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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(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, 1998
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
STARMET CORPORATION
(Exact name of Registrant as specified in its charter)
MASSACHUSETTS 04-2506761
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2229 MAIN STREET
CONCORD, MASSACHUSETTS 01742
(Address of Principal Executive Offices) (Zip Code)
(978) 369-5410
(Registrant's telephone number, including area code)
---------------------------
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 No X
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. /X/
The aggregate market value of the Common Stock of the Registrant held by
non-affiliates was approximately $14,784,641 as of November 30, 1998.
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As of September 30, 1998, there were issued and outstanding 4,790,674 shares of
the Registrant's Common Stock.
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PART I
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," "intends," "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 Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
ITEM 1. BUSINESS
GENERAL
Starmet Corporation (the "Company" or "Starmet"), was incorporated in
Massachusetts on May 7, 1984 as Nuclear Metals, Inc., and changed its name on
October 1, 1997. Effective fiscal year 1998, the Company reorganized, forming
four new wholly-owned subsidiaries: 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 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 variety of specialty metal
products using sophisticated metallurgical technology and metalworking
processes. The Company operates in three industry segments: (1) fabrication of
an assortment of specialty metal products using foundry, extrusion, and
machining capabilities; including the manufacture of high-purity, spherically
shaped metal powders; (2) uranium services and recycling of low-level
contaminated steel; and (3) manufacture of depleted uranium penetrators.
In its specialty metals business, Starmet produces a range of
products and components from advanced metals and alloys. Key among these
materials is Beralcast-Registered Trademark-, the Company's family of
beryllium aluminum alloys, which is being commercially introduced for use in
certain advanced commercial and aerospace applications. In its advanced
recycling technologies and uranium services businesses, Starmet is a fully
integrated processor of depleted uranium ("DU"), converting uranium
hexafluoride ("UF(6)") to uranium tetrafluoride ("UF(4)") and DU metal which
it manufactures into DU
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products including penetrators.
INDUSTRY SEGMENT FINANCIAL INFORMATION
The following table sets forth certain information regarding the
revenue, gross profit (loss) and identifiable assets attributable to the three
industry segments in which the Company operates.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------- ------------------------------------
1998 1997 1996
-------------------------- -------------------- ----------------
(AS RESTATED) (AS RESTATED)
(IN THOUSANDS)
<S> <C> <C> <C>
Net Sales and Contract Revenues:
Specialty Metal (1)....................... $ 14,185 $ 13,170 $ 13,730
Uranium Services and Recycle.............. 7,827 4,965 6,189
Depleted Uranium Penetrators.............. 12,811 9,927 8,775
Gross Profit (Loss):
Specialty Metal........................... $ 463 $ 1,616 $ 3,761
Uranium Services and Recycle.............. (3,932) 3,934 (367)
Depleted Uranium Penetrators.............. (1,736) 2,376 897
Identifiable Assets:
Specialty Metal........................... $ 9,665 $ 6,155 $ 6,195
Uranium Services and Recycle.............. 9,331 14,499 14,399
Depleted Uranium Penetrators.............. 4,456 7,965 8,441
</TABLE>
(1) Speciality Metal Products includes the production of DU billets for
conversion into tank armor and DU industrial and medical shielding
products.
See Note 15 of Notes to Consolidated Financial Statements.
The Company has no foreign operations. The Company has export sales,
which accounted for 18%, 25% and 28% of net sales for the fiscal year ended
September 30, 1998, 1997 and 1996, respectively.
The following is a general description of the Company's three business
segments.
SPECIALTY METAL
Starmet develops and manufactures a range of advanced metal products
and components for commercial and aerospace applications. These products are
manufactured from various metals and alloys, including the Company's Beralcast
beryllium aluminum alloys, pure beryllium, titanium, steel and zirconium.
Beralcast is an investment-castable beryllium aluminum alloy designed for
secondary structural and electronic applications.
MILITARY AEROSPACE. Beralcast components have been specified for use on
such high performance defense applications as the U. S. Army's Comanche
helicopter program. In addition, the Company has manufactured prototype parts
for advanced fighter aircraft, weapons, navigational and
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targeting systems. Management believes that its Beralcast products meet
demanding performance requirements for certain applications where stiffness,
vibration damping, light weight, workability and material uniformity are
critical, such as the Comanche helicopter program. The Company has developed
defense applications for Beralcast primarily through its work with Lockheed
Martin over the past seven years. The Company has received contracts from
Lockheed Martin for several separate Beralcast components to be used in the
night vision and target acquisition system on the Comanche helicopter
program. The qualities of Beralcast make it optimal for use in this type of
aerospace application because of its light weight, stiffness and vibration
damping characteristics, which are required by the very sensitive operations
of this night vision and laser acquisition system. The U.S. Army has stated
that if it were required to design the EOSS without the benefits of
Beralcast, it would increase costs of the Comanche project by approximately
$300 million.
DISK DRIVES. Using Beralcast alloys, disk drive designers have reduced
the thickness of individual arm sets in the disk stack and placed additional
disks within the same volume. This arm set thickness reduction enables
manufacturers to achieve increased storage capacity while maintaining current
disk drive dimensional standards. In addition, the higher vibration damping
properties of Beralcast, which certain customers have determined to be 6 to 10
times greater than aluminum, significantly increase data retrieval speeds
compared to conventional materials by facilitating higher disk rotational speeds
and reducing arm vibration. Furthermore, Beralcast has lower thermal expansion
and is more dimensionally stable than aluminum, which is critical in certain
next generation disk drive systems which are being developed to incorporate
laser-optical technology. Based in part upon input from customers concerning
performance and component requirements for doubling data storage capacity in
future disk drive applications, the Company believes Beralcast will be a
critical aspect of achieving these goals. The Company has produced prototype and
pre-production Beralcast disk drive arm sets for evaluation by several of the
leading disk drive manufacturers. Certain leading disk drive manufacturers have
funded research, development, prototype work and production tooling to support
initial production plans.
POWDERS. The Company manufactures certain metal powders for niche
markets through its proprietary processes called the Rotating Electrode
Process ("REP-Registered Trademark-") and the Plasma Rotating Electrode
Process ("PREP-Registered Trademark-"), which produce spherical metal
particles within a relatively controllable size range. These metals include
steel, titanium alloy and several nickel and cobalt-based alloys generally
known in the industry as specialty powders. Metal powders can be used
effectively in a variety of applications where exacting sizes, shapes and
cleanliness are important. For example, clean cobalt, chrome and titanium
powders, made through PREP, are used in medical implants to effectively bond
prosthetic devices to bone and tissue, and uniform steel powders made through
PREP are used in photocopiers, sophisticated rapid prototyping applications,
and magnetic paint for childrens' books, wallpaper, and toys. Management
believes the Company's metal powders offer performance advantages in these
niche markets over competing powders because they are cleaner, more uniformly
spherical and have a higher percentage of particles within a desired size
range from a given amount of raw material.
URANIUM SERVICES AND RECYCLE
Starmet develops and provides products and services based upon its
longstanding
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metallurgical, radiological and chemical know-how, including its expertise in
processing and converting UF(6) and its derivative UF(4) into products that can
be utilized in a variety of specialized applications.
UF(6) CONVERSION. Starmet owns and operates the only production
facility in North America capable of converting natural UF(6) and depleted
UF(6) into UF(4). Depleted UF(6) is a low-level radioactive by-product of the
enrichment of uranium. From UF(4), the Company produces DU and Natural
Uranium ("NU") metal which it manufactures into various uranium metal
products. The United States Department of Energy ("DOE") has stockpiled over
one billion pounds of UF(6) which Starmet believes must eventually be
dispositioned. The Company also has patents pending on a new process to
recover and convert the fluorine and related products from UF(4) which is the
by-product of the UF6 conversion. In July 1998, United States Enrichment
Corporation ("USEC") awarded Starmet a contract with a maximum value of $39
million, of which $13 million has been committed, to convert UF(6) to UF(4).
Under the contract, USEC has the exclusive right, during the first 32 months
of the contract, to negotiate with Starmet to form a joint venture company or
similar arrangement in order to commercially exploit business opportunities
involving the utilization of the Company's pending patents on a new process
to recover and convert fluorine and related products created by the
conversion of UF(6). The Company currently has a large stockpile of UF(4)
created by UF(6) conversion. The estimated cost of disposal of the UF(4) is
approximately $3.4 million and has been accrued as a liability as of
September 30, 1998. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
AVLIS FEEDSTOCK. The Company supplies DU and NU alloy material for use
as AVLIS feedstock in USEC's AVLIS program. AVLIS is a laser-based enrichment
process that, according to USEC, is expected to replace the current gaseous
diffusion process for producing enriched fuel used in nuclear reactors. The
Company is currently supplying AVLIS feedstock to USEC under an existing
contract and anticipates receiving additional contractual work from USEC during
1999.
COUNTERWEIGHTS. Starmet operates an FAA-approved facility in the United
States licensed to repair DU aircraft counterweights. Aircraft counterweights
are used in wide body commercial and certain military aircraft, such as the
Boeing 747, DC-10 and L-1011, and are periodically required to be refurbished.
The Company refurbishes DU counterweights for many international and domestic
carriers flying wide body aircraft, and has begun work on certain military
aircraft as well. The Company also has the capability to produce replacement
counterweights.
DUCRETE SHIELDING. The Company has received exclusive commercial
production rights to a patented shielding product known as DUCRETE shielding,
which uses a uranium oxide aggregate mixed with concrete to form a radiation
shielding product. The Company installed pilot facilities during 1997 to convert
DU oxide into high density DUCRETE shielding aggregate. The Company is actively
pursuing a contract with the DOE for conversion of uranium oxide into DU
aggregate for DUCRETE shielding production. To date, the Company has not
received contracts for DUCRETE shielding products.
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DEPLETED URANIUM PENETRATORS
Depleted Uranium ("DU") is a dense, heavy metal that is 67% heavier
than lead. Because of its density and workability, DU is an effective
material for anti-armor munitions, or penetrators, and is used in several
United States government and foreign government weapons systems. The U.S.
government has funded and owns a portion of the manufacturing machinery and
equipment used by the Company for producing penetrators. The Company
continues to produce penetrators under a production contract with production
scheduled through the second quarter of fiscal 1999. Due to anticipated
reduced U.S. government procurement plans, the Company expects that no
revenues will be derived from DU penetrator operations after the second
quarter of fiscal 1999. The Company will continue, however, under a
multi-year contract with Lockheed Martin Idaho Technologies Corporation
("LMITCO"), to produce DU billets in support of the Army's tank armor
program. This contract is expected to run through 2001 subject to annual
federal government appropriations.
SOURCES OF RAW MATERIALS
Raw materials used by the Company include a number of metals and
minerals used to produce its products, including beryllium, titanium, aluminum,
nickel, cobalt, chromium and molybdenum, among others. The Company currently
purchases beryllium, a metal which is used to form its Beralcast alloys,
principally from a producer-supplier located in Kazakhstan and from multiple
distributors located in Estonia, Kazakhstan, Sweden, the United States, China
and Russia. The Company also purchases scrap beryllium from domestic and foreign
distributors. The only three producers of beryllium worldwide are located in
Kazakhstan, the United States and China. For competitive reasons, the Company
does not procure significant quantities of beryllium raw materials from Brush
Wellman, the sole U.S. producer of beryllium, which is the Company's principal
competitor for beryllium aluminum products and the plaintiff in the Brush
Wellman patent lawsuit. The Company believes that a sufficient supply of
beryllium remains available for its current demand. However, if its Beralcast
products receive broad commercial acceptance, the Company's demand for beryllium
will increase. The cost of beryllium could increase as a result of the Company's
increased demand, and supplies of beryllium could also be affected. Prices of
raw materials used by the Company can be volatile, which could significantly
affect their availability and price. The Company has no long-term, fixed price
contracts or arrangements for the raw materials it purchases. Commercial metal
deposits, such as beryllium, cobalt, nickel, titanium, chromium and molybdenum,
that are required for the alloys used in the Company's precision castings and
specialty metal powders, are found in only a few parts of the world. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations, Risk Factors-- Availability and Cost of Beryllium and Other Raw
Materials."
The principal raw material for the Company's steel powders is
cold-rolled steel bars, which are readily available. Other metal powders are
manufactured to customer specifications, and the metals for these powders are
generally available for purchase in job lots from specialty metal suppliers.
UF(6) the raw material for DU products, is currently available in
abundant supply from DOE's inventory and from USEC's ongoing operations.
7
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MANUFACTURING AND OPERATIONS
Beralcast is produced using a proprietary investment casting
technology. The alloys are vacuum-induction melted and cast into pre-heated
ceramic shells. Once the casting has cooled sufficiently, the ceramic mold is
removed and the casting is cut from the gating and feed network. The residual
gating and feed materials are recycled back into the casting process. The
casting is subsequently finished by grinding, deburring, straightening,
welding and sandblasting for final inspection. Following inspection, the
castings are delivered to machining facilities for finish machining into the
final configuration.
The investment molds used in the process are produced from a
formulation developed specifically for Beralcast. These molds are fabricated
using either conventional wax patterns or rapid prototype patterns. Pursuant
to a teaming agreement between Starmet and Nu-Cast Inc., a producer of
thin-walled, light-weight aluminum castings, the molds are fabricated in
accordance with Starmet's specifications at Nu-Cast Inc. using a dedicated
mold fabrication line which was installed to support the manufacture of
Beralcast investment molds. To support the future growth of Beralcast, the
Company intends to establish ceramic mold manufacturing capabilities at its
Concord facility.
The majority of the Company's activities are conducted at a
Company-owned site in Concord, Massachusetts which comprises approximately 46
acres and includes a 180,000 square feet building used for manufacturing
activities, offices and warehousing. Beralcast investment castings are
currently produced at the Company's Concord, Massachusetts facility. The
Company's current facilities in Concord, Massachusetts may not be adequate
depending upon the demand for Beralcast products, and possible alternative
sites for additional production facilities are being explored. The Company
plans to consolidate its DU operations at its South Carolina facility.
The Company owns and operates a facility in Barnwell, South Carolina
located on over 300 acres of land which includes a 109,000 square foot
facility housing two manufacturing units (one unit provides the capability of
converting UF(6) to UF(4) and a second unit houses a reduction process to
convert UF(4) to metallic depleted uranium), a 70,000 square foot facility
adjacent to the manufacturing facility to provide recovery and recycle of DU
and other materials, and a full-scale analytical laboratory.
Due to planned new product and process introductions, principally to
support anticipated large volume Beralcast production, the Company
anticipates spending significant capital resources to increase the capacity
at the Company's facilities. This program may be accelerated, delayed or
otherwise adjusted if the Company does not have adequate working capital to
undertake this program. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operation--Liquidity and Capital
Resources."
RESEARCH AND DEVELOPMENT ACTIVITIES
Research and development activities in the Company's specialty
metals products business are focused on Beralcast technology. New development
efforts include new casting processes and technologies, extrusion and rolling
of wrought materials, alternate alloy compositions to meet specialized
applications, processes to convert beryllium ore to metal economically,
advanced beryllium and beryllium aluminum recycling technologies, and casting
simulation and solidification modeling to improve product quality and reduce
product development lead times. The focus of research and development
activities in the Company's uranium services businesses is on advanced
casting technologies for AVLIS feedstock, the manufacture of DUCRETE as a
means of incorporating depleted uranium oxide aggregate in a cement matrix to
make shielded concrete structures and recycling processes for radioactively
contaminated steel scrap.
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The Company participates in certain cooperative research and
development activities through arrangements with selected customers and
government agencies where there is potential for utilizing proprietary
technology or specialized resources not directly available to the Company. These
activities are funded both by the Company and through customer sponsored
programs. The Company employs a staff of six Ph.D. technologists with
backgrounds in chemistry, mechanical and metallurgical engineering to conduct
research and new product development.
The cost for Company-sponsored research and development activities was
$1,421,000, $1,309,000 and $876,000 in fiscal 1998, 1997 and 1996, respectively.
Total revenues from customer-funded research and development were $831,000,
$793,000 and $1,812,000 in fiscal 1998, 1997 and 1996, respectively.
SALES AND MARKETING
The Company relies on a variety of marketing strategies, including
advertising and direct sales. Technical papers given at industry symposia,
presented by Starmet and in conjunction with customers, are also used as
marketing vehicles for the Company's advanced metal products and services. In
addition, the Company has developed concurrent engineering procedures between
customers, suppliers and Starmet. The benefit of concurrent engineering is to
provide customers cost-effective solutions to product designs which mitigate
technical and scheduling risks.
Sales of Beralcast products at present are made directly to
manufacturers of assemblies and systems. The Company markets its products
through a multi-step process consisting of initial discussions of the
products as well as engineering and marketing evaluations by the customer of
sample material and demonstration products. In addition, the marketing
strategy allows customers to use and market Beralcast in the relevant
application and market and, finally, offers a production program where
expenditures are made on tooling, equipment and quality control necessary to
fulfill market requirements. The Company's sales and market organization
consists of sales offices in Concord, Massachusetts, San Jose, California,
Washington D.C., Barnwell, South Carolina and sales representatives in Europe
and Japan.
PATENTS, TRADEMARKS AND LICENSES
The Company's future success depends in substantial part on its
proprietary technology, in particular, Beralcast, the Company's family of
beryllium aluminum alloys. It seeks to protect its interests and competitive
position through a combination of patent protection, confidentiality agreements
with key employees, and restricted access to certain of the Company's critical
information. The Company pursues a diligent patent application program in the
United States and abroad.
The Company holds three U.S. patents on the alloy compositions for
Beralcast materials, which provide patent rights through the year 2012 and
certain Beralcast process details are trade secrets.
The Company holds a U.S. patent relating to developments in REP
production equipment for metal powders, which provide patent rights through the
year 2001. A second patent for an improved REP powder process provides patent
rights through the year 2016. The Company has also filed and effected this
patent in certain European countries, Canada, Israel and Japan.
In addition, the Company has also filed applications for an initial
three patents on new processes which it believes can be employed in the
processing and conversion of UF(6) into certain products, including high value
fluorine chemicals. The first patent application has been allowed and will issue
in 1999.
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The Company has registered trademarks in the following names: REP,
PREP and BERALCAST. The Company has filed for registration with the United
States Patent and Trademark Office for, and is asserting common law rights in,
its mark: STARMET.
The Company believes that its current and anticipated businesses do
not infringe on any patent owned by others; however, the Company has been
sued by Brush Wellman for alleged infringement of Brush Wellman's investment
casting process patent. There can be no assurance that the Company's products
will not infringe upon the patent rights of others or that it will not be
forced to expend substantial funds to defend against infringement claims of,
or to obtain licenses from, third parties. See Item 3, "Legal Proceedings".
SIGNIFICANT CUSTOMERS
A substantial portion of the Company's business is currently conducted
with a relatively small number of large customers. The Company's ten largest
customers accounted for approximately 67% and 78% of the Company's sales in the
fiscal years 1998 and 1997, respectively. While the Company's planned expansion
into new commercial markets may result in a substantial portion of its revenues
being derived from new customers, the dominance of a few companies in certain of
these targeted markets is likely to continue to result in a substantial portion
of the Company's revenues being derived from a small number of significant
customers. The loss of one of its key customers or any significant portion of
orders from any such customers could have a material adverse affect on the
Company's business, results of operation and financial condition.
USEC is the only customer of the Company's UF(6) conversion and AVLIS
feedstock material. Sales to USEC accounted for 14%, 14% and 5% of sales in
fiscal 1998, 1997, and 1996 respectively.
Royal Ordnance, a U.K. defense contractor, is a significant customer of
the Company's DU penetrator business. Sales to Royal Ordnance accounted for 13%,
19% and 11% of sales in fiscal 1998, 1997, and 1996 respectively.
Primex Technologies is also a significant customer of the Company's DU
penetrator business. Sales to Primex Technologies accounted for 12%, 12% and 20%
of sales in fiscal 1998, 1997, and 1996 respectively. The Company currently is
under contract to provide Primex Technologies with 120mm penetrators for the
U.S. Army's ABRAMS Tank program through the second quarter of fiscal 1999.
Lockheed Martin is a significant customer of the Company's specialty
metal products business. Sales to Lockheed Martin accounted for 11%, 7%, and 16%
of sales during fiscal 1998, 1997, and 1996 respectively. The Company is
currently under several contracts with Lockheed Martin to provide Beralcast
hardware for the Comanche helicopter program.
COMPETITION
The Company faces significant competition from established companies in
certain of its product lines. In addition, the Company's Beralcast alloys and
other products face competition from alternative or competing materials,
products and technologies, some of which are better established than those of
the Company. Many of the Company's current and potential competitors have
significantly greater financial, technical, marketing, purchasing and other
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resources than the Company, and, as a result, may be able to respond more
quickly to new or emerging technologies or standards and to changes in
customer requirements, devote greater resources to the development, promotion
and sale of products, or deliver competitive products at lower prices.
Increased competition is likely to result in price reductions, reduced
operating margins and loss of market share, any of which could have a
material adverse effect on the Company's business, results of operation and
financial condition. Although the Company believes that it has certain
technological and other advantages over its competitors, realizing and
maintaining these advantages will require continued investment in
manufacturing capacity, research and development, sales and marketing, and
customer service and support. There can be no assurance that the Company will
have sufficient resources to continue to make such investments or that the
Company will be successful in maintaining such advantages. The Company
believes that its ability to compete successfully depends on a number of
factors both within and outside of its control, including price, product
quality, success in developing and introducing new products, and general
market and economic conditions. There can be no assurance that the Company
will be able to compete as to these or other factors or that competitive
pressures faced by the Company will not materially adversely affect its
business, results of operation and financial condition.
Beralcast investment castings compete directly with aluminum,
magnesium, titanium, aluminum silicon carbide and aluminum boron carbide
castings. Use of Beralcast depends largely on the customer's weight, stiffness,
and vibration damping needs, in combination with a willingness to pay a premium
for the materials' performance benefits.
Key competitive factors in the metal powders market are price and the
ability to meet exact dimensional, metallurgical and other specifications. The
steel powder marketed by the Company for photocopy applications competes with
less expensive powders produced by larger manufacturers.
The Company has historically competed with Aerojet Ordnance, a division
of GenCorp Inc., as one of two domestic DU penetrator manufacturers. Since the
requirements for DU penetrator munitions have declined, the Company believes
that Aerojet Ordnance will attempt to compete with Starmet in the production of
AVLIS feedstock. Although the Company has been the primary supplier of AVLIS
feedstock to USEC, it expects other companies to compete for future USEC
business.
EMPLOYEE RELATIONS
As of September 30, 1998, the Company employed 290 employees.
Subsequent to the end of the fiscal year, the Company reduced the workforce to
237 employees. No employees are covered by any collective bargaining agreements.
The Company believes that its relationships with its employees are satisfactory.
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BACKLOG
The following table sets forth certain information with respect to
the Company's backlog at September 30, 1998, 1997 and 1996, including the
portions thereof represented by orders from the Company's principal
customers, USEC, Primex Technologies and Lockheed Martin. The backlog for the
Company is affected by the timing of orders from these customers. The Company
believes all orders in backlog are firm. The Company expects that
approximately 50% of the backlog orders will be filled in the next fiscal
year.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-----------------------------------------------------------------------
1998 1997 1996
--------------------- ---------------------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Specialty Metal....................... $ 9,362 $ 10,617 $ 12,502
Uranium Services and Recycle.......... 15,467 1,452 1,827
Depleted Uranium Penetrators.......... 2,703 15,585 8,919
--------------------- ---------------------- -------------------
Total........................................ $ 27,532 $ 27,654 $ 23,248
--------------------- ---------------------- -------------------
--------------------- ---------------------- -------------------
</TABLE>
ENVIRONMENTAL, SAFETY AND REGULATORY MATTERS
Materials regularly processed by the Company, including depleted
uranium and beryllium, have characteristics considered to be health or safety
hazards by various federal, state and local regulatory agencies. The processing
of these materials requires a high level of safety consciousness, personnel
monitoring devices and special equipment. Depleted uranium is a low-level
radioactive material, and the Company is subject to government licensing and
regulation. Depleted uranium in the finely divided state, such as grinding dust
or machine turnings, is combustible at room temperature and requires special
handling for safe operations and disposal of process wastes. Airborne beryllium
in respirable form, such as powder, dusts or mists generated in some
manufacturing processes can represent a hazard to the lungs in certain,
susceptible individuals. Processing this material requires use of extensive
ventilation and dust collecting systems.
The Company is subject to environmental laws that (i) govern
activities or operations that may have adverse environmental effects, such as
discharges to land, air and water, as well as handling and disposal practices
for solid, radioactive and hazardous wastes, and (ii) impose liability for
the costs of cleaning up, and certain damages resulting from, sites of past
spills, disposals or other releases of hazardous substances and materials,
including liability under CERCLA and similar state statutes for the
investigation and remediation of environmental contamination at properties
owned and/or operated by it and at off-site locations where it has arranged
for the disposal of hazardous substances. In 1997, the Company's licenses at
its Concord and South Carolina facilities were renewed for a period of five
years subject to ongoing compliance with permitting conditions.
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 governmental
action against the Company for violations of any such laws, statutes or
regulations, except as described below under "Concord Site Remediation and
Decommissioning Planning Requirements". However, the potential effects of
evolving legislation and regulations affecting the Company's business cannot
be predicted.
12
<PAGE>
If it is determined that the Company is not in compliance with
current Environmental Laws, the Company could be ordered to curtail or cease
its operations and could be subject to fines and penalties. The amount of any
such fines and penalties could be material. In addition, the Company uses
depleted uranium, beryllium and other hazardous substances. If a release of
such hazardous substances occurs on or from the Company's properties or from
an off-site disposal facility, the Company may be held liable and may be
required to pay the cost of remedying the condition. The amount of any such
liability could be material and any such liability could have a material
adverse effect on the Company' business, results of operations and financial
condition.
The Company has made, and will continue to make, expenditures to comply
with current and future environmental laws. The Company anticipates that it
could incur additional capital and operating costs in the future to comply with
existing environmental laws and new requirements arising from new or amended
statutes and regulations. In addition, because the applicable regulatory
agencies have not yet promulgated final standards for some existing
environmental programs, the Company cannot at this time reasonably estimate the
cost for compliance with these additional requirements. The amount of any such
compliance costs could be material and any additional expenditures related to
compliance, if material, would have a material adverse effect on the Company's
business, results of operation and financial condition. The Company cannot
predict the impact that future regulations will impose upon the Company's
business.
In the process of manufacturing depleted uranium products, the Company
generates low-level radioactive waste materials that must be disposed of at
sites licensed by federal, state, and local governments. The operation of these
disposal sites is at the discretion of these regulatory entities, which may at
times result in temporary or long-term closures and limited access.
For a number of years, ending in 1985, the Company deposited spent
acid and associated depleted uranium waste and other residual materials by
neutralizing them with lime and discharging the neutralized mixture to a
holding basin on its premises in Concord. The Company now uses a "closed
loop" process that it developed to discontinue such discharges. The Company
has removed a substantial quantity of hazardous materials from the holding
basin, and additional actions will be required to close the holding basin as
required by government regulations. For a further discussion of the status of
remediation of the holding basin at the Company's Concord facility, See Item
1, "Business-- Concord Site Remediation and Decommissioning Planning
Requirements".
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. Under applicable licensing regulations pertaining to
Decommissioning and Decontamination ("D&D") at licensed sites, the Company
submitted to the Nuclear Regulatory Commission ("NRC") (the predecessor of
DPH, in this regard) and the applicable state agencies a Decommissioning
Funding Plan ("DFP") to provide for possible future decommissioning of its
facilities. The Concord facility DFP estimated cost is $11.7 million and the
South Carolina facility DFP estimate is $2.9 million. The Company is required
to provide financial assurance for such decommissioning pursuant to
applicable regulations. 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 location's
regulatory agency. However, the Company's letters of credit are subject to
the forebearance agreement which expires on March 31, 1999. The Company has
notified the U.S. Army that it is discontinuing penetrator production and
that it will cease using related government furnished equipment. Accordingly,
the U.S. Army and Starmet are
13
<PAGE>
negotiating the removal of such equipment and the decommissioning and
decontamination of the affected portions of the Company's facilities. The
Company has submitted a proposal to the U.S. Army requesting the modification
and funding of an existing facilitization contract, which, in addition to
other work proposed therein, would provide the Company with funding to cover
some of the estimated D&D costs, which are material. The Company is in the
process of negotiating the contract modification scope of work with the U.S.
Army, but there is no assurance that Army funding will be provided. If this
funding is not provided, the Company's business, results of operation and
financial condition would be materially and adversely affected.
Substantially all of the depleted uranium materials to which the DFP
requirements apply were processed by the Company for the United States
Government. The Company's DFP reflects its position that it should be 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.
The United States Army, in the Memorandum of Decision dated September
13, 1996 (the "Army Decision"), pursuant to Public Law 85-804, agreed to fund
certain costs associated with remediation of the Company's Concord holding basin
site as well as some of the costs of D&D related to that facility, based in part
on the Army's determination that the Company's activities are essential to the
national defense.
The United States Army has issued to the Company a fixed price
contract for remediation of the holding basin and the Company entered into a
subcontract with Zhagrus Environmental, Inc. ("Zhagrus") to perform this
remediation. The Company's contract with Zhagrus is based on a specified
volume of waste to be removed from the basin and delivered to the Envirocare
radioactive waste disposal site in Utah. The volume of the material removed
exceeded the specified level, and the Company is obligated to pay an
additional fee per cubic yard of excess material removed. In addition,
Zhagrus has notified the Company that Zhagrus has incurred additional costs
in connection with the disposal of the material from the holding basin as a
result of the need to treat the material to meet conditions for burial
imposed by applicable environmental regulations. Zhagrus has requested that
the Company pay it any additional costs incurred by Zhagrus as a result of
such additional services. On November 4, 1998, the Company received a written
claim from Zhagrus for excess costs of approximately $5.0 million. Zhagrus
has not provided sufficient information for the Company to make an
appropriate determination of the validity of the claim or the appropriateness
of the amount. There can be no assurance of the timing and amount, if any, of
any recovery of such costs from the U.S. Army. If these costs are not
recovered from the U.S. Army, the Company would have no means to finance
these costs, and the Company's business, results of operation and financial
condition would be materially and adversely affected. The cost of remediating
the holding basin at its Concord, Massachusetts facility will exceed the
amounts covered by the Company's fixed price contract with the U.S. Army (the
"Army Contract"), by at least $1.7 million. (The exact amount of the excess
costs presently is unknown, but the Company believes that the potential range
of such costs is between $1.7 million and $8.0 million, inclusive of the
Zhagrus claim of $5.0 million). The Company believes that all or a certain
portion of such excess costs may be recoverable pursuant to a contract
modification request or pursuant to an additional application for relief
under Public Law 85-804. Alternatively, the Company believes that all or a
certain portion of such costs, subject to confirmation by government
auditors, are recoverable as allowable overhead on future government
contracts, which the Company expects to be awarded. In
14
<PAGE>
December 1998 the Company submitted an engineering change proposal to the
U.S. Army seeking a contract modification that would provide the Company with
funding to cover such estimated excess remediation costs. The Company is
awaiting a response from the U.S. Army. If these costs, potentially ranging
from $1.7 to $8.0 million, are incurred by the Company without reimbursement
or funding from other sources, including the U.S. Army, the Company's
business, results of operation and financial condition would be materially
and adversely affected.
The Company has no assurance that the Army will accept
responsibility for the share of the estimated cost of D&D at its South
Carolina facility which directly resulted from production work under U.S.
government contracts on government supplied materials. However, management
believes, based on written legal advice, that the Army is responsible for its
estimated share of D&D. If these costs are not recovered from the U.S. Army,
the Company would have no means to finance these costs, and the Company's
business, results of operation and financial condition would be materially
and adversely affected.
The Company has potential liabilities and costs associated with
discontinued or suspended aspects of its business, including costs associated
with site remediation, decontamination and decommissioning of existing
facilities, and cost overruns on existing contracts with the U.S. Army and
Zhagrus Environmental, Inc. These potential liabilities include a possible
$5.0 million cost associated with the additional treatment allegedly required
under the Zhagrus contract and decontamination and decommissioning costs of
up to $14.6 million associated with its present facilities and equipment. The
Company has insufficient capital to cover these liabilities and no current
plan for financing such liabilities. Management believes that the U.S.
Government has a responsibility to pay, directly and indirectly, for a
substantial portion of these costs. However, while there are two contract
modification proposals being reviewed by the Army, there is presently no
approved funding and no specific written agreement from the U.S. Government
to reimburse or fund these costs. No reserve for these potential liabilities
has been taken on the Company's financial statements. If these liabilities
become the responsibility of the Company, the Company would be forced to
consider insolvency or similar proceedings to preserve the Company's business
operations and the Company's business, financial condition and results of
operations would be materially and adversely affected.
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 foot 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 DU and NU gas (UF(6)) to green
salt (UF(4)) and a second unit houses a reduction process to convert
green 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 as well as aircraft counterweight repair and
refurbishment.
A full scale analytical laboratory.
For a discussion of the current under utilization of the CMI facility,
See Item 7, "Management's Discussion and Analysis."
ITEM 3. LEGAL PROCEEDINGS
On December 9, 1997, Brush Wellman filed a patent infringement suit
against the Company in the Massachusetts District Court alleging that the
Company is infringing on the Brush Wellman Patent for the process of
investment casting of beryllium aluminum alloys. Brush Wellman is seeking an
injunction against the Company's alleged patent infringement, monetary
damages (including treble damages) and attorney fees.
15
<PAGE>
On March 28, 1998, the United States Patent and Trademark Office
("PTO") granted the Company's request for re-examination (filed January 22,
1998). In the Request, the Company contended, among other things, that there was
sufficient "prior art" in the field of investment castings and castings of
beryllium aluminum alloys such that the Brush Wellman Patent should not have
been issued. In granting the Request, the patent examiner agreed that the
Company's cited examples of prior art raised substantial new issues of
patentability which were not decided in the prior examination which led to
granting the Brush Wellman Patent. On July 30, 1998, in response to a motion
to stay the suit filed by Brush Wellman against the Company pending the outcome
of the re-examination proceeding which was filed by the Company on January 27,
1998, the Massachusetts District Court dismissed the suit without prejudice to
either party's moving to restore it to the docket upon the final decision of the
PTO relative to the re-examination. On August 26, 1998, the PTO issued an Office
Action in the re-examination of the Brush Wellman Patent rejecting all claims of
the Brush Wellman Patent. Brush Wellman amended the claims of the patent on
December 10, 1998 and, on December 31, 1998, the PTO issued notice of intent to
issue a Re-examination Certificate indicating the amended claims were
patentable.
Even though the Company has been advised by its patent counsel,
Iandiorio & Teska, that Brush Wellman's amended claims are not infringed and
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 a lawsuit
if Brush Wellman decides to refile its complaint. Even if the lawsuit was not to
proceed to trial, the litigation could result in substantial costs to the
Company, and an unfavorable settlement of the lawsuit could place the Company at
a competitive disadvantage. An adverse judgment or settlement could subject the
Company to significant liabilities and expenses (e.g., reasonable royalties,
lost profits, attorneys' fees or trebling of damages for willfulness). An
adverse outcome also could cause the Company to incur substantial costs in
redesigning the investment casting process for its Beralcast products and
components. Moreover, there can be no assurance that redesign alternatives would
be available to the Company, and if available, that any redesign alternative
would not place the Company at a competitive disadvantage. The Company could be
required to license the disputed patent rights from Brush Wellman or to cease
using the patented technology. Any such license, if required, may not be
available on terms acceptable or favorable to the Company, or at all. Any of
these results could have a material adverse effect on the Company's business,
financial condition and results of operations. Even in the event of a successful
outcome, the Company may incur significant legal expenses in its defense.
The Company is named as a Potentially Responsible Party ("PRP") in
regard to the Maxey Flats, Kentucky, Superfund Site. This site was used until
1977 as a licensed and approved low level radioactive waste disposal site. A
committee of PRPs, including the Company, has submitted a remedial
investigation and feasibility study report to the Environmental Protection
Agency. The agreement signed by the settling parties in July 1995 outlines
the responsibilities of all PRPs and states that the PRPs will undertake the
initial remedial phase ("IRP") of the site remediation at an estimated cost
of $60 million. Based upon the percentage of responsibility allocated to the
Company, its liability at this site is expected to be approximately $80,000
over 10 years.
16
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended September 30, 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market
under the symbol "STMT". As reported by a principal market maker for the stock,
the high and low bid prices for the two years ended September 30, 1998 and 1997
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, 1998, there were 237 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.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Fiscal 1997:
1st Quarter.......................................................... 10.75 7.25
2nd Quarter.......................................................... 17.63 9.00
3rd Quarter.......................................................... 18.50 14.00
4th Quarter.......................................................... 19.00 14.50
Fiscal 1998:
1st Quarter.......................................................... 31.00 14.25
2nd Quarter.......................................................... 36.00 21.50
3rd Quarter.......................................................... 38.00 12.75
4th Quarter.......................................................... 24.12 8.50
</TABLE>
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.
17
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1998 1997 1996
(AS RESTATED) (AS RESTATED)
(IN THOUSANDS EXCEPT FOR EMPLOYEE AND PER SHARE DATA)
<S> <C> <C> <C>
OPERATING RESULTS FOR THE YEAR
Net Sales and Contract Revenues $ 34,823 $ 28,062 $ 28,694
Cost and Expenses 52,585 27,251 30,604
Operating Income (Loss) (17,762) 811 (1,910)
Other Income (Expense), Net (1,269) (298) (476)
Income (Loss) Before Taxes (19,031) 513 (2,386)
Provision (Benefit) for Income Taxes -- 31 1
Extraordinary Gain -- -- 585
Net Income (Loss) (19,031) 482 (2,387)
Earnings (Loss) Per Share* (3.97) 0.10 (0.50)
Capital Expenditures, Net 4,585 1,788 1,449
Research and Development 1,421 1,309 876
FINANCIAL POSITION AT YEAR-END
Stockholders' Equity 7,077 25,746 25,020
Shares Outstanding* 4,791 4,784 4,782
Net Book Value per Common Share Outstanding* 1.48 5.39 5.24
Dividends Paid -- -- --
Dividend Per Share* -- -- --
Total Assets 32,433 34,354 35,768
Working Capital (12,138) 4,542 4,048
Long-term Debt net of Unamortized Discount (including 10,665 3,363 1,874
Current Installments)
OTHER DATA
Weighted Average Number of Shares of Common
Stock Outstanding* 4,789 4,959 4,779
Backlog (at Year-end) 27,532 27,654 23,248
Number of Employees (at Year-end) 290 235 190
*Adjusted to reflect two for one stock split in 1997
on a per share basis
</TABLE>
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
OPERATING RESULTS FOR THE YEAR
Net Sales and Contract Revenues $ 18,784 $ 19,004
Cost and Expenses 20,708 29,958
Operating Income (Loss) (1,924) (10,954)
Other Income (Expense), Net (118) (430)
Income (Loss) Before Taxes (2,042) (11,384)
Provision (Benefit) for Income Taxes (1,967) (1,188)
Extraordinary Gain -- --
Net Income (Loss) 510 (10,196)
Earnings (Loss) Per Share* 0.11 (2.22)
Capital Expenditures, Net 777 709
Research and Development 439 575
FINANCIAL POSITION AT YEAR-END
Stockholders' Equity 27,245 26,252
Shares Outstanding* 4,776 4,614
Net Book Value per Common Share Outstanding* 5.70 5.69
Dividends Paid -- --
Dividend Per Share* -- --
Total Assets 40,886 40,542
Working Capital 15,866 17,477
Long-term Debt net of Unamortized Discount (including 4,480 4,859
Current Installments)
Stock Outstanding* 4,706 4,600
Backlog (at Year-end) 30,709 14,512
Number of Employees (at Year-end) 200 189
</TABLE>
*Adjusted to reflect two for one stock split in 1997
18
<PAGE>
ITEM 7. 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.
The Company has incurred a net loss of $19.0 million for the fiscal
year 1998 compared with net income of $482,000 for fiscal 1997. In addition
to the substantial loss, the Company has experienced a cash flow crisis
during the fall of 1998 and defaulted on its bank arrangement which remains
in default. The Company is operating under a forbearance arrangement with the
Bank, which expires on March 31, 1999. The auditors' report for the year
ended September 30, 1998 includes a reference to substantial doubt about the
Company's ability to continue as a going concern. Among the factors
contributing to this significant loss are the following: The Company
continues to encounter learning curve problems and manufacturing
inefficiencies with its Beralcast contracts. As a result of these problems,
the Company has incurred a loss of approximately $1.6 million on its
Beralcast contracts in 1998. In 1998, the gross margin on its penetrators
contract was adversely impacted by approximately $2.1 million due to
manufacturing inefficiencies. The estimated costs to remediate the Basin have
increased by $1.7 million above the fixed price contract the Company has with
the Army. Discretionary spending increased in 1998 in various areas by
approximately $1.7 million in anticipation of future business growth that has
not yet materialized or that the Company is unable to pursue. In addition,
the Company incurred $1.3 million of costs in connection with a failed public
offering of common stock. Due to higher borrowings and bank fees the
Company's interest expense increased by $750,000, net of amortization of
warrants, in 1998. As a result of the significant loss in 1998 and the status
of the bank arrangements, management has been forced to reassess its
operating plan. The revised plan includes significant reductions in personnel
and various spending levels as well as establishing payment plans with
certain critical suppliers. Pursuant to the revised business plan, the
Company's limited financial resources will be directed toward only certain
business segments and new technologies. Accordingly, the Company is no longer
able to implement or complete its previously planned fluorine development
project and other Depleted Uranium product development projects. Management
has reassessed the carrying value of all of the Company's assets and
liabilities in light of its current operating environment and revised
business plan and has written-off its UF4 inventory of approximately $2.3
million and has written-off the value certain other DU related inventory and
supplies of $2.4 million. In addition, management has recorded a liability of
approximately $3.4 million for the estimated disposal cost of the UF4
inventory.
19
<PAGE>
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.
These products currently are in the development stage 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 1997, 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. Losses at the facility continued through the first and
second quarter of fiscal 1998 due to under utilization. At the same time, the
Company increased its workforce in preparation for the receipt of a UF(6) to
UF(4) production contract. The Company's operations in South Carolina are
currently substantially dependent on orders from USEC and are expected to
remain so. Failure of the Company to be awarded such contracts could have a
material adverse effect on the Company's business, results of operations and
financial condition. See Item 7, "Risk Factors--Uncertainties Relating to
USEC and UF(6) Conversion."
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, was amortized as interest expense for the period January 1,
1998 through October 1, 1998.
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 (loss) and related
income (loss) per share amounts in fiscal year 1996 and 1997.
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------ -----------------------------------------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED
-------------------- --------------------- ------------------ -------------------
<S> <C> <C> <C> <C>
Net income (loss)........... $ 1,482,000 $ 482,000 $ (3,037,000) $ (2,387,000)
Income (loss) per share:
Basic....................... 0.31 0.10 (0.64) (0.50)
Diluted..................... 0.30 0.10 (0.64) (0.50)
</TABLE>
20
<PAGE>
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
$4.3 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, which consisted of approximately $3.5 million of
DU metal inventory, net and approximately $2.3 million of UF(4) inventory, net.
As of September 30, 1998, the Company had approximately $9.1 million of gross
DU inventory or approximately $1.5 million, net of reserves, which consisted
of $1.5 million of DU metal inventory, net of reserves.
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.
21
<PAGE>
SEGMENT INFORMATION
The following table sets forth certain information regarding the
revenue, gross profit (loss) and identifiable assets attributable to the
three business segments in which the Company currently operates.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------------
1998 1997 1996
-------------------- ------------------ ---------------------
(AS RESTATED) (AS RESTATED)
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales and contract revenues:
Specialty Metal Products (1) $ 14,185 $ 13,170 $ 13,730
Uranium Services & Recycle 7,827 4,965 6,189
Depleted Uranium Penetrators 12,811 9,927 8,775
Gross profit (loss):
Specialty Metal Products (1) 463 1,616 3,761
Depleted Uranium Penetrators (1,736) 2,376 897
Uranium Services & Recycle (3,932) 3,934 (367)
Identifiable assets:
Specialty Metal Products (1) 9,665 6,155 6,195
Depleted Uranium Penetrators 4,456 7,965 8,441
Uranium Services & Recycle 9,331 14,499 14,399
</TABLE>
- ------------------
(1) Speciality Metal Products includes the production of DU billets for
conversion into tank armor and DU industrial and medical shielding
products.
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
fiscal years 1998, 1997 and 1996.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
----------------------------------------------------------------------------
1998 1997 1996
---------------------- ----------------------- ------------------------
(AS RESTATED) (AS RESTATED)
<S> <C> <C> <C>
Net sales and contract revenues: 100% 100% 100%
Costs and expenses:
Cost of sales................................ 115 72 85
Selling, general and administrative
expenses 32 19 19
Research and development expenses 4 5 3
Loss on write-off of fixed assets - 1 -
Operating income (loss) (51) 3 (7)
Interest and other income (expense), net 1 - -
Interest expense 3 1 1
Income (loss) before income taxes (55) 2
Provision (benefit) for income taxes - - -
Net income (loss).............................. (55) 2 (8)
</TABLE>
22
<PAGE>
FISCAL 1998 COMPARED WITH FISCAL 1997
Net sales increased by $6,761,000 or 24% to $34,823,000 in 1998 from
$28,062,000 in 1997. Sales in the Uranium Services and Recycle segment
increased to $7,827,000 from $4,965,000, an increase of 58%. Sales in the
Specialty Metal Products segment increased to $14,185,000 from $13,170,000,
an increase of 8%. Sales in the Depleted Uranium Penetrator segment increased
to $12,811,000 from $9,927,000, an increase of 29%.
The sales increase in the Uranium Services and Recycle segment was due
primarily to AVLIS feedstock production orders which were completed in the
second and third quarter of fiscal 1998. To be prepared for the anticipated
AVLIS production, the workforce at Starmet CMI Corporation was increased
significantly during fiscal 1998. Sales in the Specialty Metal Products segment
1998 were comparable to the prior year. The sales increase in the Depleted
Uranium Penetrator segment was principally due to a $3,470,000 increase in
revenue recognized in 1998 on the remediation of the holding basin at the
Company's Concord facility pursuant to an U.S. Army contract.
The gross margin for the Uranium Services and Recycle segment
decreased to a loss of $3,932,000 in 1998 from a profit of $3,934,000 in
1997. Included in the loss in 1998 is an increase in inventory reserves for
UF(4), DU, and other related inventories of approximately $4,300,000 to
reserve for the full carrying value of the inventory and the accrual of
$3,400,000 for the related disposition costs of the UF(4). The gross margin
for the Specialty Metal Products Segment decreased to $463,000 in 1998 or 71%
from $1,616,000 in 1997. The decrease was primarily the result of an increase
in the gross loss on Beralcast contracts of approximately $300,000 and the
increase of inventory reserves of approximately $300,000 and various other
items. The gross margin in the Depleted Uranium Penetrator Segment decreased
to a loss of $1,736,000 in 1998 from a profit of $2,376,000 in 1997. The
decrease in the gross margin is primarily the result of the increase in
estimated costs of remediating the holding basin of approximately $1,700,000
and the decrease in the gross margin of approximately $2,100,000, for
penetrators due to manufacturing inefficiencies and lower volumes as the
Company completes the remainder of the penetrator contracts.
Selling, general and administrative expenses increased by $5,688,000 or
104% in fiscal 1998, primarily due to an increase in sales and administrative
personnel in expectation of growth in its business and costs associated with a
failed public offering of $1,300,000. As a percentage of sales, these expenses
were 32% in fiscal 1998 compared to 19% in fiscal 1997.
Interest expense and amortization of warrants increased to $1,124,000
in fiscal 1998 from $296,000 in fiscal 1997, primarily due to interest expense
associated with increased borrowings.
Income taxes during both of fiscal 1998 and 1997 were at an effective
rate of 0%. The Company has unrecognized net operating loss carryforwards
resulting in a minimal effective tax rate.
FISCAL 1997 COMPARED WITH FISCAL 1996
Net sales decreased by $632,000 or 2% to $28,062,000 in fiscal 1997
compared to $28,694,000 in fiscal 1996. Sales in the Uranium Services and
Recycle segment decreased by $1,224,000 or 20%. Sales in the Specialty Metal
Products segment decreased by $560,000 or 4%. Sales in the Depleted
Uranium Penetrator segment increased by $1,152,000 or 13%.
23
<PAGE>
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 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 the benefit of net operating loss carryforwards.
24
<PAGE>
YEAR 2000 READINESS DISCLOSURE STATEMENT
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. As a result,
in less than one year, computer systems and/or software used by many
companies may need to be upgraded to comply with such "Year 2000 or Y2K"
requirements. Significant uncertainty exists in the software industry
concerning the potential effects associated with the Year 2000 issue.
The Company is in the process of updating its accounting and
information systems to ensure that its computer systems are Year 2000 compliant
and to improve the Company's overall manufacturing, planning and inventory
related systems. In fiscal 1997, the Company invested approximately $250,000 to
ensure that the Company is Year 2000 compliant and will continue to make
investments in its computer systems and applications to ensure that the Company
is Year 2000 compliant. The Company believes that the Company's computer system
is Year 2000 compliant. In addition, the Company maintains a Year 2000 expert on
its staff. The financial impact to the Company of its Year 2000 compliance
programs has not been and is not anticipated to be material to its financial
position or results of operations in any given year. While the Company does not
believe it will suffer any major effects from the Year 2000 issue, it is
possible that such effects could materially impact future financial results, or
cause reported financial information not to be necessarily indicative of future
operating results or future financial condition. In addition, if any of the
Company's significant customers or suppliers do not successfully and timely
achieve year 2000 compliance, the Company's business could be materially
affected. See Item 7, "Risk Factors--Year 2000 Compliance."
The Company is in the process of forming a Y2K committee that will
review the Y2K status of the Company's vendors' software and systems used in
its internal business processes. It also will include obtaining appropriate
assurances of compliance from the manufacturers of these products or, in the
event that such assurances cannot be obtained, will provide for modification
or replacement of all non-compliant products. Management has verified that
its accounting software is Year 2000 compliant.
The Company is in the process of contacting its critical suppliers and
major customers to determine whether the products obtained by it from such
vendors or sold by the customer to third parties are Y2K compliant. Its
suppliers and customers are under no contractual obligation to provide such
information to it. The Company intends to continue its efforts to monitor the
Y2K compliance of the Company suppliers and major customers.
Based on the information available to date, the Company believes it
will be able to complete its Y2K compliance review and make necessary
modifications prior to the end of 1999. The Company is prioritizing its
efforts to focus on any Y2K discrepancies found that would impact its
operations. Nevertheless, particularly to the extent that the Company is
relying on the products of other vendors to resolve Y2K issues, there can be
no assurances that the Company will not experience delays in implementing
such changes. If key systems, or a significant number of systems were to fail
as a result of Y2K problems, or the Company were to experience delay
implementing Y2K compliant software products, the Company could incur
substantial costs and disruption of its business, which could potentially
have a material effect on the Company's business and results of operations.
In addition, as the Company purchases many critical components from single or
sole source suppliers, failure of any such vendor to adequately address
issues related to the Y2K problem may have a material adverse effect on the
Company's business, financial conditions and results of operations.
25
<PAGE>
To date the Company has not required a complete and separate budget
for investigating and remedying issues related to Y2K compliance, whether
involving its own products or the software or systems used in its internal
operations. Additionally, the Company has currently not developed a
contingency plan related to Y2K. There can be no assurances that the
Company's resources spent on investigating and remedying Y2K compliance
issues, or the lack of a contingency plan related to Y2K, will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial statements for the year ended September 30,
1998 have been prepared on a going concern basis, which contemplates the
realization of assets and the liabilities and commitments in the normal
course of business. The Company incurred a net loss of $19,031,000 for the
year ended September 30, 1998. As of September 30, 1998 the Company was out
of compliance and in default with its credit facility with State Street Bank,
all amounts outstanding under this facility, $7,171,000 as of September 30,
1998, were due on November 15, 1998. In December 1998, the Company entered
into a forbearance agreement with the Bank that extends the maturity date of
the credit facility to March 31, 1999. In addition, on December 10, 1998
$850,500 was due by the Company to certain stockholders pursuant to
Subordinated Debentures. The Company has been granted a three-year extension
to December 10, 2001 on all principal payments related to the subordinate
Debentures. The Company's auditors' report includes a reference to the
substantial doubt of the Company's ability to continue as a going concern.
The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
Management's plans with regard to the existing capital deficiency
are to adjust spending levels to appropriate amounts to ensure greater
financial stability and to actively pursue additional subordinate secured
debt and partnering relations with target customers. The Company is also
managing payment plans with certain suppliers.
As a result of the significant loss in 1998 and the status of the
bank arrangements, management has been forced to reassess its operating plan.
The revised plan includes significant reductions in personnel and various
spending levels as well as establishing payment plans with certain critical
suppliers. Pursuant to the revised business plan, the Company's limited
financial resources will be directed toward only certain business segments
and new technologies. Accordingly, the Company is no longer able to implement
or complete its previously planned fluorine development project and other
Depleted Uranium product development projects. Management has reassessed the
carrying value of all of the Company's assets and liabilities in light of its
current operating environment and revised business plan and has written-off
its UF4 inventory of approximately $2.3 million and has written off the value
of certain other DU related inventory and supplies of $2.4 million. In
addition, management has recorded a liability of approximately $3.4 million
for the estimated disposal cost of the UF4 inventory.
In addition to write offs that have been recorded, as required by
generally accepted accounting principles, the Company has potential
liabilities associated with discontinued or suspended aspects of its depleted
uranium business, including costs associated with site remediation,
decontamination and decommissioning of existing facilities, cost overruns on
existing contracts with the U.S. Army and Zhagrus. These potential
liabilities include a possible $5.0 million cost associated with the
additional treatment required under the Zhagrus contract, decontamination and
decommissioning costs of up to $14.6 million associated with its present
facilities and equipment. The Company has insufficient capital to cover these
liabilities and no current plan of financing such liabilities; however,
management, based on written advice of legal counsel, believes that the U.S.
Government has a responsibility for these costs. The United States Army, in a
Memorandum of Decision dated September 13, 1996 (the "Memorandum of
Decision") pursuant to Public Law 85-804, agreed that it would fund
remediation of the Corporation's Concord holding basin site as well as D&D
related to that facility, based in part on the Army's determination that the
Corporation's activities are essential to the national defense. However,
while there are two contract modification proposals being reviewed by the
Army, there is presently no approved funding and no specific written
agreement from the U.S. Government to reimburse or fund these costs. No
reserve for these potential liabilities has been taken on the Company's
financial statements. If these liabilities become the responsibility of the
Company, the Company would be forced to consider insolvency or similar
proceedings to preserve the Company's business operations and the Company's
business, financial condition and results of operations would be materially
and adversely affected.
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. During the fall
of 1998, the Company has experienced significant financial difficulties and
liquidity problems and has incurred a significant loss in the fourth quarter
of fiscal 1998 and for fiscal 1998. The Company is presently in default of
its bank credit facility, under which it was indebted to the bank for $7.2
million as of September 30, 1998 ($7.0 million as of January 12, 1999) and
the Company is now operating under a forbearance arrangement with the bank
which expires March 31, 1999.
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 increase capital expenditures to expand its commercial
Beralcast manufacturing capabilities through fixed assets additions including
furnaces, automated production equipment and facility upgrades.
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.
26
<PAGE>
In September 1995, in connection with an increase of the Company's
borrowing capacity under the Existing Credit Facility as then in effect, the
Company issued to the lender a warrant (the "First Warrant") to purchase
50,000 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 was 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.
The Company has outstanding in the aggregate $2,083,000 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 as amended due December 10, 2001, which are convertible
at any time into Common Stock at $5.945 per share with warrants to purchase
60,000 common shares at a strike price of $6.00, $350,000 in principal amount of
its 10% Subordinated Debentures as amended due December 10, 2001, with
three-year warrants to purchase 42,000 shares of Common Stock at an exercise
price of $7.50 per share and additional warrants to purchase 42,000 shares of
common stock at a $6.00 strike price. $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 expects that
the holders thereof will convert such debt into Common Stock instead of
accepting repayment.
27
<PAGE>
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.
On November 4, 1998, the Company received a written claim from Zhagrus
for excess costs of approximately $5.0 million, incurred in the performance of
the fixed price contract. Zhagrus has not provided sufficient information for
the Company to make a determination of the validity of the claim or the
appropriateness of the amount.
NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. This statement established standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that enterprises report
selected information about operating segments in interim financial reports
issued to stockholders. This statement is effective for fiscal years beginning
after December 15, 1997. In the initial year of application, comparative
information for earlier years will be provided unless deemed impractical. This
statement, requiring only additional informational disclosures, is effective for
the Company's fiscal year ending September 30, 1999.
In June 1998, the FASB issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. This statement establishes
account and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
those instruments at fair value. This statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The Company does not
anticipate the adoption of this statement will have a material impact on its
financial position or results of operations.
28
<PAGE>
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company does not provide forecasts of its future financial
performance. From time to time, however, information provided by the Company
or statements made by its employees may contain "forward looking" information
that involves risks and uncertainties. In particular, statements contained in
this Annual Report on Form 10-K that are not historical fact may constitute
forward looking statements and are made under the "Safe Harbor" section of
the Private Securities Litigation Reform Act of 1995. The Company's actual
results of operations and financial condition have varied and may in the
future vary significantly from those stated in any forward looking
statements. Factors that may cause such differences include, but are not
limited to, the risks, uncertainties and other information discussed within
this Annual Report on Form 10-K, as well as the accuracy of the Company's
internal estimates of revenue and operating expense levels.
The following discussion of the Company's risk factors should be read
in conjunction with the financial statements and related notes thereto set forth
elsewhere in this report. The following factors, among others, could cause
actual results to differ materially from those set forth in forward looking
statements contained or incorporated by reference in this report and presented
by management from time to time. Such factors, among others, may have a material
adverse effect upon the Company's business, results of operations and financial
conditions.
RISK FACTORS
HISTORY OF LOSSES; RISK OF FUTURE LOSSES. The Company has experienced
significant financial difficulties and liquidity problems in the past year 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, October and November of 1998) additional borrowings and extensions of
maturities under the Existing Credit Facility, and additional equipment
financing from another bank for capital expenditures required at its South
Carolina facility. Historically, a substantial portion of the Company's revenues
have been derived from the sale of products for defense munitions and tank armor
programs; however, revenues from these applications have declined sharply in
recent years due primarily to the general decline in defense spending. The
Company expects that no revenues will be derived from sales of penetrator
defense munitions after the second quarter of fiscal 1999, and only limited
revenue will be derived from sales of billets for conversion into tank armor
thereafter. The Company incurred operating losses in four of its last five
fiscal years. In addition, the Company's accountants, in their report to the
Board of Directors and stockholders of the Company for fiscal 1995 and fiscal
1998, stated that there was substantial doubt at that time about the Company's
ability to continue as a going concern. There can be no assurance that the
Company will not continue to incur losses in subsequent fiscal periods.
The Company expects to expend substantial resources on commercial
growth opportunities in many cases before it can be certain of market
acceptance of its current and planned products and services. The Company's
ability to realize the objectives of its business strategy and to achieve its
plans for commercial growth and profitability are subject to a number of
business, industry, economic and other factors, many of which are beyond the
29
<PAGE>
control of the Company, such as the Company's ability to successfully market
its products and services, particularly in new applications for its materials
and technologies, the Company's ability to manage planned expansion and
large-scale commercial production of new products, customer demand,
competition in the industries which the Company serves and general economic
conditions. The failure of the Company to realize the objectives of its
business strategy, in particular, the full-scale commercialization of
Beralcast disk drive arm sets, would have a material adverse effect on the
Company's business, financial condition and results of operations. Ongoing
losses would hinder the Company's ability to respond effectively to market
conditions, to make capital expenditures and to take advantage of business
opportunities, the failure to perform any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
ENVIRONMENTAL, HEALTH AND REGULATORY MATTERS. Materials regularly
processed by the Company, including depleted uranium and beryllium, have
characteristics considered to be health or safety hazards by various federal,
state and local regulatory agencies. The processing of these materials
requires a high level of safety consciousness, personnel monitoring devices
and special equipment. Depleted uranium is a low-level radioactive material,
and the Company is subject to government licensing and regulation. Depleted
uranium in the finely divided state, such as grinding dust or machine
turnings, is combustible at room temperature and requires special handling
for safe operations and disposal of process wastes. Airborne beryllium in
respirable form, such as powder, dusts or mists generated in some
manufacturing processes can represent a hazard to the lungs in certain,
susceptible individuals. Processing this material requires use of extensive
ventilation and dust collecting systems.
The Company is subject to environmental laws that (i) govern activities
or operations that may have adverse environmental effects, such as discharges to
land, air and water, as well as handling and disposal practices for solid,
radioactive and hazardous wastes, and (ii) impose liability for the costs of
cleaning up, and certain damages resulting from, sites of past spills, disposals
or other releases of hazardous substances and materials, including liability
under CERCLA and similar state statutes for the investigation and remediation of
environmental contamination at properties owned and/or operated by it and at
off-site locations where it has arranged for the disposal of hazardous
substances. In 1997, the Company's licenses at its Concord and South Carolina
facilities were renewed for a period of five years subject to compliance with
permitting conditions.
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 governmental
action against the Company for violations of any such laws, statutes or
regulations, except as described below under "Concord Site Remediation and
Decommissioning Planning Requirements". However, the potential effects of
evolving legislation and regulations affecting the Company's business cannot
be predicted.
If it is determined that the Company is not in compliance with
current Environmental Laws, the Company could be ordered to curtail or cease
its operations and could be subject to fines and penalties. The amount of any
such fines and penalties could be material. In addition, the Company uses
depleted uranium, beryllium and other hazardous substances. If a release of
such hazardous substances occurs on or from the Company's properties or from
an off-site disposal facility, the Company may be held liable and may be
required to pay the cost of remedying the condition. The amount of any such
liability could be material and any such liability could have a material
adverse effect on the Company' business, results of operations and financial
condition.
The Company has made, and will continue to make, expenditures to comply
with current and future environmental laws. The Company anticipates that it
could incur additional capital and operating costs in the future to comply with
existing environmental laws and new requirements arising from new or amended
statutes and regulations. In addition, because the applicable regulatory
agencies have not yet promulgated final standards for some existing
environmental programs, the Company cannot at this time reasonably estimate the
cost for compliance with these additional requirements. The amount of any such
compliance costs could be material and any additional expenditures related to
compliance, if material, would have a material adverse effect on the Company's
business, results of operation and financial condition. The Company cannot
predict the impact that future regulations will impose upon the Company's
business.
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In the process of manufacturing depleted uranium products, the Company
generates low-level radioactive waste materials that must be disposed of at
sites licensed by federal, state, and local governments. The operation of these
disposal sites is at the discretion of these regulatory entities, which may at
times result in temporary or long-term closures and limited access.
For a number of years, ending in 1985, the Company deposited spent
acid and associated depleted uranium waste and other residual materials by
neutralizing them with lime and discharging the neutralized mixture to a
holding basin on its premises in Concord. The Company now uses a "closed
loop" process that it developed to discontinue such discharges. The Company
has removed a substantial quantity of hazardous materials from the holding
basin, and additional actions will be required to close the holding basin as
required by government regulations. For a further discussion of the status of
remediation of the holding basin at the Company's Concord facility, See Item
1, "Business-- Concord Site Remediation and Decommissioning Planning
Requirements".
The Company has potential liabilities associated with discontinued
or suspended aspects of its depleted uranium business, including costs
associated with site remediation, decontamination and decommissioning of
existing facilities, cost overruns on existing contracts with the U.S. Army
and Zhagrus. These potential liabilities include a possible $5.0 million cost
associated with the additional treatment required under the Zhagrus contract,
decontamination and decommissioning costs of up to $14.6 million associated
with its present facilities and equipment. The Company has insufficient
capital to cover these liabilities and no current plan of financing such
liabilities; however, management, based on written advice of legal counsel,
believes that the U.S. Government has a responsibility for these costs. The
United States Army, in a Memorandum of Decision dated September 13, 1996 (the
"Memorandum of Decision") pursuant to Public Law 85-804, agreed that it would
fund remediation of the Corporation's Concord holding basin site as well as
D&D related to that facility, based in part on the Army's determination that
the Corporation's activities are essential to the national defense. However,
while there are two contract modification proposals being reviewed by the
Army, there is presently no approved funding and no specific written
agreement from the U.S. Government to reimburse or fund these costs. No
reserve for these potential liabilities has been taken on the Company's
financial statements. If these liabilities become the responsibility of the
Company, the Company would be forced to consider insolvency or similar
proceedings to preserve the Company's business operations and the Company's
business, financial condition and results of operations would be materially
and adversely affected.
The Company is required to maintain certain licenses issued by the
Massachusetts Department of Public Health ("DPH") and South Carolina
Department of Health and Environmental Control ("DHEC") in order to possess
and process depleted uranium materials at its facilities in Massachusetts and
South Carolina. Under applicable licensing regulations pertaining to
Decommissioning and Decontamination ("D&D") at licensed sites, the Company
submitted to the Nuclear Regulatory Commission ("NRC") (the predecessor of
DPH, in this regard) and the applicable state agencies a Decommissioning
Funding Plan ("DFP") to provide for possible future decommissioning of its
facilities. The Concord facility DFP estimated cost is $11.7 million and the
South Carolina facility DFP estimate is $2.9 million. The Company is required
to provide financial assurance for such decommissioning pursuant to
applicable regulations. 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 location's
regulatory agency. However, the Company's letters of credit are subject to
the forebearance agreement which expires on March 31, 1999. The Company has
notified the U.S. Army that it is discontinuing penetrator production and
that it will cease using related government furnished equipment. Accordingly,
the U.S. Army and Starmet are negotiating the removal of such equipment and
the decommissioning and decontamination of the affected portions of the
Company's facilities. The Company has submitted a proposal to the U.S. Army
requesting the modification and funding of an existing facilitization
contract, which, in addition to other work proposed therein, would provide
the Company with funding to cover some of the estimated D&D costs, which are
material. The Company is in the process of negotiating the contract
modification scope of work with the U.S. Army, but there is no assurance that
Army funding will be provided. If this funding is not provided, the Company's
business, results of operation and financial condition would be materially
and adversely affected.
Substantially all of the depleted uranium materials to which the DFP
requirements apply were processed by the Company for the United States
Government. The Company's DFP reflects its position that it should be 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.
The United States Army, in the Memorandum of Decision dated September
13, 1996 (the "Army Decision"), pursuant to Public Law 85-804, agreed to fund
certain costs associated with remediation of the Company's Concord holding basin
site as well as some of the costs of D&D related to that facility, based in part
on the Army's determination that the Company's activities are essential to the
national defense.
The United States Army has issued to the Company a fixed price
contract for remediation of the holding basin and the Company entered into a
subcontract with Zhagrus Environmental, Inc. ("Zhagrus") to perform this
remediation. The Company's contract with Zhagrus is based on a specified
volume of waste to be removed from the basin and delivered to the Envirocare
radioactive waste disposal site in Utah. The volume of the material removed
exceeded the specified level, and the Company is obligated to pay an
additional fee per cubic yard of excess material removed. In addition,
Zhagrus has notified the Company that Zhagrus has incurred additional costs
in connection with the disposal of the material from the holding basin as a
result of the need to treat the material to meet conditions for burial
imposed by applicable environmental regulations. Zhagrus has requested that
the Company pay it any additional costs incurred by Zhagrus as a result of
such additional services. On November 4, 1998, the Company received a written
claim from Zhagrus for excess costs of approximately $5.0 million. Zhagrus
has not provided sufficient information for the Company to make an
appropriate determination of liability. There can be no assurance of the
timing and amount, if any, of any recovery of such costs from the U.S. Army.
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If these costs are not recovered from the U.S. Army, the Company would have
no means to finance these costs, and the Company's business, results of
operation and financial condition would be materially and adversely affected.
The cost of remediating the holding basin at its Concord, Massachusetts
facility will exceed the amounts covered by the Company's fixed price
contract with the U.S. Army (the "Army Contract"), by at least $1.7 million
which has been recorded as a liability as of September 30, 1998. (The exact
amount of the excess costs presently is unknown, but the Company believes
that the potential range of such costs is between $1.7 million and
$8.0 million, inclusive of the Zhagrus claim of $5.0 million). The Company
believes that all or a certain portion of such excess costs may be
recoverable pursuant to a contract modification request or pursuant to an
additional application for relief under Public Law 85-804. Alternatively, the
Company believes that all or a certain portion of such costs, subject to
confirmation by government auditors, are recoverable as allowable overhead on
future government contracts, which the Company expects to be awarded . In
December 1998 the Company submitted an engineering change proposal to the
U.S. Army seeking a contract modification that would provide the Company with
funding to cover such estimated excess remediation costs. The Company is
awaiting a response from the U.S. Army. If these costs, potentially ranging
from $1.7 to $8.0 million, are incurred by the Company without reimbursement
or funding from other sources, including the U.S. Army, the Company's
business, results of operation and financial condition would be materially
and adversely affected.
The Company has no assurance that the Army will accept responsibility
for the share of the estimated cost of D&D at its South Carolina facility which
directly resulted from production work under U.S. government contracts on
government supplied materials. However, management believes that the Army is
responsible for its estimated share of D&D. If these costs are not recovered
from the U.S. Army, the Company would have no means to finance these costs, and
the Company's business, results of operation and financial condition would be
materially and adversely affected.
CONCENTRATION OF CUSTOMERS. A substantial portion of the Company's
business currently is conducted with a relatively small number of large
customers. The Company's ten largest customers accounted for approximately
67% and 78% of the Company's net sales in the fiscal years ended September
30, 1998 and September 30, 1997, respectively. Four of these customers (USEC,
Royal Ordnance, Primex Technologies, and Lockheed Martin) individually
accounted for greater than 10% of the Company's consolidated revenues in
fiscal 1998. The Company currently is contracting with Primex Technologies to
provide DU penetrators for the U.S. Army's ABRAMS Tank program through the
second quarter of fiscal 1999. The Company is currently under several
contracts with Lockheed Martin to provide Beralcast hardware for the Comanche
helicopter program. USEC is the sole customer for the Company's UF(6)
conversion and AVLIS feedstock material. See Item 7,"Risk
Factors--Uncertainties Relating to USEC and UF(6) Conversion." While the
Company's planned expansion into new commercial markets may result in a
substantial portion of its revenues being derived from new customers, the
dominance of a few companies in certain of these targeted markets is likely
to continue to result in a substantial portion of the Company's revenues
being derived from a small number of significant customers. The loss of one
of its key customers or any significant portion of orders from any such
customers could have a material adverse effect on the Company's business,
results of operation and financial condition. In addition, the Company also
could be materially adversely affected by any substantial work stoppage or
interruption of production at any of its major customers or if one or more of
its key customers were to reduce or cease conducting operations.
UNCERTAINTIES RELATING TO USEC AND UF6 CONVERSION. USEC, a recently
privatized global energy company created by the U.S. Congress in 1992 to
operate the DOE's uranium enrichment program, is the only customer for the
Company's AVLIS feedstock material. Furthermore, there can be no assurance
that USEC will not abandon the AVLIS program or reduce resources directed to
the program or that the Company will continue to receive contracts from USEC.
The Company also intends to pursue opportunities with DOE for the conversion
of its depleted UF(6) stockpile. There can be no assurance that USEC and/or
DOE will award contracts to the Company for the conversion of depleted UF(6)
beyond that which already has been awarded to Starmet. The Company currently
has a large stockpile of UF(4) created by UF(6) conversion. The estimated
cost of disposal of the UF(4) is approximately $3.4 million and has been
accrued as a liability as of September 30, 1998. See Item 1, "Business--UF(6)
Conversion."
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DEPENDENCE ON SALES TO PUBLIC SECTOR AND GOVERNMENT CONTRACTORS. The
Company derives, and plans to continue to derive, substantial revenues from
public sector customers or contractors for such customers, including the
United States military. There are significant risks inherent in sales to such
customers which may cause material fluctuations in the Company's operating
results. For each contract with a public sector customer, the Company
typically is subject to a protracted procurement process which includes
sealed competitive bids, systems demonstrations and the integration of
Company and third-party products. The process also can include political
influences, award protests initiated by unsuccessful bidders and changes in
budgets or appropriations which are beyond the Company's control. Contracts
of public sector customers typically are subject to procurement policies
which may be onerous and may include profit limitations and rights on the
part of the government to terminate for convenience. Sales to the United
States Department of Defense (the "DOD") are subject to a number of
significant uncertainties, including timing and availability of funding,
unforeseen changes in the timing and quantity of government orders and the
competitive nature of government contracting generally. Furthermore, the DOD
has been reducing total expenditures, and there can be no assurance that
funding will not be reduced in the future. A significant loss of sales to the
U.S. government or contractors for the U.S. government could have a material
adverse effect on the Company's business, results of operation and financial
condition.
RISKS RELATED TO NEW PRODUCT INTRODUCTIONS, RAPID TECHNOLOGICAL
CHANGE AND INDUSTRY CONDITIONS. The success of new product introductions is
dependent on several factors, including timely completion and introduction of
new products, quality of new products, market acceptance and timeliness of
market acceptance, production efficiency, costs, competition, the
availability of substitute products and customer service. Although the
Company attempts to determine the specific needs of new markets, there can be
no assurance that the identified markets will in fact materialize or that the
Company's products designed for these markets will achieve any significant
degree of market acceptance or that any such acceptance will be sustained for
any significant period. In particular, the Company's Beralcast materials,
which are central to its strategy, are generally more expensive than other
materials currently employed in the markets in which the Company competes.
There can be no assurance that the performance characteristics of Beralcast
alloys will outweigh the greater expense of Beralcast compared to competing
materials. The Company's Beralcast products and components currently are in
the development stage and have not been brought to market, and there can be
no assurance that significant commercial business will develop as anticipated
by the Company or that these products will gain acceptance in commercial
markets.
While the Company believes that there are additional commercial
applications for its Beralcast alloys, there can be no assurances that any of
its products or services will be successful or produce revenue for the
Company. Failure of new products to achieve or sustain market acceptance
could have a material adverse effect on the Company's business, results of
operation and financial condition. New product introductions will also
require substantial expenditures, and there can be no assurance that
constraints on the Company's financial resources will not adversely affect
its ability to develop and market new products. In addition, the anticipated
commercial markets for the Company's principal new products are characterized
by rapid technological change, changing customer needs, frequent new product
introduction, evolving industry standards and short product lifecycles.
Failure to successfully keep pace with technological developments could have
a material adverse effect on the Company's business, results of operation and
financial condition.
Raw materials used by the Company include a number of metals and
minerals used to produce the alloys included in its products and castings,
including beryllium, titanium, aluminum, nickel, cobalt, chromium, and
molybdenum, among others. Prices of these materials can be volatile due to a
number of factors beyond the control of the Company, including domestic and
international economic conditions and competition. This volatility could
significantly effect the availability and prices of raw materials used by the
Company. There can be no assurance that the Company will be able to pass
price fluctuations through to customers, and price moves may adversely affect
sales, operating margins and net income. Depending upon certain market
conditions, the Company may engage in forward purchases of some of these
materials. However, the Company ordinarily does not attempt to hedge the
price risk of its raw materials and has no long-term, fixed price contracts
or arrangements for the raw materials it purchases. Commercial deposits of
certain metals, such as beryllium, cobalt, nickel, titanium, chromium and
molybdenum, that are required for the alloys used in the Company's precision
castings and specialty metal powders, are found in only a few parts of the
world. The availability and prices of these metals may be influenced by
private or governmental cartels, changes in world politics, unstable
governments in exporting nations and inflation. In particular, the Company
currently purchases beryllium, a metal which is used to form its Beralcast
alloys, principally from a producer-supplier located in Kazakhstan and from
multiple distributors located in Estonia, Kazakhstan, Sweden, the United
States, China and Russia. The Company also purchases scrap beryllium from
domestic and foreign distributors. The only three producers of beryllium
worldwide are located in Kazakhstan, the United States and China. For
competitive reasons, the Company does not procure significant quantities of
beryllium raw materials from Brush Wellman, the sole U.S. producer of
beryllium, which is the Company's principal competitor for beryllium aluminum
products and the plaintiff in a pending patent lawsuit against the Company.
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The Company believes that a sufficient supply of beryllium remains available
for its current demand. However, if its Beralcast products receive broad
commercial acceptance, the Company's demand for beryllium will increase. The
cost of beryllium could increase as a result of the Company's increased
demand, and supplies of beryllium could also be affected. Although the
Company has not experienced shortages of raw materials in the past, there can
be no assurance that such shortages will not occur in the future. Any
substantial increase in raw material prices or a continued interruption in
supply of raw materials, in particular of beryllium from the Company's
producer-supplier located in Kazakhstan, could have a material adverse effect
on the Company's business, results of operation and financial condition. See
Item 1, "Business--Sources of Raw Materials."
The Company plans to focus its efforts on sales of its specialty metal
products to the commercial markets and military aerospace industries. The
Company currently is developing, among other things, prototypes and
pre-production quantities of disk drive arm sets and prototype parts for
military and commercial aerospace applications. The market for computer
storage devices historically has grown rapidly but at varying rates, and there
can be no assurance that this market will continue to grow at historical
rates. Disk drive industry practice generally is to place only short-term
orders, accompanied by projections of demand for future operations. Accordingly,
the Company expects to commit to the cost of expanding its production capacity
without firm orders for products. Failure of markets for the Company's products
to develop, cancellation of orders or deferrals of scheduled delivery dates all
could materially adversely affect the Company's business, results of
operation and financial condition.
COMPETITION. The Company faces significant competition from
established companies in certain of its product lines. In addition, the
Company's Beralcast alloys and other products face competition from
alternative or competing materials, products and technologies, some of which
are better established than those of the Company. Many of the Company's
current and potential competitors have significantly greater financial,
technical, marketing, purchasing and other resources than the Company, and,
as a result, may be able to respond more quickly to new or emerging
technologies or standards and to changes in customer requirements, devote
greater resources to the development, promotion and sale of products, or
deliver competitive products at lower prices. Increased competition is likely
to result in price reductions, reduced operating margins and loss of market
share, any of which could have a material adverse effect on the Company's
business, results of operation and financial condition. Although the Company
believes that it has certain technological and other advantages over its
competitors, realizing and maintaining these advantages will require
continued investment in manufacturing capacity, research and development,
sales and marketing, and customer service and support. There can be no
assurance that the Company will have sufficient resources to continue to make
such investments or that the Company will be successful in maintaining such
advantages. The Company believes that its ability to compete successfully
depends on a number of factors both within and outside of its control,
including price, product quality, success in developing and introducing new
products, and general market and economic conditions. There can be no
assurance that the Company will be able to compete as to these or other
factors or that competitive pressures faced by the Company will not
materially adversely affect its business, results of operation and financial
condition.
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YEAR 2000 COMPLIANCE. The Company does not produce products which
contain software where Year 2000 compliance could be an issue. The Company
has licnesed computer systems and software for its internal operations and
business processes where Year 2000 compliance could be an issue. The Company
has implemented a Year 2000 compliance program designed to ensure that the
Company's internal computer systems, business processes and applications will
function properly beyond 1999. The Company believes that adequate resources
have been allocated for this purpose and expects the Company's Year 2000 date
conversion programs to be completed on a timely basis. The Company does not
expect to incur significant expenditures to address this issue. However,
there can be no assurance that the Company will identify all Year 2000
problems in the Company's computer and other systems in advance of their
occurrence or that the Company will be able to successfully remedy any
problems that are discovered. The expenses of the Company's efforts to
address such problems, or the expenses or liabilities to which the Company
may become subject as a result of such problems, could have a material
adverse effect on the Company's business, results of operations and financial
condition. In addition, the revenue stream and financial stability of
existing customers may be adversely impacted by Year 2000 problems, which
could cause fluctuations in the Company's revenues and operating
profitability. In addition, if any of the Company's significant customers or
suppliers do not successfully and timely achieve Year 2000 compliance, the
Company's business could be materially affected.
INTERNATIONAL SALES. In 1998, 1997 and 1996, international sales
accounted for approximately 18%, 25% and 28%, respectively, of the Company's
net sales. The Company anticipates that international sales will continue to
account for a significant percentage of its net sales. A significant portion
of the Company's net sales will therefore be subject to risks associated with
internationalsales, including unexpected changes in legal and regulatory
requirements, changes in tariff, exchange rates and other barriers, political
and economic instability, difficulties in account receivable collection,
potentially longer payment cycles, difficulties in managing distributors or
representatives, difficulties in protecting the Company's intellectual
property overseas, and potentially adverse tax consequences.
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LEGAL PROCEEDINGS. The Company is involved in various legal
proceedings. See Item 3, "Legal Proceedings." An adverse judgment or
settlement under any of these proceedings could subject the Company to
significant liabilities and expenses (E.G., reasonable royalties, lost
profits, attorneys' fees and trebling of damages for willfulness). An adverse
outcome also could cause the Company to incur substantial costs in
redesigning the investment casting process for its Beralcast products and
components. Moreover, there can be no assurance that redesign alternatives
would be available to the Company, and if available, that any redesign
alternative would not place the Company at a competitive disadvantage. The
Company could be required to license the disputed patent rights from Brush
Wellman or to cease using the patented technology. Any such license, if
required, may not be available on terms acceptable or favorable to the
Company, or at all. Any of these results could have a material adverse effect
on the Company's business, financial condition and results of operations.
Even in the event of a successful outcome, the Company may incur significant
legal expenses in its defense.
The Company's success depends in substantial part on its proprietary
technology, in particular, Beralcast, the Company's family of beryllium
aluminum alloys. Although the Company protects and intends to continue to
protect its intellectual property rights through patents, copyrights, trade
secrets, license agreements and other measures, there can be no assurance that
the Company will be able to protect its technology adequately or that
competitors will not be able to develop similar technology independently. In
addition, the laws of certain foreign countries in which the Company's
products may be licensed do not protect the Company's products and
intellectual property rights to the same extent as the laws of the United
States. If the Company were unable to maintain the proprietary nature of its
intellectual property with respect to its significant current or proposed
products, the Company's business, financial condition and results of
operations could be materially adversely affected. There can be no assurance
that the Company will be able to obtain patent protection for products or
processes discovered using the Company's technologies. Furthermore, there can
be no assurance that any patents issued to the Company will not be
challenged, invalidated, narrowed or circumvented, or that the rights granted
thereunder will provide significant proprietary protection or competitive
advantages to the Company. Although the Company believes that its products,
patents and other proprietary rights do not infringe upon the proprietary
rights of third parties, as discussed above, the Company has been sued by
Brush Wellman with respect to the process of investment casting of beryllium
aluminum alloys, and there can be no assurance that other third parties will
not assert other infringement claims against the Company.
RISKS RELATED TO MANAGEMENT OF PLANNED GROWTH. The Company's
anticipated growth could place a significant strain on its management,
operations, financial and other resources. The Company's ability to manage
its growth will require it to continue to invest in its operational,
financial and management information systems, procedures and controls and to
attract, retain, motivate and effectively manage its employees. The Company
may experience design and start-up difficulties, such as cost overruns,
manufacturing and operational difficulties and significant delays. Moreover,
there can be no assurance that the Company will realize the goals of the
planned capital expenditure program, such as reductions in produce costs and
enhanced product quality. If the Company is successful in achieving its
growth plans, such growth is likely to place a significant burden on the
Company's operating and financial systems, resulting in increased
responsibility for senior management and other personnel within the Company.
There can be no assurance that the Company's existing management or any new
members of management will be able to augment or improve existing systems and
controls or implement new systems and controls in response to anticipated
future growth. The Company's failure to manage its growth could have a
material adverse effect on the Company's business, financial condition and
results in operation.
The Company may from time to time pursue selected teaming arrangements,
licenses, joint ventures and other cooperative relationships to increase its
production capacity or to complement or expand its existing businesses. Any of
these relationships may result in potentially dilutive issuances of equity
securities, the incurrence of additional debt, reductions of existing cash
balances, and charges to operations, any of which could have a material adverse
effect on the Company's business, results of operation and financial condition.
Selected teaming arrangements, licenses, joint ventures and other cooperative
relationships involve a number of risks that could adversely affect the
Company's operating results including the diversion of management's attention,
the entry into markets in which the Company has little or no direct prior
experience and the disruption of the Company's business. No assurance can be
given that any such relationship will not materially and adversely affect the
Company or that any such relationship will enhance the Company's business.
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INSUFFICIENT WORKING CAPITAL. The Company may not raise the capital
funding required according to its strategic plan (including equity, bank
lines of credit and/or bridge borrowings), and no person has committed to
purchase any Company securities or advance any borrowings. Even if funding is
received, substantial additional capital will be needed for the Company to
continue expanding its marketing efforts, to fund working capital and to
finance inventories and accounts receivable.
The Company will also need to expend additional funds in connection
with, but not limited to, manufacturing, sales and marketing activities,
product research and development, and personnel costs. Such plans will
require expenditures of capital. If capital resources of the Company prove to
be inadequate to fund such projects, because development costs greatly exceed
the budget, because anticipated revenues and financing are delayed or do not
occur, because expenses increase beyond expectations, or for any other
reason, it may be necessary for the Company to borrow funds or sell more of
its equity to raise working capital in the near future. There can be no
assurance that additional financing will be available, or available on the
terms that would be at all favorable to the Company. The Company will require
additional equity capital to finance its projected operations at some point
in the future. Additional equity financings will result in dilution of
stockholders' interests and may not be on terms favorable to the Company or
existing stockholders. If adequate funds are not available, the Company may
have to reduce substantially, or eliminate, certain aspects of its proposed
activities, or otherwise modify or curtail its operating plans.
POSSIBLE FUTURE LIABILITIES. The Company has potential liabilities
and costs associated with discontinued or suspended aspects of its business,
including costs associated with site remediation, decontamination and
decommissioning of existing facilities, and cost overruns on existing
contracts with the U.S. Army and Zhagrus Environmental, Inc. These potential
liabilities include a possible $5.0 million cost associated with the
additional treatment allegedly required under the Zhagrus contract and
decontamination and decommissioning costs of up to $14.6 million associated
with its present facilities and equipment. The Company has insufficient
capital to cover these liabilities and no current plan for financing such
liabilities. Management, based on the written advice of legal counsel,
believes that the U.S. Government has a responsibility to pay, directly and
indirectly, for a substantial portion of these costs. However, while there
are two contract modification proposals being reviewed by the Army, there is
presently no approved funding and no specific written agreement from the U.S.
Government to reimburse or fund these costs. No reserve for these potential
liabilities has been taken on the Company's financial statements. If these
liabilities become the responsibility of the Company, the Company would be
forced to consider insolvency or similar proceedings to preserve the
Company's business operations and the Company's business, financial condition
and results of operations would be materially and adversely affected.
DEPENDENCE ON KEY PERSONNEL. The Company's performance depends to a
significant extent upon a number of senior management and technical personnel.
The loss of the services of one or more key employees could have a material
adverse effect on the Company. The Company does not maintain key person life
insurance on any of its employees. The Company's future financial results will
depend in large part on its ability to continue to attract and retain highly
skilled, technical, managerial and marketing personnel and the ability of its
officers and key employees to manage growth successfully, to implement
appropriate management information systems and controls, and to continue
successful development of new products and services and enhancements to existing
products and services. Competition for such personnel is intense and there can
be no assurance that the Company will continue to be successful in attracting
and retaining the personnel required to successfully develop new and enhanced
products.
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RISK OF BUSINESS INTERRUPTION. The Company's specialty metal products
(including Beralcast) business is concentrated at its Concord facility and its
advanced recycling technologies and uranium services business is concentrated at
its South Carolina facility. Any prolonged disruption at any of the Company's
production facilities due to equipment failure, destruction of or material
damage to such facility, labor difficulties, or other reasons, could have a
material adverse effect on the Company's business, results of operations and
financial condition. Although the Company maintains property and business
interruption insurance to protect against any such disruptions (other than for
labor-related disruptions), there can be no assurance that the proceeds from
such insurance would be adequate to compensate the Company for losses, including
the loss of customers, incurred during the period of any such disruption or
thereafter.
FLUCTUATION OF STOCK PRICE; ABSENCE OF ACTIVE TRADING. In recent
periods there has been relatively little trading in the Company's Common
Stock and the market price per share of the Company's Common Stock has
fluctuated significantly. Factors such as quarterly variations in the
Company's result of operations, changes in the company's industry and market
conditions generally, the presence of a limited number of market makers for
the Company's Common Stock, the lack of availability of institutional market
research concerning the Company, and limited and sporadic trading volume of
the Company's Common Stock to fluctuate significantly. In addition, future
announcements concerning the Company or its competitors, including quarterly
results, innovations, new product introductions, government regulations or
proceedings, or litigation may cause the market price of the Common Stock to
fluctuate significantly. Furthermore, the stock markets have experienced
extreme price and volume fluctuations during certain periods. These broad
market fluctuations and other factors may adversely affect the market price
of the Company's Common Stock for reasons unrelated to the Company's
operating performance.
SUBSTANTIAL INFLUENCE OF PRINCIPAL STOCKHOLDERS. The Company
believes that certain control share acquisitions have occurred and that
members of the group which effected such control share acquisitions, namely
Wiaf Investors Co., Charles Alpert, Joseph Alpert, Melvin B. Chrein, Meryl J.
Chrein and Marshall J. Chrein (collectively, the "Investor Group"), as of
September 30, 1998 were the beneficial owners of 2,609,999 shares of Common
Stock (assuming full conversion of debentures and exercise of all warrants
held by certain members of the Investor Group), or approximately 51% of the
Company's outstanding shares of Common Stock. Directors and executive
officers of the Company beneficially own in the aggregate 1,038,855 shares of
Common Stock (assuming full conversion of debentures and exercise of all
currently exercisable options and warrants held by certain directors and
executive officers), or approximately 20% of the shares entitled to vote. The
Investor Group and/or the Company's directors and executive officers could
have substantial influence on matters requiring approval of stockholders of
the Company, including the election of directors or the approval of
significant corporate matters. This concentration of ownership by existing
stockholders may also have the effect of delaying or preventing a change of
control of the Company.
38
<PAGE>
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company as of September 30,
1998 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
- ---- --- ---------------------
<S> <C> <C>
Robert E. Quinn 44 Director, President, Treasurer and Chief Executive Officer of
the Company
George J. Matthews 67 Chairman of the Board of Directors
Wilson B. Tuffin 66 Vice Chairman of the Board of Directors
Kenneth A. Smith 61 Director
Frank H. Brenton 72 Director
William J. Shea 50 Director
Kevin R. Raftery 39 President, Starmet Commercial Castings, LLC and Starmet
Aerocast, LLC
Douglas F. Grotheer 40 President, Starmet CMI Corporation
William T. Nachtrab 45 Vice President, Engineering & Technology
James M. Spiezio 50 Vice President, Finance & Administration
James H. Scarboro 59 Vice President, Marketing
Frank J. Vumbaco 45 Vice President, Health/Safety & Corporate Communications
Bruce E. Zukauskas 47 Vice President, Operations
Kenneth A. Hurley 48 Interim Chief Financial Officer, Finance Advisor to Board of
Directors
</TABLE>
39
<PAGE>
Each director is elected for a term of one year. There are no family
relationships among any of the Company's directors. The term of office for each
executive officer of the Company is the earlier of one year or until a successor
is chosen and qualified. The executive officers are elected by the directors at
their first meeting following the annual meeting of stockholders. There are no
family relationships among the executive officers.
ROBERT E. QUINN was elected President of the Company on November 30,
1994 and Chief Executive Officer and Treasurer on January 20, 1998. Prior to
November 30, 1994, he held the position of Vice President, Sales with the
Company for six years. Mr. Quinn is also a director of the Company. Upon
graduation from college, Mr. Quinn joined the Company as a sales administrator.
Mr. Quinn is a graduate of Tufts University and has a Masters of Business
Administration from Babson College. Mr. Quinn is a member of the Massachusetts
High Technology Council, National Defense Industrial Association, Tufts
University Alumni Admissions and sits on the Board of Governors of the Concord
Museum.
GEORGE J. MATTHEWS is Chairman of the Board of Directors since 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.
WILSON B. TUFFIN is Vice Chairman since November 1994. From 1972 to
November 30, 1994, President, Chief Executive Officer and Treasurer of the
Company.
KENNETH A. SMITH is Professor of Chemical Engineering at Massachusetts
Institute of Technology since 1971.
FRANK H. BRENTON is Principal of Frank H. Brenton Associates, a
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.
WILLIAM J. SHEA is Chief Executive Officer of View Tech, Inc. Chairman
of the board of directors of Centennial Technologies, Inc., former
Vice-Chairman, Chief Financial Officer and Treasurer of BankBoston and former
Senior Partner and member of Firm Council of Coopers & Lybrand.
KEVIN R. RAFTERY became President of Starmet Commercial Castings, LLC
and Starmet Aerocast, LLC (both subsidiaries of the Company) in October 1997.
Prior to that he was the Manager of the Company's Beralcast business unit. Mr.
Raftery was promoted to Program Manager in 1994 and Business Unit Manager in
1996. Mr. Raftery is a recognized expert in casting, extrusion, heat treating,
coating, welding and joining technologies for aerospace specialty metals. During
his twenty year tenure with the Company, Mr. Raftery has authored and
co-authored several technical publications and is a co-inventor of two Beralcast
patents. Mr. Raftery received his B.S. in Mechanical Engineering Technology from
the University of Massachusetts.
DOUGLAS F. GROTHEER became President of Starmet CMI Corporation (a
subsidiary of the Company) in 1997. Prior to this promotion, Mr. Grotheer was
Vice President of Engineering, Programs and Quality for the Company since 1994.
Mr. Grotheer joined the Company as a project engineer directly after graduating
from college in 1980. He was promoted to Manager of Ordnance Programs. Mr.
Grotheer is a recognized expert in uranium metallurgy and processing, as well as
ISO 9002 Quality Systems. Mr. Grotheer received his degree in Materials
Engineering from Rensselaer Polytechnic Institute.
40
<PAGE>
WILLIAM T. NACHTRAB, PH.D. has held the position of Vice President,
Engineering and Technology with the Company since 1997 and Vice President of
Technology since 1994. Dr. Nachtrab is the Company's senior technologist. Dr.
Nachtrab, who joined the Company in 1988, is the author and co-author of
numerous technical and scientific publications and an inventor of four of the
Company's patents. He is a recognized expert in beryllium, titanium, alloy
steels, uranium metallurgy and extrusion and powder metal processing. Before
joining the Company, Dr. Nachtrab was a Senior Member of the Technical Staff of
the GE/RCA Corporation. Prior to that he was a Division Research Engineer for
Lukens Steel Company, a Research Engineer for Lehigh University, and a
Metallurgist for LTV Steel Company. Dr. Nachtrab has a Ph.D. in Metallurgical
and Materials Engineering from Lehigh University.
JAMES M. SPIEZIO has been Vice President, Finance and Administration
since October 1993. Prior to October 1993, he held the position of Corporate
Controller and prior to April 1989, he served as Manager of Business Planning
and Financial Analysis for four years. Before joining the Company, Mr.
Spiezio held positions of increasing responsibility in finance at Pratt &
Whitney Company, United Technologies Inc., and the General Electric Company.
Mr. Spiezio also held the position of President of Starmet CMI Corporation
from October 1993 to July 1997. Mr. Spiezio is a graduate of Indiana
University School of Business. On November 15, 1998 Mr. Spiezio's position
was changed to Vice President, Special Projects and Mr. Kenneth Hurley
assumed all financial responsibility including interim Chief Financial
Officer of the company.
JAMES H. SCARBORO became Vice President in December 1997 and is
responsible for government relations and strategic business development for the
Company. Mr. Scarboro has been with the Company for over five years. Mr.
Scarboro was Assistant Program Manager for the U.S. Army's Tank Main Armament
Systems and Program Manager for the Abrams Tank. Mr. Scarboro is a graduate of
Rawlins College, Ball State University, the U.S. Army Command and General Staff
College and the DOD Systems Management College and retired from the U.S. Army
with the rank of Lieutenant Colonel.
FRANK J. VUMBACO has held the position of Vice President, Health/Safety
and Corporate Communications with the Company since November 1995. Prior to
November 1995, he held the position of Vice President, Health/Safety since
November 1993. Before joining the Company in 1980, Mr. Vumbaco served as the
Manager of Health, Safety & Security for National Lead Industries, Albany, NY.
He is a director of the New England Consortium of Radioactive Material Users
(NELRAD) and a member of the Massachusetts Nuclear Incident Advisory Team. Mr.
Vumbaco is a graduate of Siena College and has a Masters in Applied Business
Management from Lesley College.
BRUCE E. ZUKAUSKAS has held the position of Vice President, Operations
since October 1994. Prior to October 1994, he was Quality Manager for over five
years. Before joining the Company, Mr. Zukauskas served as Operations Engineer
for Babcock and Wilcox Tubular Products Group. Mr. Zukauskas is a graduate of
the U.S. Military Academy at West Point and the U.S. Army Command and General
Staff College and received his Masters in Industrial Engineering from the
University of Pittsburgh. Mr. Zukauskas is a Colonel in the U.S. Army, Reserves.
41
<PAGE>
KENNETH A. HURLEY has held the position of Financial Advisor to the
Board of Directors since September 1998 and on November 15, 1998, the Board of
Directors named Mr. Hurley the Company's Interim Chief Financial Officer. Mr.
Hurley is the principal and a founder of Hurley, Vaughn & Associates, P.C., a
management advisory services and public accounting firm founded in 1989. Prior
to 1989, Mr. Hurley was a Division General Manager with Unitrode Corporation and
formerly a General Practice Manager at Coopers & Lybrand.
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, 1998, or written representations in certain cases, all Section
16(a) filing requirements were complied with.
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 $100,000 for the Company's fiscal year ended September 30, 1998
(collectively, "the Named Executive Officers"):
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
----------------------
AWARDS PAYOUTS
------ -------
ANNUAL COMPENSATION
-------------------
SECURITIES
RESTRICTED UNDERLYING ALL OTHER
NAME AND PRINCIPAL OTHER ANNUAL STOCK OPTIONS/SARS LTP COMPENSATION
POSITION YEAR(1) SALARY($) BONUS($) COMPENSATION($)(2) AWARD(S)$ (#)(6) PAYOUTS$ ($)
-------- -------- --------- --------- ------------------ ---------- ------ -------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
George J. Matthews (4) (5) 1998 350,000 - - - 7,500 - -
Chairman of Board of 1997 350,000 - - - - - -
Directors, CEO and 1996 350,000 - - - - - -
Treasurer(5)
Robert E. Quinn 1998 200,000 17,312 - - 15,000 - -
President (3)(5) CEO and 1997 200,000 15,000 - - 25,000 - -
Treasurer 1996 173,769 - - - 20,000 - -
James M. Spiezio 1998 142,000 11,982 - - 7,500 - -
Vice President, Finance 1997 131,616 13,250 - - 8,000 - -
& Administration 1996 121,058 - - - 10,000 - -
William T. Nachtrab 1998 142,000 11,792 - - 17,500 - -
Vice President, 1997 131,616 9,050 - - 8,000 - -
Technology 1996 114,847 - - - - - -
Douglas F. Grotheer 1998 135,000 10,261 - - 5,000 - -
President, Starmet CMI 1997 121,934 6,700 - - 5,000 - -
Corporation 1996 100,252 - - - - - -
</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, 1998 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.
42
<PAGE>
OPTION GRANTS DURING FISCAL YEAR
The following table sets forth certain information regarding options
granted during the fiscal year ended September 30, 1998 by the Company to the
Named Executive Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------ POTENTIAL REALIZABLE
NUMBER OF PERCENT OF TOTAL VALUE AT ASSUMED
SECURITIES OPTIONS ANNUAL RATES OF STOCK PRICE
UNDERLYING GRANTED TO APPRECIATION FOR
OPTIONS EMPLOYEES IN EXERCISE OR BASE EXPIRATION OPTION TERM(3)
NAME GRANTED FISCAL YEAR PRICE(2) DATE 10% 5%
- ----- ------- ----------- -------- ---- ------ ---
<S> <C> <C> <C> <C> <C> <C>
George J. Matthews 7,500(1) N/A $23.67 3/18/2008 $282,929 $111,645
Robert E. Quinn......... 15,000(1) 7.5% $23.67 3/18/2008 $565,858 $223,089
William T. Nachtrab... 17,500(1) 8.8% $23.67 3/18/2008 $660,168 $260,504
James M. Spiezio....... 7,500(1) 3.8% $23.67 3/18/2008 $282,929 $111,645
Douglas F. Grotheer.... 5,000(1) 2.5% $23.67 3/18/2008 $188,619 $ 74,430
</TABLE>
- ----------
(1) These options are first exercisable on March 18, 1999 at which time the
options will be one-third vested with options vesting in additional
one-third increments in two annual installments commencing on March 18,
2000.
(2) The exercise price per share is the market price of the underlying Common
Stock on the date of grant.
(3) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based upon assumed rates of share price appreciation set by the
Securities and Exchange Commission of five percent and ten percent
compounded annually from the date the respective options were granted to
their expiration date. The gains shown are net of the option exercise
price, but do not include deductions for taxes of the options exercise
price or other expenses associated with the exercise. Actual gains, if any,
are dependent on the performance of the Common Stock and the date on which
the option is exercised. There can be no assurance that the amounts
reflected will be achieved.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
The following table sets forth certain information concerning options
exercised during the fiscal year ended September 30, 1998 by the Named Executive
Officers, as well as the aggregate value of unexercised options held by such
executive officers on September 30, 1998. The Company has no outstanding stock
appreciation rights, either freestanding or in tandem with options.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
OPTIONS AT FISCAL YEAR-END MONEY OPTIONS AT FY END(2)
-------------------------- ----------------------------
SHARES
ACQUIRED ON VALUE
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
George J. Matthews 0 $ 0 13,334 6,666 $148,274 $74,126
Robert E.Quinn 0 0 81,667 38,333 201,131 28,269
James M. Spiezio 0 0 26,333 16,167 80,727 13,053
William T. Nachtrab 0 0 19,667 22,833 63,259 19,682
Douglas Grotheer 0 0 11,667 8,333 20,431 2,159
</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, 1998 ($9.00 per share),
less the exercise price, times the number of options outstanding.
43
<PAGE>
PENSION PLAN TABLE
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
----------------------
REMUNERATION 15 20 25 30 OR MORE
- ------------ ---- ---- ---- ----------
<S> <C> <C> <C> <C>
$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
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 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-22 years; James M. Spiezio-12 years; William T.
Nachtrab-8 years; and Douglas Grotheer-18 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 eligible to receive options under the Company's 1995 Directors Option
Plan (the "1995 Directors Plan"). During fiscal 1998, the Company granted to
each of Messrs. Matthews, Tuffin, Smith, Brenton and Shea options to purchase
7,500 shares of Common Stock at an exercise price of $23.67 per share, based on
the market price of the Common Stock at that time. At the same time, the Company
also granted Mr. Quinn (in his capacity as President of the Company) an
incentive stock option to purchase 15,000 shares of Common Stock at the same
exercise price under the Company's 1998 Stock Option Plan.
44
<PAGE>
The Company has entered into a management agreement with Matthews
Associates Limited, a Massachusetts corporation ("MAL"), of which George J.
Matthews, Director and Chairman of the Board of Directors of the Company, is
sole owner. The Management agreement is described in the section titled
"Employment Agreements with Certain Officers."
The Company entered into an employment and consulting agreement with Mr.
Tuffin in November 1994, which shall continue in force until February 28, 1999.
Pursuant to such agreement, Mr. Tuffin receives annual compensation of $105,000
for his services as a consultant to the Company. Mr. Tuffin's duties include his
service as a director and Vice Chairman of the Board of Directors of the
Company. During the term of the agreement and for a period of two years after
its expiration, Mr. Tuffin may not compete directly or indirectly with the
Company within the continental United States.
EMPLOYMENT ARRANGEMENTS
EMPLOYMENT AGREEMENT WITH MR. QUINN
In October 1997, the Company entered into an amended employment
agreement with Mr. Quinn. Pursuant to the agreement, Mr. Quinn will receive
initial compensation at the annual rate of $200,000, subject to such annual
increases and bonuses as the Board of Directors may from time to time determine.
The agreement shall continue in force until February 28, 2002, unless terminated
by either party in accordance with its terms, and is subject to annual renewals
as described in the agreement. During the term of the agreement and for a period
of two years after its expiration, or after the termination of Mr. Quinn's
employment with the Company, whichever occurs later, Mr. Quinn may not compete
directly or indirectly with the Company within the continental United States.
The Company shall require any successor to a majority of its business activities
to assume its obligations under this agreement.
EMPLOYMENT AGREEMENTS WITH MESSRS. SPIEZIO, NACHTRAB, GROTHEER, AND RAFTERY
In October 1997, the Company entered into employment agreements with
Messrs. Spiezio, Nachtrab, Grotheer, and Raftery (each an "Executive"). Under
the terms of their respective agreements, Messrs. Spiezio, Nachtrab, Grotheer,
and Raftery are entitled to an annual base salary of $142,000, $136,000,
$135,000 and $125,000 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 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 MATTHEWS ASSOCIATES LIMITED
The Company has entered into a management agreement with Matthews
Associates Limited ("MAL"), a Massachusetts corporation, 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.
45
<PAGE>
MANAGEMENT ADVISORY SERVICES AGREEMENT WITH HURLEY, VAUGHN & ASSOCIATES, P.C.
The Company entered into a management advisory service agreement with
Hurley, Vaughn & Associates, P.C. in September 1998. The agreement provided for
compensation based on hourly rates ranging from $60.00 per hour to $185.00 per
hour dependent on staff level assigned.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended September 30, 1998, 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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of September 30, 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>
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL
BENEFICIAL OWNER OWNERSHIP BENEFICIALLY OWNED PERCENT
- ------------------- --------------------- --------------------------
<S> <C> <C>
Charles Alpert (1)(2) ........................................... 2,609,999 51.12%
Joseph Alpert
WIAF Investors Co.
466 Arbuckle Avenue
Lawrence, NY 11516
and
Melvin B. Chrein, M.D.
Meryl J. Chrein
Marshall J. Chrein
21 Copper Beech Lane
Lawrence, NY 11559
George J. Matthews (3) .......................................... 408,254 8.00
Chairman of the Board of Directors,
Director & Consultant
C/O Matthews Associates Limited
100 Corporate Place
Peabody, MA 01960
Wilson B. Tuffin (4) ............................................ 386,116 7.56
Vice Chairman and Director
23 Arlington Street
Acton, MA 01720
Dimensional Fund Advisors, Inc. (5) ............................. 335,500 6.57
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401
Robert E. Quinn (6) ............................................. 113,811 2.23
President, CEO, Treasurer
James M. Spiezio (7) ............................................ 33,500 *
Vice President, Finance and Administration
William T. Nachtrab (8) ......................................... 23,000 *
Vice President, Engineering & Technology
Kenneth A. Smith, Director (9) .................................. 9,000 *
Frank H. Brenton, Director (9) .................................. 9,000 *
Douglas F. Grotheer (10) ........................................ 14,407 *
President of CMI Corporation
William J. Shea, Director ....................................... -- --
All directors and executive officers (13 persons) as a group (10) 1,038,855 20.35%
</TABLE>
46
<PAGE>
- -----------------------
(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
affected such control share acquisitions, namely WIAF Investors Co.,
Charles Alpert, Joseph Alpert, Melvin B. Chrein, Meryl J. Chrein, and
Marshall J. Chrein (collectively the "Investor Group") are the holders of
1,759,255 shares (the "Affected Shares") which were acquired in control
share acquisitions (within the meaning of Chapter 110D) and accordingly
will have no voting rights unless or until such voting rights are
authorized as described in "Description of Capital Stock."
(2) Derived from Schedules 13DA, dated March 28, 1997, Forms 5 and stockholder
questionnaires to the Company. The six persons named are described as a
group in such Schedules 13DA. The persons named reported ownership of the
following shares: WIAF Investors Co. 1,759,756; Melvin B. Chrein 202,300;
Meryl J. Chrein 246,600; Charles Alpert 50,000; Joseph Alpert 50,000; and
Marshall J. Chrein 46,200. Each person reported sole voting and
dispositive power with respect to the shares owned by such person. Also
includes 21,021, 79435 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) 20,000 shares which may be purchased upon the exercise of
currently exercisable options, (ii) 2,325 shares which may be acquired
upon the conversion of an outstanding 10% Convertible Subordinated
Debenture, (iii) 13,961 shares which Mr. Matthews' wife has the right to
acquire upon the conversion of an outstanding 10% Convertible Subordinated
Debenture, and (iv) 1,980 shares owned by Mr. Matthews' wife. Mr. Matthews
disclaims beneficial ownership of the debenture and shares held by Mrs.
Matthews.
(4) Includes 10,000 shares which may be purchased upon the exercise of
currently exercisable 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 Trust, these persons vote 126,100
shares which are owned by the Fund and 13,000 shares which are owned
by the Trust.
Dimensional Fund Advisors, Inc. disclaims beneficial ownership of these
securities.
(6) Includes 91,666 shares which may be purchased upon the exercise of
currently exercisable options.
(7) Includes 30,999 shares which may be purchased upon the exercise of
currently exercisable options.
(8) Includes 20,999 shares which may be purchased upon the exercise of
currently exercisable options.
(9) Includes 9,000 shares which may be purchased upon the exercise of
currently exercisable options.
(10) Includes 12,332 shares which may be purchased upon the exercise of
currently exercisable options.
(11) See notes (4), (5), (7), (8), (9) and (10) above. Also includes an
additional 37,995 shares which may be purchased upon the exercise of
currently exercisable options.
* Less than 1% ownership individually.
47
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has various employment and management agreements. See Item
11, "Employment Arrangements." 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.
PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1. Financial Statements
The following consolidated financial statements of the Company are
filed as part of this report:
Auditors' Report
Consolidated Balance Sheets--September 30, 1998 and
September 30, 1997.
Consolidated Statements of Operations for the years ended
September 30, 1998, 1997 and 1996.
Consolidated Statements of Stockholders' Equity for
the years ended September 30, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the years ended
September 30, 1998, 1997 and 1996.
Notes to Consolidated Financial Statements
2. Financial Statement Schedule for the Three Years Ended
September 30, 1998. Auditors' Report on Schedule II-Valuation
and Qualifying Accounts
3. Exhibits:
48
<PAGE>
ITEM NO.* DESCRIPTION
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)
49
<PAGE>
10(c) Employment Agreement, effective February 8, 1995 between the
Registrant and Robert E. Quinn. (7)
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
WIAF Investors Co. in amount of $334,000.00 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)
50
<PAGE>
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)
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.**
51
<PAGE>
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.**
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
FY'98 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.**
52
<PAGE>
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)
- -------------------------
* 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.
(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.
- --------------------
53
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
STARMET CORPORATION
Date: January 19, 1999 By: /s/ Robert E. Quinn
----------------------------------------------
Robert E. Quinn, President and Chief Executive
Officer (principal executive officer and
director)
Date: January 19, 1999 By: /s/ Kenneth A. Hurley
----------------------------------------------
Kenneth A. Hurley, Interim Chief Financial
Officer
Date: January 19, 1999 By: /s/ George J. Matthews
----------------------------------------------
George J. Matthews, Chairman of the Board of
Directors
Date: January 19, 1999 By: /s/ Wilson B. Tuffin
----------------------------------------------
Wilson B. Tuffin, Vice Chairman
Date: January 19, 1999 By: /s/ Frank H. Brenton
----------------------------------------------
Frank H. Brenton, Director
Date: January 19, 1999 By: /s/ Kenneth A. Smith
----------------------------------------------
Kenneth A. Smith, Director
Date: January 19, 1999 By: /s/ William J. Shea
----------------------------------------------
William J. Shea, Director
54
<PAGE>
INDEX TO FINANCIAL STATEMENT SCHEDULES
Independent Auditors' Report
Schedule II--Valuation and Qualifying Accounts
55
<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, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended September 30, 1998. 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
audits 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, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended September 30, 1998, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 1 to the financial statements, the Company has incurred a significant
loss in 1998 and is in default under its credit agreement which expires in
March 1999, which raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also
described in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
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, 1997 and 1996, and for the years then ended, have been restated
(see Note 2).
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 8, 1999
56
<PAGE>
STARMET CORPORATION AND SUBSIDIARIES
Schedule II- Valuation and Qualifying Accounts
For the Three Years Ended September 30, 1998
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND
CLASSIFICATION YEAR EXPENSES DEDUCTIONS END OF YEAR
- -------------- ---- -------- ---------- -----------
<S> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30, 1998:
Allowance for doubtful accounts .... $ 421,000 $ 103,000 $ -- $ 524,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Inventory Reserves ................. $4,212,000 $4,951,000 $ -- $9,163,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
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
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
- --------------------------
(a) See Note 1 of Notes to Consolidated Financial Statements
57
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
1998 1997
------------ -------------
(AS RESTATED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cashequivalents $ 327,000 $ 195,000
Restricted cash 238,000 73,000
Accounts receivable, net of allowances for doubtful accounts
of $524,000 in 1998 and $421,000 in 1997 6,020,000 5,546,000
Inventory 4,005,000 5,239,000
Other current assets 545,000 619,000
------------ ------------
Total Current Assets 11,135,000 11,672,000
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Land 2,136,000 2,124,000
Buildings 18,866,000 17,656,000
Machinery, equipment and fixtures 22,505,000 18,472,000
Construction-in-progress 161,000 831,000
------------ ------------
Total Property, Plant and Equipment 43,668,000 39,083,000
Less: Accumulated depreciation 25,731,000 24,036,000
------------ ------------
Property, plant, and equipment, net 17,937,000 15,047,000
Noncurrent Inventory 1,500,000 5,851,000
OTHER ASSETS 1,861,000 1,784,000
------------ ------------
$ 32,433,000 $ 34,354,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations $ 8,582,000 $ 1,885,000
Accounts payable 8,392,000 3,123,000
Accrued payroll and related costs 1,541,000 1,215,000
Other accrued expenses 4,758,000 907,000
------------ ------------
Total Current Liabilities 23,273,000 7,130,000
------------ ------------
LONG-TERM OBLIGATIONS -- 430,000
------------ ------------
NOTES PAYABLE TO SHAREHOLDERS 2,083,000 1,048,000
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, par value $.10; authorized - 15,000,000 shares; issued and
outstanding for 1998 and 1997;
4,790,674 shares and 4,784,244 shares, respectively 479,000 478,000
Additional paid-in capital 14,067,000 14,033,000
Warrants Issued 687,000 360,000
Retained earnings (deficit) (8,156,000) 10,875,000
------------ ------------
Total Stockholders' Equity 7,077,000 25,746,000
------------ ------------
$ 32,433,000 $ 34,354,000
------------ ------------
------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS
58
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -------------
(AS RESTATED) (AS RESTATED)
<S> <C> <C> <C>
NET SALES AND CONTRACT REVENUES $ 34,823,000 $ 28,062,000 $ 28,694,000
------------ ------------ ------------
COST AND EXPENSES:
Cost of sales 40,028,000 20,136,000 24,403,000
Selling, general, and administrative expenses 11,136,000 5,448,000 5,325,000
Research and development expenses 1,421,000 1,309,000 876,000
Loss on write-off of fixed assets -- 358,000 --
------------ ------------ ------------
52,585,000 27,251,000 30,604,000
------------ ------------ ------------
OPERATING INCOME (LOSS) (17,762,000) 811,000 (1,910,000)
Interest Income and Other Expense, net 145,000 2,000 89,000
Interest Expense 1,124,000 296,000 387,000
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (19,031,000) 513,000 (2,386,000)
Provision for Income Taxes -- 31,000 1,000
------------ ------------ ------------
NET INCOME (LOSS) $(19,031,000) $ 482,000 $ (2,387,000)
------------ ------------ ------------
------------ ------------ ------------
PER SHARE INFORMATION*
Basic Net Income (Loss) per Common and Common Equivalent Share (3.97) $ 0.10 $ (0.50)
------------ ------------ ------------
Weighted average number of common and common equivalent shares
outstanding 4,789,000 4,783,000 4,779,000
------------ ------------ ------------
------------ ------------ ------------
Diluted net income (loss) per common and dilutive potential
common shares outstanding (3.97) 0.10 (0.50)
Weighted average number of common and dilutive potential common
shares outstanding 4,789,000 4,959,000 4,779,000
------------ ------------ ------------
------------ ------------ ------------
</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
59
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
COMMON STOCK
------------------ ADDITIONAL RETAINED
NUMBER OF PAR PAID-IN EARNINGS
SHARES VALUE CAPITAL WARRANTS (DEFICIT) TOTAL
------ ----- ------- -------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1995 4,776,000 $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 4,782,000 $478,000 $14,019,000 $130,000 $ 10,393,000 $ 25,020,000
--------- -------- ----------- -------- ------------ ------------
Warrants issued -- -- -- 230,000 -- 230,000
Stock options exercised 2,000 -- 14,000 -- -- 14,000
Net income for year (as restated) -- -- -- -- 482,000 482,000
--------- -------- ----------- -------- ------------ ------------
Balance at September 30, 1997 4,784,000 $478,000 $14,033,000 $360,000 $ 10,875,000 $ 25,746,000
--------- -------- ----------- -------- ------------ ------------
Warrants issued -- -- -- 327,000 -- 327,000
Stock options exercised 6,000 1,000 34,000 -- -- 35,000
Net loss for year -- -- -- -- (19,031,000) (19,031,000)
--------- -------- ----------- -------- ------------ ------------
Balance at September 30, 1998 4,790,000 $479,000 $14,067,000 $687,000 $ (8,156,000) $ 7,077,000
--------- -------- ----------- -------- ------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS
60
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOW
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES: (AS RESTATED) (AS RESTATED)
<S> <C> <C> <C>
Net income (loss) $(19,031,000) $ 482,000 $(2,387,000)
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Depreciation and amortization 2,157,000 1,588,000 1,493,000
Loss on write-off of fixed assets -- 358,000 --
Changes in assets and liabilities, net
Decrease (increase) in accounts receivable (474,000) (616,000) (201,000)
Decrease (increase) in inventory, net of reserves 5,585,000 1,585,000 1,449,000
(Decrease) increase in accounts payable and accrued expenses 9,446,000 (3,629,000) 3,358,000
Gain on sale of building -- -- (75,000)
Changes in other long-term liabilities -- -- (301,000)
Other 23,000 (689,000) 440,000
------------ ------------ ------------
Net cash provided (used) by operating activities (2,294,000) (921,000) 3,776,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditure, net (4,585,000) (1,788,000) (1,449,000)
Sales of marketable securities, net -- -- 170,000
Proceeds from sale of property, plant & equipment -- -- 172,000
------------ ------------ ------------
Net cash (used) provided by investing activities (4,585,000) (1,788,000) (1,107,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payment under long-term obligations (184,000) (545,000) --
Payments on bank debt (19,332,000) (9,801,000) (4,856,000)
Proceeds from bank debt 25,792,000 11,508,000 1,530,000
Proceeds from notes payable to shareholders and warrants 900,000 500,000 850,000
Proceeds from stock issuance -- 14,000 32,000
------------ ------------ ------------
Net cash (used) provided by financing activities 7,176,000 1,676,000 (2,444,000)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:
Cash and cash equivalents at beginning of year 268,000 1,301,000 1,076,000
Cash and cash equivalents at end of year 565,000 268,000 1,301,000
------------ ------------ ------------
$ 297,000 $(1,033,000) $ 225,000
------------ ------------ ------------
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the year for:
Interest, net of amounts capitalized $ 1,019,000 $ 266,000 $ 345,000
Income tax refunds received $ -- $ 14,000 $ 11,000
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations $ -- $ -- $ 75,000
Loss on write-off of inventory $ 4,951,000 $ -- $ 2,690,000
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS
61
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. LIQUIDITY
The Company's financial statements for the year ended September 30, 1998 have
been prepared on a going concern basis, which contemplates the realization of
assets and the liabilities and commitments in the normal course of business.
The Company incurred a net loss of $19,031,000 for the year ended September
30, 1998. As of September 30, 1998 the Company was out of compliance and in
default with its credit facility with State Street Bank, all amounts
outstanding under this facility, $7,171,000 as of September 30, 1998, were
due on November 15, 1998. In December 1998, the Company entered into a
forbearance agreement with the Bank that extends the maturity date of the
credit facility to March 31, 1999. In addition, on December 10, 1998 $850,500
was due by the Company to certain stockholders pursuant to Subordinated
Debentures. The Company has been granted a three-year extension to December 10,
2001 on all principal payments related to the subordinate Debentures. The
Company's auditors' report dated January 8, 1999, includes a reference to the
substantial doubt of the Company's ability to continue as a going concern.
The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
Management's plans with regard to the existing capital deficiency are to adjust
spending levels to appropriate amounts to ensure greater financial stability and
to actively pursue additional subordinate secured debt and partnering relations
with target customers. The Company is also managing payment plans with certain
suppliers.
As a result of the significant loss in 1998 and the status of the bank
arrangements, management has been forced to reassess its operating plan. The
revised plan includes significant reductions in personnel and various
spending levels as well as establishing payment plans with certain critical
suppliers. Pursuant to the revised business plan, the Company's limited
financial resources will be directed toward only certain business segments
and new technologies. Accordingly, the Company is no longer able to implement
or complete its previously planned fluorine development project and other
Depleted Uranium product development projects. Management has reassessed the
carrying value of all of the Company's assets and liabilities in light of its
current operating environment and revised business plan and has written-off
its UF4 inventory of approximately $2.3 million and has written-off the value
of certain other DU related inventory and supplies of $2.4 million. In
addition, management has recorded a liability of approximately $3.4 million
for the estimated disposal cost of the UF4 inventory.
In addition to write offs that have been recorded, as required by generally
accepted accounting principles, the Company has potential liabilities
associated with discontinued or suspended aspects of its depleted uranium
business, including costs associated with site remediation, decontamination
and decommissioning of existing facilities, cost overruns on existing
contracts with the U.S. Army and Zhagrus. These potential liabilities include
a possible $5.0 million cost associated with the additional treatment
required under the Zhagrus contract, decontamination and decommissioning
costs of up to $14.6 million associated with its present facilities and
equipment. The Company has insufficient capital to cover these liabilities
and no current plan of financing such liabilities; however, management, based
on written advice of legal counsel, believes that the U.S. Government has a
responsibility for these costs. The United States Army, in a Memorandum of
Decision dated September 13, 1996 (the "Memorandum of Decision") pursuant to
Public Law 85-804, agreed that it would fund remediation of the Corporation's
Concord holding basin site as well as D&D related to that facility, based in
part on the Army's determination that the Corporation's activities are
essential to the national defense. However, while there are two contract
modification proposals being reviewed by the Army, there is presently no
approved funding and no specific written agreement from the U.S. Government
to reimburse or fund these costs. No reserve for these potential liabilities
has been taken on the Company's financial statements. If these liabilities
become the responsibility of the Company, the Company would be forced to
consider insolvency or similar proceedings to preserve the Company's business
operations and the Company's business, financial condition and results of
operations would be materially and adversely affected.
2. 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 18%, 25%
and 28% of total net sales and contract revenues in fiscal 1998, 1997 and 1996,
respectively. A significant portion of the Company's sales revenue has been
derived from major customers as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
USEC 14% 14% 5%
Royal Ordnance 13% 19% 11%
Primex Technologies 12% 12% 20%
Lockheed Martin 11% 7% 16%
</TABLE>
62
<PAGE>
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.
1996 1997
-------------------------- ---------------------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED
----------- ----------- ----------- -----------
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
3. 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 1998, 1997, and 1996 are for the
fiscal years ended September 30, 1998, September 30, 1997, and September 30,
1996, 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 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 contract with the U.S. Army (contracts to
establish production capacity through the purchase and installation of equipment
to be owned by the U.S. Army.) The consolidated balance sheets do not include
the cost of this U.S. Army owned equipment.
63
<PAGE>
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are recorded at cost, which approximates market value.
Cash equivalents include certificates of deposit with a maturity of three months
or less.
RESTRICTED CASH
The Company is required to maintain a certain amount of cash at a bank as
collateral for a letter of credit issued by the bank on behalf of the Company.
As of September 30, 1998, $238,000 was held in an account with the bank pursuant
to the letter of credit agreement.
INVENTORY
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:
<TABLE>
<S> <C>
Buildings............................... 20--30 years
Machinery, equipment, and fixtures...... 3--10 years
</TABLE>
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.
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.
64
<PAGE>
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.
<TABLE>
<CAPTION>
1998 1997 1996
---- ----- ------
<S> <C> <C> <C>
Statutory rate 34.0% 34.0% (34.0)%
Increase (reduction) in taxes resulting from:
State taxes, net of federal effect 6.0 6.0 (6.0)
Valuation allowance (40.0) (38.0) 40.0
------ ------ -------
-% 2.0% -%
------ ------ -------
------ ------ -------
</TABLE>
As of September 1998, the Company has a federal net operating loss carryforward
of approximately $17.9 million of which $3.2 million expires in 2009 and $1.8
million expires in 2010, $3.0 million expires in 2011, $3.1 million in 2012 and
$6.9 million in 2013. State net operating loss carry forwards of approximately
$21.3 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>
1998 1997 1996
------------ ------------ ----------
<S> <C> <C> <C>
Current (Benefit) Provision
Federal $(2,355,000) $ (961,000) $(363,000)
State (729,000) (299,000) (112,000)
Valuation allowance 3,084,000 1,260,000 475,000
----------- ----------- -----------
Total current (Benefit) Provision -- -- --
----------- ----------- -----------
----------- ----------- -----------
Deferred (Benefit) Provision:
</TABLE>
65
<PAGE>
<TABLE>
<S> <C> <C> <C>
Federal $(3,490,000) $(1,310,000) $ (592,000)
State (1,080,000) (451,000) (183,000)
Valuation allowance 4,570,000 1,792,000 776,000
----------- ----------- -----------
Total deferred (Benefit) Provision: -- 31,000 1,000
----------- ----------- -----------
Total (Benefit) Provision: -- 31,000 1,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The Company has provided a full valuation allowance on the net deferred tax
assets as of September 30, 1998, and 1997. 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 1998 and
1997 fiscal years are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Assets:
Reserves not currently deductible for tax purpose $ 5,526,000 $ 1,665,000
Accrued employee health benefits 39,000 36,000
Federal operating loss carryforward 5,423,000 3,344,000
State operating loss carryforwards and other assets 2,025,000 1,903,000
Other 670,000 460,000
Valuation allowance (9,085,000) (4,082,000)
----------- -----------
Total deferred tax assets 4,598,000 3,326,000
Alternative minimum tax credit 407,000 407,000
----------- -----------
$ 5,005,000 $ 3,733,000
----------- -----------
----------- -----------
Liabilities
Fixed asset basis difference $ 3,830,000 $ 2,422,000
Employee benefits 720,000 813,000
Other 455,000 498,000
----------- -----------
$ 5,005,000 $ 3,733,000
----------- -----------
----------- -----------
</TABLE>
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>
YEAR ENDED SEPTEMBER 30,
-----------------------------------
1998 1997 1996
-------- -------- -----------
<S> <C> <C> <C>
Revenue...................... $831,000 $793,000 $1,812,000
Cost of Sales................ $974,000 $675,000 $1,273,000
</TABLE>
66
<PAGE>
INCOME (LOSS) PER SHARE OF COMMON STOCK
The Company has adopted SFAS No 128, Earnings per Share, effective December 15,
1997. SFAS No. 128 replaces primary earnings per share with "basic earnings per
share." Basic earnings per common share is computed by dividing net income by
the weighted average number of shares of common stock outstanding during the
year. No dilution for any potentially dilutive securities is included. In
addition, SFAS No 128 replaces fully diluted earnings per common share with
"diluted earnings per common share." Dilution for options and warrants under
SFAS No. 128 is computed using the average share price of the Company's common
stock for the period. In loss periods, potentially dilutive securities are
excluded as they would be anti-dilutive. All previously reported amounts for EPS
have been restated to conform with SFAS 128.
Common share and common share dilutive potential disclosures are:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------------
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
Weighted average common shares
outstanding....................... 4,789,000 4,783,000 4,779,000
Dilutive potential common shares.... -- 176,000 --
--------- --------- ---------
Diluted common shares............... 4,789,000 4,959,000 4,779,000
--------- --------- ---------
--------- --------- ---------
Options and warrants excluded from
diluted income per common share as
their effect would be
anti-dilutive..................... 769,300 -- 303,000
--------- --------- ---------
--------- --------- ---------
</TABLE>
RECLASSIFICATION
Certain amounts previously reported in the consolidated financial statements
have been reclassified to conform to the 1998 presentation.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
DISCLOSURES ABOUT 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.
67
<PAGE>
LEGAL COSTS FOR LOSS CONTINGENCIES
Legal costs are recorded in the period in which the legal services are provided.
4. ACCOUNTS RECEIVABLE
The following is an analysis of accounts receivable (net of allowances for
doubtful accounts):
<TABLE>
<CAPTION>
1998 1997
---------- ----------
(AS RESTATED)
<S> <C> <C>
Accounts receivable $5,327,000 $5,460,000
Unbilled receivables and retainages due
upon completion of contracts 693,000 86,000
---------- ----------
$6,020,000 $5,546,000
---------- ----------
---------- ----------
</TABLE>
5. INVENTORY
Inventory (net of reserves) at September 30, 1998 and 1997, was follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
(AS RESTATED)
<S> <C> <C>
Raw materials $1,984,000 $ 7,921,000
Work-in-progress 2,865,000 2,511,000
Finished goods 656,000 658,000
----------- -----------
Total Inventory $5,505,000 $11,090,000
----------- -----------
----------- -----------
</TABLE>
68
<PAGE>
As of September 30, 1998 and 1997, approximately $2.5 million and $5.8
million of the Company's inventory net of $7.9 million and $3.2 million
reserves, respectively consists of Depleted Uranium (DU) in various stages of
production. During 1998, the Company increased its reserve for DU from $3.2
million to $7.9 million to fully reserve for DU in various stages of
production. See Note 1.
6. OTHER ACCRUED EXPENSES
Accrued expenses consist of the following at September 30, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
---------- ----------
(AS RESTATED)
<S> <C> <C>
Waste burial cost 4,149,000 $404,000
Other 609,000 503,000
---------- ----------
$4,758,000 $907,000
---------- ----------
---------- ----------
</TABLE>
During 1997, the Company reduced certain accruals by $1,750,000 for site
remediation and waste burial costs which were deemed no longer necessary.
7. LONG-TERM OBLIGATIONS AND NOTES PAYABLE
Long-term obligations and notes payable of the Company are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- ------------
(AS RESTATED)
<S> <C> <C>
Line of Credit, interest rate of prime plus 0.5% (8.75% and 9.0%
at September 30, 1998 and 1997, respectively) $ 7,171,000 $1,706,000
Industrial Development Revenue Notes, variable interest rates
(5.4862% and 5.6524% at September 30, 1998 and 1997, respectively)
due in quarterly principal payments through 2000 100,000 180,000
Notes payable to Shareholders interest only payments of 10%
until maturity 2,247,000 1,350,000
Note Payable, monthly principal and interest payments
through November 2000, interest rate of 10.25% 283,000 370,000
Note payable, monthly principal and interest payments through
October 29, 2003, interest rate of 10.25% 486,000 --
Note payable, monthly principal and interest payments through
September 30, 2008, interest rate of 10% 498,000 --
Capital Leases 44,000 59,000
----------- ------------
$10,829,000 $3,665,000
Less unamortized discount on shareholder debentures 164,000 302,000
Less current portion of long-term obligations 8,582,000 1,885,000
----------- ------------
Total long-term obligations and shareholder debentures $ 2,083,000 $1,478,000
----------- ------------
----------- ------------
</TABLE>
69
<PAGE>
CREDIT FACILITY
On August 7, 1997, the Company and its principal bank lender, State Street Bank
& Trust Company, signed the Third Amendment to the credit agreement dated March
31, 1995 (as amended, the "Credit Agreement"). The Third Amendment increased the
Company's credit facilities from $4.25 million to $6.55 million, with a maturity
date of February 28, 1998. The $6.55 million consists of $3.55 million of
letters of credit and $3.0 million credit line for working capital. Borrowings
under the Credit Agreement bear interest at the prime rate plus 1/2 of 1%. The
Company also pays a fee of 1/2 of 1% on the unused portion of the credit
facilities.
As of September 30, 1997, the Company was not in compliance with certain
financial covenants contained in the Credit Agreement including minimum working
capital and maximum capital expenditures incurred for the year ended September
30, 1997, as defined.
On October 1, 1997, the Company amended and restated the Credit Agreement (the
"Amended Credit Agreement") which amended and restated the Credit Agreement
dated March 31, 1995. The total amount of the credit available to the Company
remained at $6.55 million, and the Company and all its subsidiaries became
borrowers under the Amended Credit Agreement. The Amended Credit Agreement is
secured by an Amended and Restated Joint Security Agreement, whereby the Company
and its subsidiaries granted to the lender a first priority security interest in
all accounts, inventory and general intangibles. The Company is subject to
certain operating and financial covenants, including minimum tangible capital,
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.
70
<PAGE>
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.
For the three months ended December 31, 1997, the Company recorded a loss before
interest and taxes in excess of the amount permitted under the Amended Credit
Agreement. On February 23, 1998, the Company received a waiver from the lender
for this event of non-compliance for the three months ended December 31, 1997.
As of March 31, 1998 the Company was out of compliance with one of its financial
covenants, pursuant to the Amended Credit Agreement, that limits the amount of
capital expenditures the Company may make during the year ending September 30,
1998. On May 15, 1998, the Company received a waiver from the bank for this
event of non-compliance and of non-compliance with the capital expenditure
financial covenant for the remainder of fiscal 1998. As of March 31, 1998 all
amounts due under the Amended Credit Agreement have been classified as current
in the accompanying balance sheet in accordance with the stated maturity dates
of the Agreement.
On June 11, 1998, the Company and its lender entered into the Third Amendment to
Credit Agreement dated June 11, 1998 which provided for (i) a revised
amortization schedule whereby the maximum aggregate liability (including letters
of credit) of the Company under the Existing Credit Facility shall not exceed
$9.6 million through September 30, 1998, $8.1 million from October 1, 1998
through December 31, 1998, and $6.6 million from January 1, 1999 through
February 28, 1999, which is when the balance is due and (ii) a reduction of the
net income covenant for the third quarter of fiscal 1998.
71
<PAGE>
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.
As of September 30, 1998 and subsequently the Company has not been in
compliance with the financial covenants under its credit agreement.
Accordingly, all amounts outstanding under the loan agreement became due on
demand. On December 24, 1998 the Company and the bank entered into a
forbearance arrangement that extends the due date of the outstanding balance
until March 31, 1999. See Note 12.
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, 2001. In consideration for the extended
Debentures on December 10, 1998, the holders were issued three-year warrants to
purchase an aggregate of 60,000 shares of common stock at an exercise price of
$6.00 per share, subject to anti-dilution adjustments. 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 anti-dilution adjustments. The original maturity date of these
Debentures, December 10, 1998, has been extended by the holders pursuant to
certain letter agreements until December 10, 2001. In consideration for
extending the maturity date of 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 $6.00 per share, subject to anti-dilution adjustments.
Debentures were issued to persons who are significant stockholders of the
Company or related to such persons.
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 anti-dilution adjustments.
72
<PAGE>
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 lender'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, 1998, the Company was not in compliance with certain
of these financial covenants.
Maturities of debt obligations subsequent to September 30, 1998 are:
1999--$8,582,000; 2000--$897,000; 2001--$500,000; 2002--$850,000; and
$0 thereafter.
8. STOCK OPTION AND WARRANT AGREEMENTS
STOCK OPTION PLANS
As of September 30, 1998, a total of 638,750 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 or $6.38
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, and those with an exercise
price of $23.67 expire in 2008, in each case on the anniversary of the date of
the grant.
Common shares under option are presented:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- ------------------ ---------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of year 367,000 8.24 241,000 6.20 77,000 6.25
</TABLE>
73
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Exercised (6,000) 6.54 (2,000) 6.13 -- --
Granted 238,000 23.67 131,000 11.53 166,000 6.13
Canceled (7,000) 17.07 (3,000) 6.88 (2,000) 3.32
--------- -------- --------- --------- -------- --------
Options outstanding, end of year 592,000 14.27 367,000 8.24 241,000 6.20
--------- -------- --------- --------- -------- --------
--------- -------- --------- --------- -------- --------
Options exercisable 265,500 205,300 100,400
--------- --------- ---------
Options available for future grants 46,400 9,300
--------- --------- ---------
--------- --------- ---------
Weighted average fair value of
options granted during the year 14.70 8.18 4.41
</TABLE>
The following summarizes certain data for options outstanding at September 30,
1998.
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE
NUMBER RANGE OF AVERAGE REMAINING
OF EXERCISE EXERCISE CONTRACTUAL
SHARES PRICES PRICES LIFE
------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Options outstanding, end of year 15,000 3.32 - 4.98 3.32 5.21
267,000 4.98 - 7.74 7.13 7.03
10,000 7.47 - 11.21 8.00 5.79
66,000 11.21 - 15.56 15.56 8.85
234,000 15.56 - 23.67 23.67 9.47
-------
592,000 14.52 8.13
-------
-------
Options exercisable 15,000 3.32 - 4.98 3.32 5.21
218,500 4.98 - 7.47 6.44 6.24
10,000 7.47 - 11.21 8.00 5.79
22,000 11.21 - 15.56 15.56 8.56
-------
265,500 8.37 6.36
-------
-------
</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
74
<PAGE>
Code, opportunities to make direct purchases of the Company's Common Stock, and
opportunities to make 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.
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.
75
<PAGE>
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.
See Note 12, Subsequent Events for warrant activity subsequent to year-end.
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 1998 and 1997 under the
Company's stock-based compensation plans been determined based on fair value at
the grant dates consistent with the method set forth under SFAS No. 123, the
effect on the Company's net income and earnings per share would have been as
follows:
<TABLE>
<CAPTION>
In thousands except per share amounts 1998 1997 1996
--------------- --------------------- --------------------
<S> <C> <C> <C>
Net income (loss)
As reported $ (19,031) $ 482 $ (2,387)
Pro forma $ (19,912) $ 373 $ (2,450)
Primary/fully diluted earnings per share
As reported $ (3.97) $ 0.10 $ (0.50)
Pro forma $ (4.16) $ 0.08 $ (0.51)
</TABLE>
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<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 5.76%-6.50% 6.19% to 6.21% and 5.38%
to 6.50% for 1998, 1997 and 1996, respectively, expected life of 10 years,
expected volatility of 52%, 51% and 54% for 1998, 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 1998, 1997, and 1996 was $359,000, $375,000,
and $281,000, respectively. During 1998, 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>
1998 1997 1996
------------ -------------- ------------
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 382,000 $ 308,000 $ 183,000
Interest cost on projected benefit obligation 1,133,000 1,056,000 1,022,000
Actual return on plan assets (681,000) (1,570,000) (932,000)
Net amortization and deferral (475,000) 581,000 8,000
------------ -------------- ------------
$ 359,000 $ 375,000 $ 281,000
------------ -------------- ------------
------------ -------------- ------------
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>
77
<PAGE>
The following table sets forth the plan's funded status as of September 30, 1998
and September 30, 1997:
<TABLE>
<CAPTION>
1998 1997
---------------------------- -----------------------------
<S> <C> <C>
Vested benefit obligation $ (13,062,000) $ (12,421,000)
Accumulated benefit obligation (13,165,000) (12,456,000)
Projected benefit obligation (15,321,000) (14,164,000)
Plan assets at fair value 14,858,000 14,418,000
Funded status (464,000) 254,000
Unrecognized prior service costs 80,000 89,000
Unrecognized net loss 2,582,000 1,698,000
Prepaid pension cost 2,198,000 2,041,000
</TABLE>
Plan assets are invested under the provision of a trust agreement with a bank in
common trust funds.
10. POST RETIREMENT BENEFITS
Effective the beginning of fiscal 1994 the Company adopted Statement of
Financial Accounting Standards No. 106 ("SFAS 106"), "Employers' Accounting for
Post Retirement Benefits Other Than Pensions". The statement requires companies
to accrue the cost of post retirement health care and life insurance benefits
within the employees' active service periods.
The Company provides employees who retired from the Company prior to January 1,
1993, with at least ten years of service and under the age of 65, with Group
Health Insurance on a cost-sharing basis. Coverage for an employee's spouse or
dependents will also continue under this plan until the employee has reached age
65 at which time, the coverage ceases. In addition, the Company provides the
same employees who are at least 62 years of age with life insurance equal to
their ending annual salary up to a maximum of $50,000.
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, 1998
and 1997, is approximately $763,000 ($5,000 for medical insurance and
$758,000 for life insurance) and 767,000 ($5,000 for medical insurance and
762,000 for life insurance), respectively. Plan assets of $413,000 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.
78
<PAGE>
Post retirement benefit expense for fiscal 1998, 1997 and 1996 as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------- --------------- ----------------
<S> <C> <C> <C>
Service cost of benefits earned $ 1,000 $ 1,000 $ 1,000
Interest cost on liability 59,000 59,000 58,000
Return on plan assets (12,000) (12,000) (12,000)
Amortization of transition obligation 24,000 24,000 24,000
----------- ----------- -----------
Net postretirement benefit cost $ 72,000 $ 72,000 $ 71,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The following table sets forth the Benefit Plan's funded status as of September
30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
--------------------- --------------------
<S> <C> <C>
Accumulated post retirement benefit obligation $ (763,000) $ (767,000)
Plan assets at fair value 413,000 401,000
------------- -------------
Funded status (350,000) $ (366,000)
Transition obligation 242,000 267,000
------------- -------------
Accrued post retirement benefit cost $ (108,000) $ (99,000)
------------- -------------
------------- -------------
</TABLE>
The following actuarial assumptions were used:
<TABLE>
<CAPTION>
1998 1997 1996
----------------- -------------------- ---------------
<S> <C> <C> <C>
Salary increase 5.5% 5.5% 5.5%
Discount rate 8.0% 8.0% 8.0%
Return on assets 3.0% 3.0% 3.0%
Medical inflation 4-9% 4-9% 4-9%
</TABLE>
79
<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 1999. 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.
In the process of manufacturing depleted uranium products, the Company
generates low-level radioactive waste materials that must be disposed of at
sites licensed by federal, state, and local governments. The operation of these
disposal sites is at the discretion of these regulatory entities, which may at
times result in temporary or long-term closures and limited access.
CONCORD SITE REMEDIATION AND DECOMMISSIONING PLANNING REQUIREMENTS
For a number of years, ending in 1985, the Company disposed of
manufacturing-related depleted uranium waste and the associated spent acid
and other residual materials by neutralizing with lime and discharging the
neutralized mixture to a holding basin on its premises in Concord,
Massachusetts. In 1986 the holding basin was covered with hypalon, an
impervious material used to prevent rain and surface run-off water from
leaking through the holding basin. (The Company now uses a proprietary
"closed loop" process that it developed to discontinue such discharges. The
Company believes that both practices were and are in compliance with all
applicable regulations.) Substantially all of these waste materials were the
by-product of work performed for the U.S. Army. On September 13, 1996, the
Army Contract Adjustment Board ("ACAB") decided pursuant to Public Law 85-804
that, 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 would 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 had to 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 those additional costs
which have been incurred by Envirocare as a result of such additional
services. On November 4, 1998, the Company received a written claim from
Zhagrus for excess costs of approximately $5.0 million. Zhagrus has not
provided sufficient information for the Company to make a determination of
the validity of the claim or the appropriateness of the amount. The Company
has submitted an engineering change proposal seeking contractual relief for
the additional costs of the remediation effort, 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 such additional costs which have been incurred
by Zhagrus under the subcontract. 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 cost
of remediating the holding basin at its Concord, Massachusetts facility will
exceed the amounts covered by the Company's fixed price contract with the
U.S. Army (the "Army Contract"), by at least $1.7 million which amount has
been recorded as a liability as of September 30, 1998. (The exact amount
of the excess costs presently is unknown, but the Company believes that the
potential range of such costs is between $1.7 million and $8.0 million,
inclusive of the Zhagrus claim of $5.0 million). The Company believes that
all or a certain portion of such excess costs may be recoverable pursuant to
a contract modification request or pursuant to an additional application for
relief under Public Law 85-804. Alternatively, the Company believes that all
or a certain portion of such costs, subject to confirmation by government
auditors, are recoverable as allowable overhead on future government
contracts, which the Company expects to be awarded. In December 1998 the
Company submitted an engineering change proposal to the U.S. Army seeking a
contract modification that would provide the Company with funding to cover
such estimated excess remediation costs. The Company is awaiting a response
from the U.S. Army. If these costs, potentially ranging from $1.7 to $8.0
million, are incurred by the Company without reimbursement or funding from
other sources, including the U.S. Army, the Company's business, results of
operation and financial condition would be materially and adversely affected.
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
South Carolina facility ("CMI") 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.
80
<PAGE>
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 location's regulatory agency. However, the Company's letters
of credit are subject to the forebearance agreement which expires on
March 31, 1999. (See footnote 12.)
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 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
written advice of legal counsel, management believes that the Army is
responsible for its estimated share of D&D.
The Company believes that the estimated costs of the Concord DFP,
$11.7 million and the CMI DFP, $2.9 million and any amounts pursuant to the
Zhagrus claim will be substantially funded by the Army, however, if these
liabilities become the responsibility of the Company, the Company would be
forced to consider insolvency or similar proceedings to preserve the
Company's business operations and the Company's financial condition and
results of operations would be materially and adversely impacted.
LEGAL PROCEEDINGS
On December 9, 1997, Brush Wellman filed a patent infringement suit
against the Company in the Massachusetts District Court alleging that the
Company is infringing on the Brush Wellman Patent for the process of investment
casting of beryllium aluminum alloys. Brush Wellman is seeking an injunction
against the Company's alleged patent infringement, monetary damages (including
treble damages) and attorney fees.
On March 28, 1998, the United States Patent and Trademark Office ("PTO")
granted the Company's request for re-examination (filed January 22, 1998). In
the Request, the Company contended, among other things, that there was
sufficient "prior art" in the field of investment castings and castings of
beryllium aluminum alloys such that the Brush Wellman Patent should not have
been issued. In granting the Request, the patent examiner agreed that the
Company's cited examples of prior art raised substantial new issues of
patentability which were not decided in the prior examination which led to
granting the Brush Wellman Patent. On July 30, 1998, in response to a motion to
stay the suit filed by Brush Wellman against the Company pending the outcome of
the re-examination proceeding which was filed by the Company on January 27,
1998, the Massachusetts District Court dismissed the suit without prejudice to
either party's moving to restore it to the docket upon the final decision of the
PTO relative to the re-examination. On August 26, 1998, the PTO issued an office
action in the re-examination of the Brush Wellman Patent rejecting all claims of
the Brush Wellman Patent. Brush Wellman amended the claims of the patent on
December 10, 1998 and, on December 31, 1998, the PTO issued notice of intent to
issue a Re-examination Certificate indicating the amended claims were
patentable.
81
<PAGE>
Even though the Company has been advised by its patent counsel,
Iandiorio & Teska, that Brush Wellman's amended claims are not infringed and
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 a lawsuit
if Brush Wellman decides to refile its complaint. Even if the lawsuit was not to
proceed to trial, the litigation could result in substantial costs to the
Company, and an unfavorable settlement of the lawsuit could place the Company at
a competitive disadvantage. An adverse judgment or settlement could subject the
Company to significant liabilities and expenses (e.g., reasonable royalties,
lost profits, attorneys' fees or trebling of damages for willfulness). An
adverse outcome also could cause the Company to incur substantial costs in
redesigning the investment casting process for its Beralcast products and
components. Moreover, there can be no assurance that redesign alternatives would
be available to the Company, and if available, that any redesign alternative
would not place the Company at a competitive disadvantage. The Company could be
required to license the disputed patent rights from Brush Wellman or to cease
using the patented technology. Any such license, if required, may not be
available on terms acceptable or favorable to the Company, or at all. Any of
these results could have a material adverse effect on the Company's business,
financial condition and results of operations. Even in the event of a successful
outcome, the Company may incur significant legal expenses in its defense.
The Company is named as a Potentially Responsible Party ("PRP") in
regard to the Maxey Flats, Kentucky, Superfund Site. This site was used until
1977 as a licensed and approved low level radioactive waste disposal site. A
committee of PRPs, including the Company, has submitted a remedial investigation
and feasibility study report to the Environmental Protection Agency. The
agreement signed by the settling parties in July 1995 outlines the
responsibilities of all PRPs and states that the PRPs will undertake the initial
remedial phase ("IRP") of the site remediation at an estimated cost of $60
million. Based upon the percentage of responsibility allocated to the Company,
its liability at this site is expected to be approximately $80,000 over 10
years.
The Company is involved in various legal proceedings which have
arisen in the ordinary course of business. Management believes the outcome
of such legal proceedings will not have a material adverse impact on the
Company's financial position or results of operations.
12. SUBSEQUENT EVENTS
On October 15, 1998 the Company issued a 10% subordinate Debenture in the amount
of $500,000 to a current shareholder. Warrants totaling 60,000 shares at a
strike price of $6.00 per warrant have also been issued as part of this
Debenture.
On December 10, 1998 certain shareholders of the Company agreed to a three-year
extension to December 10, 2001 on the 10% convertible debt in the amount of
$850,500. Payments of the related interest have been extended to June 10, 1999.
Warrants totaling 102,000 with a strike price of $6.00 per warrant have also
been issued as part of this extension.
On December 24, 1998, the Company entered into an agreement with its
principal bank to forebear on all collection action until March 31, 1999 as a
result of the Company's inability to comply with certain requirements in the
Secured Revolving Line of Credit including payment of $3,550,000 due on
November 15, 1998.
13. TRANSACTIONS WITH RELATED PARTIES
Under the terms of a management agreement, Matthews Associates Limited is
entitled to an annual management fee.
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 1998, 1997, and 1996. Mr. Matthews
does not receive any other salary or fee for services as Chairman of the
Board of Directors.
Wilson B. Tuffin, Vice Chairman of the Board of Directors, and a significant
stockholder, entered into an employment and consulting agreement with the
Company in November 1994, which shall continue in force until February 1999.
Pursuant to such agreement, Mr. Tuffin receives annual compensaiton of $105,000
for his services as a consultant to the Company. Mr. Tuffin's duties include his
service as a director and Vice Chairman of the Board of Directors of the
Company. During the term of the agreement and for a period of two years after
its expiration, Mr. Tuffin may not compete directly or indirectly with the
Company within the continental United States.
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<PAGE>
14. MAINTENANCE AND REPAIRS
Maintenance and repair expenditures, which are charged to cost and expense as
incurred, amounted to $1,565,000, $1,536,000 and $1,092,000 in 1998, 1997 and
1996, respectively.
15. INDUSTRY SEGMENT INFORMATION
The Company is engaged in the manufacture and sale of various specialty metal
products. The Company operates in three industry segments: Specialty Metal
Products, Uranium Services and Recycle and Depleted Uranium Penetrators.
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>
1998 1997 1996
--------------- -------------- ---------------
<S> <C> <C> <C>
Net sales and contract revenues: (AS RESTATED) (AS RESTATED)
Uranium services & recycle $ 7,827,000 $ 4,965,000 $ 6,189,000
Specialty metal products 14,185,000 13,170,000 13,730,000
Depleted uranium penetrators 12,811,000 9,927,000 8,775,000
------------ ------------ ------------
Total $ 34,823,000 $ 28,062,000 $ 28,694,000
------------ ------------ ------------
Gross profit (loss):
Uranium services and recycle $ (3,932,000) $ 3,934,000 $ (367,000)
Specialty metal products 463,000 1,616,000 3,761,000
Depleted uranium penetrators (1,736,000) 2,376,000 897,000
------------ ------------ ------------
Subtotal $ (5,205,000) $ 7,926,000 $ 4,291,000
Other expense, net 13,826,000 7,413,000 6,677,000
------------ ------------ ------------
Income (loss) before taxes $(19,031,000) $ 513,000 $ (2,386,000)
------------ ------------ ------------
------------ ------------ ------------
Identifiable assets:
Uranium services and recycle $ 9,331,000 $ 14,499,000 $ 14,399,000
Specialty metal products 9,665,000 6,155,000 6,195,000
Depleted uranium penetrators 4,456,000 7,965,000 8,441,000
Corporate 8,981,000 5,735,000 6,733,000
------------ ------------ ------------
Total $ 32,433,000 $ 34,354,000 $ 35,768,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
83
<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 four major customers
(see Note 2). 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.
Gross profit (loss) includes net sales and contract revenues less the cost of
sales of the individual segments. Other expenses, net include selling, general
and administrative, research and development, interest and other income and
expenses.
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.
84
<PAGE>
16. QUARTERLY RESULTS (UNAUDITED)
Financial results by quarter for 1998, 1997 and 1996 are summarized below:
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
1998
Net sales $ 8,079 $ 10,690 $ 7,429 8,625
Operating income (loss) (1,427) 628 (2,301) (14,662)
Net income (loss) (1,561) 272 (2,765) (14,977)
Net income (loss) per share (0.33) 0.06 (0.58) (3.12)
1997 (as restated)
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 (as restated)
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)
</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.
85
<PAGE>
EXHIBIT 23(a)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports dated January 8, 1999 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
January 18, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000276331
<NAME> STARMET CORP.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 565,000
<SECURITIES> 0
<RECEIVABLES> 6,544,000
<ALLOWANCES> 524,000
<INVENTORY> 5,505,000
<CURRENT-ASSETS> 11,135,000
<PP&E> 43,668,000
<DEPRECIATION> 25,731,000
<TOTAL-ASSETS> 32,433,000
<CURRENT-LIABILITIES> 23,345,000
<BONDS> 0
0
0
<COMMON> 479,000
<OTHER-SE> 6,598,000
<TOTAL-LIABILITY-AND-EQUITY> 7,077,000
<SALES> 34,823,000
<TOTAL-REVENUES> 34,823,000
<CGS> 40,028,000
<TOTAL-COSTS> 52,585,000
<OTHER-EXPENSES> 145,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,124,000
<INCOME-PRETAX> (19,031,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (19,031,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,031,000)
<EPS-PRIMARY> (3.97)
<EPS-DILUTED> (3.97)
</TABLE>
