
photocopiers and sophisticated rapid prototyping applications, but in
magnetic paint for children's books, wallpaper, and toys. Materials that are
difficult to fabricate from castings or forgings are candidates for a powder
metallurgy approach. Oftentimes castings are converted to powders, which are
in turn, reconsolidated into semi-finished components with improved
mechanical properties. Fine titanium powders consolidated into semi-finished
components represent tomorrow's challenge for advanced metal powder-making
technologies at Starmet Powders. Combining a solid reputation for ultra-clean
powder processing techniques with new and dedicated engineering resources,
opens a world of possibilities for creating products. We have realized that
such possibilities exist even more clearly when we combine our resources with
other innovative companies whose enthusiasm for producing high value powder
metallurgy products matches our own. We have a vision that includes
consolidation of fine powders into complex shapes.
COMBINING A SOLID REPUTATION FOR ULTRA-CLEAN POWDER PROCESSING
TECHNIQUES WITH NEW AND DEDICATED ENGINEERING
RESOURCES, OPENS A WORLD OF POSSIBILITIES FOR CREATING PRODUCTS
14
<PAGE>
15
<PAGE>
SELECTED FINANCIAL DATA
(NOT COVERED BY REPORT OF INDEPENDENT ACCOUNTANTS)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND NUMBER OF EMPLOYEES)
<TABLE>
<CAPTION>
OPERATING RESULTS FOR THE YEAR 1997** 1996** 1995 1994 1993
- ----------------------------------------------------------- ----------- ----------- ----------- ----------- -----------
(as restated)(as restated)
<S> <C> <C> <C> <C> <C>
Net Sales and Contract Revenues............................ $ 28,062 $ 28,694 $ 18,784 $ 19,004 $ 17,019
Cost and Expenses.......................................... 27,251 30,604 20,708 29,958 27,515
Operating Income (Loss).................................... 811 (1,910) (1,924) (10,954) (10,496)
Other Income (Expense), Net................................ (298) (476) (118) (430) (557)
Income (Loss) Before Taxes................................. 513 (2,386) (2,042) (11,384) (11,053)
Provision (Benefit) for Income Taxes....................... 31 1 (1,967) (1,188) (3,746)
Extraordinary Gain......................................... -- -- 585 -- --
Cumulative Change in Accounting Principle.................. -- -- -- -- 1,100
Net Income (Loss).......................................... 482 (2,387) 510 (10,196) (6,207)
Earnings (Loss) per Share*................................. 0.10 (0.50) 0.11 (2.22) (1.35)
Capital Expenditures, Net.................................. 1,788 1,449 777 709 1,265
Research and Development................................... 1,309 876 439 575 1,031
FINANCIAL POSITION AT YEAR-END
Stockholders' Equity....................................... 25,746 25,020 27,245 26,252 36,371
Share Outstanding*......................................... 4,784 4,782 4,776 4,614 4,590
Net Book Value per Common Share Outstanding*............... 5.38 5.23 5.70 5.69 7.92
Dividends Paid............................................. -- -- -- -- 459
Dividend per Share*........................................ -- -- -- -- 0.13
Total Assets............................................... 34,354 35,768 40,886 40,542 57,223
Working Capital............................................ 4,542 4,048 15,866 17,477 24,532
Long-term Debt net of Unamortized Discount (including
current installments).................................... 3,363 1,874 4,480 4,859 8,986
OTHER DATA
Weighted Average Number of Shares of Common Stock
Outstanding*............................................. 4,959 4,779 4,706 4,600 4,590
Backlog (at Year-end)...................................... 27,654 23,248 30,709 14,512 8,285
Number of Employees (at Year-end).......................... 235 190 200 189 169
</TABLE>
- ------------------------
* ADJUSTED TO REFLECT TWO FOR ONE STOCK SPLIT IN 1997
** See Note 1 of Notes to Consolidated Financial Statements
16
<PAGE>
<TABLE>
<CAPTION>
1992 1991 1990 1989 1988
OPERATING RESULTS FOR THE YEAR --------- --------- --------- --------- ---------
- ----------------------------------------------------------- <C> <C> <C> <C> <C>
<S>
Net Sales and Contract Revenues............................ $ 42,083 $ 48,250 $ 47,662 $ 49,760 $ 45,714
Cost and Expenses.......................................... 39,791 44,930 44,734 45,350 42,378
Operating Income (Loss).................................... 2,292 3,320 2,928 4,410 3,336
Other Income (Expense), Net................................ (745) (1,029) (1,706) (1,191) (1,182)
Income (Loss) Before Taxes................................. 1,547 2,291 1,222 3,219 2,154
Provision (Benefit) for Income Taxes....................... 626 871 489 972 506
Extraordinary Gain......................................... - -- -- -- --
Cumulative Change in Accounting Principle.................. - -- -- -- --
Net Income (Loss).......................................... 921 1,420 733 2,247 1,648
Earnings (Loss) per Share*................................. 0.20 0.30 0.15 0.43 0.31
Capital Expenditures, Net.................................. 1,015 1,349 2,270 3,306 2,812
Research and Development................................... 1,233 1,357 685 1,007 1,186
FINANCIAL POSITION AT YEAR-END
Stockholders' Equity....................................... 43,037 42,614 41,756 43,135 41,592
Share Outstanding*......................................... 4,590 4,670 4,768 5,192 5,264
Net Book Value per Common Share Outstanding*............... 9.38 9.13 8.76 8.31 7.90
Dividends Paid............................................. 276 238 251 263 --
Dividend per Share*........................................ 0.06 0.05 0.05 0.05 --
Total Assets............................................... 66,391 70,810 73,603 76,520 75,461
Working Capital............................................ 32,571 33,034 32,772 35,578 36,231
Long-term Debt net of Unamortized Discount (including
current installments).................................... 11,372 13,759 16,040 18,405 19,756
OTHER DATA
Weighted Average Number of Shares of Common Stock
Outstanding*............................................. 4,604 4,738 4,894 5,244 5,354
Backlog (at Year-end)...................................... 10,729 10,398 14,758 19,352 16,016
Number of Employees (at Year-end).......................... 231 456 455 574 585
</TABLE>
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis of the Company's financial condition
and results of operations is based on the three business segments in which the
Company currently reports its results, namely Specialty Metal Products, Depleted
Uranium Penetrators and Uranium Services and Recycle. The Specialty Metal
Products segment consists of the manufacture of the Company's Beralcast alloys,
specialty metal powders, billets for tank armor, and industrial and medical
shielding products. The Depleted Uranium Penetrators segment consists of the
manufacture of DU penetrators for military munitions applications. The Uranium
Services and Recycle segment consists of the manufacture of DU and NU metal for
use as uranium feedstock supplied to USEC's AVLIS program, conversion of UF(6)
to UF(4), recycling of various low-level radioactive metals, DUCRETE shielding
capabilities and repair of counterweights for commercial and military aircraft.
In the late 1980s and the 1990s, the decline in U.S. defense spending
resulted in sharply reduced revenues from the sale of the Company's
defense-related depleted uranium products, including DU penetrators and billets
for conversion into tank armor. The Company expects that no revenue will be
derived from sales of DU penetrators after the second quarter of fiscal 1999 and
that only limited revenue will be derived from sales of billets for conversion
into tank armor thereafter. As revenues from defense-related DU products decline
overall and as a percentage of revenues, the Company may provide information on
two business segments in future periods. See "--Segment Information."
A central aspect of the Company's strategy is to concentrate its efforts and
resources on commercial applications for its technology. In particular, the
Company intends to focus on the commercialization of its family of Beralcast
alloys. To date, the Company's Beralcast business has received most of its
orders and funding from military aerospace applications. In particular, the
Company has received contracts from Lockheed Martin for Beralcast components to
be used in its Electro Optic Sensor System ("EOSS"), the night vision and target
acquisition system on the Comanche helicopter, which is scheduled for full-scale
production commencing in 2003. The Company is applying its Beralcast technology
to develop, among other things, disk drive arm sets for high-end disk drives as
well as satellite components, premium golf products and other products. These
products currently are in the development and, for certain customers, the
pre-production stages. The Company believes that as a result of the general
practice of manufacturers in the disk drive industry and other targeted
commercial industries of placing only short-term orders, the Company could
experience substantial fluctuations in revenues and earnings from quarter to
quarter. The Company is also developing additional commercial applications for
its Beralcast alloys.
In the third quarter of fiscal 1996, the Company reduced its workforce at
its South Carolina facility due to the completion of a contract for a foreign
customer and lack of anticipated new orders. During most of fiscal 1996, the
Company operated this facility at approximately 40% of capacity on a one-shift
basis. In the fourth quarter of fiscal 1996, the Company took a $2,100,000
reserve for estimated fiscal 1997 losses associated with then current production
contracts, which reserve was fully utilized during fiscal 1997.
18
<PAGE>
Losses at the facility continued through the first quarter of fiscal 1998 due to
underutilization. At the same time, the Company increased its workforce in
preparation for the receipt of an AVLIS production contract. USEC recently
exercised production options under its existing AVLIS contract with the Company,
and the Company anticipates receiving additional contractual work from USEC in
the summer of 1998. The Company's operations in South Carolina are currently
substantially dependent on orders from USEC and are expected to remain so.
Failure of the Company to be awarded such contracts could have a material
adverse effect on the Company's business, results of operations and financial
condition.
Due primarily to the sharp decline in sales of DU penetrators and lack of
orders in its uranium services and recycle business, the Company incurred losses
in three of its last four previous fiscal years and in the first nine months of
fiscal 1998. The Company's accountants, in their report to the Board of
Directors and stockholders of the Company on the Company's financial statements
for fiscal 1995, stated that there was substantial doubt at that time about the
Company's ability to continue as a going concern. Although the Company was
profitable in fiscal 1997, reserve reductions and other non-recurring income
items accounted for the profitability. Excluding these items, the Company would
have reported a net loss in fiscal 1997. As a result, the Company has
experienced significant financial difficulties and liquidity problems in
recent years and has had to seek financing from stockholders, waivers of
non-compliance with, and amendments of, certain covenants and other
provisions in its debt instruments (including waivers and amendments under
the Existing Credit Facility in February, May, June and August of 1998),
additional borrowings and extensions of maturities under the Existing Credit
Facility, and additional equipment financing from another bank for capital
expenditures required at its South Carolina facility. See "--Liquidity and
Capital Resources."
In connection with additional borrowings under the Existing Credit Facility
in December 1997, the Company issued the Second Warrant (as defined herein) to
its principal bank lender, which has been recorded as a discount to the related
debt at fair value. The fair value attributable to the Second Warrant, $327,000,
will be amortized as interest expense for the period January 1, 1998 through
October 1, 1998. On April 1, 1998, the Company and the lender entered into the
Facility Restructuring Agreement under which the Company received an option to
pay a fee of $235,313 to eliminate certain anti-dilution provisions of the
lender's warrants upon the closing of an offering of the Company's stock as
defined.
In August 1998, the Company restated its September 30, 1996 and September
30, 1997 consolidated financial statements. The restatement related to the
Company's accounting for inventory reserves. During the year ended September
30, 1996, the Company had provided approximately $3.3 million of reserves for
DU inventory of which approximately $1.0 million of such reserves were reversed
into income during the year ended September 30, 1997, based upon management's
estimate of the future recoverability of DU inventory. After further review,
management of the Company has determined, based on consideration of the
applicable accounting literature and all of the relevant information available
at the time of the release of the Company's September 30, 1996 financial
statements, that the reserves provided in 1996 should have been lower by
approximately $650,000 ($0.14 per diluted share) and the reversal of
approximately $1.0 million ($0.20 per diluted share) of such reserves in 1997
should not have been recorded. In the future, inventory reserves will not be
reversed until the related inventory is sold or disposed of. The
19
<PAGE>
following table summarizes the effects of the restatement on net income (loss)
and the related income (loss) per share amounts in fiscal year 1996 and 1997.
<TABLE>
<CAPTION>
1996 1997
---------------------------- -------------------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED
------------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
Net income (loss)............ $ (3,037,000) $ (2,387,000) $ 1,482,000 $ 482,000
Income (loss) per share:
Basic...................... (0.64) (0.50) 0.31 0.10
Diluted.................... (0.64) (0.50) 0.30 0.10
</TABLE>
The Company had established inventory reserves totaling approximately $1.6
million at the end of fiscal 1995. During fiscal 1996, the Company established
additional inventory reserves of approximately $2.7 million related to its DU
inventory, which consisted of DU metal and UF(4). These additional reserves were
established based on management's evaluation of the risks associated with the DU
inventory, including risks associated with excess and obsolete inventory, and
had the effect of writing down approximately 20% of the Company's DU metal
inventory to zero and writing down approximately 50% of the Company's UF(4)
inventory to zero. In conducting this evaluation, management considered the type
and quantity of inventory on hand, historical sales volumes and expectations
concerning the timing and amounts of then anticipated sales of current and
proposed products (based upon longer than expected sales cycles for certain
products). At September 30, 1996, the Company's utilization of DU inventory was
uncertain. In particular, the Company considered future use of DU inventory for
munitions contracts with the U.S. Army as unlikely. At that time, the Company
was also discussing with USEC the possibility, timing and volume of AVLIS
feedstock production, and was evaluating the potential use of DU inventory in
other proposed products and the timing of inventory usage with respect to such
products. Although the Company believed the long-term possibilities for DU
inventory usage were numerous, the uncertainties related to the usage of the DU
inventory were significant. Based on these uncertainties, management's judgment
and discussions between the Company and its independent public accountants,
inventory reserves were increased by such $2.7 million amount, bringing the
total inventory reserves at September 30, 1996 to approximately $4.2 million. Of
this amount, approximately $3.2 million was allocated to DU inventory, with the
balance allocated to various other inventories. As of September 30, 1996, gross
DU inventory was approximately $11.9 million and consisted of approximately $7.2
million of DU metal and $4.7 million of UF(4). As of September 30, 1996, DU
inventory, net of reserves, was approximately $8.7 million and consisted of
approximately $6.4 million of DU metal and approximately $2.3 million of UF(4).
During fiscal 1997, the Company used approximately $2.9 million of DU
metal inventory principally in connection with a munitions contract with a
foreign customer and to a lesser extent in connection with an AVLIS feedstock
production contract. Revenues related to a munitions contract with a foreign
customer and an AVLIS feedstock production contract for fiscal 1997 were $5.4
million and $3.9 million, respectively, as compared to $3.1 million and $1.3
million, respectively, for fiscal 1996. Revenues by quarter under these two
contracts were approximately $3.7 million, $1.0 million, $2.1 million and
$2.5 million for the fiscal quarters ended December 31, 1996, March 31, 1997,
June 30, 1997 and September 30, 1997, respectively. At September 30, 1997,
the Company had approximately $9.0 million of gross DU inventory or
approximately $5.8 million, net of reserves and consisted of approximately
$3.5 million of DU metal inventory, net and approximately $2.3 million of
UF(4) inventory, net. Based on current discussions with customers, the
Company presently expects to sell approximately $400,000 of DU inventory
during fiscal 1998 and approximately $1.9 million of DU inventory during
fiscal 1999. Subject to the uncertainties described above, the Company
expects to sell the balance of DU inventory, including DU inventory written
down to zero, thereafter. In the event that the Company sells DU inventory in
the future which has been written down to zero, the Company will generate
revenues with higher gross margins than if such inventory had not been
written down to zero. In the event that the actual usage of any DU inventory,
or the timing of such usage, differs materially from the Company's current
expectations, any such differences could have a material adverse effect on
results of operations of the Company's South Carolina facility and
accordingly, on the Company's overall liquidity. In such event, the Company's
liquidity, cash flows and results of operations would be dependent upon the
Company's other business segments, particularly its Specialty Metal Products
business segment. See Notes 2 and 5 to Consolidated Financial Statements.
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTS)
20
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain items in the consolidated statements
of income as a percentage of net sales and contract revenues for the fiscal
years 1997, 1996 and 1995.
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
---------------------------------------
1997 1996 1995
------------- ------------- ---------
(AS RESTATED) (AS RESTATED)
<S> <C> <C> <C>
Net sales and contract revenues............... 100% 100% 100%
Costs and expenses:
Cost of sales............................... 72 85 82
Selling, general and administrative
expenses.................................. 19 19 26
Research and development expenses........... 5 3 2
Loss on write-off of fixed asset............ 1 -- --
Operating income (loss)....................... 3 (7) (10)
Interest and other income (expense), net...... -- -- 1
Interest expense.............................. 1 1 2
Income (loss) before income taxes and
extraordinary item.......................... 2 (8) (11)
Provision (benefit) for income taxes.......... -- -- (10)
Income (loss) before extraordinary item....... 2 (8) --
Net income (loss)............................. 2 (8) 3
</TABLE>
FISCAL 1997 COMPARED WITH FISCAL 1996
Net sales decreased by $632,000 or 2% to $28,062,000 in fiscal 1997 compared
to $28,694,000 in fiscal 1996. Sales in the Uranium Services and Recycle segment
decreased by $1,224,000 or 20%. Sales in the Specialty Metal Products segment
decreased by $560,000 or 4%. Sales in the Depleted Uranium Penetrator segment
increased by $1,152,000 or 13%.
The sales decrease in the Uranium Services and Recycle segment was primarily
due to lack of volume in depleted uranium products due to completion of a
production contract for a foreign customer in fiscal 1996. This decrease was
partially offset by increases in AVLIS feedstock production for USEC. The sales
decrease in the Specialty Metal Products industry segment was a result of
decreased volumes of beryllium products due to a delay in expected orders,
partially offset by an increase in commercial depleted uranium products. The
sales increase in the Depleted Uranium Penetrator segment was the result of
higher production volume of penetrators for a foreign customer as a result of an
order which was expected to receive government funding in fiscal 1996 but which
was not funded until fiscal 1997 and the revenue recognized pursuant to the
Company's contract with the United States Army to remediate the holding basin at
the Company's Concord facility.
Gross profit increased by $3,635,000 to $7,926,000 or 28% of sales in fiscal
1997 compared to $4,291,000 or 15% of sales in fiscal 1996. This increase in
gross profit was primarily due to reduction of certain accruals in fiscal 1997
for waste burial costs of $1,750,000. The revised contract price for waste
burial costs was approximately $1,750,000 lower than what was previously
estimated and accrued. In addition, gross profit for fiscal 1996 was reduced by
an accrual of a $2,100,000 reserve for anticipated fiscal 1997 operating losses
associated with production contracts in the Uranium Services and Recycle
segment. As of September 30, 1997, the accrual had been fully utilized.
Selling, general and administrative expenses increased by $123,000 or 2% to
$5,448,000 in fiscal 1997 compared to fiscal 1996. This increase was primarily
due to additional employees required to support the
21
<PAGE>
forecasted growth in business. As a percentage of sales, these expenses remained
at 19% in fiscal 1997 compared to fiscal 1996.
Company-sponsored research and development expenses increased by 49% or
$433,000 to $1,309,000 for fiscal 1997. As a percentage of sales, these expenses
were 5% compared to 3% in fiscal 1996.
Interest and other income decreased to ($2,000) in fiscal 1997 as compared
to ($89,000) in fiscal 1996. This decrease was mainly due to the absence in
fiscal 1997 of a restructuring fee associated with amendments to the Company's
credit facility during the third quarter of fiscal 1996.
Interest expense decreased by $91,000 to $296,000 in fiscal 1997 as compared
to fiscal 1996. This decrease was primarily the result of higher interest rates
and fees associated with outstanding debt during fiscal 1996.
Income taxes provided during 1997 and 1996 were at effective rates of 2% and
0%, respectively. The 1997 effective rate of 2% differs from the statutory rate
of 34% due to a reduction in the valuation allowance associated with to the
benefit of net operating loss carryforwards.
FISCAL 1996 COMPARED WITH FISCAL 1995
Net sales increased by $9,910,000 or 53% to $28,694,000 in fiscal 1996
compared to $18,784,000 in fiscal 1995. Sales in the Uranium Services and
Recycle segment increased by $1,220,000 or 25%. Sales in the Specialty Metal
Products segment increased by $1,628,000 or 13%. Sales in the Depleted Uranium
Penetrator segment increased by $7,062,000 or 412%.
The sales increase in the Uranium Services and Recycle segment was primarily
due to increases in AVLIS feedstock production for USEC. The sales increase in
the Specialty Metal Products segment was a result of higher sales of beryllium
products and commercial depleted uranium. The sales increase in the Depleted
Uranium Penetrator segment was the result of higher sales of large caliber
penetrators.
During the third quarter of fiscal 1996, the Company reduced its workforce
from 55 to 24 employees at its South Carolina facility due to the completion of
a multi-year contract for the manufacture of depleted uranium for a foreign
customer and the lack of anticipated new orders. The Company had expected to
obtain orders from USEC and the DoE in the second half of fiscal 1996. These
orders did not materialize and as a result this facility operated at
approximately 40% capacity on a one-shift basis through most of fiscal 1996. In
the fourth quarter of fiscal 1996, the Company established a $2,100,000 reserve
for estimated fiscal 1997 losses associated with then current production
contracts.
Gross profit increased by $959,000 to $4,291,000 or 15% of sales in fiscal
1996 compared to $3,332,000 or 18% of sales in fiscal 1995. This increase in
gross profit was primarily due to increased sales volume during fiscal 1996. As
a percentage of sales, the decrease in gross profit was primarily due to the
establishment of a $2,100,000 reserve for estimated losses associated with CMI's
production contracts.
Selling, general and administrative expenses increased by $508,000 to
$5,325,000 in fiscal 1996 compared to fiscal 1995. This increase was primarily
due to additional employees required to support the growth in business. As a
percentage of sales, these expenses decreased to 19% in fiscal 1996 compared to
26% in fiscal 1995, as a result of sales increasing at a higher rate than
expenses.
Company-sponsored research and development expenses increased by 100% or
$437,000 to $876,000 in fiscal 1996 compared to fiscal 1995 due to increased
research and development costs related to the use of the Company's Beralcast
technology in certain military aerospace applications. As a percentage of sales,
these expenses were 3% in fiscal 1996 compared to 2% in fiscal 1995.
Interest and other income decreased to $89,000 of expense in fiscal 1996
compared to $232,000 of income for fiscal 1995. This decrease was mainly from a
$150,000 restructuring fee associated with amendments to the Company's credit
facility during the third quarter of fiscal 1996 and a gain of $175,000
recognized during the second quarter of fiscal 1995 on the sale of an office
building.
22
<PAGE>
Interest expense increased by $37,000 to $387,000 in fiscal 1996 compared to
fiscal 1995. This increase was primarily the result of higher interest rates and
fees associated with outstanding debt during fiscal 1996.
During fiscal 1995, the Company realized a $585,000 extraordinary gain net
of taxes of $10,000 on the early extinguishment of debt.
Income taxes provided during 1996 were at an effective rate of 0%. The 1996
effective rate of 0% differed from the statutory rate of 34% due to a reduction
in the valuation allowance associated with to the benefit of net operating loss
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
In recent fiscal years, the Company's primary sources of liquidity have been
borrowings under the Existing Credit Facility, borrowings from shareholders and,
to a limited extent, cash from operations. The Company has experienced
significant financial difficulties and liquidity problems in recent years due
primarily to the sharp decline in sales of DU penetrators and a lack of orders
for certain other DU products. As a result, the Company has had to seek
financing from stockholders, waivers of non-compliance with, and amendments of,
certain covenants and other provisions in its debt instruments (including
waivers and amendments under the Existing Credit Facility in February, May,
June and August of 1998), additional borrowings and extensions of maturities
under the Existing Credit Facility, and additional equipment financing from
another bank for capital expenditures required at its South Carolina
facility. Bank borrowings and borrowings from stockholders were effected to
fund working capital requirements, capital expenditures and a number of
expenses which were incurred in expectation of future business and revenues
from the Company's Beralcast business and its South Carolina facility.
The Company's future liquidity needs are expected to arise primarily from
its capital expenditure program, which is designed primarily to increase
manufacturing capacity to support its Beralcast business. In order to obtain and
satisfy orders for large scale commercial production of its Beralcast products,
the Company plans to significantly increase capital expenditures to expand its
commercial Beralcast manufacturing capabilities through fixed asset additions
including furnaces, automated production equipment and facility upgrades. The
Company anticipates spending up to approximately $90 million over the next four
years, subject to various factors, to increase the capacity at the Company's
facilities. Of this amount, the Company expects to spend approximately $60
million on the expansion of its Beralcast business. The Company expects to fund
such capital expenditures with the proceeds of an offering of its common
stock and cash expected to be generated from operations. However, there can
be no assurance that such an offering will take place or that such capital
expenditures will be made.
Net cash provided (used) by operating activities in fiscal years 1997, 1996
and 1995 was ($921,000), $3,776,000 and ($278,000), respectively. Differences in
cash flows from operating activities over this three-year period were primarily
related to significant year-to-year changes in accounts receivable, inventories
and accounts payable. The Company used net cash of $1,788,000, $1,107,000 and
provided $36,000 in fiscal years 1997, 1996 and 1995, respectively, primarily to
fund investing activities largely related to capital expenditures made in
anticipation of future commercial business. Net cash flows from financing
activities for fiscal years 1997, 1996 and 1995 were $1,676,000, ($2,444,000)
and $105,000, respectively. Net cash provided for financing activities in fiscal
1997 was primarily the result of an increase in bank borrowings of approximately
$1,700,000 and $500,000 in borrowings from shareholders. Fiscal 1996 net cash
used by financing activities was primarily the result of reduction of bank debt
in accordance with credit terms. As a result of the foregoing, net cash
increased (decreased) in fiscal years 1997, 1996 and 1995 by ($1,033,000),
$225,000 and ($137,000), respectively.
23
<PAGE>
On October 1, 1997, the Company and its principal bank lender, State Street
Bank & Trust Company, entered into an Amended and Restated Credit Agreement
providing for a credit facility (as amended, the "Existing Credit Facility") of
$6.6 million, including $3.6 million in letters of credit. Borrowings under the
Existing Credit Facility bear interest, payable monthly in arrears, at a rate
equal to the lender's prime rate plus one-half of one percent and the Company
pays a fee of one-half of one percent of the unused portion of the facility.
Borrowings are secured by a security interest in all of the Company's accounts,
inventory and general intangibles. The Company and its lender entered into the
First Amendment to Credit Agreement dated December 9, 1997 which provided for an
increase in the Existing Credit Facility to $8.0 million. On December 29, 1997,
the Company entered into the Second Amendment to Credit Agreement which provided
for the following: (i) an increase in the total amount of credit available to
the Company from $8.0 million to $9.6 million consisting of a $6.0 million line
of credit and $3.6 million letters of credit; (ii) a revised amortization
schedule whereby the maximum aggregate liability (including letters of credit)
of the Company under the Existing Credit Facility shall not exceed $8.1 million
from July 1, 1998 through September 30, 1998, and $6.6 million from October 1,
1998 through February 28, 1999, which is when the balance is due; and (iii)
waiver of non-compliance by the Company with certain covenants in the Existing
Credit Facility and amendment of certain financial covenants. As a result of the
loss in the first quarter of fiscal 1998, the Company sought and obtained a
waiver of non-compliance with certain covenants in the Existing Credit Facility.
The Company and its lender entered into the Third Amendment to Credit Agreement
dated June 11, 1998 which provided for (i) a revised amortization schedule
whereby the maximum aggregate liability (including letters of credit) of the
Company under the Existing Credit Facility shall not exceed $9.6 million through
September 30, 1998, $8.1 million from October 1, 1998 through December 31, 1998,
and $6.6 million from January 1, 1999 through February 28, 1999, which is when
the balance is due, and (ii) a reduction of the net income covenant for the
third quarter of fiscal 1998.
As of March 31, 1998, the Company was out of compliance with the capital
expenditure financial covenant under its credit agreement which prohibits the
Company from making capital expenditures above $2,000,000 annually. On May 15,
1998, the Company received a waiver for this event of non-compliance and of
non-compliance with the capital expenditure financial covenant for the remainder
of fiscal 1998. The Company also received a waiver of non-compliance in February
1998 with respect to its failure to meet a net income covenant in the first
quarter of fiscal 1998.
As of June 30, 1998, the Company was out of compliance with the financial
covenant under its credit agreement that limits the net loss reported for the
fiscal quarter ended June 30, 1998. On August 7, 1998, the Company received a
waiver for this event of non-compliance and any events of non-compliance as a
result of the restatement of the Company's financial statements for the years
ended September 30, 1997 and 1996. In addition, the credit agreement was
modified such that the availability was increased to $11,050,000, through
September 30, 1998; $8,050,000 from October 1, 1998 through December 31,
1998, and $6,550,000 on January 1, 1999 and thereafter until it's maturity on
February 28, 1999. Also, the tangible capital base required by the agreement
shall not be less than $22,500,000 as of September 30, 1998 plus an increase
equal to the aggregate of 75% of the Company's net income for each fiscal
quarter after September 30, 1998. Net income (loss) shall be not less than
($500,000) for the quarter ending September 30, 1998 and $750,000 for the
quarter ending December 31, 1998 and each quarter thereafter.
In September 1995, in connection with an increase of the Company's borrowing
capacity under the Existing Credit Facility as then in effect, the Company
issued to the lender a warrant (the "First Warrant")
24
<PAGE>
to purchase 55,790 shares of Common Stock (as adjusted for a
two-for-one stock dividend paid on April 7, 1997 and certain subsequent
anti-dilution adjustments) at an exercise price of $5.95, based on the market
price of the Common Stock at that time. The First Warrant has a ten-year
exercise period. In consideration of the Second Amendment to the Credit
Agreement, the Company issued to the lender a warrant (the "Second Warrant"
and, together with the First Warrant, the "Warrants") to purchase 25,000
shares of Common Stock at an exercise price of $23.58, based on the market
price of the Common Stock at that time. The Second Warrant has a seven-year
exercise period. The Second Warrant has been valued at approximately
$327,000, which amount will be amortized as interest expense over the period
ending October 1, 1998. Under the original terms of each of the Warrants, the
holder of the Warrants would be entitled to receive, without further
consideration, a number of shares of Common Stock which would permit the
holder to maintain its percentage ownership in the Company, on a
fully-diluted basis, upon any future issuances of Common Stock by the
Company.
On April 1, 1998, the Company entered into an agreement (the
"Facility Restructuring Agreement") with its principal bank lender pursuant
to which, contingent upon the closing of the offering, the Company received
an option to make a payment of $235,313 to the lender whereupon no further
adjustments for issuances of Common Stock by the Company will be made under
the First Warrant (other than an adjustment related to the closing of the
offering) and no adjustments for issuances of Common Stock by the Company
will be made under the Second Warrant.
The Company and its subsidiaries have entered into an agreement with the
Company's principal bank lender that, effective upon the closing of an
offering of the Company's common stock, with net proceeds of at least $40
million, the lender shall make available to the Company a $10,000,000
unsecured revolving credit facility, maturing on February 28, 2000 (the "New
Credit Facility"). Borrowings under the New Credit Facility will bear
interest, at the Company's option, at either a variable rate equal to the
lender's prime rate (with interest payable monthly in arrears) or at a rate
equal to the London Inter-Bank Offered Rate plus a sliding-scale fixed rate
spread based upon the Company's net income for the previous quarter (with
interest payable at the end of a one, two or three month period, at the
option of the Company). Borrowings under the New Credit Facility will be used
for working capital and stand-by letters of credit, and will be subject to
the satisfaction of certain financial covenants. The New Credit Facility
terms provide that the Company and its subsidiaries will not further pledge
their respective assets to any third party.
The Company has outstanding in the aggregate $2,250,500 in principal amount
under debt instruments issued to certain of its principal stockholders,
consisting of the following: $500,500 in principal amount of its 10% Convertible
Subordinated Debentures due December 10, 1998, which are convertible at any time
into Common Stock at $5.945 per share; $350,000 in principal amount of its 10%
Subordinated
25
<PAGE>
Debentures due December 10, 1998, with three-year warrants to purchase 42,000
shares of Common Stock at an exercise price of $7.50 per share; $500,000 in
principal amount of its 10% Subordinated Debentures due December 10, 2000, with
three-year warrants to purchase 60,000 shares of Common Stock at an exercise
price of $17.875 per share; and $900,000 in principal amount of its 10%
Convertible Subordinated Debentures due December 31, 1999, the principal amount
of which is convertible at any time into Common Stock at $21.50 per share. The
Company intends to use a portion of the proceeds of the offering to repay all of
the 10% Subordinated Debentures. The Company intends to offer to repay all of
the 10% Convertible Subordinated Debentures but expects that the holders thereof
will convert such debt into Common Stock instead of accepting repayment.
The Company believes, based on assumptions concerning backlog fulfillment
and the expected timing of new orders, that the proceeds of the offering, cash
from operations, and borrowings which will become available under the New Credit
Facility will be sufficient to sustain operations for more than 12 months and to
fund anticipated capital expenditures.
The Company anticipates that, for the foreseeable future, all earnings will
be retained to support operations and finance expansion. The Company has not
paid cash dividends in recent years, and does not intend to pay cash dividends
on the Common Stock for the foreseeable future. The Company's ability to pay
cash dividends is limited by its dependence upon the receipt of cash from its
subsidiaries to make such dividend payments. The Company's Existing Credit
Facility contains financial covenants and other restrictions that prohibit or
restrict the payment of dividends and intercompany loans among Starmet and its
subsidiaries and by the Company to its stockholders. The New Credit Facility
will not prohibit or restrict payment of dividends in the absence of a default.
The Company has not invested in derivative securities or any other financial
instrument that involves a high level of complexity or risk. Management expects
that, in the future, cash in excess of current requirements will be invested in
investment-grade, interest-bearing securities.
SUBSEQUENT EVENT
In addition to the matters described above, the Company is subject to
certain environmental matters and legal proceedings which could have a
material adverse effect on the Company's business, results of operations and
financial condition. For a discussion of these matters as updated from the
Company's Form 10-K filed with the Securities and Exchange Commission on
January 28, 1998, see Part I, Item 1 "Business--Update Relative to Concord
Site Remediation Status" and Part I, Item 3 "Update Relative to Legal
Proceedings."
IMPACT OF YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have data-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in simular normal business activities.
The Company is in the process of installing a new accounting software
system. Management believes that subject to successful installation of the
new accounting system, the year 2000 issue will not have a material adverse
impact to the Company's operations or financial position.
INFLATION
Inflation has not had a material impact on the Company's cost of doing
business. Management attempts to protect the Company by adjusting prices
where market conditions permit and by reviewing and improving production
processes where possible. Price escalation clauses also are negotiated into
long-term contracts when possible.
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTS)
26
<PAGE>
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS 1997 1996
---------- ----------
(as restated) (as restated)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents...................................... $ 195,000 $ 1,051,000
Restricted cash................................................ 73,000 250,000
Accounts receivable, net of allowances for doubtful accounts
of $421,000 in 1997 and $821,000 in 1996..................... 5,546,000 4,931,000
Inventories.................................................... 5,239,000 6,824,000
Other current assets........................................... 619,000 376,000
----------- -----------
Total Current Assets......................................... 11,672,000 13,432,000
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Land........................................................... 2,124,000 2,178,000
Buildings...................................................... 17,656,000 18,040,000
Machinery, equipment, and fixtures............................. 18,472,000 26,179,000
Construction-in-progress....................................... 831,000 583,000
----------- -----------
Total Property, Plant and Equipment.......................... 39,083,000 46,980,000
Less: Accumulated depreciation................................. 24,036,000 31,834,000
----------- -----------
Net property, plant, and equipment............................. 15,047,000 15,146,000
NON-CURRENT INVENTORY............................................ 5,851,000 5,851,000
OTHER ASSETS..................................................... 1,784,000 1,339,000
----------- -----------
$34,354,000 $35,768,000
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations....................... $ 1,885,000 $ 510,000
Accounts payable............................................... 3,123,000 2,143,000
Accrued payroll and related costs.............................. 1,215,000 1,170,000
Other accrued expenses......................................... 907,000 5,561,000
----------- -----------
Total Current Liabilities.................................... 7,130,000 9,384,000
----------- -----------
LONG-TERM OBLIGATIONS............................................ 430,000 644,000
----------- -----------
NOTES PAYABLE TO SHAREHOLDERS.................................... 1,048,000 720,000
----------- -----------
STOCKHOLDERS' EQUITY:............................................
Common stock, par value $.10; authorized--15,000,000 shares;
issued and outstanding for 1997 and 1996; 4,784,244 shares
and 4,781,928 shares, respectively........................... 478,000 478,000
Additional paid-in capital..................................... 14,033,000 14,019,000
Warrants Issued................................................ 360,000 130,000
Retained earnings.............................................. 10,875,000 10,393,000
----------- -----------
Total Stockholders' Equity................................... 25,746,000 25,020,000
----------- -----------
$34,354,000 $35,768,000
----------- -----------
----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
27
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
(as restated) (as restated)
<S> <C> <C> <C>
NET SALES AND CONTRACT REVENUES............................ $ 28,062,000 $ 28,694,000 $ 18,784,000
------------ ------------ ------------
COST AND EXPENSES:
Cost of sales............................................ 20,136,000 24,403,000 15,452,000
Selling, general, and administrative expenses............ 5,448,000 5,325,000 4,817,000
Research and development expenses........................ 1,309,000 876,000 439,000
Loss on write-off of fixed asset......................... 358,000 -- --
------------ ------------ ------------
27,251,000 30,604,000 20,708,000
------------ ------------ ------------
OPERATING INCOME (LOSS).................................... 811,000 (1,910,000) (1,924,000)
INTEREST AND OTHER INCOME (EXPENSE), NET................... (2,000) (89,000) 232,000
INTEREST EXPENSE........................................... (296,000) (387,000) (350,000)
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM... 513,000 (2,386,000) (2,042,000)
PROVISION (BENEFIT) FOR INCOME TAXES....................... 31,000 1,000 (1,967,000)
------------ ------------ ------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM.................... 482,000 (2,387,000) (75,000)
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT NET OF TAXES
OF $10,000................................................. -- -- 585,000
------------ ------------ ------------
NET INCOME (LOSS).......................................... $ 482,000 $ (2,387,000) $ 510,000
------------ ------------ ------------
------------ ------------ ------------
Per Share Information*
- ----------------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM.................... 0.10 (0.50) (0.02)
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT NET OF TAXES
OF $10,000................................................. -- -- 0.12
------------ ------------ --------------
NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE... $ 0.10 $ (0.50) $ 0.11
------------ ------------ --------------
------------ ------------ --------------
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING.......................................... 4,958,870 4,778,928 4,705,512
------------ ------------- --------------
------------ ------------- --------------
DIVIDENDS PER SHARE......................................... $ -- $ -- $ --
------------ ------------- --------------
------------ ------------- --------------
</TABLE>
*Adjusted to reflect 2 for 1 stock split issued on April 7, 1997.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
28
<PAGE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
--------------------- Additional
Number Par Paid-in Retained
of Shares Value Capital Warrants Earnings Total
---------- ---------- ----------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1994......... 4,614,928 $ 460,000 $13,522,000 $ -- $12,270,000 $ 26,252,000
---------- ---------- ----------- -------- ------------ ------------
Stock Options Exercised............... 161,000 18,000 465,000 -- -- 483,000
Net Income for Year................... -- -- -- -- 510,000 510,000
---------- ---------- ----------- -------- ------------ ------------
Balance at September 30, 1995......... 4,775,928 $ 478,000 $13,987,000 $ -- $ 12,780,000 $ 27,245,000
---------- ---------- ----------- -------- ------------ ------------
Warrants issued....................... -- -- -- 130,000 -- 130,000
Stock Options Exercised............... 6,000 -- 32,000 -- -- 32,000
Net Loss for Year (as restated)....... -- -- -- -- (2,387,000) (2,387,000)
---------- ---------- ----------- -------- ------------ ------------
Balance at September 30, 1996
(as restated)....................... 4,781,928 $ 478,000 $14,019,000 $130,000 $10,393,000 $ 25,020,000
---------- ---------- ----------- -------- ------------ ------------
Warrants issued....................... -- -- -- 230,000 -- 230,000
Stock Options Exercised............... 2,316 -- 14,000 -- -- 14,000
Net Income for Year (as restated)..... -- -- -- -- 482,000 482,000
---------- ---------- ----------- -------- ------------ ------------
Balance at September 30, 1997
(as restated)........................ 4,784,244 $ 478,000 $14,033,000 $360,000 $ 10,875,000 $ 25,746,000
---------- ---------- ----------- -------- ------------ ------------
---------- ---------- ----------- -------- ------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
29
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
1997 1996 1995
----------- ------------ ------------
(as restated) (as restated)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................................... $ 482,000 $(2,387,000) $ 510,000
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Depreciation and amortization........................... 1,588,000 1,493,000 1,339,000
Loss on write-off of fixed assets....................... 358,000 -- --
Changes in assets and liabilities, net-
Decrease (increase) in accounts receivable............ (616,000) (201,000) 725,000
Decrease (increase) in inventories.................... 1,585,000 1,449,000 (2,982,000)
(Decrease) increase in accounts payable and
accrued expenses..................................... (3,629,000) 3,358,000 1,387,000
Gain on sale of building................................ -- (75,000) (175,000)
Changes in accrued and deferred taxes................... -- -- (1,000)
Changes in other long-term liabilities.................. -- (301,000) (981,000)
Other................................................... (689,000) 440,000 (100,000)
----------- ----------- -----------
Net cash provided (used) by operating activities...... (921,000) 3,776,000 (278,000)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net.................................. (1,788,000) (1,449,000) (777,000)
Sales of marketable securities, net........................ -- 170,000 326,000
Proceeds from sale of Property, Plant & Equipment.......... -- 172,000 487,000
----------- ----------- -----------
Net cash (used) provided by investing activities...... (1,788,000) (1,107,000) 36,000
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under long-term obligations............. (545,000) -- --
Payments on bank debt...................................... (9,801,000) (4,856,000) (4,103,000)
Proceeds from bank debt.................................... 11,508,000 1,530,000 3,725,000
Proceeds from Notes Payable to Shareholders and Warrants... 500,000 850,000 --
Proceeds from Stock issuance............................... 14,000 32,000 483,000
----------- ----------- -----------
Net cash (used) provided by financing activities...... 1,676,000 (2,444,000) 105,000
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:
Cash and cash equivalents at beginning of year............. (1,033,000) 225,000 (137,000)
Cash and cash equivalents at end of year................... 1,301,000 1,076,000 1,213,000
----------- ----------- -----------
$ 268,000 $ 1,301,000 $ 1,076,000
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the year for:
Interest, net of amounts capitalized.................. $ 266,000 $ 345,000 $ 280,000
Income tax refunds received........................... $ 14,000 $ 11,000 $ 978,000
NON-CASH INVESTING & FINANCING ACTIVITIES:
Capital lease obligations.................................. $ -- $ 75,000 $ --
Loss on write-off of non-current inventories............... $ -- $ 2,650,000 $ --
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OPERATIONS
Starmet Corporation (The Company) is a manufacturer of specialized metal
products which are fabricated by a variety of metalworking processes.
Effective October 1, 1997 the company changed its name from Nuclear Metals,
Inc. to Starmet Corporation. Export sales to foreign unaffiliated customers
are 25% of total net sales and contract revenues in fiscal 1997, 28% in
fiscal 1996, and 33% in fiscal 1995. A significant portion of the Company's
sales revenue has been derived from major customers as follows:
1997 1996 1995
---- ---- ----
Royal Ordnance......................... 19% 11% -%
United States Enrichment Corp.......... 14 5 --
Primex Technologies.................... 12 20 8
Lockheed Martin........................ 7 16 18
Lockheed Idaho Falls................... 5 4 9
In August 1998, the Company restated its September 30, 1996 and September
30, 1997 consolidated financial statements. The restatement related to the
Company's accounting for inventory reserves. During the year ended
September 30, 1996, the Company had provided approximately $3.3 million of
reserves for DU inventory, of which approximately $1.0 million of such reserves
were reversed into income during the year ended September 30, 1997, based upon
management's estimate of the future recoverability of DU inventory. After
further review, management of the Company has determined, based on
consideration of the applicable accounting literature and all of the relevant
information available at the time of the release of the Company's September 30,
1996 financial statements, that the reserves provided in 1996 should have
been lower by approximately $650,000 ($0.14 per diluted share) and the
reversal of approximately $1.0 million ($0.20 per diluted share) of such
reserves in 1997 should not have been recorded. In the future, inventory
reserves will not be reversed until the related inventory is sold or disposed
of. The following table summarizes the effects of the restatement on net
income and the related income per share amounts in 1996 and 1997.
<TABLE>
<CAPTION>
1996 1997
-------------------------- --------------------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Income:........................... $(3,037,000) $(2,387,000) $1,482,000 $482,000
Income per share:
Basic............................... $ (0.64) $ (0.50) $ 0.31 $ 0.10
Diluted............................. $ (0.64) $ (0.50) $ 0.30 $ 0.10
</TABLE>
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of Starmet Corporation and its wholly owned subsidiaries: Starmet Powders,
LLC, Starmet Aerocast, LLC Starmet Comcast, LLC, Starmet NMI Corporation,
Starmet CMI Corporation, Starmet Holdings Corporation and NMI Foreign Sales
Corporation. All material intercompany transactions and balances have been
eliminated in consolidation.
FISCAL YEARS
References in these financial statements to 1997, 1996, and 1995 are for
the fiscal years ended September 30, 1997, September 30, 1996, and September
30, 1995, respectively. The accompanying financial statements and all share
and per share information have been restated to reflect a 2 for 1 stock split
effective in April 1997.
REVENUE RECOGNITION
Revenues are recorded when products are shipped, except for revenues on
long- term contracts, which are recorded on the percentage-of-completion
method. The percentage-of-completion method is used for research and
development contracts and for production contracts, which require significant
amounts of initial engineering and development costs. The
percentage-of-completion is determined by relating the actual number of
contract units completed to date to the total units to be completed under the
respective contract or by relating total costs incurred to total estimated
cost at completion. When
31
<PAGE>
the estimated total costs on a contract indicates a loss, the Company's
policy is to record the entire loss currently. Performance incentives and
penalties incorporated in certain government contracts are recognized when
incentives are earned or awarded or when penalties are incurred or assessed.
Contract revenues include fees resulting from facilitization contracts with
the U. S. Army (contracts to establish production capacity through the
purchase and installation of equipment to be owned by the U.S. Army). Costs
associated with these contracts, exclusive of the costs to purchase the
equipment ($0 in 1997, 1996 and in 1995) are included in cost of sales. The
consolidated balance sheets do not include the cost of this U.S. Army-owned
equipment.
In the fourth quarter of fiscal 1996, the Company established a
$2,100,000 reserve for estimated losses associated with Starmet CMI's
production contracts. The Company was obligated to complete these contracts,
which were fixed price. The contracts have been completed and the reserve is
$0 as of September 30, 1997.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are recorded at cost, which approximates
market value. Cash equivalents include certificates of deposit with a
maturity of three months or less.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market and include materials, labor, and manufacturing and engineering
overhead. The Company provides for inventory reserves by charges to cost of
sales when it is determined that such reserves are necessary for matters such
as excess and obsolete inventories. Increases in estimated reserve
requirements, based on relevant information, management's experience, and the
timing of expected inventory usage, are charged to cost of sales in the
period in which the increase is determined. Inventory reserves are not
reversed until the related inventory is sold or disposed of.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are recorded at the lower of cost or net
realizable value. For financial reporting purposes, the Company provides
depreciation on the straight-line method over the estimated useful lives of
the assets, which are as follows:
Buildings.................................................. 20--30 years
Machinery, equipment, and fixtures......................... 3--10 years
Maintenance and repairs are charged to operations as incurred; renewals
and betterments are capitalized. When property, plant, and equipment are
sold, retired or disposed of, the asset cost and accumulated depreciation are
removed from the accounts, and the resulting gain or loss is included in
operations.
During fiscal 1997 the Company completed a review of its property, plant
and equipment and identified assets with a net book value of $358,000 that
were no longer being utilized. The Company recorded a charge to write off
these assets.
In Fiscal 1997, the Company adopted the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards (SFAS) No.
121, "Accounting for the Impairment of Long-Lived Assets and of Long-Lived
Assets to be Disposed of." This statement requires a review of impairment for
long-lived assets and certain identifiable intangibles to be held and used by
an entity whether events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable. An impairment loss is
recognized if the sum of the expected future cash flows to result from the
use and eventual disposition of the asset is less than the carrying amount
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
32
<PAGE>
of the asset. The amount by which the carrying amount of the asset exceeds
the fair value less costs to sell, is an impairment loss. The effect of
adopting this statement was not material to the Company's financial position
or results of operation.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Accordingly, the Company recognizes deferred
income taxes based on the expected future tax consequences of differences
between the financial statement basis and the tax basis of assets and
liabilities, calculated using enacted tax rates in effect for the year in
which the differences are expected to be reflected in the tax return. The
Company records a valuation allowance against any net deferred tax assets
whose realizability is uncertain.
The deferred federal and state income taxes result primarily from using
accelerated depreciation on property, plant, and equipment for income tax
reporting purposes and from establishing reserves which are not currently
deductible for income tax purposes, respectively.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. Research and
development incurred under customer contracts are expensed through cost of
sales in the period incurred.
Customer funded research and development:
<TABLE>
<CAPTION>
Years Ended September 30,
-----------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Revenue.............................. $557,000 $1,812,000 $793,000
Cost of sales........................ 459,000 1,273,000 675,000
</TABLE>
INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARES
The Company currently calculates earnings per common share under
Accounting Principles Board Opinion (APB) No. 15, "Earnings Per Share."
Income/(loss) per share was computed by dividing the net income by the
weighted average number of shares of common stock outstanding during each
year. Common stock equivalents (stock options and stock warrants) were
considered in the computation of earnings per common and common equivalent
share for 1997. Stock options and stock warrants were not considered in
computing the loss and income per share in 1996 and 1995, as the effect would
have been antidilutive.
RECLASSIFICATIONS
Certain amounts previously reported in the consolidated financial
statements have been reclassified to conform to the 1997 presentation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
33
<PAGE>
NEW ACCOUNTING STANDARDS
In March 1997, the Financial Accounting Standards Board issued SFAS No.
128 "Earnings Per Share," which establishes standards for computing and
presenting earnings per share for entities with publicly held common stock or
potential common stock. SFAS No. 128 is effective for periods ending after
December 15, 1997 and early adoption is not permitted. SFAS No. 128 replaces
primary earnings per share with "basic earnings per common share." Basic
earnings per common share is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the year. No
dilution for any potentially dilutive securities is included. In addition,
SFAS No. 128 replaces fully diluted earnings per common share with "diluted
earnings per common share." Dilution for options and warrants under SFAS No.
128 is computed using the average share price of the Company's common stock
for the period, rather than the more dilutive greater than average share
price or end-of-period share price required by APB No. 15. For fiscal years
1997, 1996, and 1995 there would be no material change from primary and fully
diluted earnings per common share to basic and diluted earnings per share
under SFAS No. 128.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist mainly of cash and cash
equivalents, restricted cash, accounts receivable, notes receivable from
officers, accounts payable and notes payable. The carrying amounts of the
Company's cash and equivalents, restricted cash accounts receivable, notes
receivable from officers and accounts payable approximate their fair value
due to the short-term nature of these instruments. The carrying value of the
notes payable also approximates the fair value, based on rates available to
the Company for debt with similar terms and remaining maturities.
LEGAL COSTS FOR LOSS CONTINGENCIES
Legal costs are recorded in the period in which the legal services are
provided.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
34
<PAGE>
3. OTHER ACCRUED EXPENSES
Accrued expenses consist of the following
at September 30, 1997 and 1996
1997 1996
-------- ----------
Waste burial cost............................ $404,000 $2,884,000
Estimated loss on contracts.................. -- 2,100,000
Other........................................ 503,000 577,000
-------- ----------
$907,000 $5,561,000
-------- ----------
-------- ----------
During 1997, the Company reduced certain accruals by $1,750,000 for site
remediation and waste burial costs which were deemed no longer necessary.
4. ACCOUNTS RECEIVABLE
The following is an analysis of accounts receivable
(net of allowances for doubtful accounts):
1997 1996
---------- ----------
Accounts receivable.......................... $5,460,000 $3,479,000
Unbilled Receivables and Retainages due
upon completion of contracts................ 86,000 1,452,000
---------- ----------
$5,546,000 $4,931,000
---------- ----------
5. INVENTORIES
Inventories (net of reserves) at September 30, 1997,
and September 30, 1996, were as follows:
1997 1996
----------- -----------
(as restated) (as restated)
Work-in-process.............................. $ 2,511,000 $ 805,000
Raw materials................................ 7,921,000 11,162,000
Spare parts.................................. 658,000 708,000
----------- -----------
Total inventory.............................. $11,090,000 $12,675,000
----------- -----------
Less current inventory....................... 5,239,000 6,824,000
----------- -----------
----------- -----------
Non-current inventory........................ 5,851,000 5,851,000
----------- -----------
----------- -----------
As of September 30, 1997, approximately $5.8 million of the Company's
inventory net of $3.2 million reserve, consists of Depleted Uranium (DU) in
various stages of production. This amount consists of both value-added costs
to government owned material, ($3.8 million), which is used for U.S. Military
contracts and for material which the Company has acquired from other sources,
($2.0 million). During fiscal 1995 the U.S. Army notified the Company that
the Army would provide the DU for production for the most recent penetrator
contract. Management strongly believes that the Army is responsible to
compensate the Company for the value-added costs of this material and that
at a minimum the Army would allow the Company to use this material for non
U.S. military contracts at no additional cost to the Company. Management is
pursuing several Department of Energy programs that would require more DU
over the next several years than the Company currently has on hand.
Management believes that the carrying cost of the inventory on hand will be
fully realizable through these possible programs or from its ongoing usage
for U.S. and foreign military procurements; however it is uncertain how much
of the inventory balance will be utilized in fiscal 1998. However, the
Company expects to sell approximately $400,000 during fiscal 1998,
approximately $1,900,000 during fiscal 1999 and the balance thereafter.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
35
<PAGE>
6. LONG-TERM OBLIGATIONS AND NOTES PAYABLE
Long-term obligations and notes payable of the Company are as follows:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
Term credit, interest rate of prime plus 0.5% due in monthly
principal payments through 1996.................................... $ 133,000 $ --
Line of credit, interest rate of prime plus 0.5% (9.0% at September
30, 1997).......................................................... -- 1,706,000
Industrial development revenue notes, variable interest rates
(5.6524% at September 30, 1997) due in quarterly principal payments
through 2000....................................................... 492,000 180,000
Notes payable to stockholders interest only payments of 10% until
maturity........................................................... 850,000 1,350,000
Note payable, monthly interest and principal payments through
November 2000, interest rate of 10.25%............................. 457,000 370,000
Capital leases....................................................... 72,000 59,000
------------ ------------
$ 2,004,000 $ 3,665,000
Less unamortized discount on stockholder debentures and line of
credit............................................................. 130,000 302,000
Less current portion of long-term obligations........................ 510,000 1,885,000
------------ ------------
Total long-term obligations and stockholder debentures............... $ 1,364,000 $ 1,478,000
------------ ------------
------------ ------------
</TABLE>
CREDIT FACILITY
On August 7, 1997, the Company and its principal bank lender, State
Street Bank & Trust Company, signed the Third Amendment to the credit
agreement dated March 31, 1995 (as amended, the "Credit Agreement"). The
Third Amendment increased the Company's credit facilities from $4.25 million
to $6.55 million, with a maturity date of February 28, 1998. The $6.55
million consists of $3.55 million of letters of credit and $3.0 million
credit line for working capital. Borrowings under the Credit Agreement bear
interest at the prime rate plus 1/2 of 1%. The Company also pays a fee of 1/2
of 1% on the unused portion of the credit facilities.
As of September 30, 1997, the Company was not in compliance with certain
financial covenants contained in the Credit Agreement including minimum working
capital and maximum capital expenditures incurred for the year ended September
30, 1997, as defined.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
36
<PAGE>
On October 1, 1997, the Company amended and restated the Credit Agreement
(the "Amended Credit Agreement") which amended and restated the Credit Agreement
dated March 31, 1995. The total amount of the credit available to the Company
remained at $6.55 million, and the Company and all its subsidiaries became
borrowers under the Amended Credit Agreement. The Amended Credit Agreement is
secured by an Amended and Restated Joint Security Agreement, whereby the Company
and its subsidiaries granted to the lender a first priority security interest in
all accounts, inventory and general intangibles. The Company is subject to
certain operating and financial covenants, including minimum tangible capital,
as defined and net income requirements in connection with the credit facility.
Also, the minimum working capital requirement in the Credit Agreement was
deleted.
The Company has entered into a First Amendment to the Amended Credit
Agreement with its lender dated December 9, 1997, which provided for an increase
in the credit facility to $8.05 million.
On December 29, 1997, the Company entered into a Second Amendment to the
Amended Credit Agreement which provides for the following: (i) the total amount
of credit available to the Company increased from $8.05 million to $9.55
million; (ii) the terms of repayment for the line of credit have been revised as
follows, the maximum aggregate liability (including letters of credit) of the
Company under the Existing Credit Facility shall not exceed $8.1 million from
July 1, 1998 through September 30, 1998, and $6.6 million from October 1, 1998
through February 28, 1999, which is when the balance is due; and (iii) the
non-compliance with the maximum capital expenditures for the year ended
September 30, 1997 was waived and certain financial covenants have been amended.
As of September 30, 1997 all amounts due under the Amended Credit Agreement were
classified in the accompanying balance sheet in accordance with the stated
maturity dates of the Amended Credit Agreement as Amended on December 29, 1997.
In consideration of the Second Amendment to the Amended Credit Agreement the
Company has issued to the lender a warrant to purchase 25,000 shares of common
stock at the ten day average of fair market value as of December 29, 1997. The
Company also paid its lender $15,000 upon execution of the Second Amendment.
As of September 30, 1997, 1.7 million was outstanding under the Amended
Credit Agreement. The Company had $3.55 million letters of credit outstanding
at December 31, 1997.
For the three months ended December 31, 1997, the Company recorded a loss
before interest and taxes in excess of the amount permitted under the Amended
Credit Agreement. On February 23, 1998, the Company received a waiver from the
lender for this event of non-compliance for the three months ended December 31,
1997.
As of March 31, 1998 the Company was out of compliance with one of its
financial covenants, pursuant to the Amended Credit Agreement, that limits the
amount of capital expenditures the Company may make during the year ending
September 30, 1998. On May 15, 1998, the Company received a waiver from the bank
for this event of non-compliance and of non-compliance with the capital
expenditure financial covenant for the remainder of fiscal 1998. As of March 31,
1998 all amounts due under the Amended Credit Agreement have been classified as
current in the accompanying balance sheet in accordance with the stated maturity
dates of the Agreement.
As of June 30, 1998, the Company was out of compliance with the
financial covenant under its credit agreement that limits the net loss
reported for the fiscal quarter ended June 30, 1998. On August 7, 1998, the
Company received a waiver for this event of non-compliance and any events of
non-compliance as a result of the restatement of the Company's financial
statements for the years ended September 30, 1997 and 1996. In addition, the
credit agreement was modified such that the availability was increased to
$11,050,000, through September 30, 1998; $8,050,000 from October 1, 1998
through December 31, 1998, and $6,550,000 on January 1, 1999 and thereafter
until it's maturity on February 28, 1999. Also, the tangible capital base
required by the agreement should not be less than $22,500,000 as of September
30, 1998 plus an increase equal to the $22,500,000 as of September 30, 1998
plus an increase equal to the aggregate of 75% of the Company's net income
for each fiscal quarter after September 30, 1998. Net income (loss) shall be
not less than ($500,000) for the quarter ending September 30, 1998 and $750,000
for the quarter ending December 31, 1998 and each quarter thereafter.
On June 11, 1998, the Company and its lender entered into the Third
Amendment to Credit Agreement dated June 11, 1998 which provided for (i) a
revised amortization schedule whereby the maximum aggregate liability (including
letters of credit) of the Company under the Existing Credit Facility shall not
exceed $9.6 million through September 30, 1998, $8.1 million from October 1,
1998 through
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
37
<PAGE>
December 31, 1998, and $6.6 million from January 1, 1999 through February 28,
1999, which is when the balance is due and (ii) a reduction of the net income
covenant for the third quarter of fiscal 1998.
NOTES PAYABLE TO STOCKHOLDERS
On January 10, 1996, the Company issued $500,500 in principal amount of its
10% Convertible Subordinated Debentures, the principal amount of which is
convertible at the option of the holder into shares of the Company's Common
Stock at the rate of $5.945 per share. The original maturity date of these
Debentures, June 10, 1997, has been extended by the holders pursuant to certain
letter agreements until December 10, 1998. These Debentures were issued to
persons who are significant stockholders of the Company or related to such
persons.
On September 16, 1996 the Company issued an additional $350,000 in principal
amount pursuant to its 10% Subordinated Debentures due December 10, 1998 which
were issued to certain significant stockholders of the Company. In consideration
for the Debentures, the holders were issued three-year warrants to purchase an
aggregate of 42,000 shares of common stock at an exercise price of $7.50 per
share, subject to antidilution adjustments.
On September 22, 1997 the Company issued an additional $500,000 in principal
amount pursuant to its 10% Subordinated Debentures due December 10, 2000 which
were issued to a stockholder of the Company. In consideration for the
Debentures, the holder was issued three-year warrants to purchase an aggregate
of 60,000 shares of common stock at an exercise price of $17.875 per share,
subject to antidilution adjustments.
On December 23, 1997 the Company issued $850,000 in principal amount of its
10% Convertible Subordinated Notes due December 31, 1999 which were issued to
certain significant stockholders of the Company. The principal amount of the
notes are convertible at the option of the holder into shares of the Company's
Common Stock at the rate of $21.50 per share. Subsequent to December 31, 1997,
the Company issued an additional $50,000 in principal amount of these
Convertible Subordinated Notes on the same terms.
INDUSTRIAL REVENUE BONDS
The Industrial Revenue Bonds (the "IRBs") outstanding consists of one note
issue. The interest rate on this note is 66.5% of the lenders bank's prime
interest rate. This note is secured by property, plant and equipment.
The IRBs contain restrictive covenants including, among others, a
requirement to maintain minimum working capital, consolidated net worth and a
minimum current ratio. As of September 30, 1997, the Company was not in
compliance with certain of these financial covenants. The Company has received a
waiver from the trustee for these events of non-compliance.
Maturities of long-term obligations subsequent to September 30, 1997 are:
1998--$1,885,000, 1999-- $1,052,000; 2000--$655,000; thereafter $73,000.
7. INCOME TAXES
The provision (benefit) for income taxes differs from the amount computed
by applying the statutory federal income tax rate due to the following:
<TABLE>
<CAPTION>
1997 1996 1995
------ ----- ------
<S> <C> <C>
Statutory rate. . . . . . . . . . . . . . . . . . . . . . . . . . 34.0% (34.0)% (34.0)%
Increase (reduction) in taxes resulting from:
State taxes, net of federal effect. . . . . . . . . . . . . . . 6.0 (6.0) (6.0)
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . (38.0) 40.0 (2.0)
Tax reserves no longer required . . . . . . . . . . . . . . . . -- -- (48.0)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- (6.0)
----- ----- -----
2.0% -- % (96.0)%
----- ----- -----
----- ----- -----
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
38
<PAGE>
As of September 1997, the Company has a federal net operating loss
carryforward of approximately $11.1 million of which $3.2 million expires in
2009 and $1.8 million expires in 2010, $3.0 million expires in 2011, and $3.1
million in 2012. State net operating loss carry forwards of approximately
$20.2 million, will expire between 1999 through 2009. These net operating
loss carryforwards are fully reserved by valuation allowances due to
uncertainty regarding their realizability.
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ----------- -------------
<S> <C> <C> <C>
Current (Benefit) Provision:
Federal.............................................................. $ (961,000) $ (363,000) $ (766,000)
State................................................................ (299,000) (112,000) (135,000)
Valuation allowance.................................................. 1,260,000 475,000 901,000
------------- ----------- -------------
Total current (Benefit) Provision.................................. $ -- $ -- $ --
------------- ----------- -------------
------------- ----------- -------------
Deferred (Benefit) Provision:
Federal.............................................................. $ (1,310,000) $ (592,000) $ (1,819,000)
State................................................................ (451,000) (183,000) (148,000)
Valuation Allowance.................................................. 1,792,000 776,000 --
------------- ----------- -------------
Total deferred (Benefit) Provision:............................... 31,000 1,000 (1,967,000)
------------- ----------- -------------
Total (Benefit) Provision:........................................ $ 31,000 1,000 (1,967,000)
------------- ----------- -------------
------------- ----------- -------------
</TABLE>
During 1995 the Company received $978,000 of Federal income tax refunds. As
of September 30, 1994, the Company had established a full valuation allowance
for this amount. Accordingly, the Company reduced its valuation allowance by
$978,000 upon receipt of this amount.
The Company has provided a full valuation allowance on the net deferred tax
assets as of September 30, 1997, and 1996. The Company's alternative minimum tax
credit has an unlimited life. The tax effects of significant items making up the
deferred tax liabilities and deferred tax assets, as of the end of the 1997 and
1996 fiscal years are as follows:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Assets:
Reserves not currently deductable for tax purpose................................. $ 1,665,000 $ 2,475,000
Accrued employee health benefits.................................................. 36,000 38,000
Federal operating loss carryforward............................................... 3,344,000 1,850,000
State operating loss carryforwards and other assets............................... 1,903,000 1,438,000
Other............................................................................. 460,000 1,867,000
Valuation allowance............................................................... (4,082,000) (4,653,000)
------------- -------------
Total deferred tax assets....................................................... 3,326,000 3,015,000
Alternative minimum tax credit.................................................. 407,000 407,000
------------- -------------
$ 3,733,000 $ 3,422,000
------------- -------------
------------- -------------
Liabilities:
Fixed asset basis difference...................................................... $ 2,422,000 $ 2,549,000
Employee benefits................................................................. 813,000 715,000
Other 498,000 158,000
------------- -------------
$ 3,733,000 $ 3,422,000
------------- -------------
------------- -------------
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
39
<PAGE>
8. STOCK OPTIONS AND WARRANTS AGREEMENTS
STOCK OPTION PLANS
As of September 30, 1997, a total of 342,680 shares of common stock have
been reserved for issuance upon exercise of options issued or issuable
pursuant to the Company's stock option plans for employees and directors. The
exercise price of options issued or issuable under such plans may not be less
than 100% of the fair market value of the shares purchasable on the date of
grant of the options. Information concerning options which have been granted
under the plans and the exercise prices thereof is set forth below. Those
options with an indicated exercise price of $3.32 expire in 2003, those with
an exercise price of $6.75, $7.00, or $8.00 expire in 2004, those with an
exercise price of $6.13 expire in 2005, those with an exercise price of $7.38
expire in 2006, and those with an exercise price of $15.56 expire in 2007, in
each case on the anniversary of the date of the grant.
<TABLE>
<CAPTION>
1995 1996 1997
---------------------- -------------------- -------------------
WEIGHTED WEIGHTED
RANGE OF NUMBER AVERAGE NUMBER AVERAGE
NUMBER EXERCISE OF EXERCISE OF EXERCISE
OF SHARES PRICES SHARES PRICE SHARES PRICE
--------- ---------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of year....... 197,800 $3.00-8.00 77,000 $ 6.25 211,000 $ 6.20
Exercised.................................. (161,000) 3.00 -- -- (2,316) 6.13
Granted.................................... 50,600 6.75-7.00 136,000 6.13 128,000 11.53
Canceled................................... (10,400) 3.00-3.25 (2,000) 3.32 (3,334) 6.88
--------- ---------- -------- --------- -------- --------
Options outstanding, end of year............. 77,000 3.32-8.00 211,000 6.20 333,350 8.24
--------- ---------- -------- --------- -------- --------
--------- -------- --------
Options exercisable.......................... 25,719 100,444 205,361
--------- -------- --------
--------- -------- --------
Options available for future grants.......... 9,330
--------
--------
Weighted average fair value per share of
options granted during the year............ $ -- $ 4.41 $ 8.18
</TABLE>
On February 20, 1998, the Board of Directors adopted the Company's 1998
Stock Plan (the "1998 Stock Plan") and the 1998 Stock Plan was approved by the
Company's stockholders at a meeting on March 18, 1998. The Company has reserved
300,000 shares of Common Stock for issuance under the 1998 Stock Plan to
employees, officers, directors and consultants of the Company.
The 1998 Stock Plan provides for the granting of incentive stock options
which are intended to meet the requirements of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), the granting of non-qualified
stock options which do not meet the requirements of Section 422 of the Code,
opportunities to make direct purchases of the Company's Common Stock and the
making of awards of the Company's Common Stock. If any unexercised option
granted pursuant to the 1998 Stock Plan lapses or terminates for any reason, the
shares of Common Stock covered thereby are again available for subsequent option
grants under the 1998 Stock Plan.
The Company has granted options to purchase 200,000 shares of Common Stock
at an exercise price of $23.67 per share, based on the market price of the
Common Stock at that time, under the 1998 Stock Plan, of which 65,000 were
granted to certain Company officers. The remaining options to purchase were
granted to all of the full-time employees of the Company.
On November 20, 1995, the Board of Directors adopted the Company's 1995
Directors Plan (the "1995 Directors Plan") and the 1995 Directors Plan was
approved by the Company's stockholders at a meeting on May 1, 1996. The Company
has reserved 70,000 shares of Common Stock for issuance under the 1995 Directors
Plan to the Company's non-management directors.
Options granted under the 1995 Directors Plan will be non-qualified options
which do not meet the requirements of Section 422 of the Code. If any
unexercised option granted pursuant to the 1995 Directors Plan lapses or
terminates for any reason, the shares of Common Stock covered thereby are again
available for subsequent option grants under the 1995 Directors Plan. The
Company has granted options to purchase 43,500 shares of Common Stock at varying
exercise prices based upon the market price of the Common Stock at the time of
grant.
On December 21, 1981, the Board of Directors adopted the Company's Employee
Stock Plan (the "1981 Stock Plan"), which was approved by the Company's
stockholders at a meeting on February 3, 1982 and subsequently amended and
restated by the Board of Directors on August 1, 1990. The 1981 Stock Plan
provides for the granting of 255,800 shares of Common Stock to the Company's
employees, and such options are intended to be incentive stock options and meet
the requirements of Section 422 of the Code. On February 4, 1988, the Board of
Directors adopted, and amended on August 1, 1990, a Non-Qualified Stock Plan,
under which 190,000 shares of Common Stock were reserved for the granting of
non-qualified options to certain of the Company's key employees. Also, on August
1, 1990, the Company adopted a Directors Plan, under which 70,000 shares of
Common Stock were reserved for the granting of non-qualified options to the
Company's directors. No additional options will be granted under these plans;
however, 351,420 options are outstanding under these plans.
40
<PAGE>
WARRANT AGREEMENTS
In consideration of entering into a credit agreement with its principal bank
lender in September 1995, the Company issued the lender a warrant (the "First
Warrant") to purchase 50,000 shares (subject to adjustment pursuant to
anti-dilution provisions contained in the warrant) of the Company's Common Stock
for $5.95 per share, which was the approximate market value of the Company's
Common Stock at the date of the transaction. The First Warrant expires in 2005.
The holder of the First Warrant has the option to exercise a portion of the
warrant in a cashless transaction by surrendering the remaining portion of the
warrant as defined.
In consideration of the purchase of its 10% Subordinated Notes due December
10, 1998, the Company issued the holders of the notes three-year warrants to
purchase 42,000 shares of Common Stock for $7.50 per share, which was the
approximate market value of the Company's Common Stock at the date of the
transactions. The holders of the warrants have the option to exercise a portion
of the warrant in a cashless transaction by surrendering the remaining portion
of the warrants.
In consideration of the purchase of its 10% Subordinated Notes due December
10, 2000, the Company issued the holder of the Notes three-year warrants to
purchase 60,000 shares of Common Stock for $17.875 per share, which was the
approximate market value of the Company's Common Stock at the date of the
transactions.
In consideration of the Second Amendment to the Amended Credit Agreement the
Company issued to the lender a warrant (the "Second Warrant") to purchase 25,000
shares (subject to adjustment pursuant to anti-dilution provisions of the
warrant) of Common Stock of the Company at an exercise price of $23.58 per
share, based on the average fair market value for the ten days ended December
29, 1997.
On April 1, 1998, the Company entered into the Facility Restructuring
Agreement with its principal bank lender pursuant to which, contingent upon the
closing of a public offering, the Company received an option to make a payment
of $235,313 whereupon no further adjustments for issuances of Common Stock by
the Company will be made under the First Warrant following the closing of the
offering and no adjustments for issuances of Common Stock by the Company will be
made under the terms of the Second Warrant.
PRO FORMA STOCK-BASED COMPENSATION EXPENSE
In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which sets forth a fair-value based method of recognizing
stock-based compensation expense. As permitted by SFAS No. 123, the Company
has elected to continue to apply APB No. 25 to account for its stock-based
compensation plans. Had compensation cost for awards in 1997 and 1996 under
the Company's stock-based compensation plans been determined based on fair
value at the grant dates consistent with the method set forth under SFAS No.
123, the effect on the Company's net income and earnings per share would have
been as follows:
In thousands except per share amounts
<TABLE>
1997 1996
------------- -------------
(as restated) (as restated)
<S> <C> <C>
Net Income (Loss)..................................... $ 482 $ (2,387)
As reported......................................... 373 (2,450)
Pro forma...........................................
Primary/fully diluted earnings per share:
As reported......................................... $0.10 $ (0.50)
Pro forma........................................... 0.08 (0.51)
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
41
<PAGE>
Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to October 1, 1995, the resulting pro forma compensation
expense may not be representative of the amount to be expensed in future years.
Pro forma compensation expense for options granted is reflected over the vesting
period; therefore future pro forma compensation expense may be greater as
additional options are granted.
The fair value of each option granted was estimated on the grant date using
the Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rates of 6.19% to 6.21% and5.38% to 6.50% for
1997 and 1996, respectively, expected life of 10 years, expected volatility of
51% and 54% for 1997 and 1996, respectively.
9. PENSION PLAN
The Company has a defined benefit pension plan designed to provide
retirement benefits to all employees. This plan provides pension benefits that
are based on the employee's salary and years of service. The Company's policy is
to fund the plan at a level within the range required by applicable regulations.
The Company's net pension cost for 1997, 1996, and 1995 was $375,000,
$281,000, and $165,000, respectively. During 1997, the Company used the weighted
average discount rate of 8.0%. Net pension cost for the Company's defined
benefit plan included the following components:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- -------------
<S> <C> <C> <C>
Service cost - benefits earned during the period....................... $ 308,000 $ 183,000 $ 155,000
Interest cost on projected benefit obligation.......................... 1,056,000 1,022,000 954,000
Actual return on plan assets........................................... (1,570,000) (932,000) (985,000)
Net amortization and deferral.......................................... 581,000 8,000 41,000
------------ ---------- ----------
Net pension cost....................................................... $ 375,000 $ 281,000 $ 165,000
------------ ---------- ----------
------------ ---------- ----------
Assumptions used in determining the plan's funded status:
Discount rate....................................................... 8.0% 8.0% 8.0%
Expected rate of increase in compensation levels.................... 5.5% 5.5% 5.5%
Expected long-term rate of return on assets......................... 8.5% 8.5% 8.5%
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
42
<PAGE>
The following table sets forth the plan's funded status as of September 30,
1997, and September 30, 1996:
1997 1996
---------------- ---------------
Vested benefit obligation............ $ (12,421,000) $ (11,869,000)
Accumulated benefit obligation....... (12,456,000) (11,884,000)
Projected benefit obligation......... (14,164,000) (13,654,000)
Plan assets at fair value............ 14,418,000 12,517,000
Funded status........................ 254,000 (1,137,000)
Unrecognized prior service costs..... 89,000 98,000
Unrecognized net loss................ 1,698,000 2,392,000
---------------- ---------------
Prepaid pension cost................. $ 2,041,000 $ 1,353,000
---------------- ---------------
---------------- ---------------
Plan assets are invested under the provision of a trust agreement with a
bank in common trust funds.
10. POST RETIREMENT BENEFITS
Effective the beginning of fiscal 1994 the Company adopted Statement of
Financial Accounting Standards No. 106 ("SFAS 106"), "Employers' Accounting for
Post retirement Benefits Other Than Pensions". The statement requires companies
to accrue the cost of post retirement health care and life insurance benefits
within the employees' active service periods.
The Company provides employees who retired from the Company prior to January
1, 1993, with at least ten years of service and under the age of 65, with Group
Health Insurance on a cost-sharing basis. Coverage for an employee's spouse or
dependents will also continue under this plan until the employee has reached age
65 at which time, the coverage ceases. In addition, the Company provides the
same employees who are at least 62 years of age with life insurance equal to
their ending annual salary up to a maximum of $50,000.
For employees who retire after January 1, 1993, the post-retirement benefits
do not include health insurance. In addition, the life insurance benefit, up to
a maximum of $50,000, is provided for one year after retirement.
The accumulated benefit obligation of these benefits as of September 30,
1997, is approximately $767,000 ($5,000 for medical insurance and $762,000 for
life insurance). Plan assets of $401,000 in cash reserves are on hand with an
insurance company to partially cover the cost of the life insurance benefits.
The Company adopted the new standard prospectively as of October 1, 1993, and is
amortizing the transition obligation of $456,000, over three years for the
medical insurance benefits and fifteen years for the life insurance benefits.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
43
<PAGE>
Post retirement benefit expense for fiscal 1997,1996 and 1995 as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- -------------
<S> <C> <C> <C>
Service cost of benefits earned........................................ $ 1,000 $ 1,000 $ 1,000
Interest cost on liability............................................. 59,000 58,000 57,000
Return on plan assets.................................................. (12,000) (12,000) (10,000)
Amortization of transition obligation.................................. 24,000 24,000 48,000
------------ ---------- ----------
Net postretirement benefit cost........................................ $ 72,000 $ 71,000 $ 96,000
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
The following table sets forth the Benefit Plan's funded status as of
September 30, 1997 and September 30 1996:
<TABLE>
<CAPTION>
1997 1996
----------- ------------
<S> <C> <C>
Accumulated Post Retirement Benefit obligation.......................... $ (767,000) $ (758,000)
Plan Asset at Fair Value................................................ 401,000 401,000
----------- ------------
Funded Status........................................................... $ (366,000) $ (357,000)
Transition obligation................................................... 267,000 266,000
----------- ------------
Accrued Post Retirement Benefit Cost.................................... $ (99,000) $ (91,000)
----------- ------------
</TABLE>
The following actuarial assumptions were used:
<TABLE>
<CAPTION>
1997 1996 1995
-------- ---------- ---------
<S> <C> <C> <C>
Salary increase.......................................................... 5.5% 5.5% 5.5%
Discount rate............................................................ 8.0% 8.0% 7.0%
Return on Assets......................................................... 3.0% 3.0% 3.0%
Medical Inflation........................................................ 4-9% 4-9% 10.0%
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
44
<PAGE>
11. COMMITMENTS AND CONTINGENCIES EXPANSION
EXPANSION
The Company is expanding its facilities by adding new equipment and
modifying manufacturing floor space to accommodate changing product lines and
customer demands. The Company anticipates that this will require capital
expenditures totaling approximately $2,000,000 during fiscal 1998. These
capital needs will be funded through cash flow from operations, shareholder
notes and long-term debt. There is no guarantee that the Company will be able
to obtain adequate financing at acceptable terms to meet these needs.
WASTE DISPOSAL
In the process of manufacturing depleted uranium products, the Company
generates low-level radioactive waste (LLRW) that must be disposed of at
sites licensed by federal, state, and local governments. At present, there is
one licensed commercial repository in the United States available for use by
the Company. For LLRW originating in Concord, no site currently exists and
provisions have been made to accommodate interim storage. State government
has the responsibility to implement the provisions of the federal Low-Level
Waste Policy Amendments Act and provide a state solution for Massachusetts
companies that generate this type of waste. Management is of the opinion that
an extended period of storage can be accommodated within existing buildings
and in an environmentally safe manner acceptable to all regulatory agencies
until such time as an acceptable site is identified.
Concord Site Remediation and Decommissioning Planning Requirements
For a number of years, ending in 1985, the Company disposed of
manufacturing-related depleted uranium waste and the associated spent acid
and other residual materials by neutralizing with lime and discharging the
neutralized mixture to a holding basin on its premises in Concord,
Massachusetts. In 1986 the holding basin was covered with hypalon, an
impervious material used to prevent rain and surface runoff water from
leaking through the holding basin. (The Company now uses a proprietary
"closed loop" process that it developed to discontinue such discharges. The
Company believes that both practices were and are in compliance with all
applicable regulations.) Substantially all of these waste materials were the
by-product of work performed for the U.S. Army. On September 13, 1996, the
Army Contract Adjustment Board ("ACAB") decided, among other things, that the
costs to clean up the holding basin materials would be funded by the Army and
that the Army would be obligated to provide transportation and disposal of
the holding basin material pursuant to a supplement to an existing contract
with the Company. In a Supplemental Memorandum of Decision dated March 5,
1997, ACAB decided to pay the Company to transport and dispose of the holding
basin material. Pursuant to ACAB's decision, the Company contracted with the
U.S. Army to remove and dispose of the material from the holding basin and
then subcontracted with Zhagrus Environmental, Inc. ("Zhagrus") to perform
such work under a contract dated May 8, 1997. Zhagrus arranged for disposal
of the holding basin materials at a disposal site operated by its parent
corporation, Envirocare of Utah, Inc. ("Envirocare"). On May 11, 1998, the
Company was notified by Zhagrus that Zhagrus will incur additional costs in
connection with the disposal of the material from the holding basin as a
result of the need for additional work which must be performed by Envirocare
to treat the holding basin material in order for it to meet the conditions
for burial imposed by regulations applicable to Envirocare's license issued
by the State of Utah. Zhagrus has requested that the Company pay it to the
extent of any additional costs which may be incurred by Envirocare as a
result of such additional services which may be rendered. The Company has
requested that Zhagrus provide it with further information in order to
permit the Company to determine whether it has any liability to Zhagrus under
the subcontract and to calculate the amount, if any, that the Company may be
required to pay to Zhagrus under the subcontract. The Company intends to
request a contract price modification for allowance of any such additional
costs under its contract with the U.S. Army, although there can be no
assurance of the timing and amount, if any, of any recovery of such costs
from the U.S. Army. The Company has notified Zhagrus of its proposed course
of action without admitting that the Company has any liability to Zhagrus or
Envirocare for the amount of any such additional costs which may be incurred
by Zhagrus under the subcontract. The Company has not yet been provided with
sufficient information concerning the nature and extent of any additional
work which may be required to allow proper burial by Envirocare. Accordingly,
the Company is unable to determine whether it is obligated to Zhagrus under
the terms of its subcontract or the potential amount involved. Accordingly,
the amount of any additional costs could be material. In the event that the
Company became liable to Zhagrus for any material amount which is not
authorized to be paid by the U.S. Army, such liability could have a material
adverse effect on the Company's business, results of operations and financial
condition.
The Company is required to maintain certain licenses issued by the
Massachusetts Department of Public Health ("DPH") and the South Carolina
Department of Health and Environmental Control ("DHEC") in order to possess
and
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
45
<PAGE>
process depleted uranium materials at its facilities in Massachusetts and
South Carolina, respectively. Under applicable licensing regulations
pertaining to decommissioning and disposal of certain hazardous materials
("D&D") at licensed sites, the Company submitted to the Nuclear Regulatory
Commission ("NRC") and the applicable state agencies a Decommissioning
Funding Plan ("DFP") to provide for possible future decommissioning of its
facilities. The Concord Facility DFP estimated cost is $11.7 million and the
Barnwell Facility DFP estimates is $2.9 million. The Company is required to
provide financial assurance for such decommissioning pursuant to applicable
regulations. The Company has satisfied these requirements and as a result,
the site licenses for both locations have been renewed.
Substantially all of the depleted uranium materials to which the DFP
requirements apply were processed by the Company for the United States
Government. Based on the terms of certain contracts that the Company entered
into with the United States Government to process such depleted uranium
materials, the Company believes that such materials continue to be owned by
the United States Government and that the United States Government is
obligated, under applicable law, to pay for its percentage of eventual D&D.
The Company's DFP reflect its position that it is obligated to provide
financial assurance only with respect to the portion of the materials which
are attributable to the Company's commercial production for parties other
than the United States Government and that this obligation has been satisfied
by a letter of credit to each geographic locations regulatory agency.
The United States Army, in a memorandum of Decision dated September 13,
1996, determined pursuant to Public Law 85-804, that it should fund
remediation of the Concord holding basin site as well as D&D related to the
Concord facility, based in part on the Army's determination that the
Company's activities are essential to the national defense. The United States
Army has issued a fixed price contract, for approximately $6.2 million for
remediation of the holding basin and the Company entered into a fixed price
contract with a contractor to perform this remediation. This work is expected
to continue into the first half of fiscal 1998. The Company's contract with
the contractor is fixed price based on a specified volume of waste to be
removed from the basin and delivered to a burial site. If the volume of the
material removed exceeds the specified level then the Company is
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
46
<PAGE>
obligated to pay an additional fee per cubic yard of excess material removed.
The Army has provided written assurances (subject to funding appropriations)
of its intention to provide funding for D&D costs at the Concord facility in
addition to the Basin under future contracts or, in the event that no future
contracts were awarded (which the Army has indicated is unlikely in view of
its current plans). under an existing contract. D&D costs for the Company's
CMI facility are adequately covered by the existing letter of credit, which is
currently in place to assure funding for potential D&D obligations to date.
The Company has no written assurance that the Army will accept responsibility
for the share of the estimated cost of D&D at its South Carolina facility
which directly resulted from production work under U.S. government contracts
on government supplied materials. However, based on the advice of legal
counsel, management believes that the Army is responsible for its estimated
share of D&D.
The Company is currently remediating the holding basin site at its
Concord facility and may incur costs in excess of its fixed price contract
with the United States Army for remediation of the holding basin. (See Note
15)
LEGAL PROCEEDINGS
On December 9, 1997, Brush Wellman, Inc. ("Brush Wellman") filed a patent
infringement suit against the Company in the United States District Court for
the District of Massachusetts (the "Massachusetts District Court") alleging that
the Company is infringing on a process patent (the "Brush Wellman
Patent") awarded to Brush Wellman for the investment casting of beryllium
aluminum alloys. Brush Wellman is seeking an injunction against the Company's
alleged patent infringement, monetary damages (including treble damages) and
attorney fees.
On March 28, 1998 the U.S. Patent and Trademark Office (the "PTO") granted
the Company's request (filed January 22, 1998) for re-examination (the
"Request") of the Brush Wellman Patent. In the Request, the Company contended,
among other things, that there was sufficient "prior art" in the field of
investment castings and castings of beryllium aluminum alloys such that the
Brush Wellman Patent should not have been issued. In granting the Request, the
patent examiner agreed that the Company's cited
examples of prior art raised substantial new issues of patentability which were
not decided in the prior examination which led to granting the Brush Wellman
Patent. The PTO will undertake a process of re-examination of the validity of
the Brush Wellman Patent that, the Company anticipates, could last for an
extended period. There can be no assurance that the PTO will find the Brush
Wellman Patent to be invalid. On January 27, 1998, the Company filed in the
Massachusetts District Court a motion to stay the court case pending the outcome
of the re-examination proceeding. If the Massachusetts District Court were to
grant the motion to stay, the court case would not proceed until the conclusion
of the PTO's re-examination of the Brush Wellman Patent. Although the Company
believes that its motion to stay has merit, no assurance can be given that the
Massachusetts District Court will grant the motion.
Even though the Company has been advised by patent counsel that Brush
Wellman's claims are without merit because the Brush Wellman Patent is invalid
as a matter of law due to "prior art" and due to the Company's sales of
investment cast beryllium aluminum products more than one year prior to the
Brush Wellman Patent application, no assurance can be given as to the ultimate
outcome of the lawsuit. Even if the lawsuit were not to proceed to trial, the
litigation could result in substantial costs to the Company, and an unfavorable
settlement of the lawsuit could place the Company at a competitive disadvantage.
An adverse judgment or settlement could subject the Company to significant
liabilities and expenses (E.G., reasonable royalties, lost profits, attorneys'
fees and trebling of damages for willfulness). An adverse outcome also could
cause the Company to incur substantial costs in redesigning the investment
casting process for its Beralcast products and components. Moreover, there can
be no assurance that redesign alternatives would be available to the Company,
and if available, that any redesign alternative would not place the Company at a
competitive disadvantage. The Company could be required to license the disputed
patent rights from Brush Wellman or to cease using the patented technology. Any
such license, if required, may not be available on terms acceptable or favorable
to the Company, or at all. Any of these results could have a material adverse
effect on the Company's business, financial condition and results of operations.
Even in the event of a successful outcome, the Company may incur significant
legal expenses in its defense. (See Note 15)
12. TRANSACTIONS WITH RELATED PARTIES
Under the terms of a management agreement, Matthews Associates Limited is
entitled to an annual management fee.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
47
<PAGE>
George J. Matthews, Chairman of the Board of Directors, and a significant
shareholder, is sole owner of Matthews Associates Limited. These fees, as
well as certain expenses of Matthews Associates Limited that were reimbursed
by the Company, have been included in selling, general, and administrative
expenses. Management fees were $350,000 in 1997, 1996, and 1995. Mr. Matthews
does not receive any other salary or fee for services as Chairman of the
Board of Directors. Also see Note 6 for Notes Payable to Shareholders.
13. MAINTENANCE AND REPAIRS
Maintenance and repair expenditures, which are charged to cost and
expense as incurred, amounted to $1,536,000 in 1997, $1,092,000 in 1996, and
$854,000 in 1995.
14. INDUSTRY SEGMENT INFORMATION
The Company is engaged in the manufacture and sale of various specialty
metal products. The Company operates in three industry segments: Uranium
Services and Recycle, Specialty Metal Products, and Depleted Uranium
Penetrators.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
48
<PAGE>
Information relating to the Company's operations for the industry
segments described above for each of the three years in the period ended
September 30 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
(as restated) (as restated)
<S> <C> <C> <C>
Net Sales and Contract Revenues:
Uranium Services & Recycle.......... $ 4,965,000 $ 6,189,000 $ 4,969,000
Specialty Metal Products............ 13,170,000 13,730,000 12,102,000
Depleted Uranium Penetrators........ 9,927,000 8,775,000 1,713,000
----------- ----------- -----------
Total............................. $28,062,000 $28,694,000 $18,784,000
----------- ----------- -----------
----------- ----------- -----------
Operating Income (Loss):
Uranium Services & Recycle......... $ 195,000 $(2,050,000) $(996,000)
Specialty Metal Products........... 391,000 1,432,000 (341,000)
Depleted Uranium Penetrators....... 575,000 (942,000) (237,000)
----------- ----------- -----------
Subtotal......................... 1,161,000 (1,560,000) (1,574,000)
General Corporate Expenses........... 350,000 350,000 350,000
----------- ----------- -----------
Net Operating Income(Loss)........... 811,000 (1,910,000) (1,924,000)
----------- ----------- -----------
Other Expense, Net................... 298,000 476,000 118,000
----------- ----------- -----------
Income (Loss) Before Taxes........... $ 513,000 $(2,386,000) $(2,042,000)
----------- ----------- -----------
----------- ----------- -----------
Identifiable Assets:
Uranium Services & Recycle......... $14,499,000 $14,399,000 $16,609,000
Specialty Metal Products........... 6,155,000 6,195,000 5,140,000
Depleted Uranium Penetrators....... 7,965,000 8,441,000 12,158,000
Corporate.......................... 5,735,000 6,733,000 6,979,000
----------- ----------- -----------
Total............................ $34,354,000 $35,768,000 $40,886,000
----------- ----------- -----------
----------- ----------- -----------
Depreciation and Amortization Expenses:
Uranium Services & Recycle......... $ 492,000 $ 430,000 $ 404,000
Specialty Metal Products........... 275,000 291,000 251,000
Depleted Uranium Penetrators....... 498,000 519,000 443,000
Corporate.......................... 323,000 254,000 241,000
----------- ----------- -----------
Total............................ $ 1,588,000 $ 1,494,000 $ 1,339,000
----------- ----------- -----------
----------- ----------- -----------
Capital Expenditures:
Uranium Services & Recycle......... $ 627,000 $ 379,000 $ 325,000
Specialty Metal Products........... 746,000 436,000 85,000
Depleted Uranium Penetrators....... 6,000 77,000 6,000
Corporate.......................... 409,000 557,000 361,000
----------- ----------- -----------
Total............................ $ 1,788,000 $ 1,449,000 $ 777,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
49
<PAGE>
The Uranium Services and Recycle segment includes the manufacture of
depleted uranium products (non-penetrator) and the recycle of low level
radioactive metal. The Specialty Metal Products segment includes a large
assortment of metal products fabricated using foundry, extrusion, and
machining capabilities including commercial depleted uranium products and
involves the production and sale of various metal powders manufactured by the
Company's patented Rotating Electrode Process. Operations in the Depleted
Uranium Penetrator industry segment include the production of various
penetrators (a component of armor-piercing ammunition used in certain U.S.
military gun systems) which are sold to a department of the U.S. Department
of Defense (DOD), to prime contractors manufacturing such ammunition for the
DOD or to foreign military operations. Revenues derived from contract
research and development activities have been included in the above segments
based on the nature of the product.
Net sales and contract revenues by industry segment include sales to
unaffiliated customers (intersegment sales are not significant). A
significant portion of the Company's revenues has been derived from five
major customers (see Note 1). Sales to United States Enrichment Corporation
are included in the Uranium Services & Recycle industry segment. Sales to
Royal Ordnance and Primex Technologies are included in the depleted Uranium
Penetrators industry segment. Sales to Lockheed Martin and Lockheed Idaho
Falls are included in the Speciality Metal Products industry segment.
Due to the utilization among segments of common production facilities and
equipment and the involvement of a single management organization in all
phases of the Company's operations, necessary allocations have been made
based on estimates which management believes to be reasonable.
Operating income includes net sales and contract revenues less operating
expenses allocated to the individual segments. General corporate expenses
represent expenses which are not of an operating nature and, therefore, are
not allocable to industry segments.
Identifiable assets shown include accounts receivable, inventory, and
plant and equipment that have been allocated to each of the Company's
industry segments. Corporate assets consist primarily of cash and other
assets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
50
<PAGE>
15. QUARTERLY RESULTS (UNAUDITED)
Financial results by quarter for 1997, 1996 and 1995 are summarized below
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- ------- -------- -------
(as restated) (as restated) (as restated)
<S> <C> <C> <C> <C>
1997
Net Sales....................... $ 7,271 $ 5,342 $ 7,013 $ 8,436
Operating Income (Loss)......... 476 (477) 399 413
Net Income (Loss)............... 419 (541) 293 311
Net Income (Loss) per share..... 0.09 (0.11) 0.06 0.06
1996
Net Sales....................... $ 6,671 $10,021 $ 6,434 5,568
Operating Income (Loss)......... 198 287 523 (2,918)
Net Income (Loss)............... 109 238 249 (2,983)
Net Income (Loss) per share..... 0.02 0.05 0.05 (0.62)
1995
Net Sales....................... $ 5,626 $ 4,213 $ 3,753 $ 5,191
Operating Income (Loss)......... 220 (1,355) 45 (834)
Income (Loss) before
extraordinary item............ 121 (300) 39 65
Extraordinary gain on
extinguishment of debt........ -- 585 -- --
Net Income...................... 121 285 39 65
Per share amounts:
Income (Loss) before
extraordinary item............ 0.03 (0.06) 0.01 0.01
Extraordinary gain on
extinguishment of debt........ -- 0.12 -- --
Net Income per share............ 0.03 0.06 0.01 0.01
</TABLE>
During 1997 the Company reduced certain accruals by $1,750,000 for site
remediation and waste burial costs, $670,000 in the second quarter and
$1,080,000 in the fourth quarter.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Estimated Third Quarter and Nine Months Results of Operations
For the quarter ended June 30, 1998, the Company expects to report
revenues of between $7.4 million and $7.7 million and to report a net loss of
between $2.5 million ($0.52 per diluted share) and $2.8 million ($0.58 per
diluted share). For the nine months ended June 30, 1998, the Company expects
to report revenues of between $26.2 million and $26.5 million and to report a
net loss of between $3.8 million ($0.79 per diluted share) and $4.1 million
($0.85 per diluted share). Included in the results of operations for the
third quarter and nine months will be a provision of between $1.0 million
($0.21 per diluted share) and $1.3 million ($0.27 per diluted share) related
to the amount by which the estimated cost of remediating the holding basin at
the Company's Concord, Massachusetts facility is expected to exceed the
amounts covered by the Company's fixed price contract with the U.S. Army (the
"Army Contract") pursuant to which the holding basin clean-up is being done.
The exact amount of the excess costs presently is unknown, but the Company
believes the potential range of such costs is between $1.0 million and $3.4
million. The Company believes that such costs, subject to confirmation, are
recoverable as allowable overheads on future government contracts which the
Company expects to be awarded. Alternatively, the Company believes that all or
a certain portion of such excess costs may also be recoverable pursuant to a
contract modification request or pursuant to an additional application for
relief under Public Law 85-804, pursuant to which the Army Contract was
granted. Revenue for the third quarter and nine months does not include
approximately $1.0 million billed in July to a customer reflecting an
adjustment of overhead rates attributable to work done through the end of the
third quarter. Such overhead rates are subject to government audit, however,
the Company believes that such audit would not result in a material change in
the amount which it expects to receive.
As of June 30, 1998, the Company was not in compliance with certain
financial covenants contained in its bank credit facility. The Company and
its principal bank lender have agreed upon modifications to the bank credit
facility pursuant to which the Company is in compliance with such financial
covenants and prior non-compliance has been waived (see Note 6).
On July 8, 1998, the Company submitted a reply to Brush Wellman's
response to the U.S. Patent and Trademark Office's ("PTO") order granting
the reexamination. Also, on July 30, 1998, in response to a motion to stay
the court case pending the outcome of the reexamination proceeding which was
filed by the Company on January 27, 1998, the United States District Court
for the District of Massachusetts dismissed the suit without prejudice to
either party's moving to restore it to the docket upon the decision of the
PTO relative to the reexamination.
51
<PAGE>
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF STARMET CORPORATION:
We have audited the accompanying consolidated balance sheets of Starmet
Corporation (formerly known as Nuclear Metals, Inc.) (a Massachusetts
corporation) and subsidiaries as of September 30, 1997 and 1996 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended September 30, 1997.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Starmet
Corporation and subsidiaries as of September 30, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years
in the period ended September 30, 1997 in conformity with generally accepted
accounting principles.
The consolidated financial statements as of September 30, 1996 and 1997,
and for the years ended, have been restated (see Note 1).
ARTHUR ANDERSEN LLP
Boston, Massachusetts
August 7, 1998
52
<PAGE>
COMMON STOCK INFORMATION
The Company's common stock is traded on the NASDAQ Market under the
symbol STMT. As reported by a principal market maker for the stock, the high
and low bid prices for the three years ended September 30 are reflected in
the following table. This information reflects inter-dealer prices, without
retail mark-up, mark-down or commissions and may not represent actual
transactions.
As of September 30, 1997, there were approximately 300 holders of record
of the Company's Common Stock. The Company believes the actual number of
beneficial owners of the Company's Common Stock is greater because a large
number of shares are held in custodial or nominee accounts.
The Company did not declare any cash dividends during its last two fiscal
years. Given the Company's current cash flow situation, the Company does not
expect to pay cash dividends in the next year. Future cash dividends, if any,
would be paid on an annual basis, the amount of which is subject to the
determination and approval of the Company's Board of Directors. The Company's
loan agreement with a bank prohibits the declaration of dividends without the
bank's consent.
HEADQUARTERS
2229 Main Street, Concord, Massachusetts 01742
STARMET CMI
Highway 80, Barnwell, South Carolina 29812
TRANSFER AGENT AND REGISTRAR
State Street Bank & Trust Company
225 Franklin Street, Boston, Massachusetts 02110
AUDITORS
Arthur Andersen LLP
225 Franklin Street, Boston, Massachusetts 02110
ANNUAL MEETING
The annual meeting of stockholders will be held on March
18, 1998 at 10:00 A.M. at the offices of State Street Bank & Trust Company,
225 Franklin Street, Boston, Massachusetts 02110.
FORM 10-K
The Company's Annual Report on Form 10-K as filed with the Securities and
Exchange Commission will be provided without charge to shareholders on
written request. Request should be directed to the Vice President, Finance
and Administration, Starmet Corporation, 2229 Main Street, Concord,
Massachusetts 01742.
<TABLE>
<CAPTION>
1997* HIGH LOW
- ------------- --------- ---------
<S> <C> <C>
1st Quarter 10 3/4 7 1/4
2nd Quarter 17 5/8 9
3rd Quarter 18 1/2 14
4th Quarter 19 14 1/2
</TABLE>
<TABLE>
<CAPTION>
1996* HIGH LOW
- ------------- --------- ---------
<S> <C> <C>
1st Quarter 7 5 1/4
2nd Quarter 10 1/2 5 1/2
3rd Quarter 9 1/4 6 3/4
4th Quarter 9 3/8 6
</TABLE>
<TABLE>
<CAPTION>
1995* HIGH LOW
- ------------- --------- ---------
<S> <C> <C>
1st Quarter 9 6 5/8
2nd Quarter 8 3/8 5 3/4
3rd Quarter 7 1/4 5 3/4
4th Quarter 7 1/8 5 1/2
</TABLE>
- ------------------------
*Adjusted to reflect 2 for 1 stock split in the third quarter of fiscal 1997.
(CORPORATE)DIRECTORY
BOARD OF DIRECTORS
George J. Matthews, CHAIRMAN
Wilson B. Tuffin, VICE CHAIRMAN
Robert E. Quinn, PRESIDENT
Frank H. Brenton, CHAIRMAN MARSHALL'S INCORPORATED, RETIRED
Kenneth A. Smith, PROFESSOR OF CHEMICAL ENGINEERING
MASSACHUSETTS INSTITUTE OF TECHNOLOGY
EXECUTIVE OFFICERS AND CORPORATE STAFF
George J. Matthews, CHAIRMAN OF THE BOARD OF DIRECTORS,
CEO AND TREASURER
Wilson B. Tuffin, VICE CHAIRMAN OF THE BOARD OF DIRECTORS
Robert E. Quinn, PRESIDENT
Kevin R. Raftery, PRESIDENT STARMET COMCAST & AEROCAST
Douglas F. Grotheer, PRESIDENT STARMET CMI
William T. Nachtrab, VICE PRESIDENT, TECHNOLOGY & ENGINEERING
James M. Spiezio, VICE PRESIDENT, FINANCE AND ADMINISTRATION
Bruce E. Zukauskas, VICE PRESIDENT, OPERATIONS
James H. Scarboro, VICE PRESIDENT, MARKETING
Frank J. Vumbaco, VICE PRESIDENT, HEALTH/SAFETY AND CORPORATE COMMUNICATIONS
Thomas A. Wooters, CLERK
Theodore J. Crowell, CONTROLLER
<PAGE>
EXHIBIT 23(a)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports dated August 7, 1998 included or incorporated by reference in
this Form 10-K into the Company's previously filed Registration Statement
File No. 33-36812 on Form S-8.
Arthur Andersen LLP
Boston, Massachusetts
August 10, 1998
