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 for the fiscal year ended September 30, 1999
or
Transition Report Pursuant to Section - or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to
COMMISSION FILE NO. 0-8836
STARMET CORPORATION
(Exact name of Registrant as specified in its charter)
MASSACHUSETTS 04-2506761
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2229 MAIN STREET
CONCORD, MASSACHUSETTS 01742
(Address of Principal Executive Offices) (Zip Code)
(978) 369-5410
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock ($.10 Par Value)
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if the disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in a definitive proxy or information
statement incorporated in Part III of this Form 10-K or any amendments to this
Form 10-K. / /
The aggregate market value of the Common Stock of the Registrant held by
non-affiliates (i.e. persons who are not executive officers, directors or
greater than 10% shareholders) was approximately $12,677,282 as of November 30,
1999.
As of November 30, 1999, there were issued and outstanding 4,795,674 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 July 31, 1972 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,
was renamed Starmet CMI, Inc. 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 four industry segments: (1) fabrication of an assortment of
specialty metal products, primarily from depleted uranium, using foundry,
extrusion, and machining capabilities; (2) uranium services and recycling of
low-level contaminated steel; (3) manufacture of high-purity, spherically shaped
metal powders; and (4) manufacture of Beralcast(R), the Company's family of
beryllium aluminum, metal matrix composites ("MMC") for use in certain advanced
commercial and aerospace applications.
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Industry Segment Financial Information
The following table sets forth certain information regarding the revenue,
operating income (loss) and identifiable assets attributable to the four
industry segments in which the Company operates.
Year Ended September 30,
---------------------------------------------
1999 1998 1997
--------- ---------- -----------
(as restated) (as restated)
(in thousands)
Net Sales and Contract Revenues:
Specialty Metal $ 9,472 $ 18,845 $ 14,459
Uranium Services and Recycle 7,472 5,905 4,965
Powders 5,406 5,078 4,348
Composite Materials 2,651 4,995 4,290
Operating Income (Loss):
Specialty Metal $ 762 $ (2,881) $ 50
Uranium Services and Recycle (1,038) (11,519) 2,675
Powders 1,543 184 625
Composite Materials (2,200) (3,546) (2,539)
Identifiable Assets:
Specialty Metal $ 1,237 $ 2,270 $ 2,126
Uranium Services and Recycle 9,115 10,458 13,964
Powders 929 1,052 1,221
Composite Materials 3,309 3,692 2,335
Segment information has been restated for 1998 and 1997 to be consistent with
the 1999 presentation in accordance with SFAS No. 131.
See Note 15 of Notes to Consolidated Financial Statements.
The Company has no foreign operations. The Company has export sales, which
accounted for 8%, 18% and 25% of net sales for the fiscal year ended September
30, 1999, 1998 and 1997, respectively.
The following is a general description of the Company's four business segments:
Specialty Metal
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 continued to produce
penetrators under a
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production contract through the fourth 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 fiscal 1999.
The Company will continue, however, under a multi-year contract with Bechtel
BWXT Idaho, 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. In addition, the Company continues to manufacture DU
industrial and medical shielding products.
Uranium Services and Recycle
Starmet develops and provides products and services based upon its longstanding
metallurgical, radiological and chemical know-how, including its expertise in
processing and converting uranium hexafluoride (UF6) and its derivative uranium
tetrafluoride (UF4) into products that can be utilized in a variety of
specialized applications.
UF6 Conversion. Starmet owns and operates the only production facility in North
America capable of converting natural UF6 and depleted UF6 into UF4. Depleted
UF6 is a low-level radioactive by-product of the enrichment of uranium. From
UF4, the Company produces DU metal that it manufactures into various products.
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 UF6 to UF4. 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 UF4.
Fluorine Mining. The Company holds three U.S. patents on a process to recover
and convert fluorine and related products from UF4 that is the by-product of UF6
conversion. The United States Department of Energy ("DOE") has stockpiled over
one billion pounds of UF6 which Starmet believes must eventually be
dispositioned. The Company is in phase two of a three phase development program
for the commercialization of fluorine recovery from UF6.
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 has a $6 million U.S. Air Force contract for the refurbishment
of C-141 aileron and elevator assemblies for the next four fiscal years. The
Company also has the capability to produce replacement counterweights.
AVLIS Feedstock. The Company supplied DU and natural uranium alloy material for
use as AVLIS feedstock in USEC's AVLIS program. AVLIS is a laser-based
enrichment process that, according to USEC, was expected to replace the current
gaseous diffusion process for producing enriched fuel used in nuclear reactors.
The AVLIS program was cancelled by USEC in June 1999.
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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.
Powders
The Company manufactures certain metal powders for niche markets through its
proprietary processes called the Rotating Electrode Process ("REP(R)") and the
Plasma Rotating Electrode Process ("PREP(R)"), 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(R), are used in medical implants to effectively bond prosthetic devices to
bone and tissue, and uniform steel powders made through PREP(R) are used in
photocopiers, sophisticated rapid prototyping applications, and magnetic paint
for children's books, wallpaper, and toys. Management believes the Company's
metal powders offer performance advantages in these 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.
Composite Materials
Beralcast(R) is an investment-castable and extrudable metal matrix composite of
beryllium aluminum designed for lightweight and high stiffness structural and
electronic applications.
Defense & Commercial Aerospace. Beralcast(R) components have been specified for
use on such high performance defense applications as the U. S. Army's RAH-66
Comanche helicopter program. In addition, the Company has manufactured prototype
parts for advanced fighter aircraft, weapons, navigational and targeting
systems. Management believes that its Beralcast(R) products meet demanding
performance requirements for certain applications where stiffness, vibration
damping, lightweight, workability and material uniformity are critical, such as
the Comanche helicopter program. The Company has received contracts from
Lockheed Martin for several separate Beralcast(R) components to be used in the
night vision and target acquisition system on the Comanche helicopter program.
The qualities of Beralcast(R) make it optimal for use in this type of aerospace
application because of its lightweight, stiffness and vibration damping
characteristics, which are required in the Army's latest version of night vision
and targeting systems. The U.S. Army has reported that without the benefits of
Beralcast(R), costs of the Comanche program would increase by approximately $300
million covering redesign and substitute materials.
In addition to the RAH-66 Comanche applications, Beralcast(R) is currently in
use on over twenty different defense and commercial aerospace applications
requiring lightweight and high stiffness.
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Many of these programs are currently in the initial prototype phases and will
require significantly higher quantities once in the full production phase.
Computer Hard Disk Drives. Using metal matrix composites ("MMC") of beryllium
aluminum, hard disk drive designers will have the ability to reduce the
thickness of individual arm sets in the disk stack and place additional disks
within the same volume. This arm set thickness reduction will enable
manufacturers to achieve increased storage capacity while maintaining current
disk drive dimensional standards. In addition, the higher vibration damping
properties of Beralcast(R), 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. Using these properties will enable disk drive
manufacturers to reduce the quantity of platters and the responding heads at the
same time increasing storage capacity. Reducing components in the drive will
provide higher value to the customer and offset the increased cost of the MMC
arm set. Furthermore, Beralcast(R) has lower thermal expansion and is more
dimensionally stable than aluminum, characteristics that are critical in certain
next generation disk drive systems 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(R) will be a critical aspect of
achieving these goals. The Company has produced prototype and pre-production
Beralcast(R) 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.
The company recently introduced a lower cost version of is original Beralcast(R)
composite material containing less beryllium. These alloys called Beralcast(R)
MGA are custom formulated to match customers cost and performance requirements
by increasing or decreasing the beryllium content. Since Beralcast(R) MGA was
introduced last year, four customers have placed prototype orders for material,
which were fabricated into hard disk drive assemblies. These customers are
investigating the introduction of this product into their next generation of
high performance products.
To meet the anticipated demand, the company has entered a joint manufacturing
agreement with a leading manufacturer of aluminum actuators. This company,
Alexandria Extrusion Company (AEC) of Alexandria, MN has demonstrated its
capabilities to manufacture Beralcast(R) MGA into precision extrusions for their
current hard disk drive customers. The Company and AEC have selected an Asian
contract manufacturer to support the anticipated increase in demand for this
next generation hard disk drive actuator material.
Commercial Motion Control Applications. The Company is currently producing
production quantities of Beralcast(R) investment castings for use in precision
mechanical systems supporting the semiconductor manufacturing market.
Beralcast(R), which is 22% lighter than aluminum and three times greater in
stiffness, has been introduced into motion control applications to enable
equipment designers to increase their equipment performance without increasing
the equipment size or volume. This performance has enabled certain customers to
achieve up to 20% increase in Units per Hour (UPH) over their conventional
design. Customers are continuing to investigate existing components as
Beralcast(R) material substitution candidates. The Company is also investigating
other commercial applications, which would benefit from the increased
performance of Beralcast(R) alloys.
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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 some of its metal matrix composites,
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. The Company believes that a sufficient
supply of beryllium remains available for its current demand. However, if its
MMC 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.
UF6, the raw material for DU products, is currently available in abundant supply
from DOE's inventory and from USEC's ongoing operations.
Manufacturing and Operations
Beralcast(R) 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(R). These molds are fabricated using either
conventional wax patterns or rapid prototype patterns. Pursuant to a teaming
agreement between Starmet and Nu-Cast Inc., a producer of thin-walled,
lightweight aluminum castings, the molds are fabricated in accordance with
Starmet's specifications at Nu-Cast Inc. using a dedicated mold fabrication line
that was installed to support the manufacture of Beralcast(R) investment molds.
To support the future growth of Beralcast(R), the Company intends to establish
ceramic mold manufacturing capabilities at its Concord facility.
The Company's Specialty Metal, Powders and Beralcast(R) 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.
The Company owns and operates a facility in Barnwell, South Carolina located on
321 acres of land which includes a 109,000 square foot facility housing two
manufacturing units (one unit
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provides the capability of converting UF6 to UF4 and a second unit houses a
reduction process to convert UF4 to metallic depleted uranium) and a full-scale
analytical laboratory, and a 70,000 square foot facility, adjacent to the
manufacturing facility, to provide recovery and recycle of DU and other
materials.
Research and Development Activities
The Company has on-going research and development activities to support each of
its business segments. The efforts in Beralcast(R) products are focused on the
development of technology for producing shaped extrusions. The Company believes
this technology will find application in the production of disk drive actuators
and also for commercial and aerospace products. For Powders products, research
and development is focused on producing tubing from high strength titanium
alloys and on a new method for producing net shape parts from metal powders. The
Company is continuing with the development of its technology for fluorine
recovery from UF6. Work has been successfully completed on the first phase of
the three phase development program with better than anticipated results. A
small pilot plant has been installed at the Company's Concord facility to
further test and develop the process as part of the phase two effort.
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
$1,243,000, $1,421,000 and $1,309,000 in fiscal 1999, 1998 and 1997,
respectively. Total revenues from customer-funded research and development were
$825,000, $831,000 and $793,000 in fiscal 1999, 1998 and 1997, 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 that mitigate technical and
scheduling risks.
Sales of MMC 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(R) 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,
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Massachusetts, San Jose, California, and Barnwell, South Carolina and sales
representatives in Europe and Israel.
Patents, Trademarks and Licenses
The Company is actively pursuing patent protection on new technologies related
to new products and process improvements for all of the Company's business
segments.
The Company holds three U.S. patents on alloy compositions for Beralcast(R) and
has applied for patent protection in Canada and Europe. The U.S. patents provide
patent rights through the year 2012. The Company also has one additional patent
pending covering the extrusion of a metal matrix composite as a method for
producing disk drive actuators.
The Company holds three U.S. patents which provide patent rights through the
year 2018 on a process for recovering fluorine from uranium hexafluoride (UF6)
and the production of fluoride gases and chemicals. Four additional patent
applications are pending covering extensions of the technology to the production
of specific types of chemicals.
The Company holds a U.S. patent relating to developments in REP(R) technology
for metal powders which provides patent rights through the year 2001 and a
second patent for a modified REP(R) production method to make fine ceramic and
metal powders. This patent provides patent rights through the year 2016. Two
patents are pending covering the production of millimeter size spherical silicon
balls and a method of producing metal parts from metal powders.
The Company has registered trademarks in the following names: REP(R), PREP(R)and
Beralcast(R). 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.
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 72%, 67% and 78% of the Company's sales in the
fiscal years 1999, 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 UF6 conversion and AVLIS feedstock
material. The AVLIS program was cancelled by USEC in June 1999. AVLIS program
sales amounted to $1,066,000 in fiscal 1999. Sales to USEC accounted for 23%,
14% and 14% of sales in fiscal 1999, 1998, and 1997 respectively.
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Royal Ordnance, a U.K. defense contractor, is a significant customer of the
Company's DU Specialty Metal's penetrator business. Sales to Royal Ordnance
accounted for 2%, 13% and 19% of sales in fiscal 1999, 1998, and 1997
respectively.
Primex Technologies is also a significant customer of the Company's DU Specialty
Metal's penetrator business. Sales to Primex Technologies accounted for 11%, 12%
and 12% of sales in fiscal 1999, 1998, and 1997 respectively. The Company
provided Primex Technologies with 120mm penetrators for the U.S. Army's ABRAMS
Tank program through the fourth quarter of fiscal 1999.
Lockheed Martin is a significant customer of the Company's Beralcast(R) products
business. Sales to Lockheed Martin accounted for 5%, 11%, and 7% of sales during
fiscal 1999, 1998, and 1997 respectively.
Employee Relations
As of September 30, 1999, the Company employed 144 employees. No employees are
covered by any collective bargaining agreements. The Company believes that its
relationships with its employees are satisfactory.
Backlog
The Company's backlog was $22,686,000, $27,532,000 and $27,654,000 at September
30, 1999, 1998 and 1997, including the portions thereof represented by orders
from the Company's principal customers, USEC, Royal Ordnance, Primex, Lockheed
Martin, Robins AFB, and Bechtel BWXT Idaho. 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. The Company has an unfunded
option under its USEC UF6 conversion contract valued at $26 million that is not
included in backlog.
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
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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. 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.
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.
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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 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. 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's reflect its
position that it is obligated to provide financial assurance only with respect
to the portion of the materials which are attributable to the Company's
commercial production for parties other than the United States Government and
that this obligation has been satisfied by a letter of credit to each geographic
location's regulatory agency. However, the Company's letters of credit are
subject to the agreement with its principal lender, which expires on August 15,
2000. 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 the Company 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.
The United States Army, in a 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. Additionally, the Company is currently performing on a U.S. Army
facilities contract that obligates the Army to restore those facilities used in
the production of penetrators once the Company ceases DU penetrator production.
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. Under the Zhagrus contract, the Company agreed to pay an additional fee
per cubic yard of excess material removed dependant upon certain actions by
Zhagrus. 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
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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' claim is the subject of litigation described in Item 3 -
"Legal Proceedings". If these costs are not recovered from the U.S. Army and the
Company is held responsible for these costs, 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.
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. In February 1999,
based on discussions with the U.S. Army, the Company submitted a claim under
P.L. 85-804 requesting payment of these excess costs. In June 1999, the U.S.
Army denied the latter request. In August 1999, the Company re-submitted the
engineering change proposal and 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 upon examination of
relevant contracts, the actions of the Army with respect to D&D of facilities of
other contractors, and discussions with counsel, 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 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 contested $5.0 million cost associated with the additional
treatment of waste 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 capability to finance such liabilities. Management
believes, based upon written advice of consultants and counsel, that the U.S.
Government has a responsibility to pay, directly and indirectly, for a
substantial portion of these costs. The United States Army, in the Army
Decision, 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
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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 receivership 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 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 that includes:
109,000 square foot facility housing two manufacturing units: one unit
provides the capability of converting DU and natural uranium gas (UF6) to
green salt (UF4) and a second unit houses a reduction process to convert
green salt (UF4) to metallic depleted uranium and a full scale analytical
laboratory
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.
ITEM 3. LEGAL PROCEEDINGS
The Company is named as a Potentially Responsible Party ("PRP") in regard to the
Maxey Flats, Kentucky, Superfund Site. This site was used until 1977 as a
licensed and approved low-level radioactive waste disposal site. A committee of
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 remaining liability
at this site is expected to be approximately $70,000 over 8 years.
On February 5, 1999, the Company was served with a summons and complaint in a
common law diversity tort action filed in the United States District Court for
the Eastern District of Tennessee, entitled Orick v. Brush Wellman, et al.,
3:98-CV-652 (E.D. Tenn.), naming as defendants eight corporations, including
Starmet Corporation. The complaint also names the United States of America as a
defendant under the Federal Tort Claims Act. The complaint alleges that the
defendants failed to adequately warn the plaintiff, an employee of a facility in
Tennessee that processes beryllium products, regarding the dangers of beryllium
and beryllium manufacturing. The complaint seeks $1 million in compensatory
damages against the Company, as well as punitive damages of $10 million. The
Company believes that the claims are without merit and intends to
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<PAGE>
vigorously defend against the claim. However, there can be no assurance that
this litigation will ultimately be resolved on terms that are favorable to the
Company. On February 17, 1999, the Company was served with a summons and
complaint in a breach of contract action filed in The Superior Court, County of
Middlesex, Commonwealth of Massachusetts, entitled Zhagrus Environmental, Inc.
et. al. v. Nuclear Metals, Inc. et. al., MCV99-01057, naming the Company and its
subsidiaries as defendants. The Company removed the case to federal district
court in Massachusetts on March 18, 1999, where it was docketed as Civil Action
No. 99-CV-10600-RGS. The complaint alleges, among other things, that the
defendants materially breached their agreement with the plaintiff, Zhagrus
Environmental Inc., entitled "Holding Basin Remediation and Waste Disposal
Agreement" dated May 8, 1997, and that plaintiffs, Zhagrus and Envirocare of
Utah, Inc., are entitled to a judgment in the amount of at least $8,368,883 for
services rendered pursuant to such agreement. On June 18, 1999, the Company
filed its answer to the complaint denying liability, and asserted a counterclaim
against the plaintiffs alleging, among other things, breach of contract, breach
of implied covenant of good faith, deceit, and violation of Mass. Gen. Laws c.
93A. On July 7, 1999, the Company and plaintiffs agreed, pending resolution of
the lawsuit, to entry of an order placing certain limited restrictions on the
Company's ability to enter into significant transactions without affording prior
notice to the plaintiffs. Although the Company believes that it has valid
defenses to the claims alleged in this complaint, there can be no assurance that
this litigation will ultimately be resolved on terms that are favorable to the
Company. The Company has sought relief from the Army for a portion of the
amounts claimed by the plaintiffs, to the extent that the Company is otherwise
required to pay those amounts. Of the $8,368,883, $3.5 million has been recorded
as a liability. The Company believes there are material issues of fact relating
to the amount of this liability ($3.5 million) which are the subject of the
Zhagrus litigation.
On February 24, 1999, the Company was served with a summons and complaint in a
common law diversity tort action filed in the United States District Court for
the Eastern District of Tennessee, entitled Jerry Lynn Hall & Rose Mary Hall v.
Brush Wellman, et al., 3:99-CV-110 (E.D. Tenn.), naming as defendants fourteen
corporations, including Starmet Corporation. The complaint alleges that the
defendants failed to adequately warn the plaintiff, an employee of a facility in
Tennessee that processes beryllium products, regarding the dangers of beryllium
and beryllium manufacturing. The complaint seeks $6 million in compensatory
damages against the Company, as well as punitive damages of $10 million. The
Company believes that the claims are without merit and intends to vigorously
defend against the claim. However, there can be no assurance that this
litigation will ultimately be resolved on terms that are favorable to the
Company.
On December 13, 1999, the Company was served with a summons and complaint in a
common law diversity tort action filed in the United States District Court for
the Eastern District of Tennessee, entitled Jesse McDonald v. Brush Wellman, et
al., 3:99-CV-642 (E.D. Tenn.), naming as defendants thirteen corporations,
including Starmet Corporation. The complaint alleges that the defendants failed
to adequately warn the plaintiff, an employee of a facility in Tennessee that
processes beryllium products, regarding the dangers of beryllium and beryllium
manufacturing. The complaint seeks $5 million in compensatory damages against
the Company, as well as punitive damages of $10 million. The Company believes
that the claims are without merit and intends to vigorously defend against the
claim. However, there can be no assurance that this litigation will ultimately
be resolved on terms that are favorable to the Company.
15
<PAGE>
On December 20, 1999, the Company was served with a summons and complaint in a
common law diversity tort action filed in the United States District Court for
the Eastern District of Tennessee, entitled John Langley v. Brush Wellman, et
al., 3:99-CV-655 (E.D. Tenn.), naming as defendants thirteen corporations,
including Starmet Corporation. The complaint alleges that the defendants failed
to adequately warn the plaintiff, an employee of a facility in Tennessee that
processes beryllium products, regarding the dangers of beryllium and beryllium
manufacturing. The complaint seeks $6 million in compensatory damages against
the Company, as well as punitive damages of $10 million. The Company believes
that the claims are without merit and intends to vigorously defend against the
claim. However, there can be no assurance that this litigation will ultimately
be resolved on terms that are favorable to the Company.
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, 1999.
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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". The high and low bid prices for the two years ended September 30,
1999 and 1998 are reflected in the following table. This information reflects
inter-dealer prices, without retail mark-up, markdown or commissions and may not
represent actual transactions.
As of September 30, 1999, there were 224 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.
High Low
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
Fiscal 1999:
1st Quarter 14.50 3.00
2nd Quarter 10.50 5.00
3rd Quarter 6.50 2.25
4th Quarter 4.88 1.50
The Company did not declare any cash dividends during its last three fiscal
years. Given the Company's current cash flow situation, the Company does not
expect to pay cash dividends in the next year. The company presently expects
that future cash dividends, if any, would be paid on an annual basis in an
amount 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.
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<TABLE>
<CAPTION>
ITEM 6. SELECTED FINANCIAL DATA
1999 1998 1997 1996 1995
(as restated) (as restated)
(in thousands except for employee and per share data)
<S> <C> <C> <C> <C> <C>
Operating Results for the Year
Net Sales and Contract Revenues $ 25,001 $ 34,823 $ 28,062 $ 28,694 $ 18,784
Cost and Expenses 25,934 52,585 27,251 30,604 20,708
Operating Income (Loss) (933) (17,762) 811 (1,910) (1,924)
Other Income (Expense), Net (1,509) (1,269) (298 (476) (118)
Income (Loss) Before Taxes (2,442) (19,031) 513 (2,386) (2,042)
Provision (Benefit) for Income Taxes -- -- 31 1 (1,967)
Extraordinary Gain -- -- -- 585 --
Net Income (Loss) (2,442) (19,031) 482 (2,387) 510
Earnings (Loss) Per Share (0.51) (3.97) 0.10 0.11
Capital Expenditures, Net 88 4,585 1,788 1,449 777
Research and Development 1,243 1,421 1,309 876 439
Financial Position at Year-end
Stockholders' Equity 4,635 7,077 25,746 25,020 27,245
Shares Outstanding 4,791 4,791 4,784 4,782 4,776
Net Book Value per Common Share Outstanding 0.97 1.48 5.39 5.24 5.70
Dividends Paid -- -- -- -- --
Dividend Per Share -- -- -- -- --
Total Assets 25,856 32,433 34,354 35,768 40,886
Working Capital (13,218) (12,138) 4,542 4,048 15,866
Long-term Debt net of Unamortized Discount 10,127 10,665 3,363 1,874 4,480
(including Current Installments)
Other Data
Weighted Average Number of Shares of Common
Stock Outstanding 4,791 4,789 4,959 4,779 4,706
Backlog (at Year-end) 22,686 27,532 27,654 23,248 30,709
Number of Employees (at Year-end) 144 280 235 190 200
</TABLE>
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 four business segments in which the
Company currently reports its results, namely Specialty Metal, Uranium Services
and Recycle, Powders, and Composite Materials. The Specialty Metal segment
includes the fabrication of primarily depleted uranium (DU) metal products,
using foundry, extrusion, and machining capabilities. Its products include
industrial and medical shielding products, DU billets in support of the Army's
tank armor program and the production of various DU penetrators (a component of
armor-piercing ammunition used in certain U.S. military gun systems) which are
sold to prime contractors manufacturing such ammunition for the U.S. Department
of Defense or to foreign military operations. The Uranium Services and Recycle
segment includes the conversion of UF6 for United States Enrichment Corporation,
repair and refurbishment of DU aircraft counterweights for commercial and
military aircraft and the manufacture of depleted uranium. The Powders segment
includes the production and sale of various metal powders manufactured by the
Company's patented Rotating Electrode
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Process. The Composite Materials segment includes the manufacture of beryllium
aluminum composite materials for defense and commercial aerospace applications,
computer hard disk drives, and commercial motion control applications for the
semiconductor manufacturing market.
Fiscal 1999 was a year of transition for the Company. As the Company began the
year, there were four major issues: (1) return the Company to profitability, (2)
further the commercialization of existing and emerging technologies as the
Company exits the penetrator business, (3) improve the Company's liquidity and
(4) negotiate an extension to the existing maturity date with its principal
lender which was due to expire on March 31, 1999. The Company achieved
significant progress on all four fronts.
The Company completed fiscal 1999 with five consecutive profitable months. The
fourth quarter was the first profitable quarter in eighteen months. In the
quarter, the Company generated net income of $553,000, or $0.12 per share on
basic average shares outstanding of 4,791,000, on revenues in excess of $6.0
million, a profitability of 9.2%. Compared to the Company's last profitable
quarter, net income more than doubled on $4.7 million (44%) less in sales,
reflecting the Company's success in bringing its cost structure in line with the
current levels of revenue. The quarterly breakeven point was reduced to under
$5.5 million in revenues, or half of what it was a year earlier.
Compared to the third quarter of fiscal 1999, fourth quarter revenues increased
by $387,000 and net income improved by $1,371,000, or $0.29 cents per basic
share outstanding. The profit improvement for the quarter is attributable in
part to reduced direct and indirect manufacturing costs but more significantly
to reduced selling, general and administrative expenses. This is a further
reflection of the aggressive cost reductions, comprehensive restructuring of the
organization and spending curbs implemented by the Company over the past year.
During fiscal 1999, the Company introduced Beralcast(R) as a high performance
composite material for the next generation of computer disk drives. The Company
has produced cast and extruded MMC prototype and pre-production Beralcast(R)
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. Also, the Company developed motion control applications for Beralcast(R)
and introduced it to the semiconductor manufacturing market for use in precision
mechanical systems and is currently producing production quantities of
Beralcast(R) investment castings.
During fiscal 1999, the Company continued with the development of its technology
for fluorine recovery from UF6. Work has been successfully completed on the
first phase of the three phase development program with better than anticipated
results. A small pilot plant has been installed at the Company's Concord
facility to further test and develop the process as part of the phase two
effort.
Despite the reported net loss of $2,442,000 for fiscal 1999, the Company
generated positive cash flow from operations, reduced trade accounts payable by
$2.3 million, and paid down it's revolving line of credit by $1.0 million. On
November 12, 1999, the Company entered into an agreement with its principal
lender to further extend the maturity of its current credit agreement to August
15, 2000. The Company presently expects to meet certain conditions that would
extend the final maturity to
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<PAGE>
June 10, 2001, at which time the Company projects the principal balance to be
sharply reduced from current levels. The return to profitability in the fourth
quarter of fiscal 1999 and generating positive cash flow from operations were
key factors in obtaining this extension.
As we move into fiscal 2000, the Company is poised to exploit the significant
improvements made in fiscal 1999. The Company is continuing to evaluate new
business opportunities for both existing and emerging patented technologies. The
Company continues to pursue potential expansion of its titanium powder business;
development of its Beralcast(R) investment casting technology for aerospace and
defense applications; development of its Beralcast(R) MGA extrudable MMC for
computer disk drive applications, and development of its DUCRETE(TM) shielding
technology for potential radiation shielding applications. The Company continues
to invest heavily in research and development of processes to recover valuable
fluorine compounds from uranium tetrafluoride. All of these have the potential
of making significant contributions to the future profitability of the Company.
Segment Information
The following table sets forth certain information regarding the revenue, gross
profit (loss) and identifiable assets attributable to the four business segments
in which the Company currently operates:
Year Ended September 30,
---------------------------------------
1999 1998 1997
-------- -------- --------
(as restated) (as restated)
(in thousands)
Net sales and contract revenues:
Specialty Metal $ 9,472 $ 18,845 $ 14,459
Uranium Services and Recycle 7,472 5,905 4,965
Powders 5,406 5,078 4,348
Composite Materials 2,651 4,995 4,290
Operating Income (Loss):
Specialty Metal $ 762 $ (2,881) $ 50
Uranium Services and Recycle (1,038) (11,519) 2,675
Powders 1,543 184 625
Composite Materials (2,200) (3,546) (2,539)
Identifiable Assets:
Specialty Metal $ 1,237 $ 2,270 $ 2,126
Uranium Services and Recycle 9,115 10,458 13,964
Powders 929 1,052 1,221
Composite Materials 3,309 3,692 2,335
Segment information has been restated for 1998 and 1997 to be consistent with
the 1999 presentation in accordance with SFAS No. 131.
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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 1999,
1998 and 1997.
Year Ended September 30
-------------------------------
1999 1998 1997
------ ------ -------------
(as restated)
Net sales and contract revenues: 100% 100% 100%
Costs and expenses:
Cost of sales (77) (115) (72)
Selling, general and administrative expenses (22) (32) (19)
Research and development expenses (5) (4) (5)
Loss on write-off of fixed assets -- -- (1)
Operating income (loss) (4) (51) 3
Interest and other income (expense), net -- (1) --
Interest expense (6) (3) (1)
Income (loss) before income taxes (10) (55) 2
Provision (benefit) for income taxes -- -- --
Net income (loss) (10) (55) 2
Fiscal 1999 Compared with Fiscal 1998
Net sales decreased by $9,822,000, or 28%, to $25,001,000 in fiscal 1999
compared fiscal 1998. Sales in the Specialty Metal segment decreased by
$9,379,000, or 50%, due to the reduction in foreign DU penetrator procurement
and the absence of revenue recognized during fiscal 1999 on the remediation of
the holding basin at the Concord facility pursuant to a U.S. Army contract.
Sales in the Uranium Services and Recycle segment increased by $1,567,000, or
27%, due to the increased revenue from the UF6 conversion contract with United
States Enrichment Corporation partially offset by reduced AVLIS feedstock
production. USEC cancelled the AVLIS program in June 1999. Of the sales
generated in fiscal 1999, approximately $4,357,000 related to penetrator and
AVLIS products are not expected to continue into fiscal 2000. Sales in the
Powders segment increased by $328,000, or 6%, due primarily to increased demand
in the medical markets. Sales in the Composite Materials segment decreased by
$2,344,000, or 47%, due to a decreased level of activity on the Comanche
helicopter Beralcast(R) prototype contract as the program went into a redesign
phase which is expected to be completed in early fiscal 2000.
Gross profit in the fiscal 1999 improved by $10,909,000 to $5,704,000 compared
to a loss of $5,205,000 in fiscal 1998. The Uranium Services and Recycle had the
greatest improvement as nearly $8.0 million of non-recurring costs were incurred
in 1998 from the write-down of DU inventory and the accrual for UF4 disposition
costs. As a percentage of total revenue, gross profit margin was 23%, a 38-point
improvement over fiscal 1998. Had the Company not expensed Holding Basin
remediation costs of $1,193,000, the gross profit margin would have been 28% for
fiscal 1999.
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Selling, general and administrative expenses decreased by $5,742,000, or 52%, to
$5,394,000 in fiscal 1999 compared to fiscal 1998. The decrease in selling,
general and administrative expenses is primarily due to the termination of sales
office leases, reductions in administrative staff and various cost containment
measures and the non-recurring costs of $1,300,000 in connection with a failed
public offering in fiscal 1998. As a percentage of total revenue, selling,
general and administrative expenses are 22% as compared to 32% for fiscal 1998.
Interest expense increased to $1,414,000 in fiscal 1999 from $1,124,000 in
fiscal 1998. This increase is attributable to interest expense associated with
increased borrowings during the first half of fiscal 1999.
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 Specialty Metal segment increased to $18,845,000 from
$14,459,000, an increase of 30%. Sales in the Uranium Services and Recycle
segment increased to $5,905,000 from $4,965,000, an increase of 19%. Sales in
the Powders segment increased to $5,078,000 from $4,348,000, an increase of 17%.
Sales in the Composite Materials segment increased to $4,995,000 from
$4,290,000, an increase of 16%.
The sales increase in the Specialty Metal 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 sales increase in the Uranium Services and Recycle segment was due
primarily to AVLIS feedstock production orders that were completed in the second
and third quarter of fiscal 1998. The Powders segment increased due primarily to
greater demand in the medical markets. Sales in the Composite Materials segment
increased due to a greater level of activity on the Comanche helicopter
Beralcast(R) prototype contract.
Gross profit in the fiscal 1998 deteriorated by $13,131,000 to a $5,205,000 loss
when compared to fiscal 1997. Included in the loss in 1998 is an increase in
inventory reserves for UF4, 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 UF4. 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 were significant factors in
the 1998 margin decline. As a percentage of total revenue, gross profit margin
was (15%), a 43 point deterioration over fiscal 1997.
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. In connection with additional borrowings under the
Company's existing credit facility in December 1997, the Company issued warrants
to its principal bank lender, which has been recorded as a
22
<PAGE>
discount to the related debt at fair value. The fair value attributable to the
warrants, $327,000, was amortized as interest expense for the period January 1,
1998 through October 1, 1998.
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.
Liquidity and Capital Resources
In fiscal 1999 as in fiscal 1998, the Company continued to realize financial
losses and liquidity problems. The Company continues to have a significant
working capital deficiency and has restructured or amended its debt agreements
with its principal lender a number of times. The Company has been served a
complaint for breach of contract by one of its principal vendors. In addition,
the Company has significant potential liabilities associated with discontinued
or suspended aspects of its business which it believes are the responsibility of
the U.S. Government. If these liabilities were to become the responsibility of
the Company, the Company would be required to consider insolvency or similar
reorganization proceedings to preserve its business operations. In response to
this situation, the Company is pursuing alternative financing, arranging for
vendor payment plans, and continuing to restructure internally. The independent
accountants' report on the Company's financial statements contains an
explanatory paragraph expressing substantial doubt about the Company's ability
to continue as a going concern. The following discussion below describes
management's plans in this regard.
At September 30, 1999, the Company had a working capital deficit of $13,218,000,
a decrease in working capital of $1,080,000 from a deficiency of $12,138,000 at
the end of fiscal 1998. For fiscal 1999, the Company's accounts receivable and
inventories decreased by $2,485,000 and $1,770,000, respectively, compared with
September 30, 1998 levels. Cash (less restricted cash) at September 30, 1999 was
$14,000. The current portion of long-term obligations increased by $170,000 to
$8,752,000 from $8,582,000. The revolving line of credit was paid down by
$981,000 utilizing the cash generated from operations and the proceeds from
additional shareholder notes, but the reduction was more than offset by
$1,423,000 of shareholder debt becoming current, as it matures in fiscal 2000.
At the end of fiscal 1999, the long-term portion of notes payable to
shareholders, net of unamortized warrants, decreased to $1,375,000 from
$2,083,000 at September 30, 1998.
On October 15, 1998 the Company issued a 10% Subordinated Debenture in the
amount of $500,000 to a current shareholder. Warrants totaling 60,000 shares at
an exercise price of $6.00 per share have also been issued in connection with
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 held by them in the
amount of $850,500. Payments of the related interest have been extended to June
10, 1999. Warrants totaling 102,000 shares with an exercise price of $6.00 per
share have also been issued in connection with this extension.
The Company is technically in default of certain financial covenants under the
bank arrangement with its principal lender. However, on June 23, 1999, the
Company entered into an agreement with its principal lender to forbear on all
collection actions until February 15, 2000. On November 12,
23
<PAGE>
1999, the Company entered into an agreement to further extend the maturity to
August 15, 2000. The agreement also includes various extension periods if
certain conditions are met prior to August 15, 2000.
Management's plans with regard to the existing working capital deficiency are to
continue to adjust spending levels to appropriate amounts to ensure greater
financial stability while actively exploring additional capital generating
opportunities including, but not limited to, the sale and leaseback of owned
property, asset sales and joint ventures. The Company is also managing payment
plans with certain suppliers.
In addition to write-offs that were recorded during fiscal 1998, 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. For further discussion, see Part I - "Environmental,
Safety and Regulatory Matters" and "Concord Site Remediation and Decommissioning
Requirements" These potential liabilities include a contested $5.0 million cost
associated with the additional treatment of waste 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 capability to finance such liabilities.
Management believes that the U.S. Government has a responsibility to pay,
directly and indirectly, for a substantial portion of 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 a substantial portion of the remediation costs for the Company's Concord
holding basin site. As a result of cost overruns in connection with the holding
basin remediation, the Company has requested additional remediation funds from
the Army; however, while the engineering change proposal is 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 overrun 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
reorganization 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.
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.
24
<PAGE>
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
Insufficient Working Capital. The Company will need to expend 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 Environmental 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 contested $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.
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 72%, 67% and 78% of
the Company's net sales in the fiscal year ended September 30, 1999, 1998 and
1997, respectively. Two of these customers (USEC and Primex Technologies)
individually accounted for greater than 10% of the Company's consolidated
revenues in fiscal 1999. The Company currently is contracting with Primex
Technologies to
25
<PAGE>
provide DU penetrators for the U.S. Army's ABRAMS Tank program through the
fourth quarter of fiscal 1999. USEC is the sole customer for the Company's UF6
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.
Competition. The Company faces significant competition from established
companies in certain of its product lines. In addition, the Company's
Beralcast(R) MMC's and other products face competition from alternative or
competing composite 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.
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.
26
<PAGE>
Legal Proceedings. The Company is involved in various legal proceedings. See
Part I 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).
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 M.D., Meryl J. Chrein and
Marshall J. Chrein (collectively, the "Investor Group"), as of September 30,
1999 were, in the aggregate, 2,774,871 shares of Common Stock (assuming full
conversion of debentures and exercise of all warrants held by certain members of
the Investor Group), or approximately 55% of the Company's outstanding shares of
Common Stock. As of September 30, 1999, directors and executive officers of the
Company beneficially own in the aggregate 747,077 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 15% 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. The Investor Group has made a filing with the Securities and Exchange
Commission which the Company understands to report the dissolution of the
Investor Group.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements and Schedules on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
27
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company as of September 30, 1999 are
as follows:
Name Age Position With Company
George J Matthews 69 Chairman of the Board of Directors
Robert E. Quinn 45 Director, President, Treasurer and
Chief Executive Officer of the Company
Kenneth A. Smith 62 Director
Frank H. Brenton 73 Director
Matthew Brady 36 Director
Gerald R. Hoolahan 51 Director
Brian B. Sand 34 Director
Randal E. Vataha 51 Director
Kevin R. Raftery 40 President, Starmet Commercial Castings, LLC
and Starmet Aerocast, LLC
Douglas F. Grotheer 41 President, Starmet CMI Corporation
William T. Nachtrab 46 Vice President, Engineering & Technology
Gary W. Mattheson 47 Chief Financial Officer
Bruce E. Zukauskas 47 Vice President, Operations
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.
28
<PAGE>
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. Mr. Matthews has been a member of the Board
of Directors since 1972.
ROBERT E. QUINN was elected President and Director 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. 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.
KENNETH A. SMITH is Professor of Chemical Engineering at Massachusetts Institute
of Technology since 1971. Dr. Smith has been a member of the Board of Directors
since 1985.
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.
Mr. Brenton has been a member of the Board of Directors since 1986.
MATTHEW BRADY is President of Berry Hill Consulting, a benefits and insurance
consulting firm. Mr. Brady has been a member of the Board of Directors since
1999.
GERALD R. HOOLAHAN is a consultant specializing in corporate reengineering,
restructurings, and reorganizations for financial institutions, the U.S.
District Court and private industry. Mr. Hoolahan has been a member of the Board
of Directors since 1999.
BRIAN B. SAND is the President of KABZ Co., a supplier of specialty products for
the retail trade. Mr. Sand has been a member of the Board of Directors since
1999.
RANDAL E. VATAHA is President and co-founder of Game Plan LLC, an investment
banking firm partially owned by BankBoston. Mr. Vataha has been a member of the
Board of Directors since 1999.
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
29
<PAGE>
engineer directly after graduating from college in 1980. He was promoted to
Manager of Ordnance Programs. Mr. Grotheer is a recognized expert in uranium
metallurgy and processing, as well as ISO 9002 Quality Systems. Mr. Grotheer
received his degree in Materials Engineering from Rensselaer Polytechnic
Institute.
WILLIAM T. NACHTRAB, PH.D. has held the position of Vice President, Engineering
and Technology with the Company since 1997 and Vice President of Technology
since 1994. Dr. Nachtrab is the Company's senior technologist. Dr. Nachtrab, who
joined the Company in 1988, is the author and co-author of numerous technical
and scientific publications and an inventor of four of the Company's patents. He
is a recognized expert in beryllium, titanium, alloy steels, uranium metallurgy
and extrusion and powder metal processing. Before joining the Company, Dr.
Nachtrab was a Senior Member of the Technical Staff of the GE/RCA Corporation.
Prior to that he was a Division Research Engineer for Lukens Steel Company, a
Research Engineer for Lehigh University, and a Metallurgist for LTV Steel
Company. Dr. Nachtrab has a Ph.D. in Metallurgical and Materials Engineering
from Lehigh University.
GARY W. MATTHESON was promoted to Chief Financial Officer in August 1999. Prior
to August 1999, he held the position of Corporate Controller since joining
Starmet in March 1999. Before joining the Company, Mr. Mattheson was Vice
President, Finance and Administration at Ullo International, Inc. in Natick, MA;
and Vice President and Corporate Controller at Reed Publishing USA and Cahners
Publishing Company, an $800 million division of Reed Elsevier, a U.K./Dutch
media conglomerate. Early in his career, Mr. Mattheson was an audit supervisor
with Ernst & Ernst. Mr. Mattheson received his B.S. in Accounting from Bentley
College and is a CPA.
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 War College and received
his Masters in Industrial Engineering from the University of Pittsburgh. Mr.
Zukauskas is a Colonel and Brigade Commander in the U.S. Army Reserve.
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, 1999, or
written representations in certain cases, all Section 16(a) filing requirements
were complied with, except that initial statements of beneficial ownership of
securities were filed late for Messrs. Mattheson, Brady, Hoolahan, Sand and
Vataha.
30
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table discloses for the periods presented the compensation for the
person who served as the Company's Chief Executive Officer and for each of the
four most highly compensated executive officers of the Company, other than the
Chief Executive Officer, whose total compensation exceeded $100,000 for the
Company's fiscal year ended September 30, 1999 (collectively, "the Named
Executive Officers"):
<TABLE>
<CAPTION>
Long Term Compensation
----------------------------
Awards Payouts
------ -------
Annual Compensation
-------------------
Securities
Restricted Underlying All Other
Name and Principal Other Annual Stock Options/SARS LTP Compensation
Position Year(1) Salary($) Bonus ($) Compensation ($)(2) Award(s)$ (#) (6) Payouts $ ($)
------------------ ------- --------- --------- ------------------- ---------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
George J. Matthews (4)(5) 1999 287,500 -- -- -- 3,000 -- --
Chairman of Board of 1998 350,000 -- -- -- 7,500 -- --
Directors 1997 350,000 -- -- -- -- -- --
Robert E. Quinn (3)(5) 1999 200,000 -- -- -- 7,500 -- --
President , CEO and 1998 200,000 17,312 -- -- 15,000 -- --
Treasurer 1997 200,000 15,000 -- -- 25,000 -- --
William T. Nachtrab 1999 142,000 -- -- -- 7,500 -- --
Vice President, 1998 142,000 11,792 -- -- 17,500 -- --
Technology 1997 131,616 9,050 -- -- 8,000 -- --
Douglas F. Grotheer 1999 135,000 -- -- -- 7,500 -- --
President, Starmet CMI 1998 135,000 10,261 -- -- 5,000 -- --
Corporation 1997 121,934 6,700 -- -- 5,000 -- --
Bruce E. Zukauskas 1999 135,000 -- -- -- 7,500 -- --
Vice President, 1998 128,125 9,787 -- -- 5,000 -- --
Operations 1997 110,000 6,700 -- -- 5,000 -- --
- ----------------
<FN>
(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, 1999 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.
</FN>
</TABLE>
Option Grants During Fiscal Year
The following table sets forth certain information regarding options granted
during the fiscal year ended September 30, 1999 by the Company to the Named
Executive Officers:
<TABLE>
<CAPTION>
Individual Grants
--------------------------------
Potential Realizable
Number of Percent of Value at Assumed
Securities Total Options Annual Rates of Stock Price
Underlying Granted to Appreciation for
Options Employees in Exercise or Base Expiration Option Term
Name Granted Fiscal Year Price (2) Date (3) 10% 5%
- ---- ------- ----------- --------- ---- ------- ------
<S> <C> <C> <C> <C> <C> <C>
George J. Matthews 3,000(1) 1.8% $3.80 7/1/2009 $18,169 $ 7,169
Robert E. Quinn 7,500(1) 4.5% $3.80 7/1/2009 45,422 17,923
William T. Nachtrab 7,500(1) 4.5% $3.80 7/1/2009 45,422 17,923
Douglas F. Grotheer 7,500(1) 4.5% $3.80 7/1/2009 45,422 17,923
Bruce E. Zukauskas 7,500(1) 4.5% $3.80 7/1/2009 45,422 17,923
31
<PAGE>
- -----------------
<FN>
(1) These options are first exercisable on July 1, 2002.
(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.
</FN>
</TABLE>
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, 1999 by the Named Executive Officers,
as well as the aggregate value of unexercised options held by such executive
officers on September 30, 1999. 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 Value
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
George J. Matthews 0 $ 0 22,500 8,000 $ 0 $ 0
Robert E.Quinn 0 0 101,667 25,833 0 0
William T. Nachtrab 0 0 28,167 21,833 0 0
Douglas F. Grotheer 0 0 15,000 12,500 0 0
Bruce E. Zukauskas 0 0 20,000 12,500 0 0
- ----------------
<FN>
(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, 1999($2.125 per share), less the exercise price, times the number of options outstanding.
</FN>
</TABLE>
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.
Years of Service
---------------------------------------------
Remuneration 15 20 25 30 or More
- ------------ -- -- -- ----------
$100,000 $ 23,520 $ 31,360 $ 39,220 $ 47,040
150,000 38,520 51,360 64,200 77,040
200,000 53,520 71,360 89,200 107,040
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
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
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<PAGE>
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-23 years; William T.
Nachtrab-9 years; and Douglas Grotheer-19 years and Bruce Zukauskas-17 years.
Mr. Matthews does not participate in the Pension Plan.
Directors' Compensation and Stock Option Plan
Each outside director of the Company receives an annual fee of $15,000 and is
eligible to receive options under the Company's 1995 Directors Option Plan (the
"1995 Directors Plan"). During fiscal 1999, the Company granted to each of
Messrs. Matthews, Smith, Brenton, Brady, Hoolahan, Sand and Vataha options to
purchase 3,000 shares of Common Stock at an exercise price of $3.80 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 7,500 shares of Common Stock at the same
exercise price under the Company's 1999 Stock Option Plan.
The Company has entered into a management agreement with Matthews Associates
Limited, a Massachusetts corporation ("MAL"), of which George J. Matthews,
Director and Chairman of the Board of Directors of the Company, is sole owner.
The management agreement is described below.
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.
33
<PAGE>
Employment Agreements with Messrs. Nachtrab, Grotheer, and Raftery
In October 1997, the Company entered into employment agreements with Messrs.
Nachtrab, Grotheer, and Raftery (each an "Executive"). Under the terms of their
respective agreements, Messrs. Nachtrab, Grotheer, and Raftery are entitled to
an annual base salary of $142,000, $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 MAL. The agreement
provides MAL with a minimum compensation of $350,000 per annum for all services
under the agreement. This agreement was modified to reduce the minimum
compensation to $225,000 beginning April 1, 1999. The agreement expires on
February 28, 2004, subject to annual renewals as described in the agreement. In
the event of termination of MAL by the Company, the Company is obligated to pay
to MAL all of the amounts due under the agreement for the remaining term.
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended September 30, 1999, 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, 1999, 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.
34
<PAGE>
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Beneficial
Beneficial Owner Ownership Beneficially Owned Percent
- ------------------- --------- --------------------------
<S> <C> <C>
WIAF Investors Co. (1)(2) 2,055,415 41.86%
466 Arbuckle Avenue
Lawrence, NY 11516
Meryl J. Chrein (1)(2) 269,800 5.60%
21 Copper Beech Lane
Lawrence, NY 11559
George J. Matthews (3) 436,991 9.03
Chairman of the Board of Directors,
Director & Consultant
C/O Matthews Associates Limited
100 Corporate Place
Peabody, MA 01960
Dimensional Fund Advisors, Inc. (4) 331,600 6.92
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401
Robert E. Quinn (5) 123,812 2.53
President, CEO, Treasurer
William T. Nachtrab (6) 30,167 *
Vice President, Engineering & Technology
Douglas F. Grotheer (7) 17,074 *
President of CMI Corporation
Bruce E. Zukauskas(8) 22,000 *
Vice President, Operations
Kenneth A. Smith, Director (9) 18,500
Frank H. Brenton, Director (9) 18,500 *
Matthew Brady, Director 16,000 *
Gerald R. Hoolahan, Director -- --
Brian B. Sand, Director 51,700 1.08%
Randal E. Vataha -- --
All directors and executive officers (13 persons) as a group (10) 747,077 14.82%
- ---------------------
<FN>
(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 a Schedules 13D/A, dated September 30,1999. The Company understands the Schedule 13D/A to report the
dissolution of the Investor Group. Each person reported sole voting and dispositive power with respect to the
shares owned by such person. The Company understands the Schedule 13D/A to claim that none of the former members of
the Investor Group is the beneficial owner of securities beneficially owned by any other former member of the
Investor Group. Also includes 79,438 which WIAF Investors Co. has the right to acquire upon conversion of
outstanding 10% Convertible Subordinated Debentures and 40,040 and 24,000 shares which WIAF Investors Co. and Meryl
J. Chrein, respectively, have the right to acquire under outstanding warrants.
35
<PAGE>
(3) Includes (i) 22,500 shares which may be purchased upon the exercise of currently exercisable options, (ii) 2,326
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) 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.
(5) Includes 101,667 shares that may be purchased upon the exercise of currently exercisable options.
(6) Includes 28,167 shares that may be purchased upon the exercise of currently exercisable options.
(7) Includes 15,000 shares that may be purchased upon the exercise of currently exercisable options.
(8) Includes 20,000 shares that may be purchased upon the exercise of currently exercisable options.
(9) Includes 12,500 shares that may be purchased upon the exercise of currently exercisable options.
(10) See notes (3), (5), (6), (7), (8), and (9) above. Also includes an additional 224,667 shares which may be purchased
upon the exercise of currently exercisable options.
* Less than 1% ownership individually.
</FN>
</TABLE>
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 had filed Schedules
13D/A identifying themselves as part of an investor group which held more than
five percent of the Company's outstanding Common Stock and filed a Schedule
13D/A dated September 30, 1999 reporting the dissolution of such group. 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.
36
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
1. Financial Statements
The following consolidated financial statements of the Company are
filed as part of this report:
Independent Auditors' Reports
Consolidated Balance Sheets--September 30, 1999 and September 30,
1998.
Consolidated Statements of Operations for the years ended September
30, 1999, 1998 and 1997.
Consolidated Statements of Stockholders' Equity for the years ended
September 30, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows for the years ended September
30, 1999, 1998 and 1997.
Notes to Consolidated Financial Statements
2. Financial Statement Schedule for the Three Years Ended September 30, 1999.
Auditors' Report on Schedule II-Valuation and Qualifying Accounts
3. Form 8-K was filed on September 20, 1999 regarding a change in accounting
firms.
4. Exhibits:
ITEM NO.* DESCRIPTION
2 Plan of Reorganization, dated June 24, 1997. (12)
3(a) Articles of Organization, as amended, of the Registrant.(13)
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).
37
<PAGE>
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.(13)
10(a) Agreement, effective March 1, 1993, between the Registrant and
Matthews Associates Limited. (2)
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)
38
<PAGE>
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)
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. (13)
39
<PAGE>
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. (13)
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.
(13)
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. (13)
10(z) Patent Assignment of Security dated October 1, 1997 between
the Company and State Street Bank and Trust. (13)
10(aa) Employment Agreement, effective October 1, 1997 between the
Registrant and William T. Nachtrab. (13)
10(bb) Employment Agreement, effective October 1, 1997 between the
Registrant and Douglas F. Grotheer. (13)
10(cc) Employment Agreement, effective October 1, 1997 between the
Registrant and Kevin R. Raftery. (13)
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. (13)
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. (13)
10(ff) Amendment to Employment Agreement dated October 1, 1997
between the Registrant and Robert E. Quinn. (13)
10(gg) Letter agreement with Roger M. Marino dated September 22, 1997
between the registrant and Roger M. Marino. (13)
10(hh) 10% Subordinated Debenture dated September 22, 1997 payable to
Roger Marino in the amount of $500,000.00. (13)
40
<PAGE>
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. (13)
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. (13)
10(kk) Second Amendment to Credit Agreement dated December 29, 1997
among the Company, Starmet Powders, LLC, Starmet Aerocast,
LLC, Starmet Comcast, LLC, Starmet NMI Corporation, Starmet
CMI Corporation, Starmet Holdings Corporation, NMI Foreign
Sales Corporation and State Street Bank and Trust Company.
(13)
10(ll) Second Additional Revolving Credit Note dated December 29,
1997 among the Company, Starmet Powders, LLC, Starmet
Aerocast, LLC, Starmet Comcast, LLC, Starmet NMI Corporation,
Starmet CMI Corporation, Starmet Holdings Corporation, NMI
Foreign Sales Corporation and State Street Bank and Trust
Company. (13)
10(mm) Eighth Amendment to Credit Agreement dated December 29, 1997
November 12, 1999 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 Citizens Bank.
**
21 Subsidiaries of the Registrant. (13)
23(a)(b) Consents 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
** 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.
41
<PAGE>
(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.
(13) Incorporated by reference to the exhibits to the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1997
42
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page
Independent Auditors' Reports F-2
Consolidated Balance Sheets--September 30, 1999 and September 30, 1998. F-4
Consolidated Statements of Operations for the years ended September 30,
1999, 1998 and 1997. F-5
Consolidated Statements of Stockholders' Equity for the years ended
September 30, 1999, 1998 and 1997. F-6
Consolidated Statements of Cash Flows for the years ended September 30,
1999, 1998 and 1997. F-7
Notes to Consolidated Financial Statements F-8
Schedule II--Valuation and Qualifying Accounts F-32
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Starmet Corporation:
We have audited the accompanying consolidated balance sheet of Starmet
Corporation and subsidiaries as of September 30, 1999 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. 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
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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, 1999, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
The consolidated financial statements referred to above 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 significant losses in
1999 and 1998, has a working capital deficit at September 30, 1999 and is
operating under a forebearance agreement with its bank, 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 for 1999
in relation to the basic financial statements taken as a whole.
BDO SEIDMAN, LLP
December 3, 1999
F-2
<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 the related consolidated statements
of operations, stockholders' equity and cash flows for each of the two 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 the results of their
operations and their cash flows for each of the two 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 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 for the year then ended, have been restated (see Note
2).
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 8, 1999
F-3
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
1999 1998
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 14,000 $ 327,000
Restricted cash 238,000 238,000
Accounts receivable, net of allowances for doubtful
accounts of $200,000 in 1999 and $524,000 in 1998 3,535,000 6,020,000
Inventory 2,426,000 4,005,000
Other current assets 415,000 545,000
------------ ------------
Total Current Assets 6,628,000 11,135,000
------------ ------------
Property, Plant and Equipment:
Land 2,136,000 2,136,000
Buildings 18,961,000 18,866,000
Machinery, equipment and fixtures 22,545,000 22,505,000
Construction-in-progress 114,000 161,000
------------ ------------
Total Property, Plant and Equipment 43,756,000 43,668,000
Less: Accumulated depreciation 27,645,000 25,731,000
------------ ------------
Property, plant, and equipment, net 16,111,000 17,937,000
Non-current Inventory 1,309,000 1,500,000
Other Assets 1,808,000 1,861,000
------------ ------------
$ 25,856,000 $ 32,433,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term obligations $ 8,752,000 $ 8,582,000
Accounts payable 6,084,000 8,392,000
Accrued payroll and related costs 670,000 1,541,000
Other accrued expenses 4,255,000 4,758,000
------------ ------------
Total Current Liabilities 19,761,000 23,273,000
Long-Term Obligations:
Notes Payable to Shareholders 1,375,000 2,083,000
Stockholders' Equity
Common stock, par value $.10; authorized - 15,000,000
shares; 4,790,674 issued and outstanding for 1999 and 1998 479,000 479,000
Additional paid-in capital 14,067,000 14,067,000
Warrants issued 772,000 687,000
Accumulated deficit (10,598,000) (8,156,000)
------------ ------------
Total Stockholders' Equity 4,720,000 7,077,000
------------ ------------
$ 25,856,000 $ 32,433,000
============ ============
<FN>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
</FN>
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
1999 1998 1997
(as restated)
<S> <C> <C> <C>
Net Sales and Contract Revenues $ 25,001,000 $ 34,823,000 $ 28,062,000
------------ ------------ ------------
Cost and Expenses:
Cost of sales 19,297,000 40,028,000 20,136,000
Selling, general, and administrative expenses 5,394,000 11,136,000 5,448,000
Research and development expenses 1,243,000 1,421,000 1,309,000
Loss on write-off of fixed assets -- -- 358,000
------------ ------------ ------------
25,934,000 52,585,000 27,251,000
------------ ------------ ------------
Operating Income (Loss) (933,000) (17,762,000) 811,000
Interest Income and Other Expense, net 95,000 145,000 2,000
Interest Expense 1,414,000 1,124,000 296,000
------------ ------------ ------------
Income (Loss) Before Income Taxes (2,442,000) (19,031,000) 513,000
Provision for Income Taxes -- -- 31,000
------------ ------------ ------------
Net Income (Loss) $ (2,442,000) $(19,031,000) $ 482,000
============ ============ ============
Per Share Information
Basic Net Income (Loss) per Common and Common Equivalent Share $ (0.51) $ (3.97) $ 0.10
============ ============ ============
Weighted average number of common and common equivalent shares
outstanding 4,791,000 4,789,000 4,783,000
============ ============ ============
Diluted Net Income (loss) per Common and Dilutive Potential Common Shares
Outstanding $ (0.51) $ (3.97) $ 0.10
============ ============ ============
Weighted average number of common and dilutive potential common shares
outstanding 4,791,000 4,789,000 4,959,000
============ ============ ============
<FN>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
</FN>
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Common Stock
---------------------------
Additional Retained
Number of Paid-in Earnings
Shares Par value Capital Warrants (Deficit) Total
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1996 4,783,000 $ 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 4,785,000 $ 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 4,791,000 $ 479,000 $ 14,067,000 $ 687,000 $ (8,156,000) $ 7,077,000
------------ ------------ ------------ ------------ ------------ ------------
Warrants issued -- -- -- 85,000 -- 85,000
Net loss for year -- -- -- -- (2,442,000) (2,442,000)
------------ ------------ ------------ ------------ ------------ ------------
Balance at September 30, 1999 4,791,000 $ 479,000 $ 14,067,000 $ 772,000 $(10,598,000) $ 4,720,000
------------ ------------ ------------ ------------ ------------ ------------
<FN>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
</FN>
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOW
1999 1998 1997
------------- ------------- -------------
(as restated)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (2,442,000) $(19,031,000) $ 482,000
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization 1,995,000 2,157,000 1,588,000
Loss on write-off of fixed assets -- -- 358,000
Changes in assets and liabilities, net:
Decrease (increase) in accounts receivable 2,485,000 (474,000) (616,000)
Decrease (increase) in inventory, net of reserves 1,769,000 5,585,000 1,585,000
Decrease (increase) in other current assets 131,000 74,000 (243,000)
Decrease (increase) in other assets 53,000 (77,000) (445,000)
(Decrease) increase in accounts payable and
accrued expenses (3,598,000) 9,446,000 (3,629,000)
Other -- 26,000 (1,000)
------------ ------------ ------------
Net cash provided (used) by operating activities 393,000 (2,294,000) (921,000)
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures (88,000) (4,585,000) (1,788,000)
------------ ------------ ------------
Net cash (used) provided by investing activities (88,000) (4,585,000) (1,788,000)
------------ ------------ ------------
Cash flows from financing activities:
Principal payments under long-term obligations (138,000) (184,000) (545,000)
Payments on bank debt (981,000) (19,332,000) (9,801,000)
Proceeds from bank debt -- 25,792,000 11,508,000
Proceeds from notes payable and warrants to
shareholders 500,000 900,000 500,000
Proceeds from stock issuance -- -- 14,000
------------ ------------ ------------
Net cash (used) provided by financing activities (619,000) 7,176,000 1,676,000
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents:
Cash and cash equivalents at beginning of year 565,000 268,000 1,301,000
Cash and cash equivalents at end of year 252,000 565,000 268,000
------------ ------------ ------------
$ (313,000) $ 297,000 $ (1,033,000)
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid (received) during the year for:
Interest, net of amounts capitalized $ 1,420,000 $ 1,019,000 $ 266,000
Income tax refunds received $ -- $ -- $ (14,000)
Non-cash investing and financing activities:
Loss on write-off of non-current inventory $ -- $ 4,951,000 $ --
<FN>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
</FN>
</TABLE>
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. LIQUIDITY
Starmet Corporation (The Company) is a manufacturer of specialized metal
products that are fabricated by a variety of metalworking processes. Effective
October 1, 1997 the company changed its name from Nuclear Metals, Inc. to
Starmet Corporation. The Company's financial statements for the year ended
September 30, 1999 have been prepared on a going concern basis, which
contemplates the realization of assets and payment of the liabilities in the
normal course of business. In fiscal 1999 as in fiscal 1998, the Company
continued to realize financial losses and liquidity problems. The Company
continues to have a significant working capital deficiency and has restructured
or amended its debt agreements with its principal lender a number of times. The
Company has been served a complaint for breach of contract by one of its
principal vendors. In addition, the Company has significant potential
liabilities associated with discontinued or suspended aspects of its business
which it believes are the responsibility of the U.S. Government. If these
liabilities were to become the responsibility of the Company, the Company would
be required to consider insolvency or similar reorganization proceedings to
preserve its business operations. In response to this situation, the Company is
pursuing alternative financing, arranging for vendor payment plans, and
continuing to restructure internally.
At September 30, 1999, the Company had a working capital deficit of $13,218,000,
a decrease in working capital of $1,080,000 from a deficiency of $12,138,000 at
the end of fiscal 1998. For fiscal 1999, the Company's accounts receivable and
inventories decreased by $2,485,000 and $1,770,000, respectively, compared with
September 30, 1998 levels. Cash (less restricted cash) at September 30, 1999 was
$14,000. The current portion of long-term obligations increased by $170,000 to
$8,752,000 from $8,582,000. The revolving line of credit was paid down by
$981,000 utilizing the cash generated from operations and the proceeds from
additional shareholder notes, but the reduction was more than offset by
$1,423,000 of shareholder debt becoming current, as it matures in fiscal 2000.
At the end of fiscal 1999, the long-term portion of notes payable to
shareholders, net of unamortized warrants, decreased to $1,375,000 from
$2,083,000 at September 30, 1998.
Management's plans with regard to the existing working capital deficiency are to
continue to adjust spending levels to appropriate amounts to ensure greater
financial stability while actively exploring additional capital generating
opportunities including, but not limited to, the sale and leaseback of owned
property, asset sales and joint ventures. The Company is also managing payment
plans with certain suppliers.
As a result of the significant loss in fiscal 1998 and the status of the
Company's bank arrangements, management was forced to reassess its operating
plan. The revised plan included significant reductions in personnel and various
spending levels executed during fiscal 1999. The Company's liquidity constraints
required the restructuring and extension of terms on all trade payables.
In addition to write-offs that were recorded during fiscal 1998, as required by
generally accepted accounting principles, the Company has potential liabilities
associated with discontinued or
F-8
<PAGE>
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.
For further discussion, see Part I - "Environmental, Safety and Regulatory
Matters" and "Concord Site Remediation and Decommissioning Requirements" These
potential liabilities include a contested $5.0 million cost associated with the
additional treatment of waste 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 capability to finance such liabilities. Management
believes that the U.S. Government has a responsibility to pay, directly and
indirectly, for a substantial portion of 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 a substantial portion
of the remediation costs for the Company's Concord holding basin site. As a
result of cost overruns in connection with the holding basin remediation, the
Company has requested additional remediation funds from the Army; however, while
the engineering change proposal is 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 overrun 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 receivership or similar reorganization 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
Export sales to foreign unaffiliated customers, primarily to the United Kingdom,
are 8%, 18% and 25% of total net sales and contract revenues in fiscal 1999,
1998 and 1997, respectively. A significant portion of the Company's sales
revenue has been derived from major customers as follows:
1999 1998 1997
United States Enrichment Corporation ("USEC") 23% 14% 14%
Royal Ordnance 2% 13% 19%
Primex Technologies 11% 12% 12%
Lockheed Martin 5% 11% 7%
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
F-9
<PAGE>
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.
1997
---------------------------------------
As Reported As Restated
----------- -----------
Net Income: $ 1,482,000 $ 482,000
Income per share
Basic $ 0.31 $ 0.10
Diluted $ 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 1999, 1998, and 1997 are for the
fiscal years ended September 30, 1999, September 30, 1998, and September 30,
1997, 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 contracts with the U.S. Army (contracts to
establish production capacity through the purchase and installation of equipment
to be owned by the U.S. Army.) The consolidated balance sheets do not include
the cost of this U.S. Army owned equipment.
F-10
<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, 1999, $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. During 1999, the Company wrote off certain
inventories by a charge to the related reserves.
Property, Plant and Equipment
Property, plant, and equipment are recorded at the lower of cost or net
realizable value. For financial reporting purposes, the Company provides
depreciation on the straight-line method over the estimated useful lives of the
assets, which are as follows:
Buildings 20--30 years
Machinery, equipment, and fixtures 3--10 years
Maintenance and repairs are charged to operations as incurred; renewals and
betterments are capitalized. When property, plant, and equipment are sold,
retired or disposed of, the asset cost and accumulated depreciation are removed
from the accounts, and the resulting gain or loss is included in operations.
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
F-11
<PAGE>
differences are expected to be reflected in the tax return. The Company records
a valuation allowance against any net deferred tax assets whose realizability is
uncertain.
The deferred federal and state income taxes result primarily from using
accelerated depreciation on property, plant, and equipment for income tax
reporting purposes and from establishing reserves which are not currently
deductible for income tax purposes.
<TABLE>
<CAPTION>
1999 1998 1997
------------------ -------------- -----------------
<S> <C> <C> <C>
Statutory rate 34.0 % 34.0 % 34.0 %
Increase (reduction) in taxes resulting from:
State taxes, net of federal effect 6.0 6.0 6.0
Valuation allowance (40.0) (40.0) (38.0)
------------------ -------------- -----------------
-- % -- % 2.0 %
================== ============== =================
</TABLE>
As of September 1999, the Company has a federal net operating loss carryforward
of approximately $23 million expiring at various dates from 2009 to 2019. State
net operating loss carry forwards of approximately $20 million, will expire
between 2000 through 2010. 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>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Current (Benefit) Provision
Federal $(1,650,000) $(2,355,000) $ (961,000)
State (300,000) (729,000) (299,000)
Valuation allowance 1,950,000 3,084,000 1,260,000
----------- ----------- -----------
Total current (Benefit) Provision -- -- --
=========== =========== ===========
Deferred (Benefit) Provision:
Federal $ 800,000 $(3,490,000) $(1,310,000)
State 150,000 (1,080,000) (451,000)
Valuation allowance (950,000) 4,570,000 1,792,000
----------- ----------- -----------
Total deferred (Benefit) Provision -- -- 31,000
----------- ----------- -----------
Total (Benefit) Provision -- -- 31,000
=========== =========== ===========
</TABLE>
The Company has provided a full valuation allowance on the net deferred tax
assets as of September 30, 1999 and 1998. 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 1999 and
1998 fiscal years are as follows:
F-12
<PAGE>
<TABLE>
<CAPTION>
1999 1998
------------ -------------
<S> <C> <C>
Assets:
Reserves not currently deductible for tax purposes $ 4,839,000 $ 5,526,000
Federal operating loss carryforward 7,512,000 5,423,000
State operating loss carryforwards and other assets 1,900,000 2,025,000
Other 700,000 709,000
Valuation allowance (10,085,000) (9,085,000)
------------ ------------
Total deferred tax assets 4,866,000 4,598,000
Alternative minimum tax credit 407,000 407,000
------------ ------------
$ 5,273,000 $ 5,005,000
============ ============
Liabilities
Fixed asset basis difference $ 4,100,000 $ 3,830,000
Employee benefits 723,000 720,000
Other 450,000 455,000
------------ ------------
$ 5,273,000 $ 5,005,000
============ ============
</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.
The cost for Company-sponsored research and development activities was
$1,243,000, $1,421,000 and $1,309,000 in fiscal 1999, 1998 and 1997,
respectively. Total revenues from customer-funded research and development were
$825,000, $831,000 and $793,000 in fiscal 1999, 1998 and 1997, respectively.
Income (Loss) per Share of Common Stock
The Company 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:
F-13
<PAGE>
Years Ended September 30,
------------------------------------
1999 1998 1997
--------- --------- ---------
Weighted average common shares
outstanding 4,791,000 4,789,000 4,783,000
Dilutive potential common shares -- -- 176,000
--------- --------- ---------
Diluted common shares 4,791,000 4,789,000 4,959,000
========= ========= =========
Options and warrants excluded from
diluted income per common share as
their effect would be anti-dilutive 1,170,000 769,000 --
========= ========= =========
Reclassification
Certain amounts previously reported in the consolidated financial statements
have been reclassified to conform to the 1999 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.
Legal Costs for Loss Contingencies
Legal costs are recorded in the period in which the legal services are provided.
Recent Accounting Pronouncements
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
F-14
<PAGE>
unless deemed impractical. This statement, requiring only additional
informational disclosures, has become effective for the Company's fiscal year
ended 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.
In April 1998, Statement Of Position 98-5, Reporting on the Costs of Start-up
Activities was issued which required such costs, including organization costs,
to be expensed as incurred and is effective for fiscal years beginning after
December 15, 1998. The Company does not expect that this Statement of Position
will have a material impact on the Company's statement of operations or
financial position.
4. ACCOUNTS RECEIVABLE
The following is an analysis of accounts receivable (net of allowances for
doubtful accounts):
1999 1998
---------- ----------
Accounts receivable, net of reserves $3,388,000 $5,327,000
Unbilled receivables and retainages due
upon completion of contracts 147,000 693,000
---------- ----------
$3,535,000 $6,020,000
========== ==========
5. INVENTORY
Inventory (net of reserves) at September 30, 1999 and 1998, was follows:
1999 1998
---------- ----------
Raw materials $1,324,000 $1,605,000
Workinprogress 2,040,000 3,177,000
Finished goods 371,000 723,000
---------- ----------
3,735,000 5,505,000
Less noncurrent inventory 1,309,000 1,500,000
---------- ----------
Current inventory $2,426,000 $4,005,000
========== ==========
As of September 30, 1999 and 1998, approximately $2.0 million and $2.5 million
of the Company's inventory net of $7.7 million and $7.9 million reserves,
respectively, consists of Depleted Uranium
F-15
<PAGE>
(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 2.
6. OTHER ACCRUED EXPENSES
Accrued expenses consist of the following at September 30, 1999 and 1998.
1999 1998
---------- ----------
Waste burial cost $2,710,000 $4,149,000
Other 1,545,000 609,000
---------- ----------
$4,255,000 $4,758,000
========== ==========
During 1999, the Company reduced certain accruals for waste burial costs that
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>
1999 1998
----------- -----------
<S> <C> <C>
Line of Credit, interest rate of prime plus 0.5%
(8.75% and 9.0% at September 30, 1999 and 1998, respectively) $ 6,190,000 $ 7,171,000
Industrial Development Revenue Notes, variable
interest rates (5.4862% at September 30, 1998) -- 100,000
Notes Payable to Shareholders, interest
only payments of 10% until maturity at various dates from
December 31, 1999 to December 10, 2001 2,876,000 2,247,000
Note Payable, monthly principal and interest payments
through May 2001, interest rate of 10.25% 179,000 283,000
Note Payable, monthly principal and interest payments through
October 29, 2003, interest rate of 10.25% 458,000 486,000
Note Payable, monthly principal and interest payments through
September 30, 2008, interest rate of 10% 472,000 498,000
Capital Leases 29,000 44,000
----------- -----------
10,204,000 10,829,000
Less unamortized discount on shareholder debentures 77,000 164,000
Less current portion of long-term obligations 8,752,000 8,582,000
----------- -----------
Total long-term obligations and shareholder debentures $ 1,375,000 $ 2,083,000
=========== ===========
</TABLE>
F-16
<PAGE>
Credit Facility
The Company has a secured revolving line of credit with a bank that has been
amended a number of times. The Company is technically in default of certain
financial covenants under the bank arrangement with its principal lender.
However, on June 23, 1999, the Company entered into an agreement with its
principal lender to forbear on all collection actions until February 15, 2000.
On November 12, 1999, the Company entered into an agreement to further extend
the maturity to August 15, 2000. The agreement also includes various extension
periods if certain conditions are met prior to August 15, 2000 which could
extend the final maturity to June 10, 2001.
Notes Payable to Stockholders
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.
Maturities of debt obligations subsequent to September 30, 1999 are:
2000--$8,829,000; 2001--$0; 2002--$1,375,000 and $0 thereafter.
8. STOCK OPTION AND WARRANT AGREEMENTS
Stock Option Plans
As of September 30, 1999, a total of 921,350 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, those with
an exercise price of $15.56 expire in 2007, and those with an exercise price of
$23.67 expire in 2008, and those with an exercise price of $3.80 expire in 2009,
in each case on the anniversary of the date of the grant.
Common shares under option are as follows:
F-17
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- ------------------------ ----------------------
Weighted Weighted Weighted
Average Average Number Average
Number Exercise Number Exercise of Exercise
of Shares Price of Shares Price Shares Price
---------- ------------ ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of year 592,000 $ 14.27 367,000 $ 8.24 241,000 $ 6.20
Exercised -- (6,000) 6.54 (2,000) 6.13
Granted 166,800 3.80 238,000 23.67 131,000 11.53
Canceled (54,200) 23.67 (7,000) 17.07 (3,000) 6.88
-------- --------- -------- ------- ------- -------
Options outstanding, end of year 704,600 $ 11.05 592,000 $ 14.27 367,000 $ 8.24
======== ========= ======== ======= ======= =======
Options exercisable 376,800 265,500 205,300
======== ======== =======
Options available 216,750 46,400 9,300
======== ======== =======
Weighted average fair value per share of
options granted during the year $ 1.80 $ 14.70 $ 8.18
</TABLE>
The following summarizes certain data for options outstanding at September 30,
1999:
<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 181,800 Up to $5.00 $ 3.76 9.29
279,350 $5.01 -$10.00 6.63 5.98
243,450 Over $10.00 21.57 8.30
----------
704,600 $11.05 7.63
==========
Options exercisable 15,000 Up to $5.00 3.32 4.13
259,700 $5.01 -$10.00 6.57 5.90
102,100 Over $10.00 20.34 8.20
----------
376,800 $10.17 6.45
==========
</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 had initially
reserved 300,000 shares of Common Stock for issuance under the 1998 Stock Plan
to employees, officers, directors and consultants of the Company. On May 10,
1999, the Company stockholders approved increasing the number of reserved shares
of Common Stock to 500,000 for the 1998 Stock Plan.
The 1998 Stock Plan provides for the granting of incentive stock options which
are intended to meet the requirements of Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), the granting of non-qualified stock
options which do not meet the requirements of Section 422 of the Code,
opportunities to make direct purchases of the Company's Common Stock, and
F-18
<PAGE>
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.
On March 18, 1998, the Company granted options to purchase 200,000 shares of
Common Stock at an exercise price of $23.67 per share, based on the market price
of the Common Stock at that time, under the 1998 Stock Plan, of which 65,000
were granted to certain Company officers. The remaining options to purchase were
granted to all of the full-time employees of the Company.
On July 1, 1999, the Company granted options to purchase 145,800 shares of
Common Stock at an exercise price of $3.80 per share, based on the market price
of the Common Stock at that time, under the 1998 Stock Plan, of which 45,000
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 that
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. On July 1, 1999, the
Company granted options to purchase 21,000 shares of Common Stock at an exercise
price of $3.80 per share, based on the market price of the Common Stock at that
time, under the 1995 Directors Plan. The Company has granted options to purchase
49,500 shares of Common Stock at varying exercise prices based upon the market
price of the Common Stock at the time of grant under the 1995 Directors Plan.
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 options to purchase 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, 351,350 options are outstanding under these
plans as of September 30, 1999.
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
F-19
<PAGE>
Company's Common Stock for $5.95 per share, which was the approximate market
value of the Company's Common Stock at the date of the transaction. The First
Warrant expires in 2005. The holder of the First Warrant has the option to
exercise a portion of the warrant in a cashless transaction by surrendering the
remaining portion of the warrant as defined.
In consideration of the purchase of its 10% Subordinated Notes due December 10,
1998, the Company issued the holders of the notes three-year warrants to
purchase 42,000 shares of Common Stock for $7.50 per share, which was the
approximate market value of the Company's Common Stock at the date of the
transactions. The holders of the warrants have the option to exercise a portion
of the warrant in a cashless transaction by surrendering the remaining portion
of the warrants.
In consideration of the purchase of its 10% Subordinated Notes due December 10,
2000, the Company issued the holder of the Notes three-year warrants to purchase
60,000 shares of Common Stock for $17.875 per share, which was the approximate
market value of the Company's Common Stock at the date of the transactions.
In consideration of the Second Amendment to the Amended Credit Agreement the
Company issued, to its principal lender, a warrant (the "Second Warrant") to
purchase 25,000 shares (subject to adjustment pursuant to anti-dilution
provisions of the warrant) of Common Stock of the Company at an exercise price
of $23.58 per share, based on the average fair market value for the ten days
ended December 29, 1997.
On 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. Warrants totaling 102,000 with a strike price of $6.00 per warrant
have also been issued as part of this extension.
The following summarizes certain data for warrants outstanding at September 30,
1999:
Purchase Number of
Price Shares
---------------- ----------------
Expiration Date:
September 22, 2000 $ 17.785 60,000
December 10, 2001 7.500 42,000
December 10, 2001 6.000 162,000
September 30, 2005 5.950 50,000
December 29, 2007 4.500 25,000
----------
Total 339,000
==========
See Note 12, Subsequent Events for warrant activity subsequent to year-end.
F-20
<PAGE>
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 1999, 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 1999 1998 1997
--------------- -------------- ------------
<S> <C> <C> <C>
Net income (loss):
As reported $ (2,442) $ (19,031) $ 482
Pro forma $ (2,524) $ (19,912) $ 373
Basic and fully diluted earnings per share:
As reported $ (0.51) $ (3.97) $ 0.10
Pro forma $ (0.51) $ (4.16) $ 0.08
</TABLE>
Because the method prescribed by SFAS No. 123 has not been applied to options
granted prior to October 1, 1995, the resulting pro forma compensation expense
may not be representative of the amount to be expensed in future years. Pro
forma compensation expense for options granted is reflected over the vesting
period; therefore future pro forma compensation expense may be greater as
additional options are granted.
The fair value of each option granted was estimated on the grant date using the
Black Scholes option pricing model with the following weighted average
assumptions: risk-free interest rates of 5.95% to 6.48%, 5.76% to 6.50% and
6.19% to 6.21% for 1999, 1998 and 1997, respectively, expected life of 10 years,
expected volatility of 50%, 52%, and 51% for 1999, 1998 and 1997, 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 1999, 1998, and 1997 was $195,000, $359,000,
and $375,000, respectively. During 1999, the Company used a weighted average
discount rate of 8.0%. Net pension cost for the Company's defined benefit plan
included the following components:
F-21
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 341,000 $ 382,000 $ 308,000
Interest cost on projected benefit obligation 1,069,000 1,133,000 1,056,000
Actual return on plan assets (1,459,000) (681,000) (1,570,000)
Net amortization and deferral 244,000 (475,000) 581,000
----------- ----------- -----------
$ 195,000 $ 359,000 $ 375,000
=========== =========== ===========
Assumptions used in determining the plan's funded status:
Discount rate 8.0% 8.0% 8.0%
Expected rate of increase in compensation levels 4.5% 5.5% 5.5%
Expected long-term rate of return on assets 8.5% 8.5% 8.5%
</TABLE>
The following table sets forth the plan's funded status as of September 30, 1999
and September 30, 1998:
1999 1998
------------- --------------
Accumulated benefit obligation $(13,166,000) $(13,165,000)
Projected benefit obligation (14,390,000) (15,321,000)
Plan assets at fair value 15,485,000 14,858,000
Funded status 1,095,000 (464,000)
Unrecognized prior service costs 70,000 80,000
Unrecognized net loss 838,000 2,582,000
Prepaid pension cost 2,003,000 2,198,000
Plan assets are invested under the provision of a trust agreement with a bank in
common trust funds.
10. POST RETIREMENT BENEFITS
Effective the beginning of fiscal 1994 the Company adopted Statement of
Financial Accounting Standards No. 106 ("SFAS 106"), "Employers' Accounting for
Post Retirement Benefits Other Than Pensions". The statement requires companies
to accrue the cost of post retirement health care and life insurance benefits
within the employees' active service periods.
The Company provides employees who retired from the Company prior to January 1,
1993, with at least ten years of service and under the age of 65, with Group
Health Insurance on a cost-sharing basis. Coverage for an employee's spouse or
dependents will also continue under this plan until the employee has reached age
65 at which time, the coverage ceases. In addition, the Company provides the
same employees who are at least 62 years of age with life insurance equal to
their ending annual salary up to a maximum of $50,000.
For employees who retire after January 1, 1993, the post-retirement benefits do
not include health insurance. In addition, the life insurance benefit, up to a
maximum of $50,000, is provided for one year after retirement.
The accumulated benefit obligation of these benefits as of September 30, 1999
and 1998, is approximately $685,000 (for life insurance only) and 763,000
($5,000 for medical insurance and
F-22
<PAGE>
758,000 for life insurance), respectively. Plan assets of $493,000 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. There are no longer any participants eligible for post
retirement medical benefits.
Post retirement benefit expense for fiscal 1999, 1998 and 1997 as follows:
1999 1998 1997
--------- -------- --------
Service cost of benefits earned $ 2,000 $ 1,000 $ 1,000
Interest cost on liability 54,000 59,000 59,000
Return on plan assets (16,000) (12,000) (12,000)
Amortization of transition obligation 24,000 24,000 24,000
-------- -------- --------
Net post retirement benefit cost $ 64,000 $ 72,000 $ 72,000
======== ======== ========
The following table sets forth the Benefit Plan's funded status as of September
30, 1999 and 1998:
1999 1998
--------- ----------
Accumulated post retirement benefit obligation $(685,000) $(763,000)
Plan assets at fair value 493,000 413,000
--------- ---------
Funded status (192,000) (350,000)
Transition obligation 106,000 242,000
--------- ---------
Accrued post retirement benefit cost $ (86,000) $(108,000)
========= =========
The following actuarial assumptions were used:
1999 1998 1997
------ ------ ------
Salary increase 4.5% 5.5% 5.5%
Discount rate 8.0% 8.0% 8.0%
Return on assets 3.0% 3.0% 3.0%
Medical inflation N/A 4-9% 4-9%
11. COMMITMENTS AND CONTINGENCIES
Waste Disposal
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.
F-23
<PAGE>
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 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. 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's reflect its
position that it is obligated to provide financial assurance only with respect
to the portion of the materials which are attributable to the Company's
commercial production for parties other than the United States Government and
that this obligation has been satisfied by a letter of credit to each geographic
location's regulatory agency. However, the Company's letters of credit are
subject to the agreement with its principal lender, which expires on August 15,
2000. 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 the Company 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.
The United States Army, in a 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. Additionally, the Company is currently performing on a U.S. Army
facilities contract that obligates the Army to restore those facilities used in
the production of penetrators once the Company ceases DU penetrator production.
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. Under the Zhagrus contract, the Company agreed to pay an additional fee
per cubic yard of excess material removed dependant upon certain actions by
Zhagrus. 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
F-24
<PAGE>
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' claim is the subject of litigation described below. If these
costs are not recovered from the U.S. Army and the Company is held responsible
for these costs, 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 contested 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. 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. In February 1999, based on discussions with
the U.S. Army, the Company submitted a claim under P.L. 85-804 requesting
payment of these excess costs. In June 1999, the U.S. Army denied the latter
request. In August 1999, the Company re-submitted the engineering change
proposal and 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 upon examination of
relevant contracts, the actions of the Army with respect to D&D of facilities of
other contractors, and discussions with counsel, 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 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 contested $5.0 million cost associated with the additional
treatment of waste 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 capability to finance such liabilities. Management
believes, based upon written advice of consultants and counsel, that the U.S.
Government has a responsibility to pay, directly and indirectly, for a
substantial portion of these costs. The United States Army, in the Army
Decision, 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
F-25
<PAGE>
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 receivership 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.
Legal Proceedings
The Company is named as a Potentially Responsible Party ("PRP") in regard to the
Maxey Flats, Kentucky, Superfund Site. This site was used until 1977 as a
licensed and approved low-level radioactive waste disposal site. A committee of
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 remaining liability
at this site is expected to be approximately $70,000 over 8 years.
On February 5, 1999, the Company was served with a summons and complaint in a
common law diversity tort action filed in the United States District Court for
the Eastern District of Tennessee, entitled Orick v. Brush Wellman, et al.,
3:98-CV-652 (E.D. Tenn.), naming as defendants eight corporations, including
Starmet Corporation. The complaint also names the United States of America as a
defendant under the Federal Tort Claims Act. The complaint alleges that the
defendants failed to adequately warn the plaintiff, an employee of a facility in
Tennessee that processes beryllium products, regarding the dangers of beryllium
and beryllium manufacturing. The complaint seeks $1 million in compensatory
damages against the Company, as well as punitive damages of $10 million. The
Company believes that the claims are without merit and intends to vigorously
defend against the claim. However, there can be no assurance that this
litigation will ultimately be resolved on terms that are favorable to the
Company.
On February 17, 1999, the Company was served with a summons and complaint in a
breach of contract action filed in The Superior Court, County of Middlesex,
Commonwealth of Massachusetts, entitled Zhagrus Environmental, Inc. et. al. v.
Nuclear Metals, Inc. et. al., MCV99-01057, naming the Company and its
subsidiaries as defendants. The Company removed the case to federal district
court in Massachusetts on March 18, 1999, where it was docketed as Civil Action
No. 99-CV-10600-RGS. The complaint alleges, among other things, that the
defendants materially breached their agreement with the plaintiff, Zhagrus
Environmental Inc., entitled "Holding Basin Remediation and Waste Disposal
Agreement" dated May 8, 1997, and that plaintiffs, Zhagrus and Envirocare of
Utah, Inc., are entitled to a judgment in the amount of at least $8,368,883 for
services rendered pursuant to such agreement. On June 18, 1999, the Company
filed its answer to the complaint denying liability, and asserted a counterclaim
against the plaintiffs alleging, among other things, breach of contract, breach
of implied covenant of good faith, deceit, and violation of Mass. Gen. Laws c.
93A. On July 7, 1999, the Company and plaintiffs agreed, pending resolution of
the lawsuit, to entry of an order placing certain limited restrictions on the
Company's ability to enter into significant transactions without affording prior
notice to the plaintiffs. Although the Company believes that it has valid
defenses to the claims alleged in this complaint, there can be no
F-26
<PAGE>
assurance that this litigation will ultimately be resolved on terms that are
favorable to the Company. The Company has sought relief from the Army for a
portion of the amounts claimed by the plaintiffs, to the extent that the Company
is otherwise required to pay those amounts. Of the $8,368,883, $3.5 million has
been recorded as a liability. The Company believes there are material issues of
fact relating to the amount of this liability ($3.5 million) which are the
subject of the Zhagrus litigation.
On February 24, 1999, the Company was served with a summons and complaint in a
common law diversity tort action filed in the United States District Court for
the Eastern District of Tennessee, entitled Jerry Lynn Hall & Rose Mary Hall v.
Brush Wellman, et al., 3:99-CV-110 (E.D. Tenn.), naming as defendants fourteen
corporations, including Starmet Corporation. The complaint alleges that the
defendants failed to adequately warn the plaintiff, an employee of a facility in
Tennessee that processes beryllium products, regarding the dangers of beryllium
and beryllium manufacturing. The complaint seeks $6 million in compensatory
damages against the Company, as well as punitive damages of $10 million. The
Company believes that the claims are without merit and intends to vigorously
defend against the claim. However, there can be no assurance that this
litigation will ultimately be resolved on terms that are favorable to the
Company.
On December 13, 1999, the Company was served with a summons and complaint in a
common law diversity tort action filed in the United States District Court for
the Eastern District of Tennessee, entitled Jesse McDonald v. Brush Wellman, et
al., 3:99-CV-642 (E.D. Tenn.), naming as defendants thirteen corporations,
including Starmet Corporation. The complaint alleges that the defendants failed
to adequately warn the plaintiff, an employee of a facility in Tennessee that
processes beryllium products, regarding the dangers of beryllium and beryllium
manufacturing. The complaint seeks $5 million in compensatory damages against
the Company, as well as punitive damages of $10 million. The Company believes
that the claims are without merit and intends to vigorously defend against the
claim. However, there can be no assurance that this litigation will ultimately
be resolved on terms that are favorable to the Company.
On December 20, 1999, the Company was served with a summons and complaint in a
common law diversity tort action filed in the United States District Court for
the Eastern District of Tennessee, entitled John Langley v. Brush Wellman, et
al., 3:99-CV-655 (E.D. Tenn.), naming as defendants thirteen corporations,
including Starmet Corporation. The complaint alleges that the defendants failed
to adequately warn the plaintiff, an employee of a facility in Tennessee that
processes beryllium products, regarding the dangers of beryllium and beryllium
manufacturing. The complaint seeks $6 million in compensatory damages against
the Company, as well as punitive damages of $10 million. The Company believes
that the claims are without merit and intends to vigorously defend against the
claim. However, there can be no assurance that this litigation will ultimately
be resolved on terms that are favorable to the Company.
The Company is involved in various other legal proceedings that 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.
F-27
<PAGE>
12. SUBSEQUENT EVENTS
The Company is in default of the financial covenants under the bank arrangement
with its principal lender. On June 23, 1999, the Company entered into an
agreement with its principal lender to forbear on all collection actions until
February 15, 2000. On November 12, 1999, the Company entered into an agreement
to further extend the maturity to August 15, 2000. The agreement also includes
various extension periods if certain conditions are met prior August 15, 2000
which could extend the final maturity to June 10, 2001.
On December 31, 1999, the original maturity date of certain debentures due to
shareholders, certain shareholders of the Company agreed to a three-year
extension to December 31, 2002 on the 10% convertible debt in the amount of
$900,000. In consideration for extending the maturity date of the Debentures,
the interest rate was increased to 14% and the holders were issued three-year
warrants to purchase an aggregate of 108,000 shares of common stock at an
exercise price of $3.875 per share, subject to anti-dilution adjustments.
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 $287,500 in 1999 and $350,000 in 1998 and 1997. This
agreement was modified to reduce the minimum compensation to $225,000 beginning
April 1, 1999. The agreement expires on February 28, 2004, subject to annual
renewals as described in the agreement. Mr. Matthews does not receive any other
salary or fee for services as Chairman of the Board of Directors.
14. MAINTENANCE AND REPAIRS
Maintenance and repair expenditures, which are charged to cost and expense as
incurred, amounted to $644,000, $1,565,000 and $1,536,000 in 1999, 1998 and
1997, respectively.
15. INDUSTRY SEGMENT INFORMATION
The Company is engaged in the manufacture and sale of various specialty metal
products. The Company operates in four industry segments: Specialty Metal,
Uranium Services and Recycle, Powders and Composite Materials.
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:
F-28
<PAGE>
1999 1998 1997
------------ ------------ ------------
(as restated) (as restated)
Net sales and contract revenues:
Specialty Metal $ 9,472,000 $ 18,845,000 $ 14,459,000
Uranium Services and Recycle 7,472,000 5,905,000 4,965,000
Powders 5,406,000 5,078,000 4,348,000
Composite Materials 2,651,000 4,995,000 4,290,000
------------ ------------ ------------
Total $ 25,001,000 $ 34,823,000 $ 28,062,000
------------ ------------ ------------
Operating income (loss):
Specialty Metal $ 762,000 $ (2,881,000) $ 50,000
Uranium Services and Recycle (1,038,000) (11,519,000) 2,675,000
Powders 1,543,000 184,000 625,000
Composite Materials (2,200,000) (3,546,000) (2,539,000)
------------ ------------ ------------
Subtotal $ (933,000) $(17,762,000) $ 811,000
Other expense, net 1,509,000 1,269,000 298,000
------------ ------------ ------------
Income (loss) before taxes $ (2,442,000) $(19,031,000) $ 513,000
============ ============ ============
Identifiable assets:
Specialty Metal $ 1,237,000 $ 2,270,000 $ 2,126,000
Uranium Services and Recycle 9,115,000 10,458,000 13,964,000
Powders 929,000 1,052,000 1,221,000
Composite Materials 3,309,000 3,692,000 2,335,000
Corporate 11,266,000 14,961,000 14,708,000
------------ ------------ ------------
Total $ 25,856,000 $ 32,433,000 $ 34,354,000
============ ============ ============
Depreciation:
Specialty Metal $ 469,000 $ 471,000 $ 412,000
Uranium Services and Recycle 750,000 730,000 726,000
Powders 9,000 2,000 1,000
Composite Materials 406,000 320,000 208,000
Corporate 280,000 226,000 203,000
------------ ------------ ------------
Total $ 1,914,000 $ 1,749,000 $ 1,550,000
============ ============ ============
Segment information has been restated for 1998 and 1997 to be consistent with
the 1999 presentation in accordance with SFAS No. 131.
The Specialty Metal segment includes the fabrication of primarily depleted
uranium (DU) metal products, using foundry, extrusion, and machining
capabilities. It's products include industrial and medical shielding products,
DU billets in support of the Army's tank armor program and the production of
various DU penetrators (a component of armor-piercing ammunition used in certain
U.S. military gun systems) which are sold to prime contractors manufacturing
such ammunition for
F-29
<PAGE>
the U.S. Department of Defense or to foreign military operations. The Uranium
Services and Recycle segment includes the conversion of UF6 for United States
Enrichment Corporation, repair and refurbishment of DU aircraft counterweights
for commercial and military aircraft and the manufacture of depleted uranium.
The Powders segment includes the production and sale of various metal powders
manufactured by the Company's patented Rotating Electrode Process. The Composite
Materials segment includes the manufacture of beryllium aluminum composite
materials for defense and commercial aerospace applications, computer hard disk
drives, and commercial motion control applications for the semiconductor
manufacturing market.
Net sales and contract revenues by 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 segment. Sales to Royal Ordnance and Primex Technologies are
included in the Specialty Metal segment. Sales to Lockheed Martin are included
in the Composite Materials segment.
Due to the utilization among segments of common production facilities and
equipment and the involvement of a single management organization in all phases
of the Company's operations, necessary allocations have been made based on
estimates which management believes to be reasonable.
Operating income (loss) includes net sales and contract revenues less the cost
of sales of the individual segments and less allocated selling, general
administrative and R&D expenses. Other expenses, net include interest and other
income and expenses.
Identifiable assets shown include inventory and plant and equipment that have
been allocated to each of the Company's segments. Corporate assets consist
primarily of cash, accounts receivable, unallocated plant and equipment and
other assets.
16. QUARTERLY RESULTS (UNAUDITED)
Financial results by quarter for 1999, 1998 and 1997 are summarized below in
thousands except for per share information:
F-30
<PAGE>
First Second Third Fourth
Quarter Quarter Quarter Quarter
1999
Net sales $ 7,419 $ 5,919 $ 5,638 $ 6,025
Operating income (loss) 334 (1,653) (437) 823
Net income (loss) (87) (2,091) (817) 553
Basic net income (loss) per share (0.02) (0.44) (0.17) 0.12
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)
Basic net income (loss) per share (0.33) 0.06 (0.58) (3.12)
1997
Net sales $ 7,271 $ 5,342 $ 7,013 $ 8,436
Operating income (loss) 476 (477) 399 413
Net income (loss) 419 (541) 293 311
Basic net income (loss) per share 0.09 (0.11) 0.06 0.06
F-31
<PAGE>
<TABLE>
<CAPTION>
STARMET CORPORATION AND SUBSIDIARIES
Schedule II- Valuation and Qualifying Accounts
For the Three Years Ended September 30, 1999
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, 1999:
Allowance for doubtful accounts $ 524,000 $ (9,000) $ 315,000 $ 200,000
========== =========== ============ ==========
Inventory Reserves $9,163,000 $ -- $ 852,000 $8,311,000
========== =========== ============ ==========
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
========== =========== ============ ==========
<FN>
- ----------
(a) See Note 1 of Notes to Consolidated Financial Statements
</FN>
</TABLE>
F-32
<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 13, 2000 By: /s/ Robert E. Quinn
Robert E. Quinn, President and Chief Executive
Officer (principal executive officer and director)
Date: January 13, 2000 By: /s/ Gary W. Mattheson
Gary W. Mattheson, Chief Financial Officer
Date: January 13, 2000 By: /s/ George J. Matthews
George J. Matthews, Chairman of the Board of
Directors
Date: January 13, 2000 By: /s/ Matthew Brady
Matthew Brady, Director
Date: January 13, 2000 By: /s/ Frank H. Brenton
Frank H. Brenton, Director
Date: January 13, 2000 By: /s/ Gerald R. Hoolahan
Gerald R. Hoolahan, Director
Date: January 13, 2000 By: /s/ Brian B. Sand
Brian B. Sand, Director
Date: January __, 2000 By:_________________________
Kenneth A. Smith, Director
Date: January 13, 2000 By: /s/ Randal E. Vataha
Randal E. Vataha, Director
EXHIBIT 10.(mm)
EXECUTION COPY
FORBEARANCE AGREEMENT AND
EIGHTH AMENDMENT TO CREDIT AGREEMENT
THIS FORBEARANCE AGREEMENT AND EIGHTH AMENDMENT TO CREDIT AGREEMENT
(this "Agreement"), dated as of November 12, 1999, is by and among STARMET
CORPORATION, a Massachusetts corporation (f/k/a Nuclear Metals, Inc.)
("StarMet"), STARMET POWDERS, LLC, a Delaware limited liability corporation
("Powders"), STARMET AEROCAST, LLC, a Delaware limited liability corporation
("AeroCast"), STARMET COMMERCIAL CASTINGS, LLC, a Delaware limited liability
corporation ("ComCast"), STARMET NMI CORPORATION, a Massachusetts corporation
("NMI"), STARMET CMI CORPORATION, a Delaware corporation (f/k/a Carolina Metals,
Inc.) ("CMI"), STARMET HOLDINGS CORPORATION, a Massachusetts corporation
("Holdings"), NMI FOREIGN SALES CORPORATION, a U.S. Virgin Islands corporation
("FSC", and together with StarMet, Powders, AeroCast, ComCast, NMI, CMI and
Holdings, the "Borrowers") and CITIZENS BANK OF MASSACHUSETTS, an FDIC insured
bank and successor in interest to State Street Bank and Trust Company under the
Credit Agreement referred to below (the "Bank").
Preliminary Statements
A. The Bank, as successor in interest to State Street Bank and Trust
Company ("State Street"), and the Borrowers are parties to an Amended and
Restated Credit Agreement dated as of October 1, 1997 (such Credit Agreement as
amended prior to the date hereof by a First Amendment to Credit Agreement dated
as of December 19, 1997, a Second Amendment to Credit Agreement dated as of
December 29, 1997, a Third Amendment to Credit Agreement dated as of July 2,
1998, a Fourth Amendment to Credit Agreement dated as of August 7, 1998, a Fifth
Amendment to Credit Agreement dated as of September 30, 1998, a Forbearance
Agreement and Sixth Amendment to Credit Agreement dated as of February 24, 1999
(the "Sixth Amendment"), a Forbearance Agreement and Seventh Amendment to Credit
Agreement dated as of August 23, 1999 (the "Seventh Amendment") and by a letter
agreement dated November 10, 1998 among State Street and the Borrowers (the
"Letter Agreement"), as further amended by this Agreement and as further amended
from time to time, the "Credit Agreement"; capitalized terms used but not
defined herein shall have the meanings ascribed to them in the Credit Agreement)
pursuant to which the Bank agreed to make certain revolving credit loans to
Borrowers on the terms and conditions set forth therein. Borrowers' obligations
under the Credit Agreement are evidenced by an Amended and Restated Revolving
Credit Note dated August 7, 1998 (as amended and/or restated by and through the
date of this Agreement, and as hereafter
<PAGE>
amended and/or restated from time to time, the "Revolving Credit Note" and
together with the Credit Agreement, the "Credit Documents") executed and
delivered by the Borrowers to the Bank. The Borrowers' obligations to the Bank
under the Credit Documents are referred to herein as the "Revolving Credit
Loans". Borrowers are also parties to certain security documents, instruments
and agreements executed by Borrowers in connection with the Credit Documents (as
amended by and through the date of this Agreement and as amended from time to
time hereafter, the "Borrower Security Documents"; the Credit Agreement, the
Revolving Credit Note, the Borrower Security Documents, this Agreement, and any
agreement or instrument executed in connection therewith or herewith, as the
same have been amended or may be amended from time to time hereafter, are
collectively referred to herein as the "Borrower Loan Documents")
B. Borrowers have defaulted on their obligations to the Bank under the
Credit Documents because the "Aggregate Bank Liabilities" (as defined in the
Letter Agreement) exceed the "Maximum Credit" (as defined in the Letter
Agreement") and the Borrowers have failed to pay such excess to the Bank, which
failure constitutes an Event of Default. State Street issued a notice of the
aforesaid Event of Default to the Borrowers by letter dated November 20, 1998
and reserved the full extent of its rights in respect of such Event of Default.
C. Following the occurrence of the aforesaid Event of Default, the
Borrowers and State Street entered into the Sixth Amendment pursuant to which
State Street agreed, subject to the terms and conditions set forth therein, to
(i) forbear until May 28, 1999 from exercising its rights and remedies under the
Borrower Loan Documents and applicable law with respect to the existing Event of
Default and (ii) continue to provide financing to the Borrowers until May 28,
1999 on the terms set forth in the Credit Agreement, as in effect at the time.
D. After the date of the Sixth Amendment, additional Events of Default
occurred as a result of defaults occurring under Sections 4.20. 4.21, 4.22,
4.31, 4.32, and 4.33 of the Credit Agreement and the Maturity Date passed.
E. Following the occurrence of the aforesaid Events of Default, the
Borrowers and State Street entered into the Seventh Amendment pursuant to which
State Street agreed, subject to the terms and conditions set forth therein, to
(i) forbear until February 15, 2000 (subject to extension as provided in the
Seventh Amendment) from exercising its rights and remedies under the Borrower
Loan Documents and applicable law with respect to the existing Events of Default
and (ii) continue to provide financing to the Borrowers until February 15, 2000
(subject to extension as provided in the Seventh Amendment) on the terms set
forth in the Credit Agreement, as in effect at the time.
F. The Borrowers have requested that the Bank (i) forbear until August
15, 2000 from exercising its rights and remedies under the Borrower Loan
Documents and applicable law with respect to the existing Events of Default and
(ii) continue to provide financing to the Borrowers on the terms set forth in
the Credit Agreement, as in effect at the time.
2
<PAGE>
G. The Bank is willing, subject to the terms and conditions set forth
herein, to forbear and continue to provide financing to the Borrowers, but only
as and to the extent provided herein.
NOW, THEREFORE, in consideration of the mutual promises and agreements
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by each of the Borrowers, and
subject to the terms and conditions of this Agreement, the parties agree as
follows:
ss.1. CONFIRMATION OF INDEBTEDNESS. As of November 12, 1999 the
respective amounts of outstanding principal of and accrued but unpaid interest
on the Revolving Credit Note and the aggregate face amount of all outstanding
L/C's are as follows:
Revolving Credit Note:
---------------------
Principal: $5,499,168.00
Interest: $ 4,009.81
-------------
TOTAL: $5,503,277.81
=============
Face Amount of L/C's $3,550,000.00
--------------------
The Revolving Credit Note shall continue to accrue interest in accordance with
the terms of the Borrower Loan Documents, as amended hereby.
The Borrowers are indebted to the Bank for unreimbursed legal fees and
related expenses incurred by the Bank. By the execution of this Agreement by the
Borrowers, the total amount of Borrowers' indebtedness and obligations to the
Bank evidenced by and/or related to the Borrower Loan Documents, including
without limitation principal and interest on the Revolving Credit Note, and fees
and expenses of the Bank's counsel and their consultants, is jointly and
severally ratified, confirmed and approved by the Borrowers in all respects (the
indebtedness and obligations referred to in this ss.1, in each case whether now
existing or hereafter arising, are hereinafter referred to collectively as the
"Borrower Obligations"). Borrowers acknowledge and agree that (a) the Borrower
Obligations are valid and binding obligations of each Borrower, enforceable in
accordance with the Borrower Loan Documents, as amended hereby, and (b) the Bank
is presently entitled to demand, and each Borrower is presently obligated (upon
demand by the Bank) to pay in full, all of the Borrower Obligations, without any
further demand, notice or claim subject only to the agreement of the Bank to
forbear on the terms set forth in this Agreement. Without limiting the
foregoing, each Borrower acknowledges and agrees that the Bank has no
forbearance obligation whatsoever except as expressly provided in this
Agreement.
ss.2. RATIFICATION AND CONFIRMATION OF BORROWER SECURITY DOCUMENTS,
COLLATERAL SECURITY AND EXISTING AGREEMENTS. Each
3
<PAGE>
Borrower, by the execution of this Agreement, ratifies, confirms and approves in
all respects each of the Borrower Security Documents, and acknowledges, confirms
and agrees that all of the Borrower Obligations are and shall be hereafter
secured by and entitled to the benefits of each of the Borrower Security
Documents and that the liens granted to the Bank thereunder remain valid,
perfected and enforceable against such Borrower, and shall extend to all
properties and assets of each Borrower, whether real, personal or mixed,
tangible or intangible, and now owned or hereafter acquired or arising
(collectively, the "Collateral"), including, without limitation, all outstanding
shares of capital stock or other equity interests of any Borrower (other than
StarMet) or any Subsidiary of any Borrower and all rights to acquire the same,
and such liens shall secure all Borrower Obligations now existing or hereafter
arising. Each Borrower acknowledges and agrees that for all purposes, as the
context permits or requires in each Borrower Security Document, all Borrower
Obligations (as defined in ss.1 above) do and shall at all times hereafter
constitute "Obligations" and "Secured Obligations" for all purposes of the
Borrower Security Documents.
Each Borrower acknowledges, confirms and agrees that, except as shown
on Exhibit 4.14 of the Credit Agreement and except with respect to certain
specific equipment on which vendors have existing perfected purchase money
liens, as previously consented to by the Bank, the Bank has and shall retain a
first priority perfected security interest in and lien on all Collateral. Each
Borrower also acknowledges, confirms and agrees that they have pledged all loans
and notes receivable owned by such Borrower to the Bank. Each Borrower confirms
its agreement in the Borrower Loan Documents to take, or cause to be taken, all
actions requested by the Bank in order to create, maintain, renew and/or perfect
the Bank's security interests in the Collateral.
Without limiting the generality of this ss.2, each Borrower ratifies,
confirms and approves the Amended and Restated Joint Security Agreement in favor
of the Bank dated as of October 1, 1997 (as amended by and through the date of
this Agreement and as amended from time to time hereafter, the "Security
Agreement") and each Borrower further ratifies, confirms and approves the Pledge
and Security Agreement in favor of the Bank dated as of February 24, 1999 (as
amended by and through the date of this Agreement and as amended from time to
time hereafter, the "Pledge Agreement") . Each Borrower acknowledges and
confirms that it intended, upon executing the Security Agreement in favor of the
Bank, that such Security Agreement secure any and all indebtedness and other
obligations of the Borrowers to the Bank, whether then existing or thereafter
arising. Each Borrower further acknowledges and confirms that it intended, upon
executing the Pledge Agreement in favor of the Bank, that such Pledge Agreement
secure any and all indebtedness and other obligations of the Borrowers to the
Bank, whether then existing or thereafter arising.
Without limiting any other provision of this Agreement, the Borrowers
acknowledge and agree for the benefit of the Bank that the Bank is entering into
this Agreement in reliance on the agreements set forth in the foregoing
provisions of this ss.2 and on the understanding that any Revolving Credit Loans
and other financing made available to Borrowers by the Bank after the
4
<PAGE>
date of this Agreement are secured by and entitled to the benefits of each of
the Borrower Security Documents and the Collateral described therein. In
addition, each Borrower hereby incorporates by reference and restates in full
the grant of a security interest in the Collateral contained in Section 1 of the
Security Agreement and contained in Section 1 of the Pledge Agreement, and
confirms that the Obligations, as defined in Section 2 of the Security
Agreement, includes all of the Borrower Obligations and every other sum owed the
Bank by any Borrower, and that the Secured Obligations, as defined in Section 2
of the Pledge Agreement, includes all of the Borrower Obligations and every
other sum owed the Bank by any Borrower.
ss.3. NO PRESENT CLAIMS; ETC. Each of the Borrowers acknowledges and
agrees with the Bank that: (a) it has no claim or cause of action against the
Bank (or any of its directors, officers, employees, consultants, agents,
affiliates or attorneys or any of the consultants to any of its attorneys); (b)
it has no offset right, counterclaim or defense of any kind against any of the
Borrower Obligations or any other obligation or indebtedness of any Borrower to
the Bank; and (c) the Bank has heretofore properly performed and satisfied in a
timely manner all of its obligations to each Borrower. The Bank wishes (and each
of the Borrowers agrees) to eliminate any possibility that any past conditions,
acts, omissions, events or circumstances would impair or otherwise adversely
affect any of the Bank's rights, interests, security and/or remedies. For and in
consideration of the agreements contained in this Agreement and other good and
valuable consideration, the Borrowers (collectively, the "Releasors")
unconditionally and irrevocably release, waive and forever discharge the Bank,
together with its successors, assigns, subsidiaries, directors, officers,
employees, consultants, affiliates, agents and attorneys and consultants to its
attorneys (collectively, the "Released Parties"), from: (x) any and all
liabilities, obligations, duties, promises or indebtedness of any kind of the
Released Parties to the Releasors or any of them, and (y) all claims, offsets,
causes of action, suits or defenses of any kind whatsoever (if any), which the
Releasors or any of them might otherwise have against the Released Parties or
any of them, in either case (x) or (y) on account of any condition, act,
omission, event, contract, liability, obligation, indebtedness, claim, cause of
action, defense, circumstance or matter of any kind (aa) which existed, arose or
occurred at any time from the beginning of the world to the execution of this
Agreement or (bb) which could hereafter arise as a result of the execution of
(or the observance of the terms of) this Agreement or any of the other Borrower
Loan Documents.
ss.4. AMENDMENTS TO CREDIT AGREEMENT.
Preliminary Statement. Pursuant to the Seventh Amendment, the Bank's
commitment to provide Revolving Credit Loans to Borrowers will expire on
February 15, 2000, unless earlier terminated and subject to extension, all as
provided in the Seventh Amendment. Nonetheless, Borrowers have requested that
the Bank agree to further extend, on the terms and conditions set forth herein,
the Bank's commitment to provide Revolving Credit Loans to Borrowers and to
amend certain other provisions of the Credit Agreement, and the Bank is willing
to agree to such extension and amendments, all on the terms and conditions set
forth herein. In order to give
5
<PAGE>
effect to the foregoing, Borrowers and the Bank hereby agree to amend the Credit
Agreement as follows:
4.1. Section 1.02(a). Section 1.02(a) of the Credit Agreement is hereby
amended by deleting such Section 1.02(a) in its entirety and substituting
therefor the following:
"(a) Amount. Provided no Event of Default (as defined in
Article V) or event which with the passage of time or notice, or both,
would become an Event of Default has occurred and is continuing, each
Borrower may from time to time from the date hereof up to August 15,
2000 (such date, subject to extension as provided in clauses (j)
through (n) below, the "Maturity Date") borrow and reborrow from the
Bank and the Bank shall advance funds under the Revolving Credit to
such Borrower (an "Advance" or the "Advances"); provided that the
aggregate of all Advances outstanding at any time plus the maximum
aggregate liability of the Borrowers under any outstanding letters of
credit issued prior to the date hereof or pursuant to this Credit
Agreement (minus the aggregate amount of any Cash Collateral Proceeds)
shall not exceed an amount (the "Maximum Credit") equal to $10,350,000
up to the Maturity Date, provided, further, that the Maximum Credit:
(i) shall be reduced (x) on the twentieth day of each
calendar month (other than any month which commences after the US Army
Payment Commencement Date), commencing September 20, 1999, by the
greater of (A) $50,000 or (B) the sum of (I) 25% of Available Free Cash
for the immediately preceding fiscal month up to $400,000 of Available
Free Cash, and (II) 50% of the amount by which Available Free Cash for
the immediately preceding fiscal month exceeds $400,000, and (y) on the
twentieth day of each calendar month which commences after the US Army
Payment Commencement Date, by the greater of (A) $100,000 or (B) the
sum of (I) 25% of Available Free Cash for the immediately preceding
fiscal month up to $400,000 of Available Free Cash, (II) 50% of the
amount by which Available Free Cash for the immediately preceding
fiscal month exceeds $400,000, and (III) 75% of the US Army Payments
during the immediately preceding fiscal month; and
(ii) shall be further reduced from time to time as provided in
Section 1.02(b).
For purposes of this Agreement:
"Available Free Cash" for any period shall mean the aggregate amount
collected by the Borrowers and their Subsidiaries during such period in
respect of accounts receivables (excluding any US Army Payments) minus
the aggregate payroll expenditures and Current Accounts Payable paid by
the Borrowers and their Subsidiaries during such period, all
consolidated and determined in accordance with GAAP.
6
<PAGE>
"Current Accounts Payable" shall mean accounts payable for goods and
services which remain unpaid not more than 180 days after the date of
invoice.
"US Army Payment Commencement Date" shall mean the last day of the
first full calendar month commencing after the date, if any, on which
any of the Borrowers first receives payments under the facilities
contract between one or more of the Borrowers and the United States
Army (the "Facilities Contract") in respect of either (x) "rent" on all
or a portion of the Borrowers' facilities located in Concord,
Massachusetts or (y) decontamination and decommissioning costs thereof.
"US Army Payments" for any period shall mean the aggregate rental
payments made to the Borrowers under the Facilities Contract during
such period plus any net operating income of or other payments to the
Borrowers under the Facilities Contract in respect of decontamination
and decommissioning during such period."
4.2. Section 1.02(b). Section 1.02(b) of the Credit Agreement is hereby
amended by deleting the last sentence thereof and inserting the following in its
place:
"The Borrowers shall apply all proceeds (net of reasonable
closing costs approved in advance in writing by the Bank) of sales or
other dispositions of any of their respective properties or assets
(other than sales of inventory in the ordinary course, but including
proceeds of any license agreement and including bulk sales) (all such
proceeds being referred to as the "Asset Sale Proceeds") to pay
outstanding Advances, and the Maximum Credit shall be deemed
automatically reduced by the amount of any Asset Sale Proceeds
(excluding any Asset Sale Proceeds applied at the request of the Bank
pursuant to the following two proviso clauses) on the date such
proceeds are received by the Borrowers, provided that, if so requested
by the Bank, all or a portion of Asset Sale Proceeds shall instead be
used to cash collateralize the Borrowers' maximum liability in respect
of such outstanding L/C's as the Bank may designate at the time of
receipt of such Asset Sale Proceeds (the amount of any such proceeds
serving at any time as such cash collateral being referred to as the
"Cash Collateral Proceeds"), and, provided, further, that, if so
requested by the Bank, all or a portion of Asset Sale Proceeds shall
instead be used to satisfy the Financial Assurance requirements of the
Massachusetts Department of Environmental Protection and the South
Carolina Department of Health and Environmental Control, such that the
L/C's issued to the respective governmental agencies by the Bank may be
canceled."
4.3. Section 1.02(c). Section 1.02(c) of the Credit Agreement is hereby
amended by deleting such Section 1.02(c) in its entirety and inserting the
following in its place:
"(c) The Revolving Credit Note. Amounts owed to the Bank with
respect to Advances made by the Bank shall be evidenced by Bank's books
and records and may, at
7
<PAGE>
the request of the Bank, be further evidenced by one or more revolving
credit notes (collectively, the "Revolving Credit Notes"). As of
November 12, 1999, the Advances are evidenced by an Amended and
Restated Revolving Credit Note dated November 12, 1999 in the principal
amount of $10,350,000, which replaces and supersedes all prior
revolving credit notes issued under this Credit Agreement. Any
repayments of principal shall be applied to the Revolving Credit Note
in such order as the Bank in its discretion shall determine. The unpaid
principal balance of the Revolving Credit Note may be voluntarily
prepaid in whole or in part during the continuation of the Revolving
Credit Note without premium or penalty; provided that if the Revolving
Credit is to be terminated by the Borrowers, thirty (30) days prior
notice shall be given to the Bank. Upon termination, the Borrowers
shall satisfy the provisions of Section 6.01 of this Agreement. The
Revolving Credit Note is subject to mandatory repayments as provided in
section 1.02(b)."
4.4. Sections 1.02(j) through (n). Section 1.02 of the Credit Agreement
is hereby amended by deleting clauses 1.02(j) through (n) and inserting the
following new clauses 1.02(j) through (n) in their place:
"(j) First Extension Option. The Borrowers shall have the
option to extend the Maturity Date from August 15, 2000 until December
13, 2000 (the "First Extension Option") if both (x) the First Extension
Option Condition is satisfied and (y) no Event of Default has occurred
since the date of the Forbearance Agreement and Eighth Amendment to
Credit Agreement dated as of November 12, 1999 among the Borrowers and
the Bank (the "Eighth Amendment") nor has there occurred since such
date any event which with notice or lapse of time or both would
constitute an Event of Default. In order to exercise the First
Extension Option, the Borrowers shall deliver to the Bank a written
notice not later than August 15, 2000, which notice shall be
accompanied by a schedule demonstrating, to the satisfaction of the
Bank, that the First Extension Option Condition was satisfied and
certifying that no Event of Default has occurred since the date of the
Eighth Amendment and that no other event has occurred since such date
which with notice or lapse of time of both would constitute an Event of
Default.
The First Extension Option Condition will be satisfied if (a)
the gross sales of the Borrowers for the fiscal quarter ending July 2,
2000 exceed (on an annualized basis) by at least $5,000,000 the gross
sales of the Borrowers for the preceding fiscal quarter (on an
annualized basis) all determined in accordance with generally accepted
accounting principles consistently applied ("GAAP"), and (b) the
Annualized Operating Cash Flow for the fiscal quarter ending July 2,
2000 exceeds the Annualized Operating Cash Flow for the preceding
fiscal quarter by at least $1,500,000.
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"Annualized Operating Cash Flow" of the Borrowers for any
fiscal quarter or other three month period shall mean (a) the Operating
Cash Flow of the Borrowers for such fiscal quarter or other three month
period, multiplied by (b) four.
"Operating Cash Flow" of the Borrowers for any fiscal quarter
or other three month period shall mean the "operating income provided
by operating activities" of the Borrowers for such fiscal quarter or
other three month period as shown on the financial statements for the
Borrowers for such period, all determined in accordance with GAAP, but
excluding all extraordinary, unusual, or non-recurring gains or losses.
(k) Further Extension Option. If, but only if, the First
Extension Option is exercised, the Borrowers shall have the further
option to extend the Maturity Date from December 13, 2000 until June
10, 2001 (the "Further Extension Option") if both (x) the Further
Extension Option Condition is satisfied and (y) no Event of Default has
occurred since the date of the Eighth Amendment nor has there occurred
since such date any event which with notice or lapse of time of both
would constitute an Event of Default. In order to exercise the Further
Extension Option, the Borrowers shall deliver to the Bank a written
notice not later than December 13, 2000, which notice shall be
accompanied by a schedule demonstrating, to the satisfaction of the
Bank, that the Further Extension Option Condition was satisfied and
certifying that no Event of Default has occurred since the date of the
Eighth Amendment and that no other event has occurred since such date
which with notice or lapse of time of both would constitute an Event of
Default.
The Further Extension Option Condition will be satisfied if
(a) the gross sales of the Borrowers for the three fiscal month period
ending September 30, 2000 exceed (on an annualized basis) by at least
$5,000,000 the gross sales of the Borrowers for the preceding fiscal
quarter (on an annualized basis) (determined in accordance with GAAP),
and (b) the Annualized Operating Cash Flow for the three fiscal month
period ending September 30, 2000 exceeds the Annualized Operating Cash
Flow for the preceding fiscal quarter by at least $1,500,000.
(l) First Alternate Extension Option. If the First Extension
Option is not exercised, the Borrowers shall nonetheless have the
option to extend the Maturity Date from August 15, 2000 until November
13, 2000 (the "First Alternate Extension Option") if as of August 15,
2000 both (x) the First Alternate Extension Option Condition is
satisfied and (y) no Event of Default has occurred since the date of
the Eighth Amendment nor has there occurred since such date any event
which with notice or lapse of time of both would constitute an Event of
Default. In order to exercise the First Alternate Extension Option, the
Borrowers shall deliver to the Bank a written notice not earlier than
January 1, 2000 and not later than August 15, 2000, which notice (A)
shall be accompanied by a copy of the First Alternate Extension Option
Letter of Intent (as defined below) and (B) shall include a
certification that no Event of Default has occurred
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since the date of the Eighth Amendment and that no other even has
occurred since such date which with notice or lapse of time of both
would constitute an Event of Default.
The First Alternate Extension Option Condition will be
satisfied if, as of August 15, 2000, one or more of the Borrowers has
entered into an unlapsed, fully effective letter of intent with a
qualified bona fide independent third party to enter into a transaction
with one or more Borrowers, including without limitation a purchase of
assets, which will result at closing of such transaction in net
proceeds sufficient to, and then available for, the repayment in full
of all indebtedness and other obligations owed by the Borrowers to the
Bank, including either, at the Bank's election, the cancellation of all
outstanding L/C's or the cash collateralization of the maximum
liability of the Borrowers in respect of all outstanding L/C's (the
"First Alternate Extension Option Letter of Intent"). The First
Alternate Extension Option Letter of Intent must provide for a closing
date no later than February 1, 2001 and shall only be subject to
conditions or contingencies customary in such transactions, and any
financing condition or contingency in such letter of intent must be
satisfactory to the Bank. In the event a definitive binding agreement
is entered into between the Borrowers and the other party to such
letter of intent before the then scheduled Maturity Date, the Borrowers
shall have the option to further extend the Maturity Date to the
earlier of February 11, 2001 and the closing under such definitive
binding agreement by delivering to the Bank a written notice not later
than November 13, 2000, which notice (A) shall be accompanied by a copy
of such definitive binding agreement and (B) shall include a
certification that no Event of Default has occurred since the date of
the Eighth Amendment and that no other event has occurred since such
date which with notice or lapse of time of both would constitute an
Event of Default. Upon closing under such definitive binding agreement,
the Maturity Date shall be deemed to have occurred and all net proceeds
shall be applied directly to repay in full all indebtedness and other
obligations owed by the Borrowers to the Bank, including either, at the
Bank's election, to cancel all outstanding L/C's or to cash
collateralize the maximum liability of the Borrowers in respect of all
outstanding L/C's.
(m) Second Alternate Extension Option. If neither the First
Extension Option nor the First Alternate Extension Option is exercised,
the Borrowers shall nonetheless have the option to extend the Maturity
Date from August 15, 2000 until November 13, 2000 (the "Second
Alternate Extension Option") if as of August 15, 2000 both (x) the
Second Alternate Extension Option Condition is satisfied and (y) no
Event of Default has occurred since the date of the Eighth Amendment
nor has there occurred since such date any event which with notice or
lapse of time of both would constitute an Event of Default. In order to
exercise the Second Alternate Extension Option, the Borrowers shall
deliver to the Bank a written notice not earlier than January 1, 2000
and not later than August 15, 2000, which notice (A) shall be
accompanied by a copy of the Second Alternate Extension Option Letter
of Intent (as defined below) and (B) shall include a certification that
no Event of Default has occurred since the date of the Eighth
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Amendment and that no other even has occurred since such date which
with notice or lapse of time of both would constitute an Event of
Default.
The Second Alternate Extension Option Condition will be
satisfied if, as of August 15, 2000, one or more of the Borrowers has
entered into an unlapsed, fully effective letter of intent with a
qualified bona fide independent third party to enter into a transaction
with one or more Borrowers, including without limitation a purchase of
assets, which will result at closing of such transaction in net
proceeds sufficient to, and then available for, the repayment of not
less than $5,000,000 of indebtedness and other obligations owed by the
Borrowers to the Bank (including by either, at the Bank's election, the
cancellation of outstanding L/C's or the cash collateralization of the
maximum liability of the Borrowers in respect of outstanding L/C's)
(the "Second Alternate Extension Option Letter of Intent"). The Second
Alternate Extension Option Letter of Intent must provide for a closing
date no later than February 1, 2001 and shall only be subject to
conditions or contingencies customary in such transactions, and any
financing condition or contingency in such letter of intent must be
satisfactory to the Bank. In the event a definitive binding agreement
is entered into between the Borrowers and the other party to such
letter of intent before the then scheduled Maturity Date, the Borrowers
shall have the option to further extend the Maturity Date to February
11, 2001 by delivering to the Bank a written notice not later than
November 13, 2000, which notice (A) shall be accompanied by a copy of
such definitive binding agreement and (B) shall include a certification
that no Event of Default has occurred since the date of the Eighth
Amendment and that no other event has occurred since such date which
with notice or lapse of time of both would constitute an Event of
Default. Upon closing under such definitive binding agreement, all net
proceeds, which must not be less than $5,000,000, shall be applied
directly to repay the indebtedness and other obligations owed by the
Borrowers to the Bank and either, at the Bank's election, to cancel all
outstanding L/C's or to cash collateralize the maximum liability of the
Borrowers in respect of all outstanding L/C's. If such closing is
consummated and such indebtedness and obligations are so repaid, the
Maturity Date will be extended until June 10, 2001.
(n) Third Alternate Extension Option If the Second Alternate
Extension Option is exercised, but a definitive binding agreement is
not entered into with respect to the Second Alternate Extension Option
Letter of Intent before the then scheduled Maturity Date, the Borrowers
shall nonetheless have the option to extend the Maturity Date from
November 13, 2000 until February 11, 2001 (the "Third Alternate
Extension Option") if as of November 13, 2000 both (x) the Third
Alternate Extension Option Condition is satisfied and (y) no Event of
Default has occurred since the date of the Eighth Amendment nor has
there occurred since such date any event which with notice or lapse of
time of both would constitute an Event of Default. In order to exercise
the Third Alternate Extension Option, the Borrowers shall deliver to
the Bank a written notice not later than November 13, 2000, which
notice (A) shall be accompanied by a
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copy of the Third Alternate Extension Option Letter of Intent (as
defined below) and (B) shall include a certification that no Event of
Default has occurred since the date of the Eighth Amendment and that no
other even has occurred since such date which with notice or lapse of
time of both would constitute an Event of Default.
The Third Alternate Extension Option Condition will be
satisfied if, as of November 13, 2000, one or more of the Borrowers has
entered into an unlapsed, fully effective letter of intent with a
qualified bona fide independent third party to enter into a transaction
with one or more Borrowers, including without limitation a purchase of
assets, which will result at closing of such transaction in net
proceeds sufficient to, and then available for, the repayment in full
of all indebtedness and other obligations owed by the Borrowers to the
Bank, including either, at the Bank's election, the cancellation of all
outstanding L/C's or the cash collateralization of the maximum
liability of the Borrowers in respect of all outstanding L/C's (the
"Third Alternate Extension Option Letter of Intent"). The Third
Alternate Extension Option Letter of Intent must provide for a closing
date no later than May 1, 2001 and shall only be subject to conditions
or contingencies customary in such transactions, and any financing
condition or contingency in such letter of intent must be satisfactory
to the Bank. In the event a definitive binding agreement is entered
into between the Borrowers and the other party to such letter of intent
before the then scheduled Maturity Date, the Borrowers shall have the
option to further extend the Maturity Date to the earlier of May 12,
2001 and the closing under such definitive binding agreement by
delivering to the Bank a written notice not later than February 11,
2001, which notice (A) shall be accompanied by a copy of such
definitive binding agreement and (B) shall include a certification that
no Event of Default has occurred since the date of the Eighth Amendment
and that no other event has occurred since such date which with notice
or lapse of time of both would constitute an Event of Default. Upon
closing under such definitive binding agreement, the Maturity Date
shall be deemed to have occurred and all net proceeds shall be applied
directly to repay in full all indebtedness and other obligations owed
by the Borrowers to the Bank, including either, at the Bank's election,
to cancel all outstanding L/C's or to cash collateralize the maximum
liability of the Borrowers in respect of all outstanding L/C's."
4.5 Section 1.04. Section 1.04 of the Credit Agreement is hereby
amended by deleting the reference to "Seventh Amendment" appearing therein and
inserting the following new definitions in appropriate alphabetical order:
"Eighth Amendment Section 1.02(j)
Facilities Contract Section 1.02(a)
Seventh Amendment Section V(q)
US Army Payment Commencement Date Section 1.02(a)
US Army Payments Section 1.02(a)"
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<PAGE>
4.6 Section 1.05. Section 1.05 of the Credit Agreement is hereby
amended by deleting clause (e) of such Section in its entirety and inserting in
its place the following:
"(e) Amount. The aggregate amount of L/C's outstanding shall
not exceed $3,550,000."
4.7. Sections 4.21, 4.22 and 4.32. Article IV of the Credit Agreement
is hereby amended by deleting Sections 4.21, 4.22 and 4.32 and inserting the
following new Sections 4.21, 4.22 and 4.32 in their place:
"Section 4.21. Capital Expenditures. In any fiscal year,
unless the Bank otherwise consents in writing, the Borrowers and their
Subsidiaries on a consolidated basis shall not make or incur
expenditures which are properly chargeable to capital account under
GAAP (including leases which are capitalized) in an aggregate amount in
excess of $500,000, provided that such dollar limit shall be increased
by $300,000 (solely for capital expenditures relating to CMI and its
assets) to $800,000 if the Borrowers have delivered to the Bank an
unlapsed, fully effective letter of intent between CMI and a qualified
bona fide independent third party to enter into a transaction with CMI
for the purchase of the assets of CMI, which will result at closing of
such transaction in net proceeds sufficient to, and then available for,
the repayment in full of all indebtedness and other obligations owed by
the Borrowers to the Bank, including either, at the Bank's election,
the cancellation of all outstanding L/C's or the cash collateralization
of the maximum liability of the Borrowers in respect of all outstanding
L/C's, which letter of intent may only be subject to conditions or
contingencies customary in such transactions, and any financing
condition or contingency in such letter of intent must be satisfactory
to the Bank, provided, further that such dollar amount shall be reduced
by the amount of such $300,000 increase not theretofore utilized for
capital expenditures relating to CMI and its assets if such letter of
intent lapses or is terminated. Except as permitted in Section 1.02(i),
none of the proceeds of any Advance may be used to fund any capital
expenditures.
Section 4.22. Limit on Consulting Payments. Unless waived in
writing in advance by the Bank with respect to specific proposed
compensation, the Borrowers shall not permit the aggregate compensation
paid or payable in cash by the Borrowers and their Subsidiaries to
Affiliates of any of the Borrowers to exceed $18,750 per month to all
such Affiliates, provided that the Borrowers may accrue, and not pay in
cash, amounts in excess of $18,750 per month on the condition that such
excess amounts are not due and are not paid until the Revolving Credit
Loans and all other Borrower Obligations have been paid in full and the
commitment to make Advances has terminated.
Section 4.32. Engagement of Consultant. If an Event of Default
occurs after the date of the Eighth Amendment, the Borrowers will,
within five days after the occurrence
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of such Event of Default, engage a firm selected by the Borrowers and
acceptable to the Bank, as turnaround consultant and financial manager
for the Borrowers."
4.8. Section 4.08. Section 4.08 of Article IV of the Credit Agreement
is hereby amended by deleting clause (j) thereof in is entirety.
4.9. Section 4.24. Section 4.24 of Article IV of the Credit Agreement
is hereby amended by deleting the reference to the "Seventh Amendment" appearing
in the first sentence thereof and inserting a reference to the "Eighth
Amendment" in its place.
4.10. Article V. Article V is hereby amended by deleting clause (q)
thereof in its entirety and inserting the following in its place:
"(q) default by any Borrower of any material obligation,
including any payment obligation, under the Sixth Amendment, the
Forbearance Agreement and Seventh Amendment to Credit Agreement dated
as of August 23, 1999 (the "Seventh Amendment") or the Eighth
Amendment;"
Article V is hereby further amended by deleting clause (t) thereof in its
entirety and inserting the following in its place:
"(t) the Maximum Credit shall equal or exceed $8,500,000 on or
after May 15, 2000;"
ss.5. FEES. Upon execution and delivery of the Seventh Amendment the
Borrowers owed the Bank an extension fee of $50,000, which extension fee was
fully earned as of such date, but payment of such extension fee has been
deferred, with the consent of the Bank, at the option of the Borrowers through
the date of this Agreement and may be further deferred at the option of the
Borrowers until the earlier of (i) August 1, 2000 and (ii) immediately upon the
occurrence of a Forbearance Event of Default, provided that payment of such
extension fee shall be waived in the event the Maximum Credit shall have been
reduced to less than $8,500,000 as of February 1, 2000 and no Forbearance Event
of Default shall have occurred and be continuing as of February 1, 2000.
ss.6. FORBEARANCE, ETC. Subject to the Borrowers' compliance with the
terms and conditions of this Agreement and provided that no Forbearance Event of
Default shall have occurred, the Bank shall forbear from enforcing any of its
rights under the Borrower Loan Documents or under applicable law until the
Maturity Date (the period from the date of this Agreement to and including the
Maturity Date being referred to herein as the "Forbearance Period"), and
temporarily waives its rights to impose the default rate of interest provided
for in Section 1.02(d) of the Credit Agreement. The Borrowers acknowledge and
agree that the
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provisions of this ss.6 relate solely to the Bank's agreement (subject to the
terms and conditions hereof) to forbear from exercising its existing rights and
remedies in respect of the existing Events of Defaults under the Borrower Loan
Documents described in clauses B and D of the Preliminary Statements to this
Agreement, and are not, and shall in no way be deemed or construed as, a waiver
by the Bank of such existing Events of Default or any other Event of Default now
existing or occurring subsequent to the date hereof. The Bank expressly reserves
the full extent of its rights under the Borrower Loan Documents and applicable
law in respect of any defaults or Events of Default existing on the date hereof
and not described in clauses B or D of the Preliminary Statements to this
Agreement.
ss.7. TERMINATION. The Bank's obligation to forbear from exercising its
rights under the Borrower Loan Documents and applicable law and to make Advances
under the Credit Agreement shall automatically terminate, without the
requirement of any notice or demand to any of the Borrowers, on the first to
occur of (i) the Maturity Date or (ii) the occurrence of any Event of Default
(other than the Events of Default described in clauses B or D of the Preliminary
Statements to this Agreement) or of any event which with notice and/or the lapse
of time would become an Event of Default or (iii) any act to challenge the
Bank's rights or interests which could reasonably be expected to have a material
adverse effect on the rights or remedies of the Bank under the Borrower Loan
Documents or (iv) the occurrence of any event or circumstance which could
reasonably be expected to have a material adverse effect on (x) the business,
operations, properties, condition or assets of any Borrower, (y) the ability of
any Borrower to perform its obligations under this Agreement or any other
Borrower Loan Document or (z) the validity or enforceability of this Agreement
or any other Borrower Loan Document or the rights and remedies of the Bank
hereunder or thereunder (each of the events described in this ss.7 being
referred to as a "Forbearance Event of Default".
ss.8. REMEDIES. On and after the occurrence of any Forbearance Event of
Default and in each case without any demand, presentment, notice and/or other
action of any nature by the Bank (all of which are hereby expressly waived by
each Borrower), and without limiting any other remedy provided to the Bank under
any other agreement, document or instrument or under applicable law, (a) the
default rate provided for in the Credit Documents shall immediately be imposed
with respect to the Revolving Credit Loans; (b) all Borrower Obligations shall
be immediately due and payable and the Bank shall be immediately and permanently
relieved of its obligations to make advances under the Credit Agreement and of
its forbearance obligations set forth in this Agreement or otherwise; (c) the
Bank may proceed to enforce its rights and remedies under and in respect of this
Agreement and the other Borrower Loan Documents, which rights and remedies,
subject only to the Bank's forbearance obligations under this Agreement, are
expressly reserved; and (d) the Bank shall be free to avail itself of all other
rights and remedies available under applicable law. The failure (or delay) of
the Bank in exercising any remedy after any particular Forbearance Event of
Default shall not constitute a waiver of such remedy or any other remedy in that
or in any subsequent instance, or otherwise prejudice the rights of the Bank in
any manner.
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ss.9. BANK CONSULTANT. The Borrowers reconfirm and agree that the Bank
or, at the Bank's discretion, counsel to the Bank are entitled to and have
engaged a consultant with respect to the Bank's loan arrangements with the
Borrowers and that the Borrowers shall, on demand, pay the reasonable costs and
expenses of such consultant and the Borrowers also shall permit such consultant
access to the books, records, properties and assets of the Borrowers, to members
of the management of each Borrower, to the outside auditors and accountants of
the Borrowers and their work papers, and to legal counsel to the Borrowers, and
the Borrowers hereby waive any privilege which would preclude or interfere with
such access and hereby direct such accountants and legal counsel to provide such
access, all during regular business hours.
ss.10. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWERS. In
order to induce the Bank to enter into this Agreement, the Borrowers jointly and
severally represent, covenant and warrant to the Bank as follows:
(a) Authority, Etc. The execution and delivery by the Borrowers of this
Agreement and the performance of their respective obligations hereunder have
been duly authorized by all necessary action and do not and will not (i) violate
any provision of any law, rule, regulation, order, judgment, injunction, decree
or determination applicable to any Borrower or their respective charters or
other governing instruments or (ii) result in a breach of or constitute a
default under any agreement, lease or instrument to which any of the Borrowers
is a party or by which it or its properties may be bound or affected.
(b) Binding Obligation. This Agreement and each other agreement
executed by the Borrowers in connection herewith constitute legal, valid and
binding obligations of the Borrowers.
(c) Borrower Loan Documents. Except for the Events of Default described
in clause B and clause D of the Preliminary Statements to this Agreement, each
Borrower is in compliance in all material respects with the covenants contained
in the Borrower Loan Documents and the representations and warranties in each of
the Borrower Loan Documents (except those that expressly relate to an earlier
date) are true and correct in all material respects on the date hereof.
(d) No Approval. No authorization, consent, approval, license,
exemption or filing or registration with, any court or governmental authorize,
agency or instrumentality is or will be necessary to the valid execution,
delivery or performance by the Borrowers of this Agreement or any documents
executed pursuant hereto, except such filings as shall have been made prior to
or concurrent with the execution of this Agreement in connection with the
perfection of the Bank's liens in the Collateral.
(e) Security Documents. Each Borrower Security Document, including
without limitation the Security Agreement and the Pledge Agreement, is effective
to grant to the Bank a
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legal, valid, enforceable and perfected security interest in all right, title
and interest of each Borrower in the Collateral described therein; no further
action or filing is required in order to perfect the Bank's security interests.
(f) Preliminary Statement. The statements contained in the Preliminary
Statements of this Agreement are true and correct.
ss.11. NEGATIVE PLEDGE. The Borrowers hereby pledge, covenant and agree
that they will not: (i) create, incur, assume or suffer to exist any mortgage,
lien, security interest or other encumbrance on the real property and fixtures
owned by one or more of the Borrowers located in Concord, Massachusetts or on
the real property and fixtures owned by one or more of the Borrowers located in
Barnwell, South Carolina (other than the existing liens on such Barnwell
property securing the Barnwell Secured Debt (as defined below)); (ii) make a
similar pledge, covenant or agreement to or with any party other than the Bank
with respect to the matters covered by this ss.11; (iii) sell all or any part of
its assets outside of the ordinary course of business other than to another of
the Borrowers pursuant to Section 4.20 of the Credit Agreement or with the
Bank's written consent, obtained at least twenty (20) days prior to such sale;
or (iv) incur any debt or debts to any party other than the Bank which, in the
aggregate or with respect to any individual creditor, is in excess of such debt
or debts outstanding as of the date hereof. The Barnwell Secured Debt shall mean
(i) the loan from the Lower Savannah Regional Development Corporation in the
aggregate principal amount of $469,306.76, and (ii) the loan from Regions Bank
(f/k/a Palmetto Federal Savings Bank of South Carolina), November 29, 1995, in
the aggregate principal amount of $613,910.55, and a lien on cash collateral in
the amount of $73,024 (Carolina Metals as Obligor and the Borrowers as
Guarantor).
ss.12. CONDITIONS PRECEDENT. The willingness of the Bank to enter into
this Agreement and the obligations of the Bank hereunder are subject to the
satisfaction (or written waiver) of all of the following conditions precedent,
time being of the essence hereof:
(a) As of the time of the Bank's execution hereof, the Borrowers shall
be in compliance with all of the terms, covenants and provisions contained
herein and all representations and warranties contained herein shall be true in
all material respects, and the Bank shall have received a certificate signed by
an officer of each Borrower to the foregoing effect.
(b) All corporate, limited liability, partnership and other legal
proceedings and all instruments in connection herewith and therewith shall be
satisfactory in form and substance to the Bank and its counsel and the Bank
shall have received all information and all documents and certificates
(corporate and other) which the Bank may reasonably have requested in connection
herewith.
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(c) The Borrowers shall have delivered to the Bank copies of all
documents relating to the Subordinated Debt, which must be satisfactory to the
Bank.
(d) The Borrowers shall have delivered to the Bank a list of all
current or proposed payment schedules with each creditor of any of the
Borrowers, including all professionals and vendors with which extended payment
agreements have been reached.
(e) The Borrowers shall have issued to the Bank new warrants in
substitution for the two warrants, dated September 26, 1995 and December 29,
1997, respectively, issued to State Street and SSB Investments, Inc., and shall
have reconfirmed the obligations of the Borrowers under the Warrant Agreements
pursuant to which such warrants were issued.
(f) The Borrowers and the Bank shall have executed an amendment to the
Warrant Agreement dated as of December 29, 1997 deferring until December 1, 2000
the right to require repurchase of the warrant issued pursuant to such Warrant
Agreement, provided that such repurchase right shall only be effective if the
Borrowers have exercised either the First Extension Option, the First Alternate
Extension Option, the Second Alternate Extension Option or the Third Alternate
Extension Option.
(g) The Borrowers shall have delivered to the Bank an Amended and
Restated Revolving Credit Note of even date payable to the order of the Bank in
the principal amount of $10,350,000.
(h) The Bank shall have received a favorable opinion of counsel to the
Borrowers, in form and substance satisfactory to the Bank.
(i) No event or circumstance shall have occurred which could result in
a Forbearance Event of Default.
(j) No default shall have occurred under any other indebtedness of any
of the Borrowers except as previously disclosed to the Bank in writing.
(k) The Bank shall have received all such other agreements, information
and certificates as the Bank shall have reasonably requested.
ss.13. FURTHER ASSURANCES, ETC. The Borrowers jointly and severally
agree to take any action and to execute and deliver any additional documents
which the Bank may reasonably request in order to obtain and enjoy the full
rights and benefits granted to the Bank by the Borrower Loan Documents,
including this Agreement.
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ss.14. WAIVERS BY BORROWERS; BANKRUPTCY MATTERS.
(a) WAIVER OF JURY TRIAL, ETC. EACH BORROWER HEREBY WAIVES ANY RIGHTS
THAT IT MAY HAVE TO A JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIMS ARISING
OUT OF ANY DISPUTE IN CONNECTION WITH THIS AGREEMENT, ANY OF THE OTHER BORROWER
LOAN DOCUMENTS, ANY GUARANTY PROVIDED TO THE BANK IN CONNECTION THEREWITH AND
ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THEREUNDER OR THE PERFORMANCE OF SUCH
RIGHTS AND OBLIGATIONS. Except as prohibited by law which cannot be waived, each
Borrower hereby waives any right that it may have to claim or recover in any
litigation referred to in the preceding sentence any special, exemplary,
punitive or consequential damages or any damages other than, or in addition to,
actual damages.
(b) BANKRUPTCY MATTERS; HEARING. IN THE CASE OF ANY FORBEARANCE EVENT
OF DEFAULT ARISING BY VIRTUE OF ANY BANKRUPTCY PROCEEDING INVOLVING ANY
BORROWER, THE BORROWERS COVENANT AND AGREE THAT, UPON THE OCCURRENCE OF SUCH
FORBEARANCE EVENT OF DEFAULT, (i) ANY OBLIGATION OF THE BANK TO PROVIDE
FINANCING TO ANY OF THE BORROWERS SHALL AUTOMATICALLY TERMINATE AS PROVIDED
HEREIN AND THE OTHER BORROWER LOAN DOCUMENTS, (ii) THE BANK SHALL CONTINUE TO
HAVE THE RIGHT TO COLLECT ACCOUNTS RECEIVABLE IN THE ORDINARY COURSE AND APPLY
THE PROCEEDS THEREOF TO INDEBTEDNESS OWED TO IT, (iii) THE BANK SHALL BE
ENTITLED TO AN EMERGENCY HEARING (ON TWO (2) BUSINESS DAYS' NOTICE DELIVERED BY
MESSENGER) ON ANY MOTION WHICH IT MAY FILE SEEKING A GENERAL LIFTING OF THE STAY
TO ENFORCE RIGHTS WHICH IT HAS IN THE CIRCUMSTANCES AND TO FORECLOSE ALL ITS
SECURITY INTERESTS, AND (IV) THE BORROWERS HEREBY WAIVE ANY AND ALL RIGHTS,
UNDER 11 U.S.C. SECTION 1121 OR OTHERWISE, TO THE EXCLUSIVE RIGHT TO FILE OR
SOLICIT ACCEPTANCES TO A PLAN OF REORGANIZATION AND EACH BORROWER ALSO HEREBY
AGREES, AT THE REQUEST OF THE BANK, TO CONSENT TO ANY MOTION BY THE BANK SEEKING
A TERMINATION OF ANY SUCH EXCLUSIVITY RIGHTS.
(c) CONSENT TO RECEIVER. WITHOUT DEROGATING FROM ANY RIGHT, REMEDY OR
OTHER PROVISION CONTAINED IN THIS AGREEMENT OR ANY OTHER BORROWER LOAN DOCUMENT,
AT ANY TIME FROM AND AFTER THE OCCURRENCE OF A FORBEARANCE EVENT OF DEFAULT, THE
BANK SHALL HAVE THE RIGHT TO APPLY FOR AND HAVE A RECEIVER APPOINTED BY A COURT
OF COMPETENT JURISDICTION IN ANY ACTION TAKEN BY THE BANK TO ENFORCE THE RIGHTS
AND REMEDIES OF THE BANK UNDER THIS AGREEMENT OR ANY OTHER BORROWER LOAN
DOCUMENT IN ORDER TO MANAGE, PROTECT AND PRESERVE THE COLLATERAL AND CONTINUE
THE OPERATION OF THE BUSINESS
19
<PAGE>
OF ANY BORROWER, OR TO SELL OR DISPOSE OF THE COLLATERAL, AND TO COLLECT ALL
REVENUES AND PROFITS THEREOF AND APPLY THE SAME TO THE PAYMENT OF ALL EXPENSES
AND OTHER CHARGES OF SUCH RECEIVERSHIP, INCLUDING THE COMPENSATION OF THE
RECEIVER, SAID EXPENSES AND CHARGES TO CONSTITUTE PART OF THE OBLIGATIONS, AND
TO THE PAYMENT OF THE BORROWER OBLIGATIONS. TO THE EXTENT NOT PROHIBITED BY
APPLICABLE LAW, EACH BORROWER HEREBY IRREVOCABLY CONSENTS TO AND WAIVES ANY
RIGHT TO OBJECT TO OR OTHERWISE CONTEST THE APPOINTMENT OF RECEIVER AS PROVIDED
ABOVE. EACH BORROWER (I) GRANTS SUCH WAIVER AND CONSENT KNOWINGLY AFTER HAVING
DISCUSSED THE IMPLICATIONS THEREOF WITH COUNSEL, (II) ACKNOWLEDGES THAT (A) THE
UNCONTESTED RIGHT TO HAVE A RECEIVER APPOINTED FOR THE FOREGOING PURPOSES IS
CONSIDERED ESSENTIAL BY THE BANK IN CONNECTION WITH THE ENFORCEMENT OF ITS
RIGHTS AND REMEDIES UNDER THIS AGREEMENT AND THE OTHER BORROWER LOAN DOCUMENTS,
AND (B) THE AVAILABILITY OF SUCH APPOINTMENT AS A REMEDY UNDER THE FOREGOING
CIRCUMSTANCES WAS A MATERIAL FACTOR IN INDUCING THE BANK TO ENTER INTO THIS
AGREEMENT; AND (III) TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW, AGREES TO
ENTER INTO ANY AND ALL STIPULATIONS IN ANY LEGAL ACTIONS, OR AGREEMENTS OR OTHER
INSTRUMENTS IN CONNECTION WITH THE FOREGOING AND TO COOPERATE FULLY WITH THE
BANK IN CONNECTION WITH THE ASSUMPTION AND EXERCISE OF CONTROL BY THE RECEIVER
OVER ALL OR ANY PORTION OF THE COLLATERAL.
(d) ACKNOWLEDGMENTS. The Borrowers hereby (i) certify that no
representative, agent or attorney of the Bank has represented, expressly or
otherwise, that the Bank would not, in the event of litigation, seek to enforce
the foregoing waivers (or any other waivers or other provisions contained in
this Agreement or in any of the other Borrower Loan Documents) and (ii)
acknowledge that the Bank has been induced to enter into this Agreement by,
among other things, the confirmations, ratifications, waivers, agreements and
certifications set forth herein.
ss.16. FEES, ETC. The Borrowers agree to pay all reasonable expenses,
fees and disbursements of counsel for the Bank and of consultants to the Bank
which the Bank has incurred or may hereafter incur in connection with the
Borrower Loan Documents, including the negotiation and preparation of this
Agreement and all other documents related hereto and thereto (including any
amendment, consent or waiver hereunder or thereunder) and the transactions
contemplated hereby or thereby or the enforcement of the rights of the Bank
hereunder or under the other Borrower Loan Documents in the event of a default
hereunder or thereunder or any "workout" of their obligations to the Bank. All
such expenses, fees and disbursements shall constitute "Borrower Obligations"
and shall be secured by the Collateral. Concurrent with the
20
<PAGE>
execution of this Agreement, the Borrowers shall pay all of the expenses, fees
and disbursements of the Bank's counsel and of such consultants accrued through
the execution of this Agreement, and the Borrowers shall thereafter pay all of
the expenses, fees and disbursements of the Bank's counsel and of such
consultants on demand.
ss.17. SETOFFS, ETC. If any Forbearance Event of Default occurs, any
indebtedness or other obligations from the Bank to any Borrower may, without
regard to the value or adequacy of the Collateral, be offset and applied toward
the payment of any indebtedness or obligations from such Borrower to the Bank,
whether or not such indebtedness or obligations, or any part thereof, shall then
be due. Notwithstanding the foregoing, the Bank may at any time charge any of
the Borrowers' accounts with the Bank for purposes of paying any amounts due in
respect of expenses, fees and disbursements of counsel to the Bank or the Bank's
consultants or to pay any fees due the Bank.
ss.18. NOTICES. All notices, consents, requests, approvals,
instructions and other communications provided for herein shall be in writing
and validly given or made when delivered personally, or sent by overnight
courier, or by facsimile transmission (when confirmation of receipt thereof is
received) to the party entitled or required to receive the same at the addresses
set forth in the Credit Agreement (provided that a copy of any notice to the
Bank shall be delivered to Charles L. Glerum, Esq., Choate, Hall & Stewart, 53
State Street, Boston, Massachusetts, 02109), or at such other address as any
party hereto may subsequently furnish in writing to the other parties.
ss.19. NO WAIVERS, ETC. Except to the extent the Bank has agreed to
forbear pursuant to this Agreement, the Bank may enforce its rights to the
fullest extent permitted under this Agreement, the other Borrower Loan Documents
and/or applicable law. Neither this Agreement nor the compliance by the Bank
herewith shall be deemed or construed to be a waiver of any right or remedy to
which the Bank may now or hereafter be entitled against any of the Borrowers,
except to the extent herein otherwise explicitly provided. The parties agree
that, except to the extent herein otherwise explicitly provided, the provisions
of the Borrower Loan Documents and all related agreements shall be unaffected
hereby and shall continue in full force and effect. The failure of the Bank to
insist upon the strict performance of any term, condition or other provision
hereof or of any other agreement, document or instrument or to exercise any
right or remedy hereunder or thereunder shall not constitute a waiver by the
Bank of any such term, condition or other provision or Event of Default or
Forbearance Event of Default in connection therewith; and any waiver of any such
term, condition or other provision or any such Event of Default or Forbearance
Event of Default shall not affect or alter this Agreement or the other Borrower
Loan Documents except as expressly provided by the Bank in writing, and each and
every term, condition and other provision of this Agreement and the other
Borrower Loan Documents shall, in such event, continue in full force and effect
and shall be operative with respect to any other then existing or subsequent
Event of Default or Forbearance Event of Default in connection therewith.
21
<PAGE>
ss.20. MISCELLANEOUS.
(a) Counterparts, Successors, Governing Law, Etc. This Agreement may be
executed in multiple counterparts, each of which shall be considered an original
but all of which shall constitute one and the same agreement. One or more
counterparts may be delivered via telecopier; any such telecopied counterpart
shall have the same force and effect as an original counterpart hereof. This
Agreement and the other Borrower Loan Documents shall be binding and inure to
the benefit of each of the parties hereto, and their respective successors,
heirs, legal representatives and assigns provided, that no Borrower may assign
its rights and obligations without the Bank's prior written consent. In the
event of any assignment by the Bank of all of its rights and obligations under
this Agreement and the other Borrower Loan Documents, the term "Bank" as used in
this Agreement and the other Borrower Loan Documents shall be deemed to refer to
such assignee. This Agreement is solely for the purpose, and shall have the sole
effect, of defining the relative rights and obligations of the parties hereto
and may not be relied upon or enforced by any person not a party hereto; no
Person shall have third-party beneficiary rights hereunder.
This Agreement shall be construed in accordance with and governed by
the internal laws of the Commonwealth of Massachusetts (without giving effect to
conflicts of laws principles) and is being executed as a sealed instrument under
Massachusetts law. To the extent that it may lawfully do so, each Borrower each
hereby consents to service of process, and to be sued, in the Commonwealth of
Massachusetts and consents to the jurisdiction of the courts of the Commonwealth
of Massachusetts and the U.S. District Court for the District of Massachusetts,
as well as to the jurisdiction of all courts to which an appeal may be taken
from such courts, for the purpose of any suit, action or other proceeding
arising out of any of its obligations hereunder or under the other Borrower Loan
Documents with respect to the transactions contemplated hereby or thereby, and
expressly waives any and all objections it may have as to venue in any such
courts. Each of the Borrowers further agrees that a summons and complaint
commencing an action or proceeding in any of such courts shall be properly
served and shall confer personal jurisdiction if served personally or by
certified mail to it at its address as provided herein or as otherwise provided
under the laws of the Commonwealth of Massachusetts or the jurisdiction in which
suit is brought.
(b) Amendments and Waivers. Any term of this Agreement or of the other
Borrower Loan Documents may be amended and the observance of any term of this
Agreement may be waived only with the written consent of each party hereto.
(c) Construction. The parties acknowledge and agree that this Agreement
shall not be construed in favor of one party more than the other(s) based upon
which party drafted (or caused to be drafted) the same. Headings contained
herein are included for convenience of reference only and shall not constitute a
part of or affect the meaning or interpretation of this Agreement. This
Agreement together with the other Borrower Loan Documents sets forth the entire
22
<PAGE>
understanding of the parties with respect to its subject matter and supersedes
all other negotiations, understandings and representations made by and among
such parties. No course of dealing, course of performance, trade usage or parol
evidence of any nature shall be used to supplement or modify any terms of this
Agreement.
(d) Survival of Representations. All representations and warranties
made herein and/or in certificates delivered pursuant hereto by any Borrower
shall survive the execution and delivery hereof, and shall continue in full
force and effect with respect to the date as of which made so long as any
obligation or indebtedness of any of the Borrowers to the Bank is outstanding.
(e) Statute of Limitations; Time of Essence. Any statute of limitations
applicable to any remedy of the Bank under the Borrower Loan Documents or any
applicable law shall be suspended and tolled until such time as the Bank's
forbearance obligation hereunder or under any extension or amendment hereto
terminates. Time shall be of the essence with respect to each and every
undertaking and obligation of the Borrowers set forth herein.
(f) Specific Performance, Etc. The Borrowers stipulate that the Bank's
remedies at law, in the event of any default or threatened default by any
Borrower in the performance of or compliance with any of the terms and
provisions of this Agreement on its part to be observed or performed, are not
and will not be adequate, and that such terms may be specifically enforced by a
decree for the specific performance of any agreement contained herein or by an
injunction against a violation of any of the terms or provisions hereof or
otherwise.
(g) Severability. The unenforceability of any provision of this
Agreement shall not affect the validity, binding effect and enforceability of
any other provision or provisions of this Agreement; provided, however, that if
any provision of this Agreement is declared unenforceable against any Borrower
for any reason by any court or governmental body having jurisdiction, all
agreements, consents and waivers of the Bank set forth herein shall, at the
option of the Bank, be deemed null and void ab initio, and the Bank shall, at
its election, be restored to the position it would have occupied, with all
rights available to it as though such agreements, consents and waivers had never
been made. Without limiting the foregoing, the Bank shall have all rights and
remedies under the Borrower Loan Documents and applicable law in respect of the
Events of Default described in clauses B and D of the Preliminary Statements to
this Agreement.
(h) Indemnification. In addition to any indemnification obligations
contained in any of the other Borrower Loan Documents, each Borrower agrees to
indemnify the Bank and each of the other Released Parties and hold the Bank and
each of the other Released Parties harmless from and against any and all claims,
damages, losses, liabilities, judgments and expenses (including without
limitation all reasonable counsel fees and expenses and litigation expenses)
which the Bank or any other Released Party may incur or which may be asserted
against it in connection with or arising out of any investigation, litigation or
proceeding which arises out of the transactions contemplated hereby or by the
other Borrower Loan Documents (or any action or
23
<PAGE>
inaction by the Bank hereunder or thereunder) or which otherwise involves any
Borrower, whether or not the Bank is a party thereto, other than claims,
damages, losses, liabilities or judgments with respect to any matter as to which
the Bank or any other Released Party shall have been finally adjudicated to have
acted with willful misconduct or gross negligence. The provisions of this
paragraph shall survive payment of all obligations and indebtedness of the
Borrowers to the Bank. Promptly upon receipt by any indemnified party hereunder
of notice of the commencement against such party of any action, such indemnified
party shall, if a claim in respect thereof is to be made against any Borrower
hereunder, notify the Borrowers in writing of the commencement thereof, provided
that the failure to provide such notice shall not limit any party's right to
indemnification unless and to the extent such failure shall have materially
adversely affected the Borrowers.
(i) Arms-Length Transaction. The Borrowers recognize, stipulate and
agree that the Bank's actions and relationships with the parties hereto,
including but not limited to those relationships created or referenced by or in
this Agreement, have been and continue to constitute arms-length commercial
transactions, that such actions and relationships shall at all times in the
future continue to constitute arms-length commercial transactions and that the
Bank shall not at any time act, be obligated to act, or otherwise be construed
or interpreted as acting as or being the agent, partner, joint venturer,
employee or fiduciary of any of the Borrowers.
(j) Negotiations/Counsel. The Borrowers stipulate and agree that this
Agreement is the product of and results from lengthy arms-length negotiations
among the parties and that neither the Bank nor any other party has exerted or
attempted to exert improper or unlawful pressure or has in any way attempted to
induce, through threats or otherwise, the execution or delivery of this
Agreement. Without in any way limiting the foregoing, each of the parties hereto
stipulates and agrees that at all times during the course of the negotiations
surrounding the execution and delivery of this Agreement, they have, to the
extent deemed necessary or advisable in their sole discretion, been advised and
assisted by competent counsel of their own choosing, that such counsel has been
present and participated in the negotiations surrounding this Agreement and that
they have been fully advised by such counsel of the effect of each term,
condition, provision and stipulation contained herein.
24
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
a sealed instrument as of the date first above written.
STARMET CORPORATION
By:______________________
Duly Authorized
STARMET POWDERS, LLC
By:______________________
Duly Authorized
STARMET AEROCAST, LLC
By:______________________
Duly Authorized
STARMET COMMERCIAL CASTINGS, LLC
By:______________________
Duly Authorized
STARMET NMI CORPORATION
By:______________________
Duly Authorized
STARMET CMI CORPORATION
By:______________________
Duly Authorized
STARMET HOLDINGS CORPORATION
By:______________________
Duly Authorized
25
<PAGE>
NMI FOREIGN SALES CORPORATION
By:______________________
Duly Authorized
CITIZENS BANK OF MASSACHUSETTS
By:______________________
Duly Authorized
26
Exhibit 23.(a)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated January 8, 1999 included 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 13, 2000
Exhibit 23.(b)
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference of our report dated December
3,1999 relating to the consolidated financial statements and schedule of Starmet
Corporation (the "Company") appearing in the Company's Annual Report on Form
10-K for the year ended September 30, 1999 into the Company's previously filed
Registration Statement File No. 33-36812 on Form S-8.
BDO Seidman, LLP
Boston, Massachusetts
January 10, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
audited financial statements of Starmet Corporation at and for the period ended
September 30, 1999 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 252,000
<SECURITIES> 0
<RECEIVABLES> 3,735,000
<ALLOWANCES> 200,000
<INVENTORY> 3,735,000
<CURRENT-ASSETS> 6,628,000
<PP&E> 43,756,000
<DEPRECIATION> 27,645,000
<TOTAL-ASSETS> 25,856,000
<CURRENT-LIABILITIES> 19,761,000
<BONDS> 0
0
0
<COMMON> 479,000
<OTHER-SE> 4,241,000
<TOTAL-LIABILITY-AND-EQUITY> 25,856,000
<SALES> 25,001,000
<TOTAL-REVENUES> 25,001,000
<CGS> 19,297,000
<TOTAL-COSTS> 25,934,000
<OTHER-EXPENSES> 95,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,414,000
<INCOME-PRETAX> (2,442,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,442,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,442,000)
<EPS-BASIC> (0.51)
<EPS-DILUTED> (0.51)
</TABLE>
