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UNITED STATES
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 AND
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
For the transition period from to
Commission file number 0-8328
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DYNAMIC MATERIALS CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 84-0608431
(State or Incorporation or Organization) (I.R.S. Employer Identification No.)
5405 Spine Road, Boulder, Colorado 80301
(Address of principal executive offices, including zip code)
(303) 665-5700
(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,
$.05 Par Value
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 disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained in this form, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 under the Act). Yes No X
--- ---
The approximate aggregate market value of the voting stock held by
non-affiliates of the registrant was $4,371,549 as of March 10, 2003.
The number of shares of Common Stock outstanding was 5,061,390 as of March
10, 2003.
PART I
ITEM 1. Business
Overview
Dynamic Materials Corporation ("DMC" or the "Company") is a worldwide
leader in the high energy metal working business. The high energy metal working
business includes the use of explosives to perform metallurgical bonding, or
metal "cladding". The Company performs metal cladding using its proprietary
technologies. In 1998, the Company established its Aerospace Group after
acquiring three businesses that provide a variety of metalworking, fabrication,
welding and assembly services to the aerospace industry.
Explosive Metalworking. The primary product of the Explosive Metalworking
Group is explosion bonded clad metal plate. Clad metal plates are used in the
construction of heavy, corrosion resistant pressure vessels and heat exchangers
for chemical processing, refining, power and similar industries. Clad plates
consist of a thin layer of an expensive, corrosion resistant metal, such as
titanium or stainless steel, which is metallurgically bonded to a less
expensive, less corrosion resistant, thick base metal, typically carbon steel.
Explosion clad occupies a well-defined technical and commercial niche in the
broader clad metal marketplace. Explosion clad is a high performance, low cost
alternative for many applications requiring corrosion resistant alloys.
Explosive metalworking can also be used for precision metal forming, powder
metal compaction, and shock synthesis. The company has a long-term ongoing
contract for shock synthesis of industrial diamonds.
On July 3, 2001, the Company completed its acquisition of substantially all
of the outstanding stock of Nobelclad Europe S.A. ("Nobelclad") from Nobel
Explosifs France ("NEF"). Nobelclad and its wholly-owned subsidiary, Nitro
Metall AB ("Nitro Metall") are the primary manufacturers of explosion clad
products in Europe and operate cladding businesses located in Rivesaltes, France
and Likenas, Sweden, respectively, along with sales offices in each country.
Products manufactured by Nobelclad and Nitro Metall are similar to those
produced by DMC's domestic factory in Mount Braddock, Pennsylvania. NEF is
wholly owned by Groupe SNPE and is a sister company to SNPE, Inc., which owns
55% of the Company's common stock. The purchase price of approximately $5.3
million was financed through a $4.0 million intercompany note agreement between
the Company and SNPE, Inc. and the assumption of approximately $1.23 million in
third party bank debt associated with Nobelclad's acquisition of Nitro Metall
from NEF prior to the Company's purchase of Nobelclad stock. As a result of the
Company and Nobelclad both being majority owned by Groupe SNPE, the acquisition
of Nobelclad has been accounted for as a reorganization of entities under common
control. The historical financial position and operating results of the Company
have been restated to reflect the addition of the Nobelclad and Nitro Metall
historical financial results as if the companies had been consolidated from June
2000, the date on which Groupe SNPE acquired its majority ownership in the
Company.
Aerospace Manufacturing. Products manufactured by the Aerospace Group are
typically made from sheet metal and forgings that are subsequently machined or
formed into precise, three-dimensional shapes that are held to tight tolerances.
Metal machining and forming is accomplished through traditional technologies,
including spinning, machining, rolling and hydraulic expansion. DMC also
performs welding services utilizing a variety of manual and automatic welding
techniques that include electron beam and gas tungsten arc welding processes.
The Company's metalworking and welding operations are often performed to support
the manufacture of completed assemblies and sub-assemblies required by its
customers. Assembly and fabrication services are performed utilizing the
Company's close-tolerance machining, forming, welding, inspection and other
special service capabilities. The Company's forming, machining, welding and
assembly operations serve a variety of product applications in the aerospace,
defense, aircraft, high technology and power generation industries.
In January 1998, the Company completed its acquisition of the assets of AMK
Welding ("AMK"), a supplier of commercial aircraft engine, ground-based turbine
and aerospace-related welding services that include the use of automatic and
manual gas tungsten, electron beam and arc welding techniques. The Company
completed its acquisition of the assets of Spin Forge, LLC ("Spin Forge"), a
manufacturer of tactical missile motor cases and titanium pressure vessels for
commercial aerospace and defense industries, in March 1998. In December 1998,
the Company completed its
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acquisition of the assets of Precision Machined Products, Inc. ("PMP"), a
contract machining shop specializing in high precision, high quality, complex
machined parts used in the aerospace, satellite, medical equipment and high
technology industries.
Stock Purchase Agreement with SNPE. On June 14, 2000, the Company's
stockholders approved a Stock Purchase Agreement (the "Agreement") between the
Company and SNPE, Inc ("SNPE"). The closing of the transaction, which was held
immediately following stockholder approval, resulted in a payment from SNPE of
$5,800,000 to the Company in exchange for 2,109,091 of the Company's common
stock at a price of $2.75 per share causing SNPE to become a 50.8% stockholder
of the Company on the closing date. In addition, the Company borrowed $1,200,000
under a convertible subordinated note from SNPE and $3,500,000 under a credit
facility with SNPE. Proceeds from the SNPE equity investment, convertible
subordinated note issuance and credit facility borrowings enabled the Company to
repay all borrowings from its bank under a revolving credit facility on which
the Company had been in default since September 30, 1999. In December 2001, the
SNPE credit facility was replaced by a bank facility.
Dynamic Materials Corporation, formerly Explosive Fabricators, Inc., was
incorporated in Colorado in 1971 and was reincorporated in Delaware in 1997.
Our principal Internet address is www.dynamicmaterials.com. We make
available free of charge on www.dynamicmaterials.com our annual, quarterly and
current reports, and amendments to those reports, as soon as reasonably
practicable after we electronically file such material with, or furnish it to,
the SEC.
Financial Information about Industry Segments
See Note 8 to the Company's financial statements included under Item 8 for
certain financial information about the Company's industry segments.
Risk Factors
Except for the historical information contained herein, this report on Form
10-K contains forward-looking statements that involve risks and uncertainties.
The Company wishes to caution readers that the risks detailed below, among
others, in some cases have affected the Company's results, and in others could
cause the Company's results to differ materially from those expressed in any
forward-looking statements made by the Company and could otherwise affect the
Company's business, results of operations and financial condition. Certain of
these factors are further discussed below and should be considered in evaluating
the Company's forward-looking statements and any investment in the Company's
Common Stock.
Fluctuations in Operating Results. The Company generated significant
operating income in 2002 and 2001 due principally to the strong financial
performance of its Explosive Metalworking Group, which had earned a small
operating profit in 2000 after incurring significant operating losses in 1999.
In 2000, the Company experienced significant operating losses as a result of a
significant decline in sales revenue and gross margin levels within its
Aerospace Group. The Company has also experienced, and expects to continue to
experience, quarterly fluctuations in operating results caused by various
factors, including the timing and size of orders by major customers, customer
inventory levels, shifts in product mix, the occurrence of non-recurring costs
associated with plant closings, plant start-ups, acquisitions and divestitures,
and general economic conditions. In addition, the ongoing war in Iraq, the
threat of terrorism and other geopolitical uncertainty could have a negative
impact on the global economy, the industries served by the Company and the
Company's operating results. The Company typically does not obtain long-term
volume purchase contracts from its customers. Quarterly sales and operating
results therefore depend on the volume and timing of backlog as well as bookings
received during the quarter. Significant portions of the Company's operating
expenses are fixed, and planned expenditures are based primarily on sales
forecasts and product development programs. If sales do not meet the Company's
expectations in any given period, the adverse impact on operating results may be
magnified by the Company's inability to adjust operating expenses sufficiently
or quickly enough to compensate for such a shortfall. Results of operations in
any period should not be considered indicative of the results to be expected for
any future period.
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Fluctuations in operating results may also result in fluctuations in the price
of the Company's Common Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Dependence on Clad Metal Business; Limitation on Growth in Existing Markets
for Clad Metal Products. For the year ended December 31, 2002, the Company's
cladding business accounted for approximately 78% of its net sales. The
explosion bonded clad metal products industry in which the Company currently
operates is mature and offers limited potential for substantial growth in
existing markets. The Company estimates that it currently serves a major
percentage of the world market for its explosion bonded clad metal products.
Historically, the worldwide demand for clad metal products has been cyclical.
Lower future demand for clad metal products could have a material adverse effect
on the Company's business, financial condition and results of operations.
Importance of Aerospace Manufacturing. The Company's aerospace
manufacturing business was established in 1998 and accounted for approximately
22% of the Company's net sales for the fiscal year ended December 31, 2002. The
aerospace manufacturing industry is largely reliant on defense industry demand
and positive economic conditions in general. Fluctuations or downturns in either
could have a materially adverse impact on the Company. The Company's Spin Forge
Division is highly dependent on two missile motor case programs for the defense
industry. While these two programs are expected to continue for a number of
years, cancellation of one or both of these programs could have a material
adverse impact on the Company. The Company currently estimates that it services
a very small percentage of the aerospace industry. While the Company believes
that it will be able to maintain and hopes to eventually increase its market
share through the businesses it currently owns, there can be no assurance that
its sales and marketing efforts will be successful. Failure to either increase
or maintain market share could have a material adverse effect on the Company's
business, financial condition and results of operations.
Availability of Suitable Cladding Sites. The cladding process involves the
detonation of large amounts of explosives. As a result, the sites where the
Company performs cladding must meet certain criteria, including lack of
proximity to a densely populated area, the specific geological characteristics
of the site, and the Company's ability to comply with local noise and vibration
abatement regulations in conducting the process. The process of identifying
suitable sites and obtaining permits for using the sites from local government
agencies can be time-consuming or costly. In addition, the Company could
experience difficulty in obtaining permits because of resistance from residents
in the vicinity of proposed sites. The Company currently leases its only
domestic cladding site in Dunbar, Pennsylvania. The lease term for the
Pennsylvania site expires in 2005 but the underlying agreement has renewal
options extending through 2029. The failure to obtain required governmental
approvals or permits would have a material adverse effect on the Company's
business, financial condition and results of operations.
Competition. The Company's explosion clad products compete with explosion
clad made by other like-kind manufacturers located throughout the world and with
clad products manufactured using other technologies. The company's combined
North American and European operations typically supply explosive clad for a
major percentage of the worldwide market needs. There is one other major
explosion clad supplier worldwide, Asahi Chemical of Japan. There are a number
of much smaller companies worldwide with explosion clad manufacturing
capability. There are no other significant North American based explosion clad
suppliers. The company focuses strongly on reliability, product quality, on-time
delivery performance, and low cost manufacture to minimize the potential of
future competitive threats.
Explosion clad products also compete with clad manufactured by rollbond and
overlay cladding processes. In rollbond technology, the clad and base metal are
bonded together during a hot rolling process in which slab is converted to
plate. In weld overlay, which is typically performed by the Company's fabricator
customers, the cladding layer is deposited on the base metal through a fusion
welding process. The technical and commercial niches of each cladding process
are well understood within the industry and vary from one world market location
to another. The company has established exclusive sales arrangements with other
manufacturers where explosion clad is not the low cost solution, and
consequently participates as a sales agent in a significant share of the North
American rollbond market. The company has minimal share of the world rollbond
market, which is dominated by very large Japanese and European steel producers.
The U.S. clad market is currently protected from Japanese and European
competition by anti-dumping orders. The Company's products compete with weld
overlay clad products manufactured by a significant number of its fabricator
customers. Competitive niche positions in the world market are strongly driven
by currency exchange rates and regulatory factors. Unfavorable currency exchange
and regulatory conditions in various parts of world could put the
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Company at a competitive disadvantage and thus have a material adverse effect on
the Company's business, financial condition and results of operations.
Competition in the aerospace business is, and is expected to remain,
intense. Competitors include domestic and international companies. Many of these
competitors have financial, technical, marketing, sales, manufacturing,
distribution and other resources significantly greater than those of the
Company. In addition, many of these competitors have name recognition,
established positions in the market, and long standing relationships with
customers. To remain competitive, the Company will be required to continue to
develop and provide technologically advanced manufacturing services, maintain
quality levels, offer flexible delivery schedules, deliver finished products on
a reliable basis and compete favorably on the basis of price. The Company
competes against aerospace manufacturers on the basis of product quality,
performance and cost. There can be no assurance that the Company will continue
to compete successfully against these companies.
Availability and Pricing of Raw Materials. Although the Company generally
uses standard metals and other materials in manufacturing its products, certain
materials such as specific grades of carbon steel, titanium, zirconium and
nickel are currently obtained from single sources or are subject to supply
shortages due to general economic conditions. While the Company seeks to
maintain a sufficient inventory of these materials and believes that these
materials are available from other sources, there can be no assurance that the
Company would be able to obtain alternative supplies, or a sufficient inventory
of materials, or obtain supplies at acceptable prices without production delays,
additional costs or a loss of product quality. If the Company were to lose a
single-source supply or fail to obtain sufficient supply on a timely basis or
obtain supplies at acceptable prices, such loss or failure would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Suppliers."
Customer Concentration. A significant portion of the Company's net sales is
derived from a relatively small number of customers. The Company expects to
continue to depend upon its principal customers for a significant portion of its
sales, although there can be no assurance that the Company's principal customers
will continue to purchase products and services from the Company at current
levels, if at all. The loss of one or more major customers or a change in their
buying patterns could have a material adverse effect on the Company's business,
financial condition and results of operations. Historically, the majority of the
Company's revenues have been derived from customers in the chemical processing,
power generation, petrochemical and aerospace industries. As was evidenced by
the operating losses the Company incurred in 1999 and 2000, an economic downturn
in any of these industries can have a material adverse effect on the Company's
business, financial condition and results of operations. The Company believes
that its risks in this area are partially mitigated by its strengthened world
market position in explosive clad following the 2001 acquisition of Nobelclad
Europe and the breadth and depth of its customer base in the various industries
that purchase clad metal.
Dependence on Key Personnel; Need to Attract and Retain Employees. The
Company's continued success depends to a large extent upon the efforts and
abilities of key managerial and technical employees. The loss of services of
certain of these key personnel could have a material adverse effect on the
Company's business, results of operations and financial condition. There can be
no assurance that the Company will be able to attract and retain such
individuals on acceptable terms, if at all, and the failure to do so could have
a material adverse effect on the Company's business, financial condition and
results of operations.
Government Regulation; Safety. The Company's explosion metal working
business is subject to extensive government regulation in the United States,
France and Sweden, including guidelines and regulations for the safe handling
and transport of explosives provided by the U.S. Bureau of Alcohol, Tobacco and
Firearms, the U.S. Department of Transportation set forth in the Federal Motor
Carrier Safety Regulations and the Institute of Makers of Explosive Safety
Library Publications. The Company must comply with licensing and regulations for
the purchase, transport, manufacture and use of explosives. In addition,
depending upon the types of explosives used, the detonation by-products may be
subject to environmental regulation. The Company's activities are also subject
to federal, state and local environmental and safety laws and regulations,
including but not limited to, local noise abatement and air emissions
regulations, the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 as amended, including the regulations issued and laws
enforced by the labor and employment departments of states in which the Company
conducts business, the U.S. Department of Commerce, the U.S. Environmental
Protection Agency and by state and county health and safety agencies. Any
failure to comply with present and future regulations could subject the Company
to future liabilities. In addition, such regulations could restrict the
Company's ability to expand its facilities,
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construct new facilities or could require the Company to incur other significant
expenses in order to comply with government regulations. In particular, any
failure by the Company to adequately control the discharge of its hazardous
materials and wastes could subject it to future liabilities, which could be
significant.
The Company's explosive metalworking operation involves the detonation of
large amounts of explosives. As a result, the Company is required to use
specific safety precautions under the Occupational Safety and Health
Administration guidelines. These include precautions which must be taken to
protect employees from facility deterioration as well as exposure to sound and
ground vibration.
Explosive Metalworking
The explosive metalworking business includes the use of explosives to
perform metal cladding and shock synthesis of industrial diamonds. While metal
cladding is a mature industry, DMC believes that the characteristics of its
high-energy metal working processes may enable the development of new products
in a variety of industries and continues to explore such development
opportunities.
Metal Cladding. The principal product of metal cladding is a metal plate
composed of two or more dissimilar metals, usually a corrosion resistant alloy
and carbon steel, bonded together at the atomic level. High energy metal
cladding is performed by detonating an explosion on the surface of an assembly
of two parallel metal plates, the cladding metal and the backing metal,
separated by a "standoff space". The explosive force creates metallurgical bond
between the two metal components. The technology is unique in that it can be
used to weld non-compatible metals, which cannot be welded by conventional
processes, such as titanium-steel, aluminum-steel, and aluminum-copper. It can
also be used to weld compatible metals, such as stainless steels and nickel
alloys to steel. DMC Detaclad(R) is used in the fabrication of pressure vessels
and heat exchangers for chemical and petrochemical processing, power generation,
petroleum refining, mining, air conditioning (HVAC) and other industries where
corrosion, temperature, and pressure combine to produce demanding environments.
DMC Detacouple(R) bimetal welding transition joints are used in ship
construction, and a variety of electrochemical industries including aluminum
smelters.
The Company's clad metal products are primarily produced on a
project-by-project basis conforming to requirements set forth in customer
purchase orders. Upon receipt of an order, the Company obtains the component
materials from a variety of sources based on quality, availability and cost. The
company explosively bonds the metals in one of its three manufacturing plants
(Mount Braddock, PA, USA; Rivesaltes, France and Likenas, Sweden). Final
products are processed to meet contract specific requirements for product
configuration and quality/inspection level. Maintaining DMC's corporate culture
and reputation for product quality and on-time delivery is a critical factor for
management.
Shock Synthesis. In connection with the 1996 acquisition of the Detaclad
division of DuPont, DMC entered into an agreement to provide explosive shock
synthesis services associated with the manufacture of industrial diamonds. Shock
synthesis is one step in a series of operations required for production of
industrial grade diamond abrasives.
Aerospace Manufacturing
Metalworking. The Company currently manufactures machined and formed metal
parts for the commercial aircraft, aerospace and power generation industries.
Products are made generally from sheet metal or forgings that are subsequently
machined or formed into precise, three-dimensional shapes that are held to tight
tolerances according to customers' specifications.
Traditional metalworking technologies used by DMC in its aerospace
manufacturing operations include spinning, machining, rolling, and hydraulic
expansion. These technologies were acquired in the 1998 purchases of Spin Forge
and PMP. The equipment utilized in the spinning process at Spin Forge is
believed to be the largest of its kind in North America, and is capable of
producing large, thin wall, close tolerance parts. Formed and machined metal
products include tactical and ballistic missile motor cases, high strength,
light weight pressurant tanks utilizing specialty aerospace alloys and other
high precision, high quality and complex parts. The industries served include
space launch vehicle, defense, satellite, stationary power generation,
commercial aircraft, medical and high technology.
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The Company's products are produced on a project-by-project basis based on
specifications set forth in a customer's purchase order. Upon receipt of an
order for a product from a customer, the Company identifies sources for the
specified raw materials, which typically include sheet metals composed of
aluminum, titanium, inconels, monels, hastealloys, waspalloy, invar or stainless
steel. The Company obtains the raw materials from a variety of sources based on
quality, availability, transportation costs and unit price. Following the
machining and forming processes, the Company treats the metal parts by using
operations such as anodizing, heat-treating and painting. The Company completes
the manufacturing process by performing testing for final certification of the
product to the customer's specifications.
Welding. The Company's capabilities for providing welding services and
assemblies reside primarily with AMK Welding and Spin Forge. Both AMK and Spin
Forge provide welding and assembly services to the commercial aircraft,
aerospace, power generation and defense industries. Welding services are
provided on a project-by-project basis based on specifications set forth in
customer's purchase orders. Upon receipt of an order for welded assemblies, the
Company performs welding services using customer specific welding procedures.
The welding services are performed utilizing a variety of manual and
automatic welding techniques, including electron beam and gas tungsten arc
welding processes. The Company has considerable expertise in vacuum controlled
atmospheric purged chamber welding which is a critical capability when welding
titanium, zirconium, high temperature nickel alloys and other specialty alloys.
In addition to its welding capabilities, the Company also utilizes various
special stress relieving and non-destructive examination processes such as mag
particle and radiographic inspection in support of its welding operations.
Metal Assembly Operations. The Company's metalworking and welding
operations are often performed to support the manufacture of completed
assemblies and sub-assemblies required by its customers. DMC's assembly
capabilities are provided on a project-by-project basis according to
specifications set forth in customers' purchase orders. After receiving customer
orders for completed assemblies and sub-assemblies, the Company performs
fabrication services utilizing its close-tolerance machining, forming, welding,
inspection and other special service capabilities.
Strategy
The Company's strategy for growth is to expand and refine its basic
processes and product offerings to generate solutions to the materials needs of
customers in its target markets. Key elements of the Company's strategy include:
Take Advantage of Recent Investments in New Technology and Manufacturing
Leadership. The Company seeks to take advantage of its technology leadership in
the explosion metalworking business. In 1998 and 1999, the Company invested
nearly $7 million in new manufacturing equipment and technologies at Mount
Braddock, Pennsylvania, that has substantially increased manufacturing
efficiencies and plant capacity. Management believes this new clad plate
manufacturing facility provides a significant advantage to the Company in the
global marketplace for explosion bonded clad metal plates. In 2001, the Company
invested approximately $5.3 million in the acquisition of Nobelclad Europe,
strengthening its competitive position in Europe, and much of the rest of the
world.
Establish Global Presence. The Company seeks to establish a global sales
and marketing presence in the major international markets for explosion metal
working, including Europe, Australia, the Far East and the Americas. The Company
is working to establish relationships with end users, engineering contractors,
metal fabricators and independent sales representatives in these markets and has
developed the capacity in its sales and marketing department to address these
markets. The Company's plan to continue its international expansion depends on a
number of factors. See "Investment Considerations" for a discussion of certain
of the risks associated with the Company's ability to establish a global
presence.
Add New Product Lines or Customers. The Company seeks to grow its sales
base by adding new product lines and/or programs to its Aerospace Group and new
customers to both of its business segments. The Company's future sales growth
plans depend on a number of factors. See "Investment Considerations" for a
discussion of certain of the risks associated with the Company's ability to
achieve its planned sales growth.
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Suppliers
The Company uses numerous suppliers of alloys, steels and other materials
for its operations. The Company typically bears a short-term risk of alloy,
steel and other component price increases, which could adversely affect the
Company's gross profit margins. Although the Company will work with customers
and suppliers to minimize the impact of any component shortages, component
shortages have had, and are expected to have, from time to time, short-term
adverse effects on the Company's business. The Company generally uses standard
metals and other materials in manufacturing its products; however, certain
materials such as specific grades of carbon steel, titanium, zirconium and
nickel are currently obtained from single sources or are subject to supply
shortages due to general economic conditions. If the Company were to lose a
single-source supply or fail to obtain sufficient supply on a timely basis or
obtain supplies at acceptable prices, such loss or failure could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Competition
Competition in the explosion metal working business and the aerospace
business is, and is expected to remain, intense. The Company's strong market
position in the clad metal industry makes it a target for competitors attempting
to gain market share. Competitors include major domestic and international
companies. Competitors in the explosion metal working business use alternative
technologies; additionally certain of DMC's customers and suppliers have
in-house metalworking capabilities. Many of these companies have financial,
technical, marketing, sales, manufacturing, distribution and other resources
significantly greater than those of the Company. In addition, many of these
companies have name recognition, established positions in the market, and long
standing relationships with customers. To remain competitive, the Company will
be required to continue to develop and provide technologically advanced
manufacturing services, maintain quality levels, offer flexible delivery
schedules, deliver finished products on a reliable basis and compete favorably
on the basis of price.
Customer Profile and Marketing
The primary industries served by the Company are the chemical processing,
power generation, petrochemical, commercial aerospace and marine engineering
industries. The Company's metal cladding customers in these industries require
metal products that can withstand exposure to corrosive materials, high
temperatures and high pressures. The Company's Aerospace Group customers operate
in industries that require metal products that meet rigorous criteria for
tolerances, weight, strength and reliability.
At any given time, certain customers may account for significant portions
of the Company's business. A significant portion of the Company's net sales is
derived from a relatively small number of customers. Large customers also
accounted for a significant portion of the Company's backlog as of March 2003.
The Company expects to continue to depend upon its principal customers for a
significant portion of its sales, although there can be no assurance that the
Company's principal customers will continue to purchase products and services
from the Company at current levels, if at all. The loss of one or more major
customers or a change in their buying pattern could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company extends its internal selling efforts by marketing its services
to potential customers through senior management, direct sales personnel,
program managers and independent sales representatives. Prospective accounts in
specific industries are identified through networking in the industry,
cooperative relationships with suppliers, public relations, customer references,
inquiries from technical articles and seminars and trade shows. The Company
markets its clad metal products to three tiers of customers; the product
end-users (e.g., operators of chemical processing plants), the engineering
contractors in charge of specifying the metal parts to be used by the end-users,
and the metal fabricators who manufacture the products or equipment that utilize
the Company's metal products. By maintaining relationships with these parties
and educating them as to the technical benefits of DMC's high-energy metal
worked products, the Company endeavors to have its products specified as early
as possible in the design process.
The DMC clad metal businesses have several exclusive or non-exclusive
agreements with agents for sales and business promotion in specific territories
defined by each agreement. These agency contracts cover sales in specific
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European, Middle East and Far East countries. Agency agreements are usually of
one to two years in duration and, subject to agents meeting the Company's
performance expectations, are automatically renewed.
Backlog
The Company's backlog was approximately $14.5 million at December 31, 2002
including Nobelclad and Nitro Metall, compared with approximately $11.3 million
and $9.0 million at December 31, 2001 and 2000, respectively. Backlog consists
of firm purchase orders and commitments that the Company expects to fill within
the next 12 months. The Company expects most of the backlog at December 31, 2002
to be filled during 2003. However, since orders may be rescheduled or canceled
and a significant portion of the Company's net sales is derived from a small
number of customers, backlog is not necessarily indicative of future sales
levels.
Employees
The Company employs approximately 234 full-time employees as of February
28, 2003, the majority of which are engaged in manufacturing operations. The
Company believes that its relations with its employees are good. Of the 234
employees, there are 53 full-time employees working in France at the Nobelclad
facility and 17 full-time employees working in Sweden for Nitro Metall. Twenty
of the Nobelclad employees and all of the Swedish employees are members of trade
unions.
Protection of Proprietary Information
The Company holds numerous patents related to the business of explosion
metal working and metallic processes and also owns certain registered
trademarks, including Detaclad(R), Detacouple(R), Dynalock(R), EFTEK(R) and
NOBELCLAD(R). The Company's current patents expire on various dates through
2012. Since individual patents relate to specific product applications and not
to core technology, the Company does not believe that such patents are material
to its business and the expiration of any single patent is not expected to have
a material adverse effect on the Company or its operations.
Financial Information about Foreign and Domestic Operations and Export
Sales
See Note 8 to the Company's financial statements included under Item 8 for
certain financial information about the Company's export sales.
ITEM 2. Properties
The Company's principal manufacturing site, which is owned by the Company,
is located in Mount Braddock, Pennsylvania. The Company also leases property in
Dunbar, Pennsylvania that serves as an explosion site. The lease for the Dunbar,
Pennsylvania property will expire in December 2005, but has renewal options that
extend through 2029. The Company leases office space in Boulder, Colorado to
house its corporate headquarters under a lease with the building owner that
expires in February 2006. The Company owns the land and buildings housing the
operations of AMK in South Windsor, Connecticut. The Company leases the land and
building occupied by its Spin Forge operations in El Segundo, California. The
lease expires in January 2012, and the Company holds an option to purchase the
land and building housing the Spin Forge operations at a fixed price through
January 2004 and at market value thereafter. The Company also leases the land
and building occupied by its PMP operations in Fort Collins, Colorado. The lease
expires in December 2003, and the Company has an option to renew the lease for
an additional five-year term. The Company also holds a first right of offer to
purchase the land and building housing the PMP operations through December 2008.
The Company, through its French subsidiary Nobelclad, owns the land and the
buildings housing its operations in Rivesaltes, France and leases the land that
serves as the shooting site in Tautavel, France. This lease expires in July 2011
and may be extended. The Company, through its Swedish subsidiary, Nitro Metall,
owns the buildings housing its manufacturing operations in Likenas, Sweden and
leases the land. Both the buildings and the land housing the Nitro Metall sales
office in Nora, Sweden are leased. These leases are automatically renewed every
year, without risk of non-renewal. The Company believes that its current
facilities are adequate for its existing operations and are in good condition.
See "Item 1
-9-
- - Investment Considerations" for a discussion of certain of the risks associated
with the Company's ability to renew the leases for its current manufacturing
sites and to identify and establish new manufacturing sites.
ITEM 3. Legal Proceedings
There are no significant pending legal proceedings against the Company or
its subsidiary.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to security holders for vote during the
fourth quarter of the fiscal year ended December 31, 2002.
-10-
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Common Stock of the Company was publicly traded on The Nasdaq Stock
Market (National Market) under the symbol "BOOM" from January 3, 1997 through
February 3, 2000. On February 4, 2000, the Company transferred to Nasdaq's
SmallCap Market as a result of the Company's inability to maintain the $5
million minimum market value of public float required by the Nasdaq National
Market. The following table sets forth quarterly high and low bid quotations for
the Common Stock during the Company's last two fiscal years, as reported by
Nasdaq. The quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not represent actual transactions.
2002 High Low
---- ---- ---
First Quarter $ 4.100 $ 2.520
Second Quarter $ 3.980 $ 3.080
Third Quarter $ 3.350 $ 2.000
Fourth Quarter $ 3.410 $ 2.010
2001
----
First Quarter $ 2.125 $ 0.875
Second Quarter $ 3.150 $ 1.563
Third Quarter $ 3.620 $ 2.010
Fourth Quarter $ 4.150 $ 2.050
As of March 10, 2003, there were approximately 476 holders of record of the
Company's Common Stock.
The Company has never declared or paid cash dividends on its Common Stock.
The Company currently intends to retain any future earnings to finance the
growth and development of its business and therefore does not anticipate paying
any cash dividends in 2003.
-11-
ITEM 6. Selected Financial Data
The selected financial data set forth below has been derived from the
financial statements of the Company.
Year Ended December 31,
-------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
-------------------------------------------------------------------------------------
Statement of Operations
Net sales $45,657,569 $42,514,774 $33,759,581 $29,131,289 $38,212,051
Cost of products sold 34,191,224 31,832,892 28,154,815 25,419,287 30,372,600
---------- ---------- ---------- ---------- ----------
Gross profit 11,466,345 10,681,882 5,604,766 3,712,002 7,839,451
Costs and expenses 6,627,589 6,645,989 6,234,879 6,608,895 5,303,495
---------- ---------- ---------- ---------- ----------
Income (loss) from operations 4,838,756 4,035,893 (630,113) (2,896,893) 2,535,956
Other expense, net 741,166 845,063 866,386 975,215 263,200
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes,
extraordinary item and cumulative
effect of a change in accounting
principle 4,097,590 3,190,830 (1,496,499) (3,872,108) 2,272,756
Income tax (provision) benefit (1,609,353) (401,600) (164,000) 1,154,000 (887,000)
---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary
item and cumulative effect of change
in accounting principle 2,488,237 2,789,230 (1,660,499) (2,718,108) 1,385,756
Extraordinary item - loss from
extinguishment of debt - - (80,111) - -
Income (loss) before cumulative effect
of change in accounting principle 2,488,237 2,789,230 (1,740,610) (2,718,108) 1,385,756
Cumulative effect of change in
accounting principle, net of tax
benefit of $1,482,000 (2,318,108) - - - -
---------- ---------- ---------- ---------- ----------
Net income (loss) $ 170,129 $ 2,789,230 $(1,740,610) $(2,718,108) $ 1,385,756
========== ========== ========== ========== ==========
Income (loss) per share before cumulative
effect of change in accounting
principle:
Basic $ 0.49 $ 0.56 $ (0.43) $ (0.96) $ 0.50
Diluted $ 0.49 $ 0.55 $ (0.43) $ (0.96) $ 0.49
Net income (loss) per share:
Basic $ 0.03 $ 0.56 $ (0.43) $ (0.96) $ 0.50
Diluted $ 0.03 $ 0.55 $ (0.43) $ (0.96) $ 0.49
Weighted average number of shares
outstanding:
Basic 5,042,382 5,003,399 4,004,873 2,822,184 2,770,139
Diluted 5,087,051 5,051,223 4,004,873 2,822,184 2,852,547
Financial Position
Current assets $16,882,469 $16,410,967 $14,520,301 $ 8,898,184 $11,145,995
Total assets 33,697,992 36,913,345 35,406,455 30,087,318 33,201,578
Current liabilities 8,382,411 8,060,823 7,189,274 19,921,074 6,069,050
Non-current liabilities 9,750,841 14,206,528 10,477,887 136,261 14,503,617
Stockholders' equity 15,564,740 14,645,994 17,739,294 10,029,983 12,628,911
-12-
Selected unaudited quarterly financial data for the years ended December 31,
2002 and 2001 is presented below:
Year ended December 31, 2002
-----------------------------------------------------------------------
Quarter ended Quarter ended Quarter ended Quarter ended
March 31, * June 30, September 30, December 31,
-----------------------------------------------------------------------
Net sales $11,974,211 $9,628,835 $10,695,195 $13,359,328
Gross profit $ 3,125,512 $2,292,951 $ 2,483,917 $ 3,563,965
Net income (loss) $(1,531,572) $ 295,564 $ 383,974 $ 1,022,163
Net income (loss) per share - basic $ (0.30) $ 0.06 $ 0.08 $ 0.20
Net income (loss) per share - diluted $ (0.30) $ 0.06 $ 0.08 $ 0.20
Year ended December 31, 2001
-----------------------------------------------------------------------
Quarter ended Quarter ended Quarter ended Quarter ended
March 31, June 30, September 30, December 31,
-----------------------------------------------------------------------
Net sales $ 9,517,401 $11,252,246 $ 12,257,533 $ 9,487,594
Gross profit $ 2,190,106 $ 3,197,677 $ 3,368,734 $ 1,925,365
Net income $ 321,864 $ 904,451 $ 1,343,545 $ 219,370
Net income per share - basic $ 0.06 $ 0.18 $ 0.27 $ 0.04
Net income per share - diluted $ 0.06 $ 0.18 $ 0.26 $ 0.04
* The unaudited quarterly financial data for the period ended March 31, 2002 was
restated to include the effect of the cumulative effect of a change in
accounting principle related to the adoption of SFAS No. 142 as discussed below.
-13-
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
DMC is a worldwide leader in explosive metalworking and, through its
Aerospace Group, is involved in a variety of metal forming, machining, welding,
and assembly activities. The explosive metalworking business includes the use of
explosives to perform metallurgical bonding (or "metal cladding") and shock
synthesis of synthetic diamonds. DMC performs metal cladding using its
proprietary technologies. The revenues from our explosive metalworking
businesses, as a proportion of consolidated DMC revenues, have increased from
68% in 2000 (as restated) to 71% in 2001 and 78% in 2002. DMC's Aerospace Group
was formed as a result of the 1998 acquisitions of AMK Welding, Spin Forge and
Precision Machined Products and accounted for 32%, 29% and 22% of our
consolidated 2000, 2001 and 2002 revenues, respectively.
Explosive Metalworking. Clad metal products are used in manufacturing
processes or environments that involve highly corrosive chemicals, high
temperatures and/or high pressure conditions. For example, we fabricate clad
metal tube sheets for heat exchangers. Heat exchangers are used in a variety of
high temperature, high pressure, highly corrosive chemical processes, such as
processing crude oil in the petrochemical industry and processing chemicals used
in the manufacture of synthetic fibers. In addition, DMC has produced titanium
clad plates used in the fabrication of metal autoclaves to replace autoclaves
made of brick and lead for customers in the nickel mining industry. We believe
that our clad metal products are an economical, high-performance alternative to
the use of solid corrosion-resistant alloys. In addition to clad metal products,
the explosive metalworking business includes shock synthesis of synthetic
diamonds.
Aerospace Manufacturing. Products manufactured by our Aerospace Group are
typically made from sheet metal and forgings that are subsequently machined or
formed into precise, three-dimensional shapes that are held to tight tolerances.
Metal machining and forming is accomplished through traditional technologies,
including spinning, machining, rolling and hydraulic expansion. DMC also
performs welding services utilizing a variety of manual and automatic welding
techniques that include electron beam and gas tungsten arc welding processes.
Forming and welding operations are often performed to support the manufacture of
completed assemblies and sub-assemblies required by our customers. Fabrication
and assembly services are performed utilizing close-tolerance machining,
forming, welding, inspection and other special service capabilities. Our
forming, machining, welding and assembly operations serve a variety of product
applications in the commercial aircraft, aerospace, defense and power generation
industries. Product applications include tactical missile motor cases, titanium
pressure tanks for launch vehicles, and complex, high precision component parts
for satellites.
Impact of SFAS No. 142. In June 2001, the FASB authorized the issuance of
Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other
Intangible Assets. Under SFAS No. 142, goodwill will no longer be amortized on a
straight-line basis over its estimated useful life, but will be tested for
impairment on an annual basis and whenever indicators of impairment arise. The
goodwill impairment test, which is based on fair value, is to be performed on a
reporting unit level. A reporting unit is defined as a SFAS No. 131 operating
segment or one level lower. Goodwill will no longer be allocated to other
long-lived assets for impairment testing under SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of.
Under SFAS No. 142, intangible assets with indefinite lives will not be
amortized. Instead they will be carried at the lower cost or market value and
tested for impairment at least annually. All other recognized intangible assets
will continue to be amortized over their estimated useful lives.
SFAS No. 142 is effective for fiscal years beginning after December 15,
2001. DMC adopted SFAS No. 142 as of January 1, 2002 and in early 2002 disclosed
that up to the full amount of the remaining goodwill associated with the
Company's 1998 acquisition of PMP could be impaired. In the fourth quarter of
2002, DMC completed its evaluation of goodwill impairment at PMP and determined
that the remaining goodwill in the amount of $3,800,108 was impaired.
Accordingly, we wrote off all of the remaining PMP goodwill, less associated tax
benefits of $1,482,000, and reported the resultant after tax loss of $2,318,108,
or $.46 per diluted share, as a cumulative effect of a change in accounting
principle.
-14-
Restatement of 2000 for Reorganization. On July 3, 2001, DMC completed its
acquisition of substantially all of the outstanding stock of Nobelclad Europe
S.A. ("Nobelclad") from Nobel Explosifs France ("NEF"). Nobelclad and its
wholly-owned subsidiary, Nitro Metall AB ("Nitro Metall"), operate cladding
businesses located in Rivesaltes, France and Likenas, Sweden, respectively. NEF
is wholly owned by Groupe SNPE and is a sister company to SNPE, Inc., which owns
55% of our common stock. The purchase price of approximately $5.3 million was
financed through a $4.0 million intercompany note agreement between DMC and
SNPE, Inc. and the assumption of approximately $1.23 million in third party bank
debt associated with Nobelclad's acquisition of Nitro Metall from NEF prior to
DMC's purchase of Nobelclad stock. As a result of DMC and Nobelclad both being
majority owned by Groupe SNPE, the acquisition of Nobelclad has been accounted
for as a reorganization of entities under common control. Our historical
financial position and operating results have been restated to reflect the
addition of the Nobelclad and Nitro Metall historical financial results as if
the companies had been consolidated from June 2000, the date on which Groupe
SNPE acquired its majority ownership in DMC.
Due largely to the operating loss we incurred during 1999, DMC violated
certain financial covenants under its debt agreements beginning with the quarter
ended September 30, 1999. Once it became apparent that financial covenant
violations under our debt agreements would continue, we began to evaluate
various business strategies and financing alternatives in connection with the
need to restructure our debt agreements and/or re-capitalize our balance sheet.
These efforts culminated in DMC entering into a Stock Purchase Agreement (the
"Agreement") with SNPE, Inc. ("SNPE") that was signed on January 20, 2000 and
subsequently approved by our stockholders on June 14, 2000. The closing of the
transaction, which was held immediately following stockholder approval, resulted
in a payment from SNPE of $5,800,000 to DMC in exchange for 2,109,091 of DMC's
common stock at a price of $2.75 per share causing SNPE to become a majority
stockholder of DMC on the closing date. We also borrowed $3,500,000 on June 14,
2000 under a credit facility with SNPE that was replaced by a bank credit
facility in December 2001.
DMC generated significant operating income in 2001 and 2002 due to the
strong financial performance of its Explosive Metalworking Group, which had
earned a small operating profit in 2000 after incurring significant operating
losses in 1999. In 2000, the Company experienced significant operating losses as
a result of a significant decline in sales revenue and gross margin levels
within its Aerospace Group. DMC has also experienced, and expects to continue to
experience, quarterly fluctuations in operating results caused by various
factors, including the timing and size of orders from major customers, customer
inventory levels, shifts in product mix, the occurrence of acquisition and
divestiture-related costs, and general economic conditions. In addition, the
ongoing war in Iraq, the threat of terrorism and other geopolitical uncertainty
could have a negative impact on the global economy, the industries served by DMC
and DMC's operating results. We typically do not obtain long-term volume
purchase contracts from our customers. Quarterly sales and operating results
therefore depend on the volume and timing of backlog as well as bookings
received during the quarter. A significant portion of our operating expenses is
fixed, and planned expenditures are based primarily on sales forecasts and
product development programs. If sales do not meet our expectations in any given
period, the adverse impact on operating results may be magnified by our
inability to adjust operating expenses sufficiently or quickly enough to
compensate for such a shortfall. In addition, DMC uses numerous suppliers of
alloys, steels and other materials for its operations. We typically bear the
short-term risk of alloy, steel and other component price increases, which could
adversely affect our gross profit margins. Although DMC will work with customers
and suppliers to minimize the impact of any component shortages, component
shortages have had, and are expected from time to time to have, short-term
adverse effects on the our business. Results of operations in any period should
not be considered indicative of the results to be expected for any future
period. Fluctuations in operating results may also result in fluctuations in the
price of our common stock.
Year Ended December 31, 2002 compared to Year Ended December 31, 2001
Net Sales. Net sales for 2002 increased 7.4% to $45,657,569 from
$42,514,774 in 2001. Sales by our Explosive Metalworking Group, which include
explosion bonding of clad metal and shock synthesis of synthetic diamonds,
increased 18.6% to $35,603,415 in 2002 (78.0% of total sales) from $30,019,586
in 2001 (70.6% of total sales). Explosive Metalworking Group results for 2002
and 2001 include net sales of Nobelclad Europe in the amounts of $11,088,526 and
$9,867,000, respectively. The 18.6% increase in worldwide Explosive Metalworking
Group sales is principally attributable to more than $5 million of 2002
shipments in support of Inco's Goro Nickel Project in New Caledonia. Our
Aerospace Group contributed $10,054,154 to 2002 sales (22.0% of total sales)
versus sales of $12,495,188 in 2001 (29.4% of total sales). This decrease of
$2,441,034, or 19.5%, reflects year-to-year sales decreases
-15-
of 58% and 19% at Precision Machined Products ("PMP") and Spin Forge,
respectively, that were only partially offset by a 60% sales increase at AMK
Welding.
Gross Profit. Gross profit for 2002 increased by 7.3% to $11,466,345 from
$10,681,882 in 2001. Our consolidated gross profit margin for both years was
25.1%. The gross profit margin for our Explosion Metalworking Group increased
from 30.9% in 2001 to 31.6% in 2002, while the gross profit margin for the
Aerospace Group decreased to 2.2% in 2002 from 11.4% in 2001. The increase in
the gross profit margin for the Explosive Metalworking Group is principally due
to increased sales relating to the Goro Nickel Project and the more favorable
absorption of fixed manufacturing overhead expenses that resulted from the
higher 2002 sales volume. The decline in the gross margin rate for the Aerospace
Group is principally due to the poor sales performance of PMP and Spin Forge
where negative gross margins of 28% and 11%, respectively, were reported in 2002
compared to positive gross margins of 9% and 8%, respectively, in 2001. The
negative 2002 gross margins are largely attributable to sales for these two
divisions being at levels that did not provide for full coverage of their
respective fixed manufacturing overhead costs.
General and Administrative. General and administrative expenses decreased
by $140,136, or 3.3%, to $4,090,103 in 2002 from $4,230,239 in 2001. The decline
in general and administrative expenses reflects staffing reductions in the
administration of our Aerospace Group and the discontinuance of goodwill
amortization. As a percentage of net sales, general and administrative expenses
decreased from 10.0% in 2001 to 9.0% in 2002. This decreased percentage is
attributable to increased 2002 sales and lower year-to-year spending levels for
our U.S. operations.
Selling Expense. Selling expenses increased by 5.0% to $2,537,486 in 2002
from $2,415,750 in 2001. The increase in 2002 selling expenses relates to
increased compensation expense associated with higher 2002 bonuses for the
Explosive Metalworking Group and annual salary adjustments. As a percentage of
net sales, selling expenses decreased from 5.7% in 2001 to 5.6% in 2002 due to
the increase in 2002 net sales.
Income from Operations. DMC reported income from operations of $4,838,756
in 2002, an increase of $802,863, or 19.9%, from the $4,035,893 reported in
2001. This year-to-year increase reflects a significant improvement in operating
results for our Explosive Metalworking Group that was partially offset by an
increased operating loss for our Aerospace Group. Our Explosive Metalworking
Group reported income from operations of $6,149,961 in 2002 as compared to
$4,487,824 in 2001. This 37% increase in operating income is largely
attributable to the 18.6% sales increase discussed above. With no large projects
like the Goro Nickel Project on the horizon, the Explosive Metalworking Group is
likely to have difficulty matching its 2002 sales and operating income
performance in 2003. DMC's Aerospace Group reported a loss from operations of
$1,311,205 in 2002 compared to an operating loss of $451,931 in 2001. The
Group's increased 2002 operating loss is attributable to the previously
discussed significant decline in sales and gross profit at PMP and Spin Forge
that was only partially offset by excellent operating results at AMK Welding.
With the exception of AMK Welding who expects another strong year in 2003, our
Aerospace Group continues to suffer from the depressed commercial aircraft
market and decreased demand for satellite and launch vehicle component parts.
Given the current economic environment, our previously stated goal of returning
the Group to profitability for the full year 2003 may be difficult to achieve.
Interest Expense, net. Interest expense decreased by 10.8% to $689,129 in
2002 from $772,723 in 2001. This decrease relates principally to a decline in
interest rates during the year but also reflects lower average borrowings during
the latter part of 2002. Outstanding borrowings were reduced to $11,702,239 at
December 31, 2002 from $15,497,097 at the end of 2001. Related party interest
expense totaled $272,727 and $488,000 in 2002 and 2001, respectively.
Income Tax Provision. DMC recorded a consolidated income tax provision of
$1,609,353 in 2002 on income before income taxes, extraordinary item and
cumulative effect of a change in accounting principle as compared to a
consolidated income tax provision of $401,600 in 2001. This significant increase
reflects an increase in the effective tax rate to 39.3% in 2002 from 12.6% in
2001. The 2002 and 2001 income tax provisions include $1,292,700 and $102,600,
respectively, related to U.S. taxes, with the remainder relating to foreign
taxes associated with the acquired operations of Nobelclad. The 2001 tax
provision in the U.S. was low because DMC was able to generate enough taxable
income in 2001 to allow it to fully recognize the tax benefits associated with
operating loss carry-forwards for which valuation allowances has been
established as of December 31, 2000. Income tax provisions on the 2002 and 2001
earnings of Nobelclad and Nitro Metall have been provided based upon the
respective French and Swedish statutory tax rates.
-16-
Cumulative Effect of a Change in Accounting Principle. On January 1, 2002,
DMC adopted Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets, and in early 2002 disclosed that up to the full amount
of the remaining goodwill associated with the Company's 1998 acquisition of PMP
could be impaired. In the fourth quarter of 2002, we completed our evaluation of
goodwill impairment at PMP and determined that the remaining goodwill in the
amount of $3,800,108 was impaired. Accordingly, we wrote off all of the
remaining PMP goodwill, less associated tax benefits of $1,482,000, and reported
the resultant after tax loss of $2,318,108 as a cumulative effect of a change in
accounting principle.
Net Income. The Company recorded net income of $170,129 in 2002 compared to
net income of $2,789,230 in 2001. This decline is attributable to the $2,318,108
goodwill impairment charge discussed above and an increase in the effective
income tax rate to 39.3% in 2002 from 12.6% in 2001.
Year Ended December 31, 2001 compared to Year Ended December 31, 2000
Net Sales. Net sales for 2001 increased 25.9% to $42,514,774 from
$33,759,581 in 2000. Sales by the Explosive Metalworking Group, which includes
explosion bonding of clad metal and shock synthesis of synthetic diamonds,
increased 31.3% to $30,019,586 in 2001 (70.6% of total sales) from $22,862,677
in 2000 (67.7% of total sales). The significant Explosive Metalworking Group
sales increase is attributable to the acquisition of Nobelclad and improved
domestic demand for clad metal plate. Nobelclad's net sales for the full year
2001 and the last six months of 2000 are included in the Company's consolidated
financial statements and totaled $9,867,000 and $5,897,000 for the respective
periods. The Company's Aerospace Group contributed $12,495,188 to 2001 sales
(29.4% of total sales) versus sales of $10,896,904 in 2000 (32.3% of total
sales). This increase of $1,598,284, or 14.7%, reflects year-to-year sales
increases of 38% and 22% at AMK Welding and Spin Forge, respectively, that were
partially offset by a 2% sales decrease at Precision Machined Products.
Gross Profit. Gross profit for 2001 increased by 90.6% to $10,681,882 from
$5,604,766 in 2000. The Company's gross profit margin for 2001 was 25.1%, a
51.2% increase from the gross profit margin of 16.6% in 2000. The gross profit
margin for the Company's Explosion Metalworking Group increased from 18.1% in
2000 to 30.9% in 2001, while the gross profit margin for the Aerospace Group
decreased to 11.4% in 2001 from 13.5% in 2000. The large increase in the gross
profit margin for the Explosive Metalworking Group is principally due to
improved market conditions, favorable changes in product mix, continual
improvements in operating efficiency at the Group's new production facility in
Mount Braddock, Pennsylvania and the acquisition of Nobelclad whose gross margin
increased slightly from 26.4% in 2000 to 27.4% in 2001. The decline in the gross
margin rate for the Aerospace Group reflects a significant improvement in AMK
Welding's gross margin and a modest improvement in the Spin Forge gross margin
that were more than offset by the poor margin performance of the Group's
Precision Machined Products Division ("PMP") whose gross margin fell from
approximately 27% in 2000 to less than 10% in 2001. PMP's gross margin decline
is principally attributable to product mix changes but also reflects a reduction
in sales that resulted in a lower absorption of fixed manufacturing costs.
General and Administrative. General and administrative expenses decreased
by $13,114, or 0.3%, to $4,230,239 in 2001 from $4,243,353 in 2000. If the
general and administrative expenses of Nobelclad were excluded from the totals,
general and administrative expenses would have decreased by 10.6% to $3,238,658
in 2001 from $3,622,403 in 2000. As a percentage of net sales, general and
administrative expenses decreased from 12.6% in 2000 to 10.0% in 2001. This
decreased percentage is attributable to the increase in the Company's sales
during 2001 and lower year-to-year spending levels for the Company's U.S.
operations and for Nobelclad.
Selling Expense. Selling expenses increased by 21.3% to $2,415,750 in 2001
from $1,991,526 in 2000. As a percentage of net sales, selling expenses
decreased from 5.9% in 2000 to 5.7% in 2001. If the selling expenses of
Nobelclad were excluded from the totals, selling expenses would have increased
by only 8.2% to $1,605,331 in 2001 from $1,483,476 in 2000. This increase
relates principally to compensation expense related to bonuses associated with
the Explosive Metalworking Group's strong 2001 financial performance.
-17-
Income (Loss) from Operations. The Company reported income from operations
of $4,035,893 in 2001 compared to a $630,113 loss from operations in 2000. The
$4,666,006 year-to-year increase in the Company's income from operations
reflects a significant improvement in operating results for the Explosive
Metalworking Group and a reduced operating loss for the Aerospace Group. The
Explosive Metalworking Group reported income from operations of $4,487,824 and
$518,149 in 2001 and 2000, respectively. This dramatic improvement in operating
results is primarily attributable to the Group's ability to increase its gross
margin from 18.1% in 2000 to 30.9% in 2001. The Company's Aerospace Group
reported a loss from operations of $451,931 in 2001 as compared to an operating
loss of $1,148,262 in 2000. Both AMK Welding and Spin Forge reported improved
operating results in 2001 that were partially offset by an increased operating
loss at PMP.
Interest Expense. Interest expense decreased by 27.2% to $799,571 in 2001
from $1,098,181 in 2000. This decrease relates principally to the significant
decline in interest rates during 2001 as average borrowing levels did not change
significantly from 2000 to 2001. The reduction in revolving credit debt that was
made possible by SNPE Inc.'s June 14, 2000 equity investment in the Company was
largely offset by the term loan and revolving credit debt that was incurred in
connection with the Company's July 3, 2001 acquisition of Nobelclad and its
Nitro Metall subsidiary. Total related party interest expense was $488,000 and
$202,000 in 2001 and 2000, respectively.
Income Tax Provision. The Company recorded a consolidated income tax
provision of $401,600 in 2001 versus $164,000 in 2000 of which $102,400 and
zero, respectively, related to U.S. taxes, with the remainder relating to
foreign taxes associated with acquired operations of Nobelclad. The Company did
not record a U.S. tax benefit in its December 31, 2000 financial statements
since it had utilized all of its tax loss carry-backs in 1999 and the Company's
financial position and near-term operations outlook as of December 31, 2000 made
the future realization of tax benefits associated with net operating loss
carry-forwards uncertain. Thus, the Company recorded a large valuation allowance
as of December 31, 2000 that it was able to reverse when it generated taxable
income in 2001 and recognized the tax benefits associated with its operating
loss carry-forwards. The provision for U.S. taxes includes alternative minimum
tax expense of $32,000 and deferred tax expense of $70,400. Income tax
provisions on the 2001 and 2000 earnings of Nobelclad and Nitro Metall have been
provided based upon the respective French and Swedish statutory tax rates.
Historically, in the absence of operating loss carry-backs, operating loss
carry-forwards and any related valuation allowance, the Company's effective tax
rate has ranged from 37% to 39%.
Net Income (Loss). The Company recorded net income of $2,789,230 in 2001
compared to a net loss of $1,740,610 in 2000. This significant improvement is
principally attributable to the $4,666,006 increase in income from operations
discussed above and also reflects the benefit of a low, 12.6% effective income
tax rate in 2001, as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Historically, DMC has obtained most of its operational financing from a
combination of operating activities and an asset-backed revolving credit
facility. Due primarily to the operating losses incurred during 1999 and the
first quarter of 2000, we violated certain financial covenants under both the
revolving credit facility that was then in effect and the reimbursement
agreement related to the letter of credit supporting payment of principal and
interest under the Company's industrial development revenue bonds used to
finance the construction of its manufacturing facilities in Pennsylvania. On
June 14, 2000, our stockholders approved a Stock Purchase Agreement between DMC
and SNPE, Inc ("SNPE"). The closing of the transaction, which was held
immediately following stockholder approval, resulted in a payment from SNPE of
$5,800,000 to DMC in exchange for 2,109,091 shares of DMC common stock at a
price of $2.75 per share causing SNPE to become a majority stockholder of DMC on
the closing date. An additional $1,200,000 cash payment was made by SNPE to DMC
to purchase a five-year, 5% Convertible Subordinated Note that is convertible in
whole or in part into common stock by SNPE at a conversion price of $6 per
share. We also borrowed $3,500,000 on June 14, 2000 under a credit facility with
SNPE that carried interest at the Federal Funds Rate plus 1.5% and provided for
maximum borrowings of $4,500,000. Proceeds from the SNPE equity investment,
convertible subordinated note issuance and credit facility borrowings aggregated
$10,500,000 and enabled us to repay all outstanding borrowings under a bank
revolving credit facility on which we had been in default since September 30,
1999. The bank revolving credit facility was terminated on June 14, 2000.
-18-
As a result of the SNPE debt and equity infusion, we were also able to
restructure financial covenants under a reimbursement agreement with our bank
relating to a letter of credit in support of the our outstanding industrial
development revenue bonds. This original bank letter of credit, which expired in
September 2001, was secured by the U.S.-based accounts receivable, inventory,
property, plant and equipment of our Explosive Metalworking Group and the bond
proceeds not yet expended for construction. On September 5, 2001, we obtained a
replacement letter of credit from a different bank that has a five-year term and
does not require an asset pledge.
In connection with its July 3, 2001 acquisition of Nobelclad, DMC entered
into a $4,000,000 term loan agreement with SNPE. The term loan bears interest at
the Federal Funds Rate plus 3.0%, payable quarterly. Commencing September 30,
2002 and on the last day of each calendar quarter thereafter, principal payments
of $333,333 are due, with a final principal payment of $333,337 being due on
June 30, 2005. The term loan is secured by a pledge of 65% of the capital stock
of Nobelclad held by DMC. In anticipation of its acquisition by DMC, Nobelclad
acquired the stock of Nitro Metall and financed this acquisition with proceeds
obtained from a revolving credit facility with a French bank that provides for
maximum borrowings of 1,448,266 Euros ($1,518,797 based upon the December 31,
2002 exchange rate). This bank line of credit, which had outstanding borrowings
of $1,518,800 on December 31, 2002, carries interest at the Euro Interbank
Offered Rate ("EURIBOR") plus 0.4%. Beginning on June 21, 2004 and on each
anniversary date thereafter until final maturity on June 21, 2008, maximum
borrowings available under the line become permanently reduced by 289,653 Euros.
The bank has the option of demanding early repayment of any outstanding loans if
Groupe SNPE's indirect ownership of Nobelclad falls below 50%. Nobelclad also
maintains a 2 million Euro ($2,097,400 based upon the December 31, 2002 exchange
rate) intercompany working capital line with Groupe SNPE under which borrowings
of $235,367 were outstanding as of December 31, 2002. This intercompany line
bears interest at EURIBOR plus 1.5%.
In December 2001, we obtained a $6,000,000 revolving line of credit with a
U.S. bank that replaced the $4,500,000 credit facility between DMC and SNPE,
Inc. This new bank line of credit is being used to finance ongoing working
capital requirements of our U.S. operations. Initial proceeds from the bank line
of credit were used to repay $3,650,000 of borrowings that were outstanding
under the credit facility with SNPE, Inc. The bank line, which expires on
December 4, 2004, carries an interest rate equal to the bank's prime rate plus
1.0% through February 28, 2002 and the bank's prime rate plus 0.5% thereafter.
Borrowings under the line of credit are limited to a calculated borrowing base
that is a function of inventory and accounts receivable balances and are secured
by accounts receivable and inventories of our U.S. operations and by new
investments in property, plant and equipment with respect to U.S. operations
that are made during the term of the agreement. As of December 31, 2002,
borrowing availability under the line of credit was approximately $4.6 million
greater than the $929,831 in outstanding borrowings as of that date.
We believe that cash flow from operations and funds available under our
credit facilities will be sufficient to fund working capital, debt service
obligations and capital expenditure requirements of our current business
operations for the foreseeable future. However, a significant portion of our
sales is derived from a relatively small number of customers; therefore, the
failure to perform existing contracts on a timely basis, and to receive payment
for such services in a timely manner, or to enter into future contracts at
projected volumes and profitability levels could adversely affect our ability to
meet cash requirements exclusively through operating activities. Consequently,
any restriction on the availability of borrowing under the our credit facilities
could negatively affect our ability to meet future cash requirements. DMC
attempts to minimize its risk of losing customers or specific contracts by
continually improving product quality, delivering product on time and competing
favorably on the basis of price. Risks associated with the availability of funds
are minimized by borrowing from multiple lenders. The nature of DMC's business
is largely insulated from the negative effects of inflation on sales and
operating income because the pricing on custom orders reflects current raw
material and other manufacturing costs.
The Company's existing loan agreements include various covenants and
restrictions, certain of which relate to the payment of dividends or other
distributions to stockholders, redemption of capital stock, incurrence of
additional indebtedness, mortgaging, pledging or disposition of major assets and
maintenance of specified financial ratios. As of December 31, 2002, the Company
is in compliance with all financial covenants and other provisions of its debt
agreements.
-19-
The table below presents principal cash flows and related weighted-average
interest rates by expected maturity dates for the Company's debt obligations.
As of December 31, 2002
----------------------------------------------------------------------------------------
2003 2004 2005 2006 2007 and Total
Thereafter
----------------------------------------------------------------------------------------
Bank lines of credit - $1,233,590 $303,759 $303,759 $607,520 $2,448,628
Weighted average interest rate 3.88% 3.88% 3.88% 3.88% 3.88% 3.88
Line of Credit - SNPE S.A. $235,367 - - - - $235,367
4.49% - - - - 4.49%
Subordinated note with SNPE, Inc. - - $1,200,000 - - $1,200,000
5.00% 5.00% 5.00% - - 5.00%
Term Loan with SNPE, Inc. $1,333,332 $1,333,332 $666,670 - $3,333,334
Weighted average interest rate 4.16% 4.16% 4.16% - 4.16%
Industrial development
revenue bonds $855,000 $930,000 $790,000 $185,000 $1,725,000 $4,485,000
Interest rate 1.80% 1.80% 1.80% 1.80% 1.80% 1.80%
Highlights From the Statement of Cash Flows for the Year Ended December 31,
2002
Net cash flows from operating activities for the year ended December 31,
2002 was $4,296,044, which consisted primarily of net income of $170,129
adjusted for non-cash depreciation and amortization expense of $1,775,474 and
non-cash goodwill impairment charges of $3,800,108. These sources of operating
cash flow were partially offset by negative net changes in various components of
working capital in the amount of $1,211,698, including a $1,904,344 increase in
accounts receivable.
Net cash flow used in investing activities for the year ended December 31,
2002 was $1,465,195 and consisted primarily of $1,493,549 in capital
expenditures.
Net cash flow used in financing activities for the year ended December 31,
2002 was $3,707,178. Significant uses of cash for financing activities included
a $2,451,266 reduction in borrowings under bank lines of credit, related party
debt repayments of $815,107 and industrial development revenue bond principal
payments of $795,000.
-20-
Highlights From the Statement of Cash Flows for the Year Ended December 31,
2001
Net cash flows from operating activities for the year ended December 31,
2001 was $4,685,334, which consisted primarily of net income of $2,789,230
adjusted for non-cash depreciation and amortization expense of $1,759,410.
Positive net changes in various components of working capital contributed
$72,061 to cash flow from operating activities for the year.
Net cash flow used in investing activities for the year ended December 31,
2001 was $1,362,307 and consisted primarily of $1,360,186 in capital
expenditures.
Net cash flow used in financing activities for the year ended December 31,
2001 was $1,696,939. Significant sources of cash flow from financing activities
included borrowings on new bank lines of credit in the aggregate amount of
$4,609,097 and $4,000,000 in proceeds from a term loan with SNPE, Inc relating
to the acquisition of Nobelclad. These sources were more than offset by the
repayment of intercompany line of credit borrowings in the amount of $3,941,000,
distributions to DMC's parent related to July 2001 reorganization of
Nobelclad/Nitro Metall in the amount of $5,293,000, bond principal payments of
$725,000, and dividend payments of $296,000 by Nobelclad and Nitro Metall to
NEF, their former parent company.
Highlights From the Statement of Cash Flows for the Year Ended December 31,
2000
Net cash flows used in operating activities for the year ended December 31,
2000 was $348,702. The Company's net loss of $1,740,610 was offset by
depreciation and amortization expense of $1,770,210 and thus had little impact
on cash flow from operating activities. However, the net loss included a
non-cash gain of $185,570 that, along with net negative changes in various
components of working capital in the amount of $143,646, accounted for the
majority of cash used in operating activities. Positive changes in working
capital included a $1,360,000 reduction in income tax receivable relating to the
receipt of tax refunds associated with 1999 tax loss carry-backs and a
$2,026,507 increase in accounts payable and accrued expenses. The acquisition of
Nobelclad accounted for $1,640,000 of the increase in accounts payable and
accrued expenses. These positive changes in working capital were more than
offset by negative working capital changes relating to increases in accounts
receivable, inventories, and prepaid expenses of $2,814,244, $292,327, and
$423,582, respectively. The acquisition of Nobelclad accounted for $2,030,000 of
the accounts receivable increase and $422,000 of the increase in prepaid
expenses.
Net cash flow from investing activities for the year ended December 31,
2000 was $955,290. Significant sources of cash flow from investing activities
included $940,036 in proceeds from the sales of property, plant and equipment,
$354,588 from the repayment of a loan to a related party, $255,008 from the
release of bond proceeds and $245,971 from other changes in non-current assets.
These sources were partially offset by capital expenditures of $830,223,
including $336,347 of expenditures on the new manufacturing facility in
Pennsylvania.
Financing activities for the year ended December 31, 2000 used $651,058 of
cash. Significant sources of cash flow from financing activities included net
proceeds in the aggregate amount of $10,186,252 from the SNPE transaction that
closed on June 14, 2000 and $696,000 in line of credit borrowings. Sources of
cash flow from the SNPE transaction were more than offset by the repayment of
$10,255,000 in bank line of credit borrowings, $680,000 of bond principal
payments and dividends payments of $298,000 by Nitro Metall to NEF, its former
parent company.
Future Capital Needs and Resources
We anticipate that, for the foreseeable future, significant amounts of
available cash flows will be utilized for:
- operating expenses to support our domestic and foreign manufacturing
operations;
- capital expenditures;
- debt service requirements; and
- other general corporate expenditures.
-21-
We expect cash inflows from operating activities to exceed outflows for the
full year 2003. However, our success depends on the execution of our strategies,
including our ability to:
- secure an adequate level of new customer orders at all operating
divisions; and
- continue to implement the most cost-effective internal processes.
Based on available cash resources, anticipated capital expenditures and
projected operating cash flow, we believe that we will be able to fully fund our
operations during 2003. In making this assessment, we have considered:
- presently scheduled debt service requirements during 2003, as well as
the availability of funding related to our line of credit with SNPE
and our bank lines of credit;
- the anticipated level of capital expenditures in 2003; and
- our expectation of realizing positive cash flow from operations in 2003.
Critical Accounting Policies
In response to the SEC's Release No. 33-8040, Cautionary Advice Regarding
Disclosure About Critical Accounting Policies, we identified the most critical
accounting principles upon which our financial status depends. We determined the
critical principles by considering accounting policies that involve the most
complex or subjective decisions or assessments. We identified our most critical
accounting policies to be those related to revenue recognition, inventory
valuation and impact of foreign currency exchange rate risks.
Revenue Recognition. The Company's contracts with its customers generally
require the production and delivery of multiple units or products. The Company
records revenue from its contracts using the completed contract method as
products are completed and shipped to the customer. If, as a contract proceeds
toward completion, projected total cost on an individual contract indicates a
potential loss, the Company provides currently for such anticipated loss.
Inventory Valuation. Inventories are stated at the lower-of-cost (first-in,
first-out) or market value. Cost elements included in inventory are material,
labor, subcontract costs and factory overhead.
Impact of Foreign Currency Exchange Rate Risks. The functional currency for
the Company's foreign operations is the applicable local currency for each
affiliate company. Assets and liabilities of foreign subsidiaries for which the
functional currency is the local currency are translated at exchange rates in
effect at period-end, and the statements of operations are translated at the
average exchange rates during the period. Exchange rate fluctuations on
translating foreign currency financial statements into U.S. dollars that result
in unrealized gains or losses are referred to as translation adjustments.
Cumulative translation adjustments are recorded as a separate component of
stockholders' equity and are included in other cumulative comprehensive income
(loss). Transactions denominated in currencies other than the local currency are
recorded based on exchange rates at the time such transactions arise. Subsequent
changes in exchange rates result in transaction gains and losses which are
reflected in income as unrealized (based on period-end translations) or realized
upon settlement of the transactions. Cash flows from the Company's operations in
foreign countries are translated at actual exchange rates when known, or at the
average rate for the period. As a result, amounts related to assets and
liabilities reported in the consolidated statements of cash flows will not agree
to changes in the corresponding balances in the consolidated balance sheets. The
effects of exchange rate changes on cash balances held in foreign currencies are
reported as a separate line item below cash flows from financing activities.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, "Accounting for Asset Retirement Obligations," which establishes
accounting standards for recognition and measurement of a liability for an asset
retirement obligation and the associated asset retirement cost. This statement
is effective for financial statements issued for fiscal years beginning after
June 15, 2002. Management does not believe adoption will have a material effect
on the Company's financial position.
-22-
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which specifies that a liability
for a cost associated with an exit or disposal activity be recognized when the
liability is incurred instead of recognized at the date of an entity's
commitment to an exit plan. This statement is effective for exit or disposal
activities that are initiated after December 31, 2002. Management does not
believe adoption will have a material effect on the Company's financial
position.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure." SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. SFAS No. 148 also required
that disclosures of the pro forma effect of using the fair value method of
accounting for stock-based employee compensation be displayed more prominently
and in a tabular format. The Company has implemented all required disclosures of
SFAS 148 in this Form 10-K filing. Additionally, SFAS No. 148 requires
disclosure of the pro forma effect in interim financial statements. The
transition requirements of SFAS No. 148 are effective for the Company's fiscal
year 2003. The Company does not plan to transition to a fair value method of
accounting for stock-based employee compensation.
Forward-Looking Statements
Statements which are not historical facts contained in this report are
forward-looking statements that involve risks and uncertainties that could cause
actual results to differ materially from projected results. Factors that could
cause actual results to differ materially include, but are not limited to the
following: the ability to obtain new contracts at attractive prices; the size
and timing of customer orders; fluctuations in customer demand; competitive
factors; the timely completion of contracts; any actions which may be taken by
SNPE as the controlling shareholder of the Company with respect to the Company
and its businesses; the timing and size of expenditures; the timely receipt of
government approvals and permits; the adequacy of local labor supplies at the
Company's facilities; the availability and cost of funds; and general economic
conditions, both domestically and abroad. Readers are cautioned not to place
undue reliance on these forward-looking statements, which reflect management's
analysis only as of the date hereof. The Company undertakes no obligation to
publicly release the results of any revision to these forward-looking statements
which may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
-23-
ITEM 7A. Quantitative and Qualitative Disclosure about Market Risk
The table below provides information about the Company's financial
instruments that are sensitive to changes in interest rates, primarily debt
obligations. Since most of the Company's obligations carry variable interest
rates, there is no material difference between the book value and the fair value
of those obligations.
As of December 31,
2002
-----------------------
Line of credit with SNPE S.A. - variable rate $235,367
Interest rate 4.49%
Subordinated note with SNPE, Inc. - fixed rate $1,200,000
Interest rate 5.00%
Term-loan, SNPE Inc. related to acquisition $3,333,334
of Nobelclad - variable rate
Interest rate 4.16%
Industrial development revenue Bonds - variable rate $4,485,000
Interest rate 1.80%
Bank lines of credit - variable rates $2,448,628
Weighted average interest rate 3.88%
Prior to the acquisition of Nobelclad in 2001, all of DMC's sales were made
in U.S. Dollars and, as a result, DMC was not exposed to foreign exchange risks.
On a going forward basis, the functional currencies for the foreign operations
of Nobelclad and Nitro Metall are the Euro and the Swedish Krona, respectively.
Thus, the major foreign exchange risks relates to the Euro / Swedish Krona and
Euro / U.S. Dollar conversion rates. Additionally, Nobelclad and Nitro Metall
occasionally enter into transactions denominated in currencies other than the
local currency, which exposes them to other foreign exchange risks. Sales made
in currencies other than U.S. Dollars accounted for 24%, 23% and 17% of total
sales for the years ended 2002, 2001 and 2000, respectively.
-24-
ITEM 8. Consolidated Financial Statements
DYNAMIC MATERIALS CORPORATION AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2002 and 2001 and for the Three Years Ended
December 2002, 2001 and 2000
Page
Report of Independent Auditor................................................26
Report of Independent Public Accountants.....................................27
Financial Statements:
Consolidated Balance Sheets.............................................28
Consolidated Statements of Operations...................................30
Consolidated Statements of Stockholders' Equity.........................31
Consolidated Statements of Cash Flows...................................34
Notes to Consolidated Financial Statements .............................36
The consolidated financial statement schedules required by Regulation S-X are
filed under Item 15 "Exhibits, Financial Statement Schedules and Reports on Form
8-K".
-25-
Report of Independent Auditor
To the Stockholders and the
Board of Directors of Dynamic Materials Corporation:
We have audited the accompanying consolidated balance sheet of Dynamic Materials
Corporation and subsidiaries as of December 31, 2002, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year ended December 31, 2002. These consolidated financial statements are
the responsibility of Dynamic Materials Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. The consolidated financial statements of Dynamic
Materials Corporation for the years ended December 31, 2001 and 2000, were
audited by other auditors who have ceased operations and whose report dated
February 25, 2002 expressed an unqualified opinion on those statements before
the revision to include the transitional disclosures included in Note 3.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. These 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 2002 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Dynamic Materials Corporation and subsidiaries as of December 31, 2002, and the
consolidated results of their operations and their cash flows for the year ended
December 31, 2002 in conformity with accounting principles generally accepted in
the United States.
As discussed in Note 3 to the consolidated financial statements, effective
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets."
As discussed above, the consolidated financial statements of Dynamic Materials
Corporation as of December 31, 2001 and 2000, and for the years then ended were
audited by other auditors who have ceased operations. As described in Note 3,
these consolidated financial statements have been revised to include the
transitional disclosures required by Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets," which was adopted by the
Company as of January 1, 2002. Our audit procedures with respect to the
disclosures in Note 3 with respect to 2001 and 2000 included (a) agreeing the
previously reported net income (loss) to the previously issued consolidated
financial statements and the adjustments to reported net income (loss)
representing amortization expense (including any related tax effects) recognized
in those periods related to goodwill, to the Company's underlying records
obtained from management, and (b) testing the mathematical accuracy of the
reconciliation of adjusted net income (loss) to reported net income (loss). In
our opinion, the disclosures for 2001 and 2000 in Note 1 are appropriate.
However, we were not engaged to audit, review, or apply any procedures to the
2001 and 2000 consolidated financial statements of Dynamic Materials Corporation
other than with respect to such disclosures and, accordingly, we do not express
an opinion or any other form of assurance on Dynamic Materials Corporation's
2001 and 2000 consolidated financial statements taken as a whole.
/s/ ERNST & YOUNG LLP
Denver, Colorado
February 14, 2003
-26-
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Dynamic Materials Corporation:
We have audited the accompanying consolidated balance sheets of DYNAMIC
MATERIALS CORPORATION (a Delaware corporation) and subsidiary as of December 31,
2001 and 2000 (as restated - see Note 2), and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 2001 (year ended December 31, 2000
as restated - see Note 2). These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Dynamic Materials
Corporation and subsidiary as of December 31, 2001 and 2000 (as restated - see
Note 2), and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2001 (year ended December 31,
2000 as restated - see Note 2), in conformity with accounting principles
generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado
February 25, 2002
This is a copy of the audit report previously issued by Arthur Andersen LLP in
connection with Dynamic Materials Corporation's filing on Form 10-K for the year
ended December 31, 2001. This audit report has not been reissued by Arthur
Andersen LLP in connection with this filing on Form 10-K. The consolidated
balance sheet as of December 31, 2000, referred to in this report has not been
included in the accompanying financial statements.
-27-
Page 1 of 2
DYNAMIC MATERIALS CORPORATION & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2002 AND 2001
ASSETS 2002 2001
------ ------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,158,234 $ 1,811,618
Accounts receivable, net of allowance
for doubtful accounts of $255,769 and
$234,304, respectively 8,747,238 6,486,171
Inventories 5,863,261 6,708,422
Prepaid expenses and other 798,236 1,143,356
Current deferred tax asset 315,500 261,400
------------ ------------
Total current assets 16,882,469 16,410,967
------------ ------------
PROPERTY, PLANT AND EQUIPMENT 23,474,725 21,353,725
Less- Accumulated depreciation (8,076,227) (6,144,251)
------------ ------------
Property, plant and equipment--net 15,398,498 15,209,474
------------ ------------
RESTRICTED CASH AND INVESTMENTS 191,202 189,128
GOODWILL, net of accumulated amortization of
$234,299 and $768,913, respectively 847,076 4,647,185
INTANGIBLE ASSETS, net of accumulated amortization of
$672,354 and $614,938, respectively 89,168 56,584
OTHER ASSETS, net 289,579 400,007
------------ ------------
Total assets $33,697,992 $36,913,345
============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
-28-
Page 2 of 2
DYNAMIC MATERIALS CORPORATION & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2002 AND 2001
LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2001
------------------------------------ ----------- -----------
CURRENT LIABILITIES:
Bank overdraft $ 213,979 $ -
Accounts payable 2,404,662 3,153,391
Accrued expenses 3,340,071 3,085,766
Current maturities on long-term debt 2,423,699 1,821,666
----------- -----------
Total current liabilities 8,382,411 8,060,823
LONG-TERM DEBT 9,278,630 13,675,431
NET DEFERRED TAX LIABILITIES 334,179 469,000
OTHER LONG-TERM LIABILITIES 89,539 -
DEFERRED GAIN ON SWAP TERMINATION 48,493 62,097
----------- -----------
Total liabilities 18,133,252 22,267,351
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY:
Preferred stock, $.05 par value; 4,000,000
shares authorized; no issued and
outstanding shares
Common stock, $.05 par value; 15,000,000 shares
authorized; 5,061,390 and 5,029,983 shares
issued and outstanding, respectively 253,071 251,500
Additional paid-in capital 12,373,568 12,315,596
Retained earnings 2,763,027 2,592,898
Other cumulative comprehensive income (loss) 175,074 (514,000
----------- -----------
Total stockholders' equity 15,564,740 14,645,994
----------- -----------
Total liabilities and stockholders' equity $33,697,992 $36,913,345
=========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
-29-
DYNAMIC MATERIALS CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
------------- ------------ ------------
NET SALES $45,657,569 $42,514,774 $33,759,581
COST OF PRODUCTS SOLD 34,191,224 31,832,892 28,154,815
------------- ------------ ------------
Gross profit 11,466,345 10,681,882 5,604,766
------------- ------------ ------------
COSTS AND EXPENSES:
General and administrative expenses 4,090,103 4,230,239 4,243,353
Selling expenses 2,537,486 2,415,750 1,991,526
------------- ------------ ------------
Total costs and expenses 6,627,589 6,645,989 6,234,879
------------- ------------ ------------
INCOME (LOSS) FROM OPERATIONS 4,838,756 4,035,893 (630,113)
OTHER INCOME (EXPENSE):
Other income (expense), net (52,037) (72,340) 200,290
Interest expense, net of amounts capitalized (420,503) (311,571) (896,181)
Related party interest expense (272,727) (488,000) (202,000)
Interest income 4,101 26,848 31,505
------------- ------------ ------------
Income (loss) before income taxes, extraordinary item and
cumulative effect of a change in accounting principle 4,097,590 3,190,830 (1,496,499)
INCOME TAX PROVISION (1,609,353) (401,600) (164,000)
------------- ------------ ------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE 2,488,237 2,789,230 (1,660,499)
EXTRAORDINARY ITEM - LOSS FROM EARLY EXTINGUISHMENT
OF DEBT - - (80,111)
------------- ------------ ------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE 2,488,237 2,789,230 (1,740,610)
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE, NET OF TAX BENEFIT OF $1,482,000 (2,318,108) - -
------------- ------------ ------------
NET INCOME (LOSS) $ 170,129 $ 2,789,230 $(1,740,610)
============= ============ ============
NET INCOME (LOSS) PER SHARE - BASIC:
Income (loss) before extraordinary item and cumulative effect of a
change in accounting principle $ 0.49 $ 0.56 $ (0.41)
Extraordinary item -
- (0.02)
Cumulative effect of a change in accounting principle (0.46) - -
------------- ------------ ------------
Net income (loss) $ 0.03 $ 0.56 $ (0.43)
============= ============ ============
NET INCOME (LOSS) PER SHARE - DILUTED:
Income (loss) before extraordinary item and cumulative effect
of a change in accounting principle $ 0.49 $ 0.55 $ (0.41)
Extraordinary item - -
(0.02)
Cumulative effect of a change in accounting principle (0.46) - -
------------- ------------ ------------
Net income (loss) $ 0.03 $ 0.55 $ (0.43)
============= ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 5,042,382 5,003,399 4,004,873
============= ============ ============
Diluted 5,087,051 5,051,223 4,004,873
============= ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
-30-
Page 1 of 3
DYNAMIC MATERIALS CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Common Stock Additional Retained Equity of
------------------------ Paid-In Earnings of Nobelclad and Deferred
Shares Amount Capital the Company Nitro Metall Compensation
----------- ----------- ------------ ------------ ------------- -------------
Balances, December 31, 1999 2,842,429 $ 142,122 $ 7,122,553 $ 2,803,278 $ - $ (37,970)
Shares issued to SNPE Inc., net of
$563,748 in issuance costs 2,109,091 105,455 5,130,797 - - -
Shares issued in connection with
the employee stock purchase plan 42,561 2,128 42,322 - - -
Amortization of deferred
compensation - - - - - 4,219
Dividends paid by Nitro Metall
to former parent company
(See Note 2) - - - - (298,000) -
Retroactive consolidation of
Nobelclad and Nitro Metall
effective June 30, 2000, to
reflect the July 2001
reorganization of entities
under common control - - - - 4,628,000 -
Forfeiture of restricted stock grant (3,750) (188) (33,563) - - 33,751
Net income (loss) - - - (2,010,610) 270,000 -
Change in cumulative foreign
currency translation adjustment - - - - - -
----------- ----------- ------------ ------------ ------------- -------------
Balances, December 31, 2000 4,990,331 $ 249,517 $ 12,262,109 $ 792,668 $ 4,600,000 $ -
=========== =========== ============ ============ ============= =============
Other
Cumulative Comprehensive
Comprehensive Loss for
Loss Total The period
------------ ------------ -------------
Balances, December 31, 1999 $ - $ 10,029,983
Shares issued to SNPE Inc., net of
$563,748 in issuance costs - 5,236,252
Shares issued in connection with
the employee stock purchase plan - 44,450
Amortization of deferred
compensation - 4,219
Dividends paid by Nitro Metall
to former parent company
(See Note 2) - (298,000)
Retroactive consolidation of
Nobelclad and Nitro Metall
effective June 30, 2000, to
reflect the July 2001
reorganization of entities
under common control - 4,628,000
Forfeiture of restricted stock grant - -
Net income (loss) - (1,740,610) $ (1,740,610)
Change in cumulative foreign
currency translation adjustment (165,000) (165,000) (165,000)
------------ ------------ ------------
Balances, December 31, 2000 $ (165,000) $ 17,739,294 $ (1,905,610)
============ ============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
-31-
Page 2 of 3
DYNAMIC MATERIALS CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Common Stock Additional Retained Equity of
------------------------ Paid-In Earnings of Nobelclad and Deferred
Shares Amount Capital the Company Nitro Metall Compensation
----------- ----------- ------------ ------------ ------------- -------------
Balances, December 31, 2000 4,990,331 $ 249,517 $ 12,262,109 $ 792,668 $ 4,600,000 -
Shares issued for stock option
exercises 1,250 63 2,125 - - -
Shares issued in connection
with the employee stock
purchase plan 38,402 1,920 51,362 - - -
Dividends paid by Nobelclad and
Nitro Metall to former parent
company (see Note 2) - - - - (296,000) -
Deemed dividend for debt obligation
to SNPE and third party debt
assumed in July 2001 as part of
reorganization of entities under
common control (See Note 2) - - - (989,000) (4,304,000) -
Net income - - - 2,789,230 - -
Change in cumulative foreign
currency translation adjustment - - - - - -
----------- ---------- ------------ ------------ ----------- -----------
Balances, December 31, 2001 5,029,983 $ 251,500 $ 12,315,596 $ 2,592,898 $ - $ -
=========== ========== ============ ============ =========== ===========
Other
Cumulative Comprehensive
Comprehensive Loss for
Loss Total The period
------------ ------------ -------------
Balances, December 31, 2000 $ (165,000) $17,739,294
Shares issued for stock option
exercises - 2,188
Shares issued in connection
with the employee stock
purchase plan - 53,282
Dividends paid by Nobelclad and
Nitro Metall to former parent
company (see Note 2) - (296,000)
Deemed dividend for debt obligation
to SNPE and third party debt
assumed in July 2001 as part of
reorganization of entities under
common control (See Note 2) - (5,293,000)
Net income - 2,789,230 $2,789,230
Change in cumulative foreign
currency translation adjustment (349,000) (349,000) (349,000)
------------ ----------- -----------
Balances, December 31, 2001 $ (514,000) $14,645,994 2,440,230
============ =========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
-32-
Page 3 of 3
DYNAMIC MATERIALS CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Common Stock Additional Retained Equity of
------------------------ Paid-In Earnings of Nobelclad and Deferred
Shares Amount Capital the Company Nitro Metall Compensation
----------- ----------- ------------ ------------ ------------- -------------
Balances, December 31, 2001 5,029,983 $ 251,500 $ 12,315,596 $ 2,592,898 $ - $ -
Shares issued for stock option
exercises 17,252 863 24,577 - - -
Shares issued in connection
with the employee stock
purchase plan 14,155 708 33,395 - - -
Net income - - - 170,129 - -
Change in cumulative foreign
currency translation adjustment - - - - - -
----------- --------- ------------ --------------- ----------- -------------
Balances, December 31, 2002 5,061,390 $ 253,071 $ 12,373,568 $ 2,763,027 $ - $ -
Other
Cumulative Comprehensive
Comprehensive Loss for
Loss Total The period
------------ ------------ -------------
Balances, December 31, 2001 $ (514,000) $14,645,994
Shares issued for stock option
exercises - 25,440
Shares issued in connection
with the employee stock
purchase plan - 34,103
Net income - 170,129 $ 170,129
Change in cumulative foreign
currency translation adjustment 689,074 689,074 689,074
------------- ------------ ------------
Balances, December 31, 2002 $ 175,074 $15,564,740 $ 859,203
The accompanying notes are an integral part
of these consolidated financial statements.
-33-
Page 1 of 2
DYNAMIC MATERIALS CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
------------ ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 170,129 $ 2,789,230 $ (1,740,610)
Adjustments to reconcile net income (loss)
to net cash flows from operating activities-
Depreciation 1,718,058 1,470,429 1,461,417
Amortization 57,416 288,981 308,793
Amortization of deferred compensation - - 4,219
Amortization of deferred gain on swap termination (13,604) (15,790) (55,305)
Impairment of goodwill, net of tax 2,318,108 - -
Provision for deferred income taxes 1,303,953 79,600 2,000
Loss (gain) on sale of property, plant and equipment (8,887) 823 (185,570)
Change in-
Accounts receivable, net (1,904,344) 631,952 (2,814,244)
Inventories 1,294,161 (600,267) (292,327)
Prepaid expenses and other 155,543 (215,863) (423,582)
Income tax receivable - - 1,360,000
Accounts payable (1,103,579) (605,910) 1,411,724
Accrued expenses 309,090 862,149 614,783
------------- ------------- -------------
Net cash flows from operating activities 4,296,044 4,685,334 (348,702)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment and earnings on bond proceeds (2,074) (9,734) (10,090)
Release of bond proceeds by trustee - - 255,008
Cash paid in connection with the construction
of the new facility - - (336,347)
Acquisition of property, plant and equipment (1,493,549) (1,360,186) (493,876)
Proceeds from repayment of loan to related party - - 354,588
Change in other non-current assets 20,428 6,453 245,971
Proceeds from sale of property, plant and equipment 10,000 1,160 940,036
------------ ------------- -------------
Net cash flows from investing activities (1,465,195) (1,362,307) 955,290
------------ ------------- -------------
The accompanying notes are an integral part
of these consolidated financial statements.
-34-
Page 2 of 2
DYNAMIC MATERIALS CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
-------------- ------------- ------------
BCASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings/(payments) on bank line of credit, net $ (2,451,266) $ 3,381,097 $ 696,000
Repayment on bank line of credit - - (10,255,000)
Payment on SNPE, Inc. term loan (666,666) - -
Payment on industrial development revenue bonds (795,000) (725,000) (680,000)
Proceeds from issuance of common stock to SNPE, Inc.,
net of issuance costs - - 5,236,252
Borrowings on SNPE, Inc. line of credit - - 3,750,000
Borrowings on SNPE, Inc. convertible subordinated note - - 1,200,000
Reorganization of entities under common control-
Borrowed from parent under note payable - 4,000,000 -
Distributions to parent for July 2001 reorganization - (5,293,000) -
Dividends paid by Nobelclad / Nitro Metall to former
parent company - (296,000) (298,000)
Payments on capital lease obligation - (3,394) (34,905)
Payment of deferred financing costs - (146,109) (116,384)
Bank overdraft 213,979 - -
Repayment of bank overdraft - - (193,471)
Change in other long-term liabilities 80,673 - -
Net proceeds from issuance of common stock 59,543 55,467 44,450
-------------- ------------- ------------
Net cash flows from financing activities (3,707,178) (1,739,939) (651,058)
-------------- ------------- ------------
EFFECTS OF EXCHANGE RATES ON CASH 222,945 (70,000) (39,000)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (653,384) 1,513,088 (83,470)
CASH AND CASH EQUIVALENTS, beginning of the year 1,811,618 298,530 382,000
-------------- ------------- ------------
CASH AND CASH EQUIVALENTS, end of the year $ 1,158,234 $ 1,811,618 $ 298,530
============== ============= ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for-
Interest $ 552,642 $ 683,542 $ 856,026
============== ============= =============
Income taxes $ 317,546 $ 154,531 $ 162,547
============== ============= =============
The accompanying notes are an integral part
of these consolidated financial statements.
-35-
DYNAMIC MATERIALS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
(1) ORGANIZATION AND BUSINESS
Dynamic Materials Corporation (the "Company") was incorporated in the state
of Colorado in 1971, and reincorporated in the state of Delaware during 1997, to
provide products and services requiring explosive metalworking. The Company is
headquartered in Boulder, Colorado and has manufacturing facilities in the
United States, France and Sweden. Customers are located throughout North
America, Western Europe, Australia and the Far East. The Company currently
operates under two business groups - explosion metalworking, in which metals are
metallurgically joined or altered by using explosives; and aerospace, in which
parts are machined, formed or welded primarily for the commercial aircraft and
aerospace industries. The Company's wholly-owned subsidiary, Nobelclad Europe
S.A. ("Nobelclad"), was acquired during 2001 (See Note 2) from an affiliate of
the Company's parent.
Transaction with SNPE, Inc.
On June 14, 2000, the Company's stockholders approved a Stock Purchase
Agreement ("the Agreement") between the Company and SNPE, Inc. ("SNPE"). The
closing of the transaction, which was held immediately following stockholder
approval, resulted in a payment from SNPE of $5,800,000 to the Company in
exchange for 2,109,091 of the Company's common stock at a price of $2.75 per
share causing SNPE to become a 50.8% stockholder of the Company on the closing
date. In addition, the Company borrowed $1,200,000 under a convertible
subordinated note from SNPE. The Company also borrowed an original amount of
$3,500,000 under a credit facility with SNPE (see Note 4). Proceeds from the
SNPE equity investment, convertible subordinated note issuance and credit
facility borrowings enabled the Company to repay all borrowings from its bank
under a revolving credit facility on which the Company had been in default since
September 30, 1999. SNPE Inc. held 406,400 shares of the Company, prior to the
Agreement, and purchased an additional 248,000 shares on June 20, 2000. SNPE,
Inc. currently owns 2,763,491 shares or 55% of the Company's common stock.
(2) ACQUISITIONS
On July 3, 2001, the Company completed its acquisition of substantially all
of the outstanding stock of Nobelclad from Nobel Explosifs France ("NEF").
Nobelclad and its wholly-owned subsidiary, Nitro Metall AB ("Nitro Metall"),
operate cladding businesses located in Rivesaltes, France and Likenas, Sweden,
respectively. NEF is wholly owned by SNPE S.A. ("Groupe SNPE") and is a sister
company to SNPE, Inc., which owns 55% of the Company's common stock. The
purchase price of approximately $5.3 million was financed through a $4.0 million
intercompany note agreement between the Company and SNPE, Inc. and the
assumption of approximately $1.23 million in third party bank debt associated
with Nobelclad's acquisition of Nitro Metall from NEF prior to the Company's
purchase of Nobelclad stock.
As a result of the Company and Nobelclad both being majority owned by
Groupe SNPE, the acquisition of Nobelclad has been accounted for as a
reorganization of entities under common control. The financial statements of the
Company for the year ended December 31, 2000 have been retroactively restated to
effectively combine the historical financial statements of Nobelclad and Nitro
Metall prospectively, from June 2000, the date SNPE acquired a majority interest
in the Company. The purchase price paid by the Company in July 2001 of $5.3
million, the majority of which was financed by a note payable to SNPE and
third-party debt assumed from SNPE, is reflected in the restated statement of
stockholder's equity as a deemed dividend paid to SNPE at the time of the
reorganization. The historical cost amounts for Nobelclad and Nitro Metall that
were retroactively combined are as follows:
-36-
December 31, 2001
-----------------
Balance sheet
Current assets $ 5,546,000
Net property, plant & equipment 2,139,000
Total assets 7,685,000
Current liabilities 3,186,000
Non-current liabilities 1,413,000
Stockholders' equity 3,086,000
---------------------------------------------------------------------------
Period from January 1, 2001 through Period from June 30, 2000 through
December 31, 2001 December 31, 2000
---------------------------------------------------------------------------
Statement of Operations
Net sales $ 9,867,000 $ 5,897,000
Cost of products sold 7,014,000 4,332,000
----------- -----------
Gross profit 2,853,000 1,565,000
Costs and expenses 1,802,000 1,129,000
----------- -----------
Income from operations 1,051,000 436,000
Other income (expense) (163,000) (2,000)
----------- -----------
Income before income tax provision 888,000 434,000
Income tax benefit (provision) (299,000) (164,000)
----------- -----------
Net income $ 589,000 $ 270,000
=========== ===========
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and subsidiary in which it has a greater than a 50% interest. All significant
intercompany accounts, profits and transactions have been eliminated in
consolidation. Investments in affiliates that are not majority-owned and where
the Company does not exercise significant influence are reported using the
equity method of accounting.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
Foreign Operations and Foreign Exchange Rate Risk
The functional currency for the Company's foreign operations is the
applicable local currency for each affiliate company. Assets and liabilities of
foreign subsidiaries for which the functional currency is the local currency are
translated at exchange rates in effect at period-end, and the statements of
operations are translated at the average exchange rates during the period.
Exchange rate fluctuations on translating foreign currency financial statements
into U.S. dollars that result in unrealized gains or losses are referred to as
translation
-37-
adjustments. Cumulative translation adjustments are recorded as a separate
component of stockholders' equity and are included in other cumulative
comprehensive income (loss). Transactions denominated in currencies other than
the local currency are recorded based on exchange rates at the time such
transactions arise. Subsequent changes in exchange rates result in transaction
gains and losses which are reflected in income as unrealized (based on
period-end translations) or realized upon settlement of the transactions. Cash
flows from the Company's operations in foreign countries are translated at
actual exchange rates when known, or at the average rate for the period. As a
result, amounts related to assets and liabilities reported in the consolidated
statements of cash flows will not agree to changes in the corresponding balances
in the consolidated balance sheets. The effects of exchange rate changes on cash
balances held in foreign currencies are reported as a separate line item below
cash flows from financing activities.
Cash and Cash Equivalents
For purposes of the financial statements, the Company considers highly
liquid investments purchased with an original maturity of three months or less
to be cash equivalents. Cash held in escrow and restricted to a specific use is
classified based on the expected timing of such disbursement.
Inventories
Inventories are stated at the lower-of-cost (first-in, first-out) or market
value. Cost elements included in inventory are material, labor, subcontract
costs and factory overhead.
Inventories consist of the following at December 31, 2002 and 2001:
2002 2001
----------- -----------
Raw materials $ 1,846,038 $ 2,414,394
Work in process 3,835,176 4,230,671
Supplies 182,047 63,357
----------- -----------
$ 5,863,261 $ 6,708,422
=========== ===========
Shipping and handling costs incurred by the Company upon shipment to
customers are included in cost of products sold in the accompanying consolidated
statement of operations.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Additions, improvements
and betterments are capitalized when incurred. Maintenance and repairs are
charged to operations as the costs are incurred. Depreciation is computed using
the straight-line method over the estimated useful life of the related asset as
follows:
Building and improvements 3-30 years
Manufacturing equipment and tooling 3-15 years
Furniture, fixtures and computer equipment 3-10 years
Other 3-10 years
-38-
Property, plant and equipment consists of the following at December 31,
2002 and 2001:
2002 2001
----------- -----------
Land $ 477,613 $ 435,736
Building and improvements 7,143,932 6,664,845
Manufacturing equipment and tooling 12,716,131 11,726,322
Furniture, fixtures and computer equipment 2,567,292 2,330,602
Other 569,757 196,220
----------- -----------
$23,474,725 $21,353,725
=========== ===========
Asset Impairments
The Company reviews its long-lived assets and certain identifiable
intangibles to be held and used by the Company for impairment whenever events or
changes in circumstances indicate their carrying amount may not be recoverable.
In so doing, the Company estimates the future net cash flows expected to result
from the use of the asset and its eventual disposition. If the sum of the
expected future net cash flows (undiscounted and without interest charges) is
less than the carrying amount of the asset, an impairment loss is recognized to
reduce the asset to its estimated fair value. Otherwise, an impairment loss is
not recognized. Long-lived assets and certain identifiable intangibles to be
disposed of, if any, are reported at the lower of carrying amount or fair value
less cost to sell. On January 1, 2002, the Company adopted Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets".
Goodwill
Goodwill represents the excess of acquisition costs over the fair value of
net assets of businesses acquired. Prior to the Company's January 1, 2002
adoption of Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets ("SFAS 142"), goodwill was amortized on a straight-line
basis over a period of 25 years. Under, SFAS 142, goodwill is no longer required
to be amortized; however, the carrying value of goodwill must be tested annually
for impairment.
In the year of its adoption, SFAS 142 required a transitional goodwill
impairment evaluation, which was a two-step process. The first step was to
determine whether there was an indication that goodwill was impaired on January
1, 2002. SFAS 142 required a separate impairment evaluation of goodwill relating
to the Company's U.S.-based Clad Metal Products and Precision Machined Products
("PMP") reporting units, the only two reporting units with recorded goodwill. To
perform the first step, either Company management or a third party appraiser
estimated the fair value of each reporting unit based upon discounting the
expected future cash flows. The estimated fair value of each reporting unit was
then compared to its carrying value, including goodwill. This first step
evaluation indicated an impairment of the goodwill recorded by its PMP reporting
unit, but no impairment of the goodwill recorded with respect to its U.S.-based
Clad Metal Products reporting unit.
Since the first step indicated an impairment of PMP's goodwill, SFAS 142
required a second step to determine the amount of the impairment. The amount of
the impairment was determined by comparing the implied fair value of PMP's
goodwill to its carrying value. The implied fair value of the goodwill was
determined by allocating the estimated fair value of PMP to its assets and
liabilities as if it had been acquired on January 1, 2002 and the estimated fair
value was the purchase price. Any excess "purchase price" over the amounts
assigned to the assets and liabilities would represent the implied value of
goodwill. In the case of PMP, the estimated fair value or "purchase price" was
less than the amounts assigned to the assets and liabilities. Therefore, the
full carrying value of PMP goodwill in the amount of $3,800,108 was considered
impaired and the resultant loss associated with the write-off of this amount,
net of a tax benefit of $1,482,000, has been recorded as a cumulative effect of
a change in accounting principle in the consolidated statement of operations for
the year ended December 31, 2002.
-39-
The following tables summarize the Company's net income before
extraordinary item and cumulative effect of a change in accounting principle,
net income (loss), and earnings (loss) per share had the provisions of SFAS 142
been in effect on January 1, 2000:
December 31,
----------------------------------------------
2002 2001 2000
------------ ------------ -------------
Reported net income (loss) before
extraordinary item and cumulative effect
of a change in accounting principle $2,488,237 $2,789,230 $(1,660,499)
Goodwill amortization, net of tax of $84,500 in 2001 and 2002 - 132,100 132,100
----------------------------------------------
Adjusted net income (loss) before extraordinary
item and cumulative $2,488,237 $2,921,330 $(1,528,399)
effect of a change in accounting principle
==============================================
Basic per share--as reported $ 0.49 $ 0.56 $ (0.41)
==============================================
Diluted per share--as reported $ 0.49 $ 0.55 $ (0.41)
==============================================
Basic per share--adjusted $ 0.49 $ 0.58 $ (0.38)
==============================================
Diluted per share--adjusted $ 0.49 $ 0.58 $ (0.38)
==============================================
December 31,
-----------------------------------------------
2002 2001 2000
------------ ------------ --------------
Reported net income (loss) $ 170,129 $2,789,230 $(1,740,610)
Goodwill amortization, net of tax of $84,500 in 2001 and 2002 - 132,100 132,100
-----------------------------------------------
Adjusted net income (loss) $ 170,129 $2,921,330 $(1,608,510)
===============================================
Basic per share--as reported $ 0.03 $ 0.56 $ (0.43)
===============================================
Diluted per share--as reported $ 0.03 $ 0.55 $ (0.43)
===============================================
Basic per share--adjusted $ 0.03 $ 0.58 $ (0.40)
===============================================
Diluted per share--adjusted $ 0.03 $ 0.58 $ (0.40)
===============================================
Intangible Assets
The Company holds numerous product and process patents related to the
business of explosion metalworking and metallic products produced by various
explosive processes. The Company's current patents expire between 2002 and 2012;
however, expiration of any single patent is not expected to have a material
adverse effect on the Company or its operations.
Patent costs are included in intangible assets in the accompanying balance
sheets and include primarily legal and filing fees associated with the patent
registration. These costs are amortized over the expected useful life of the
issued patent, up to 17 years.
Non-compete agreements are included in intangible assets in the
accompanying balance sheets and are fully amortized as of December 31, 2002.
-40-
Intangible assets are summarized as follows as of December 31, 2002 and
2001:
2002 2001
-------------- --------------
Non-compete agreements $ 420,000 $ 420,000
Patents and other 341,522 251,522
------------ ------------
761,522 671,522
Accumulated amortization (672,354) (614,938)
------------ ------------
$ 89,168 $ 56,584
============ ============
Other Assets
Included in other assets are deferred financing costs of $175,174 and
$212,623, net of accumulated amortization of $101,683 and $34,234, as of
December 31, 2002 and 2001, respectively. The deferred financing costs
outstanding at December 31, 2002 related to the Company's new bank line of
credit (see Note 4) and the replacement letter of credit on the industrial
revenue bonds (see Note 4). The Company obtained the new bank line of credit in
December 2001 and is amortizing the related deferred financing costs over the
three-year term of the loan agreement. With the proceeds from the new bank line
of credit, the Company paid off the intercompany line of credit with SNPE, Inc.
All deferred financing costs related to the SNPE, Inc. line of credit were fully
amortized. The original letter of credit on the industrial revenue bonds expired
in September 2001 at which time the Company obtained a replacement letter of
credit. The deferred financing costs associated with the replacement letter of
credit in the amount of $100,225 are being amortized over its five-year term.
Also included in other assets at December 31, 2002 and 2001 are net bond issue
costs of $79,160 and $101,367, respectively, associated with the industrial
development revenue bonds used to finance the Company's new manufacturing
facility (Note 4). These costs, which originally totaled $195,720, are being
amortized over the life of the bonds.
Revenue Recognition
The Company's contracts with its customers generally require the production
and delivery of multiple units or products. The Company records revenue from its
contracts using the completed contract method as products are completed and
shipped to the customer. If, as a contract proceeds toward completion, projected
total cost on an individual contract indicates a potential loss, the Company
provides currently for such anticipated loss.
-41-
Net Income (Loss) Per Share
Basic earnings per share ("EPS") is computed by dividing net (loss) income
by the weighted average number of shares of common stock outstanding during the
period. Diluted EPS recognizes the potential dilutive effects of dilutive
securities. The following represents a reconciliation of the numerator and
denominator used in the calculation of basic and diluted EPS:
For the year ended December 31, 2002
------------------------------------
Per share
Income Shares Amount
------ ------ ------
Basic earnings per share:
Income available to common stockholders $170,129 5,042,382 $ 0.03
=========
Dilutive effect of options to purchase common stock - 44,669
-------- --------
Dilutive earnings per share:
Income available to common stockholders $170,129 5,087,051 $ 0.03
======== ========= =========
For the year ended December 31, 2001
------------------------------------
Per share
Income Shares Amount
------ ------ ------
Basic earnings per share:
Income available to common stockholders $2,789,230 5,003,399 $ 0.56
=========
Dilutive effect of options to purchase common stock - 47,824
--------- --------
Dilutive earnings per share:
Income available to common stockholders $2,789,230 5,051,223 $ 0.55
========== ========= =========
During the year ended December 31, 2000, the Company incurred a net loss,
therefore, there is no difference in basic and diluted loss per share because
the effect of options to purchase common stock and the conversion of the
convertible subordinated debt is antidilutive.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, trade accounts receivable
and payable, accrued expenses and notes receivable are considered to approximate
fair value due to the short-term nature of these instruments. The fair value of
the Company's long-term debt is estimated to approximate carrying value based on
the borrowing rates currently available to the Company for bank loans with
similar terms and average maturities.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the expected
future income tax consequences based on enacted tax laws of temporary
differences between the financial reporting and tax bases of assets and
liabilities. The Company recognizes deferred tax assets for the expected future
effects of all deductible temporary differences. Deferred tax assets are then
reduced, if deemed necessary, by a valuation allowance for the amount of any tax
benefits which, more likely than not based on current circumstances, are not
expected to be realized (see Note 6).
-42-
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to a
concentration of credit risk, consist primarily of cash, restricted cash, cash
equivalents and accounts receivable. Generally, the Company does not require
collateral to secure receivables. The Company currently has no significant
financial instruments with off-balance sheet risk of accounting losses, such as
foreign exchange contracts, options contracts, or other foreign currency hedging
arrangements.
Stock Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB 25"), and related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options is generally
equal to the market price of the underlying stock on the date of the grant, no
compensation expense is recognized. Statement of Financial Accounting Standards
No. 123, Accounting and Disclosure of Stock-Based Compensation ("SFAS 123"),
establishes an alternative method of expense recognition for stock-based
compensation awards to employees that is based on fair values. The Company
elected not to adopt SFAS 123 for expense recognition purposes.
Pro-forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options and employees stock purchase plan under the fair
value method of SFAS 123. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions:
2002 2001 2000
------------ ------------ ------------
Risk-free interest rate 3.8% 4.4% 6.4%
Expected lives 4.0 years 4.0 years 4.0 years
Expected volatility 101.2% 103.0% 97.2%
Expected dividend yield 0% 0% 0%
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including expected stock price
characteristics significantly different from those of traded options. Because
changes in the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
-43-
The weighted average fair value of options granted during 2002, 2001 and
2000 was $2.18, $1.45, and $1.21, respectively. For purposes of pro-forma
disclosures, the estimated fair value of the options is amortized to expense
over the options' vesting periods. The Company's pro-forma net income (loss) and
pro-forma net income (loss) per share, as if the Company had used the fair value
accounting provisions of SFAS 123, are shown below.
Year Ended December 31,
-----------------------------------------
2002 2001 2000
------------- ------------ ------------
Net (loss) income:
As reported $ 170,129 $2,789,230 $(1,740,610)
Pro forma $ (32,981) $2,553,429 $(2,052,069)
Pro forma basic earnings (loss) per common share:
As reported $ 0.03 $ 0.56 $(0.43)
Pro forma $ (0.01) $ 0.51 $(0.50)
Pro forma diluted earnings (loss) per common share:
As reported $ 0.03 $ 0.55 $(0.43)
Pro forma $ (0.01) $ 0.51 $(0.50)
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, Accounting for Asset Retirement Obligations, which establishes
accounting standards for recognition and measurement of a liability for an asset
retirement obligation and the associated asset retirement cost. This statement
is effective for financial statements issued for fiscal years beginning after
June 15, 2002. Management does not believe adoption will have a material effect
on the Company's financial position.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which specifies that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred instead of recognized at the date of an entity's commitment to an exit
plan. This statement is effective for exit or disposal activities that are
initiated after December 31, 2002. Management does not believe adoption will
have a material effect on the Company's financial position.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation--Transition and Disclosure. SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. SFAS No. 148 also required
that disclosures of the pro forma effect of using the fair value method of
accounting for stock-based employee compensation be displayed more prominently
and in a tabular format. The Company has implemented all required disclosures of
SFAS 148. Additionally, SFAS No. 148 requires disclosure of the pro forma effect
in interim financial statements. The transition requirements of SFAS No. 148 are
effective for the Company's fiscal year 2003. The Company does not plan to
transition to a fair value method of accounting for stock-based employee
compensation.
-44-
(4) LONG-TERM DEBT
Long-term debt consists of the following at December 31, 2002 and 2001:
2002 2001
------------ ------------
Line of credit - SNPE S.A. $ 235,367 $ 360,000
Convertible subordinated note - SNPE, Inc. 1,200,000 1,200,000
Term-loan - SNPE, Inc. related to the acquisition
of Nobelclad 3,333,334 4,000,000
Bank lines of credit 2,448,628 4,657,097
Industrial development revenue bonds 4,485,000 5,280,000
------------ ------------
11,702,329 15,497,097
Less- Current maturities (2,423,699) (1,821,666)
------------ ------------
$ 9,278,630 $ 13,675,431
============ ============
SNPE S.A. Line of Credit
The Company's subsidiary, Nobelclad, has a line of credit or "cash
agreement" with SNPE S.A. ("Groupe SNPE") that provides for up to 2 million
Euros ($2,097,400 based upon the December 31, 2002 exchange rate) in cash
advances to meet the working capital needs of Nobelclad. Borrowings under the
line bear interest at EURIBOR plus 1.5%. The line expires on December 31, 2003
but is subject to annual renewal by the parties. The agreement automatically
terminates if Groupe SNPE loses its indirect control of Nobelclad. The interest
rate on outstanding borrowings as of December 31, 2002 was 4.49%.
SNPE, Inc. Convertible Subordinated Note
In connection with the SNPE transaction (see Note 1), a cash payment was
made by SNPE to the Company to purchase a five-year, 5% Convertible Subordinated
Note ("Subordinated Note"). SNPE may convert the $1,200,000 Subordinated Note
into common stock of the Company at a conversion price of $6 per share at any
time up to, and including the maturity date (June 14, 2005). If the note is not
converted, the entire principal balance is due at the maturity date.
SNPE, Inc. Term Loan
In connection with its July 3, 2001 acquisition of Nobelclad, the Company
entered into a $4,000,000 term loan agreement with SNPE, Inc. The term loan
bears interest at the Federal Funds Rate plus 3.0%, payable quarterly.
Commencing September 30, 2002 and on the last day of each calendar quarter
thereafter, principal payments of $333,333 are due, with the final principal
payment of $333,337 being due on June 30, 2005. The Company made the two
scheduled principal payments during 2002; the balance as of December 31, 2002 is
$3,333,334. The term loan is secured by a pledge of 65% of the capital stock of
Nobelclad held by the Company. The interest rate on outstanding borrowings as of
December 31, 200 was 4.16%.
-45-
Bank Lines of Credit
In June 2001, Nobelclad obtained a revolving line of credit with a French
bank that provides for maximum borrowings of 1,448,265 Euros ($1,518,797 based
upon the December 31, 2002 exchange rate), the full amount of which was
outstanding as of December 31, 2002 and 2001. Proceeds from the line of credit
were used to finance Nobelclad's acquisition of the stock of Nitro Metall (see
Note 2). Borrowings under the line of credit bear interest at EURIBOR plus 0.4%.
Beginning on June 21, 2004 and on each anniversary date thereafter until final
maturity on June 21, 2008, maximum borrowings available under the line become
permanently reduced by 289,653 Euros. The bank has the option of demanding early
repayment of any outstanding loans if Groupe SNPE's indirect ownership of
Nobelclad falls below 50%. The interest rate on outstanding borrowings as of
December 31, 2002 was 3.34%.
In December 2001, the Company obtained a $6,000,000 revolving line of
credit with a U.S. bank that has an outstanding balance of $929,831 as of
December 31, 2002. At closing, proceeds from the line of credit were used to
retire line of credit borrowings from SNPE and the line is used to finance
ongoing working capital requirements of the Company's U.S. operations. The line
of credit, which expires on December 4, 2004, carries an interest rate equal to
the bank's prime rate plus 1% through February 28, 2002 and the bank's prime
rate plus 0.5% thereafter. Maximum borrowings under the line of credit are
limited to a calculated borrowing base ($5,535,001 based on inventory and
accounts receivable balances as of December 31, 2002) and are secured by
accounts receivable and inventories of the Company's U.S. operations and by
investments in property, plant and equipment with respect to U.S. operations
that are made during the term of the agreement and that constitute capital
expenditures. The interest rate on outstanding borrowings as of December 31,
2002 was 4.75%.
In December 1998, the Company entered into an interest rate swap agreement
with its former bank related to the former bank lines of credit. The Company
terminated this swap agreement in the third quarter of 1999 resulting in a
deferred gain of $45,600 that was being amortized over the terms of the
acquisition line of credit. Once the bank lines of credit were extinguished as
part of the SNPE transaction, the unamortized deferred gain of $31,388 was
offset against the unamortized deferred finance charges of $111,499 related to
the lines of credit and recorded as a extraordinary loss on extinguishment.
Industrial Development Revenue Bonds
During September 1998, the Company began construction on a new
manufacturing facility in Fayette County, Pennsylvania. This project was being
financed with proceeds from industrial development revenue bonds issued by the
Fayette County Industrial Development Authority. The loan bears interest at a
variable rate which is set weekly based on the current weekly market rate for
tax-exempt bonds. The interest rate at December 31, 2002 was 1.80%. Principal
payments, which vary in amount, are paid on a quarterly basis though out the
life of the bonds. The Company has established a bank letter of credit in the
trustee's favor for the principal amount of outstanding bonds plus 98 days
accrued interest on the bonds. The original letter of credit, which expired in
September 2001, was secured by the U.S.-based accounts receivable, inventory,
property, plant and equipment of the Company's Explosive Metalworking Group and
the bond proceeds not yet expended for construction. On September 5, 2001, the
Company obtained a replacement letter of credit from a different bank that has a
five-year term and does not require an asset pledge. The portion of the
borrowings not yet expended for construction was $191,202 and $189,128 as of
December 31, 2002 and 2001, respectively, and was classified as restricted cash
and investments in the accompanying balance sheets. A trustee holds the proceeds
until qualified expenditures are made and reimbursed to the Company. The Company
may redeem the bonds prior to their final maturity on September 1, 2013 at an
amount equal to the outstanding principal plus any accrued interest. Annual
principal repayments ranging from $185,000 to $930,000 are required with final
maturity on September 1, 2013.
In September 1998, the Company entered into an interest rate swap agreement
with its bank under which the Company converted the variable interest rate on
the bonds to a rate that is largely fixed. The Company terminated this swap
agreement during the third quarter of 1999 resulting in a deferred gain of
$105,300, which is being amortized over the term of the bonds.
-46-
Loan Covenants and Restrictions
The Company's existing loan agreements include various covenants and
restrictions, certain of which relate to the payment of dividends or other
distributions to stockholders, redemption of capital stock, incurrence of
additional indebtedness, mortgaging, pledging or disposition of major assets and
maintenance of specified financial ratios. As of December 31, 2002, the Company
is in compliance with all financial covenants and other provisions of its debt
agreements.
Scheduled Debt Maturity
The Company's long-term debt matures as follows:
Year ended December 31-
2003 $ 2,423,699
2004 3,496,922
2005 2,960,429
2006 488,759
2007 503,759
Thereafter 1,828,761
-------------
$ 11,702,329
(5) COMMON STOCK OPTIONS AND BENEFIT PLAN
Stock Option Plans
The Company maintains stock option plans that provide for grants of both
incentive stock options and non-statutory stock options. During 1997, the 1992
Incentive Stock Option Plan and the 1994 Non-employee Director Stock Option Plan
were both amended and restated in the form of the 1997 Equity Incentive Plan,
which was approved by the Company's stockholders in May of 1997. Incentive stock
options are granted at exercise prices that equal the fair market value at date
of grant based upon the closing sales price of the Company's common stock on
that date. Incentive stock options generally vest 25% annually and expire ten
years from the date of grant. Non-statutory stock options are granted at
exercise prices that range from 85% to 100% of the fair market value of the
stock at date of grant. These options vest over periods ranging from one to four
years and have expiration dates that range from five to ten years from the date
of grant. Under the 1997 Equity Incentive Plan, there are 1,075,000 shares of
common stock authorized to be granted, of which 233,250 remain available for
future grants.
-47-
A summary of stock option activity for the years ended December 31, 2002, 2001
and 2000 is as follows:
2002 2001 2000
------------------------- -----------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
Outstanding at beginning of year 465,750 $ 4.27 354,251 $ 5.75 540,334 $ 6.66
Granted 166,500 $ 3.03 187,000 $ 2.02 127,500 $ 1.59
Cancelled (14,500) $ 2.53 (74,251) $ 5.69 (313,583) $ 5.62
Exercised (17,252) $ 1.47 (1,250) $ 1.75 - -
------- ------ ------- -------- ------- -----
Outstanding at end of year 600,498 $ 4.05 465,750 $ 4.27 354,251 $5.75
======= ====== ======= ====== ======= =====
Exercisable at end of year 316,755 $ 5.38 239,941 $ 5.93 212,376 $ 7.22
======= ====== ======= ====== ======= ======
The weighted average fair values and weighted average exercise prices of
options granted are as follows:
For the Year Ended For the Year Ended For the Year Ended
December 31, 2002 December 31, 2001 December 31, 2000
------------------ ------------------ ------------------
Fair Exercise Fair Exercise Fair Exercise
Number Value Price Number Value Price Number Value Price
----------------------------------------------------------------------------------------------
Exercise Price
Less than market
price - - - 35,000 $1.83 $2.65 47,500 $1.14 $1.33
Equal to market price 166,500 $2.18 $3.03 152,000 $1.36 $1.88 80,000 $1.24 $1.75
Greater than market
price - - - - - - - - -
------- ------- ------- ------- ------- ------- ------- ----- -----
Total 166,500 $2.18 $3.03 187,000 $1.45 $2.02 127,500 $1.21 $1.59
======= ======= ======= ======= ======= ======= ======= ===== =====
-48-
The following table summarizes information about employee stock options
outstanding and exercisable at December 31, 2002:
Options Outstanding Options Exercisable
----------------------------------------------------- ----------------------------------
Weighted Average
Number of Options Remaining Weighted Number Weighted
Range of Exercise Outstanding at Contractual Life Average Exercisable at Average
Prices December 31, 2002 in Years Exercise Price December 31, 2002 Exercise Price
- ----------------- ----------------- ----------------- -------------- ----------------- --------------
$1.33 - 1.75 66,998 7.38 $1.53 50,630 $1.46
$1.88 - 1.88 130,000 8.12 $1.88 31,000 $1.88
$2.00 - 2.65 83,000 9.14 $2.41 32,500 $2.60
$3.35 - 5.31 147,500 8.57 $3.52 29,125 $4.06
$7.01 - 9.63 173,500 4.80 $7.89 173,500 $7.89
------- ---- ----- ------- -----
$1.33 - 9.63 600,498 7.33 $4.05 316,755 $5.38
======= ==== ===== ======= =====
Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan ("ESPP") which is
authorized to issue up to 175,000 shares. The offerings begin on the first day
following each previous offering ("Offering Date") and end six months from the
offering date ("Purchase Date"). The ESPP provides that full time employees may
authorize the Company to withhold up to 15% of their earnings, subject to
certain limitations, to be used to purchase common stock of the Company at the
lesser of 85% of the fair market value of the Company's common stock on the
Offering Date or the Purchase Date. In connection with the ESPP, 14,155, 38,402
and 42,561 shares of the Company's stock were purchased during the years ended
December 31, 2002, 2001 and 2000, respectively.
The pro forma net income calculation in Note 3 reflects $15,253, $26,575
and $29,124 in compensation expense associated with the ESPP for 2002, 2001 and
2000, respectively. The compensation expense represents the fair value of the
employees' purchase rights which was estimated using an acceptable pricing model
with the following weighted average assumptions:
Year Ended December 31,
-------------------------------------------
2002 2001 2000
--------- --------- ---------
Risk-free interest rate 2.2% 4.6% 6.3%
Expected lives 0.5 year 0.5 year 0.5 year
Expected volatility 78.5% 98.0% 149.3%
Expected dividend yield 0% 0% 0%
401(k) Plan
The Company offers a contributory 401(k) plan (the "Plan") to its
employees. The Company made matching contributions to the Plan equal to 50% of
each employee's contribution for up to the first 8% of each employee's
compensation for 2002, 2001 and 2000. Total Company contributions were $166,556,
$161,104 and $169,535 for the years ended December 31, 2002, 2001 and 2000,
respectively.
-49-
(6) INCOME TAXES
The components of the provision for income taxes are as follows:
2002 2001 2000
------------ ----------- ----------
Current - Federal $ - $ 32,000 $ -
Current - State - - -
Current - Foreign 305,400 290,000 162,000
------------ ----------- ----------
305,400 322,000 162,000
Deferred - Federal 1,127,000 61,400 -
Deferred - State 165,700 9,200 -
Deferred - Foreign 11,253 9,000 2,000
------------ ----------- ----------
1,303,953 79,600 2,000
------------ ----------- ----------
Income tax provision $ 1,609,353 $ 401,600 $ 164,000
============ =========== ==========
The Company's deferred tax assets and liabilities at December 31, 2002 and
2001 consist of the following:
2002 2001
------------ ------------
Deferred tax assets-
Federal net operating loss carry-forward $ 70,400 $ 858,000
Federal AMT tax credit carry-forward 112,800 113,000
State net operating loss carry-forward - 220,000
Inventory 33,700 13,200
Inventory reserve 29,200 -
Allowance for doubtful accounts 74,500 70,900
Repair reserve 19,500 29,200
Vacation accrual 118,500 113,000
Accrual for unbilled services 5,100 5,900
Goodwill impairment 1,482,000 -
Other 35,300 -
------------ ------------
1,981,000 1,423,200
Deferred tax liability-
Depreciation (1,609,000) (1,416,200)
Amortization (184,000) -
Foreign income taxed in future periods (141,279) (137,000)
Other (65,400) (77,600)
------------ ------------
Net deferred tax liabilities $ (18,679) $ (207,600)
============ ============
Net current deferred tax assets 315,500 $ 261,400
Net long-term deferred tax liabilities (334,179) (469,000)
------------ ------------
$ (18,679) $ (207,600)
============ ============
-50-
A reconciliation of the Company's income tax provision (benefit) computed
by applying the federal statutory income tax rate of 34% to income before taxes
is as follows:
2002 2001 2000
------------ ------------ -----------
Federal income tax at statutory rate $ 1,393,200 $ 1,085,000 $(536,000)
State tax items, net 204,900 116,500 (99,500)
Effect of difference between US Federal
and Foreign tax rates 63,753 (3,000) 16,400
Permanent differences - tax effected (52,500) 8,100 8,100
Revision of prior years estimates - 227,000 -
Change in valuation allowance - (1,032,000) 775,000
------------ ------------ ----------
Provision for income taxes $ 1,609,353 $ 401,600 $ 164,000
============ ============ ==========
The available tax loss carry-backs were fully utilized in 1999 and, were
therefore, not available for any of the 2000 tax loss. The Company has $207,000
in NOL carry-forwards for US Federal tax purposes that expire through 2021.
(7) BUSINESS SEGMENTS
The Company is organized in the following two segments: the Explosive
Metalworking Group ("Explosive Manufacturing") and the Aerospace Group
("Aerospace"). Explosive Manufacturing uses explosives to perform metal cladding
and shock synthesis. The most significant product of this group is clad metal
which is used in the fabrication of pressure vessels, heat exchangers and
transition joints used in the hydrocarbon processing, chemical processing, power
generation, petrochemical, pulp and paper, mining, shipbuilding and heat,
ventilation and air conditioning industries. Aerospace machines, forms and welds
parts for the commercial aircraft, aerospace and defense industries.
The accounting policies of both segments are the same as those described in
the summary of significant accounting policies.
The Company's reportable segments are strategic business units that offer
different products and services and are separately managed. Each segment is
marketed to different customer types and requires different manufacturing
processes and technologies.
-51-
Segment information is presented for the years ended December 31, 2002, 2001 and
2000 as follows:
Explosive ------------
Manufacturing Aerospace Total
------------- ------------ -----------
As of and for the year ended December 31, 2002:
Net sales $35,603,415 $10,054,154 $45,657,569
=========== =========== ===========
Depreciation and amortization $ 1,008,788 $ 766,686 $ 1,775,474
=========== =========== ===========
Income (loss) from operations $ 6,149,961 $(1,311,205) $ 4,838,756
Unallocated amounts:
Other income (expense) (52,037)
Interest expense (693,230)
Interest income 4,101
-----------
Consolidated income before income taxes $ 4,097,590
===========
Segment assets $21,799,134 $ 9,146,107 $30,945,241
=========== =========== ===========
Assets not allocated to segments:
Cash 1,158,234
Prepaid expenses and other 798,236
Current deferred tax asset 315,500
Other long-term corporate assets 480,781
-----------
Consolidated total assets $33,697,992
===========
Capital expenditures $ 678,182 $ 815,367 $ 1,493,549
=========== =========== ===========
Explosive ------------
Manufacturing Aerospace Total
------------- ------------ -----------
As of and for the year ended December 31, 2001:
Net sales $30,019,586 $12,495,188 $42,514,774
=========== =========== ===========
Depreciation and amortization $ 999,465 $ 759,945 $ 1,759,410
=========== =========== ============
Income (loss) from operations $ 4,487,824 $ (451,931) $ 4,035,893
Unallocated amounts:
Other income (expense) (72,340)
Interest expense (799,571)
Interest income 26,848
-----------
Consolidated income before income taxes $ 3,190,830
===========
Segment assets $21,274,942 $12,819,829 $34,094,771
=========== =========== ===========
Assets not allocated to segments:
Cash 1,811,618
Prepaid expenses and other 347,326
Current deferred tax asset 261,400
Other long-term corporate assets 398,230
-----------
Consolidated total assets $36,913,345
===========
Capital expenditures $ 1,212,704 $ 147,482 $ 1,360,186
=========== =========== ===========
-52-
Explosive ------------
Manufacturing Aerospace Total
------------- ------------ -----------
As of and for the year ended December 31, 2000
(Restated - See Note 2):
Net sales $22,862,677 $10,896,904 $33,759,581
=========== =========== ===========
Depreciation and amortization $ 970,953 $ 799,257 $ 1,770,210
=========== =========== ===========
Income (loss) from operations $ 518,149 $(1,148,262) $ (630,113)
Unallocated amounts:
Other income 200,290
Interest expense (1,098,181)
Interest income 31,505
-----------
Consolidated loss before income taxes and
extraordinary item $(1,496,499)
============
Segment assets $22,115,880 $12,539,505 $34,655,385
=========== =========== ===========
Assets not allocated to segments:
Cash 298,530
Prepaid expenses and other 193,966
Other long-term corporate assets 258,574
-----------
Consolidated total assets $35,406,455
===========
Capital expenditures $ 743,443 $ 86,780 $ 830,223
=========== =========== ===========
Capital expenditures for the Explosive Manufacturing segment included
$336,347 of costs incurred related to the construction of the Company's new
manufacturing facility and the acquisition of related manufacturing equipment
during the year ended December 31, 2000.
The geographic location of the Company's property, plant and equipment, net
of accumulated depreciation, is as follows:
For the years ended December 31,
--------------------------------
2002 2001
--------------------------------------------
United States $ 12,826,529 $ 13,070,474
France 2,216,691 1,834,000
Sweden 355,278 305,000
------------ -------------
Total $ 15,398,498 $ 15,209,474
============ =============
-53-
All of the Company's sales are shipped from the manufacturing locations,
located in the United States, France and Sweden. The following represents the
Company's net sales based on the geographic location of the customer:
For the years ended December 31,
--------------------------------
2002 2001 2000
----------- ----------- -----------
United States $31,092,704 $29,643,976 $25,767,268
Belgium 3,383,202 1,839,361 664,549
Canada 2,460,128 1,687,545 1,419,841
Italy 642,744 1,540,802 782,774
France 1,571,567 1,190,898 593,403
South Korea 56,473 10,139 1,022,285
Russia 416,921 4,731 1,490,213
Other foreign countries 6,033,830 6,597,322 2,019,248
----------- ----------- -----------
Total consolidated net sales $45,657,569 $42,514,774 $33,759,581
=========== =========== ===========
During the years ended December 31, 2002, 2001 and 2000, no one customer
accounted for more than 10% of total net sales.
(9) COMMITMENTS AND CONTINGENCIES
The Company leases certain office space, storage space, vehicles and other
equipment under various operating lease agreements. Future minimum rental
commitments under non-cancelable operating leases are as follows:
Year ended December 31-
2003 $ 884,544
2004 781,030
2005 668,416
2006 435,913
2007 412,013
Thereafter 1,465,962
------------
$ 4,647,878
============
Total rental expense included in operations was $1,017,502, $830,754 and
$885,726 in the years ended December 31, 2002, 2001 and 2000, respectively.
In the normal course of business, the Company is a party to various
contractual disputes and claims. After considering the Company's insurance
coverage and evaluations by legal counsel regarding pending actions, management
is of the opinion that the outcome of such actions will not have a material
adverse effect on the financial position or results of operations of the
Company.
-54-
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On July 12, 2002, the Board of Directors of the Company, upon the
recommendation of its Audit Committee, dismissed Arthur Andersen LLP ("Arthur
Andersen" or "AA") as the Company's independent public accountants and engaged
Ernst & Young LLP ("E&Y") to serve as the Company's independent public
accountants for the year ending December 31, 2002.
Arthur Andersen's reports on the Company's consolidated financial
statements for each of the years ended December 31, 2001 and 2000 did not
contain an adverse opinion or disclaimer of opinion, nor were they qualified or
modified as to uncertainty, audit scope or accounting principles.
In connection with its audits for the Company's years ended December 31,
2001 and 2000 and through July 12, 2002, there were no disagreements between the
Company and Arthur Andersen on any matter of accounting principle or practice,
financial statement disclosure, or auditing scope or procedure which, if not
resolved to AA's satisfaction, would have caused AA to make reference to the
subject matter in connection with AA's report on the Company's consolidated
financial statements for such years; and there were no reportable events as
defined in Item 304(a)(1)(v) of Regulation S-K.
We have requested Arthur Andersen to furnish us a letter addressed to the
Securities and Exchange Commission stating whether it agrees with the above
statements. A representative of Arthur Andersen has informed the Company that
Arthur Andersen is no longer furnishing such letters.
During the years ended December 31, 2001 and 2000 and through July 18,
2002, the Company did not consult E&Y with respect to the application of
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on the Company's
consolidated financial statements, or any other matters or reportable events
listed in Items 304(a)(2)(i) and (ii) of Regulation S-K.
-55-
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Directors
Mr. Michel Philippe. Mr. Philippe, age 59, has served as director of the
Company since June 2000 and has been Chairman of the Board of the Company since
September 2002. His current term as director will expire at the annual meeting
of stockholders in 2005. Mr. Philippe is currently Senior Vice President of
Finance and Legal Affairs of Groupe SNPE, a position he has held since 1990. Mr.
Philippe has also served as President of Nobel Explosifs France, a subsidiary of
Groupe SNPE engaged in the manufacture and sale of industrial explosives, since
2002.
Mr. Bernard Hueber. Mr. Hueber, age 61, has served as director of the
Company since June 2000 and was Chairman of the Board of the Company from June
2000 until September 2002. His current term as director will expire at the
annual meeting of stockholders in 2003. Following his retirement from Groupe
SNPE in June 2002, Mr. Hueber became Secretary General of the Federation of
European Explosives Manufacturers (FEEM) and continues to serve in that
capacity. From 1990 to December 2001, Mr. Hueber served as the Chairman of the
Board and Chief Executive Officer of Nobel Explosifs France. From January 2002
until his retirement from Groupe SNPE in June 2002, Mr. Hueber served as General
Manager of Groupe SNPE's Industrial Explosives operating unit.
Mr. Gerard Munera. Mr. Munera has served as a director of the Company since
September 2000, and his current term will expire at the annual meeting of
stockholders in 2003. From October 1996 to the present, Mr. Munera, age 67, has
been chairman and CEO of Synergex, a personally controlled holding company, with
majority participation in Arcadia (a manufacturer of low rise curtain walls,
store fronts and office partitions) and in Estancia El Olmo, a large cattle
ranch, as well as minority participation in other companies, particularly in the
gold mining and high technology industries. Mr. Munera is also a director of
Security Biometrics, Inc. Between 1990 and 1991, Mr. Munera was Senior Vice
President Corporate Planning and Development and a member of the Executive
Committee of RTZ plc. Between 1991 and 1994, Mr. Munera was President of Minorco
(USA), a diversified $1.5 billion natural resources group. From 1994 to October
1996, Mr. Munera was Chairman and CEO of Latin American Gold Inc., a gold
exploration and mining company.
Dr. George W. Morgenthaler. Dr. Morgenthaler, age 76, has served as a
director of the Company since June 1986, and his current term will expire at the
annual meeting of stockholders in 2004. Dr. Morgenthaler also served as a
director during the period from 1971 to 1976. Dr. Morgenthaler has been a
Professor of Aerospace Engineering at the University of Colorado at Boulder
since 1986. He has served as Department Chair, Director of the University of
Colorado's BioServe Commercial Space Center and Associate Dean of Engineering
for Research. Previously, Dr. Morgenthaler was Vice President of Technical
Operations at Martin Marietta's Denver Aerospace Division, Vice President
Primary Products Division of Martin Marietta Aluminum Co. and Vice President and
General Manager of the Baltimore Division of Martin Marietta Aerospace Co. Dr.
Morgenthaler has served as a director of Computer Technology Assoc. Inc. from
1993 to 1999 and served as a director of Columbia Aluminum Company from 1987 to
1996.
Mr. Bernard Fontana. Mr. Fontana, age 42, has served as a director of the
Company since June 2000 and was President and Chief Executive Officer of the
Company from June 2000 to November 2000. Mr. Fontana's current term as director
will expire at the annual meeting of stockholders in 2004. Mr. Fontana is
currently Executive Vice President of Chemical Activities of Groupe SNPE, a
position he has held since February 2002. Since February 2002, Mr. Fontana has
also served as Chairman and CEO of Isochem, Bergerac NC and Tolochimie,
subsidiaries of Groupe SNPE. Previously, Mr. Fontana was Executive Vice
President of the Fine Chemicals division of Groupe SNPE from January 2001 to
January 2002. Mr. Fontana has also been Vice President of Groupe SNPE, North
America since September 1999 and President of SNPE, Inc. since November 1999.
Mr. Fontana was Vice President of Strategy and Business Development of the
Chemicals division of Groupe SNPE from June 1998 to September 1999, General
Manager of SNPE Chimie from September 1996 to June 1998 and General Manager,
Bergerac N.C., a business unit of Groupe SNPE, from 1992 to September 1996.
-56-
Mr. Dean K. Allen. Mr. Allen, age 67, has served the Company as a director
since July 1993, and his current term will expire at the annual meeting of
stockholders in 2005. In January 2001, Mr. Allen retired as President of Parsons
Europe, Middle East and South Africa, a position he had held since February
1996. Mr. Allen was Vice President and General Manager of Raytheon Engineers and
Constructors, Europe, from February 1994 to December 1995.
Mr. Yves Charvin Mr. Charvin, age 48, has served as a director of the
Company since September 2002 and his current term will expire at the annual
meeting of stockholders in 2005. Mr. Charvin is currently Director of Corporate
Development and Legal Counsel for Groupe SNPE, a position he has held since
January 1995. Previously, Mr. Charvin served as Chief of the Legal Department of
Groupe SNPE from January 1989 to December 1994.
-57-
Executive Officers
The following individuals serve as executive officers of the Company. Each
executive officer is elected by the Board of Directors and serves at the
pleasure of the Board.
Name Position Age
---- -------- ---
Mr. Yvon Pierre Cariou President and Chief Executive Officer 57
Mr. Richard A. Santa Vice President, Chief Financial Officer and Secretary 52
Mr. John G. Banker Vice President, Marketing and Sales, Clad Metal 56
Products Division
Mr. Yvon Pierre Cariou. Mr. Cariou has served as President and Chief
Executive Officer since November 2000. From March 2000 to November 2000, Mr.
Cariou was a consultant who performed research and development projects for the
oil industry and market research for a start-up company. From November 1998 to
March 2000, Mr. Cariou was President and Chief Executive Officer of Astrocosmos
Metallurgical Inc., a division of Groupe Carbone Lorraine of France, involved in
the design and fabrication of process equipment for the chemical and
pharmaceutical industries. From September 1993 to September 1998, Mr. Cariou was
a Partner and Vice President Sales and Marketing of Hydrodyne/FPI Inc. From
January 1991 to September 1993, Mr. Cariou was President of MAINCO Corp. and
ESCO Corp., manufacturing divisions of Nu-Swift, a public company based in the
United Kingdom.
Mr. Richard A. Santa. Mr. Santa has served as Vice President, Chief
Financial Officer and Secretary of the Company since October 1996 and served as
interim Chief Financial Officer from August 1996 to October 1996. Prior to
joining the Company in August 1996, Mr. Santa was Corporate Controller of Scott
Sports Group Inc. from September 1993 to April 1996. From April 1996 to August
1996, Mr. Santa was a private investor. From June 1992 to August 1993, Mr. Santa
was Chief Financial Officer of Scott USA, a sports equipment manufacturer and
distributor. Earlier in his career, Mr. Santa was a senior manager with Price
Waterhouse, where he was employed for ten years.
Mr. John G. Banker. Mr. Banker has served as Vice President, Marketing and
Sales, Clad Metal Division since June 2000. From June 1996 to June 2000, Mr.
Banker was President of CLAD Metal Products, Inc. From June 1977 to June 1996,
Mr. Banker was employed by the Company and served in various technical, sales
and management positions. Mr. Banker held the position of Senior Vice President,
Sales and New Business Development from June 1991 to July 1995.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires DMC's
directors and officers, and persons who own more than 10% of a registered class
of DMC's equity securities, to file with the SEC an initial report of ownership
and to report changes in ownership of common stock and other equity securities
of DMC. Officers, directors and greater than 10% stockholders are required by
SEC regulations to furnish DMC with copies of all Section 16(a) forms they file.
To DMC's knowledge, based solely on a review of the copies of such reports
furnished to DMC and written representations that no other reports were
required, during the fiscal year ended December 31, 2002, all Section 16(a)
filing requirements applicable to its officers, directors and greater than 10%
beneficial owners were complied with.
-58-
ITEM 11. Executive Compensation
SUMMARY OF COMPENSATION
The following table shows compensation awarded or paid to, or earned by,
the Company's executive officers (the "Named Executive Officers") during the
fiscal years ended December 31, 2001, 2000 and 1999:
Summary Compensation Table
Annual Compensation Long-Term
----------------------------------------------- Compensation
Awards
Name and Principal Fiscal Other Annual ------------ All Other
Position Year Salary($) Bonus($) Compensation($)(1) Options(#) Compensation($)
- -------------------------- ---- --------- -------- ------------------ ---------- ---------------
Yvon Pierre Cariou 2002 225,000 90,000 - 30,000 8,070(3)
President and 2001 185,000 101,000 - 30,000 285(4)
Chief Executive Officer(2) 2000 23,130 10,000 - - -
Richard A. Santa............. 2002 205,000 65,600 - 23,000 9,360(5)
Vice President, Chief 2001 200,000 64,000 - 23,000 8,519(6)
Financial Officer and 2000 157,037 16,500 - 10,000 6,537(7)
Secretary
John G. Banker............... 2002 128,750 146,551 - 23,000 6,379(9)
Vice President, 2001 125,000 100,241 - 23,000 8,366(10)
Sales and Marketing(8) 2000 65,866 10,000 - - 1,528(11)
Joseph P. Allwein 2002 - - - - -
President and 2001 - - - - -
Chief Executive Officer(12) 2000 136,107 - - 20,000 6,290(13)
(1) Except as disclosed in this column, the amount of perquisites provided to
each Named Executive Officer did not exceed the lesser of $50,000 or 10% of
total salary and bonus for each fiscal year.
(2) Mr. Cariou joined the Company in November 2000.
(3) Includes $2,570 of life insurance premiums $5,500 of matching contributions
under the 401(k) plan.
(4) Includes $285 of matching contributions under the 401(k) plan.
(5) Includes $3,860 of life insurance premiums and $5,500 of matching
contributions under the 401(k) plan
(6) Includes $3,269 of life insurance premiums and $5,250 of matching
contributions under the 401(k) plan.
(7) Includes $1,287 of life insurance premiums and $5,250 of matching
contributions under the 401(k) plan.
(8) Mr. Banker joined the Company in June 2000.
(9) Includes $1,427 of life insurance premiums and $4,952 of matching
contributions under the 401(k) plan
(10) Includes $3,783 of life insurance premiums and $4,583 of matching
contributions under the 401(k) plan.
(11) Includes $1,528 of life insurance premiums.
(12) Mr. Allwein joined the Company in March 1998 and terminated employment with
the Company in August 2000.
(13) Includes $1,040 of life insurance premiums and $5,250 of matching
contributions under the 401(k) plan.
-59-
STOCK OPTION EXERCISES
The Company grants options to its executive officers under its 1997 Equity
Incentive Plan (the "1997 Plan"). As of March 10, 2003, options to purchase a
total of 658,498 shares were outstanding under the 1997 Plan and options to
purchase 175,250 shares remained available for grant thereunder.
The following table shows for the fiscal year ended December 31, 2002,
certain information regarding options exercised by, and held at year-end by, the
Named Executive Officers:
Option Exercises in Fiscal 2002 and Fiscal Year-End Option Values
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
December 31, 2002 December 31, 2002(1)
----------------- --------------------
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized ($) Unexercisable Unexercisable
- ------------------------------- ---------------- ------------ ----------------- -------------
Yvon Pierre Cariou............. - - 7,500/52,500 $3,713/$11,138
Richard A. Santa............... - - 83,250/47,750 $5,946/$11,639
John. G. Banker................ - - 5,750/40,250 $2,846/$8,539
(1) i.e., value of options for which the fair market value of the Company's
Common Stock at December 31, 2002 ($2.37) exceeds the exercise price.
-60-
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the ownership
of DMC's common stock as of March 10, 2003 by: (i) each person or group known by
DMC to be the beneficial owner of more than 5% of DMC's common stock, (ii) each
director of DMC; (iii) each executive officer; and (iv) all executive officers
and directors of DMC as a group.
Beneficial
Ownership (1)
-------------
Number Percent
Name and Address of Beneficial Owner(2) Of Shares of Total
- ---------------------------------------- --------- --------
SNPE Inc.
100 College Road East
Princeton, NJ 08540(3).......................................... 2,763,491 54.60%
Mr. Yvon Pierre Cariou(4).......................................... 21,000 *
Mr. Richard A. Santa(4)............................................ 110,164 2.14%
Mr. John G. Banker(4).............................................. 24,587 *
Mr. Bernard Hueber(4).............................................. 12,500 *
Mr. Dean K. Allen(4)............................................... 38,000 *
Mr. Bernard Fontana(4)............................................. 12,500 *
Dr. George W. Morgenthaler(4)...................................... 107,778 2.12%
Mr. Gerard Munera(4)............................................... 12,500 *
Mr. Michel Philippe(4)............................................. 12,500 *
Mr. Yves Charvin(4)................................................ 0 *
All executive officers and directors as a group (10 persons)(5).... 351,529 6.66%
- -----------------------
*Less than 1%
-61-
(1) This table is based upon information supplied by officers, directors and
principal stockholders and Schedules 13D and 13G, if any, filed with the
Securities and Exchange Commission (the "SEC"). Unless otherwise indicated
in the footnotes to this table and subject to community property laws where
applicable, DMC believes that each of the stockholders named in this table
has sole voting and investment power with respect to the shares indicated
as beneficially owned. Applicable percentages are based on 5,061,390 shares
outstanding on March 10, 2003 adjusted as required by rules promulgated by
the SEC.
(2) Unless otherwise indicated, the address of each beneficial owner is c/o
Dynamic Materials Corporation, 5405 Spine Road, Boulder, Colorado 80301.
(3) The information reported is based solely on information contained in the
Form 4 filed by each of SNPE, Inc., SOFIGEXI, and SNPE. Each reported that
it had shared voting and investment power and beneficial ownership of
2,763,491 shares.
(4) Amounts reported include shares subject to stock options exercisable within
60 days of March 10, 2003 as follows: Mr. Cariou, 15,000 shares; Mr. Santa,
94,000 shares; Mr. Banker, 11,500 shares; Mr. Hueber, 12,500 shares; Mr.
Allen, 25,000 shares; Mr. Fontana, 12,500 shares; Mr. Morgenthaler, 20,000
shares; Mr; Munera, 12,500 shares and Mr. Philippe, 12,500 shares. Shares
of common stock subject to options that are exercisable within 60 days of
March 10, 2003 are deemed to be beneficially owned by the person holding
those options for the purpose of computing the percentage ownership of the
person, but are not treated as outstanding for the purpose of computing any
other person's percentage ownership.
(5) The amount reported includes 215,500 shares subject to stock options
exercisable within 60 days of March 10, 2003. The applicable percentage is
based on 5,276,890 shares outstanding, which includes shares subject to
stock options exercisable within 60 days.
ITEM 13. Certain Relationships and Related Transactions
On July 3, 2001, the Company completed its acquisition of substantially all
of the outstanding stock of Nobelclad Europe S.A. ("Nobelclad") from Nobel
Explosifs France ("NEF"). Nobelclad and its wholly-owned subsidiary, Nitro
Metall AB ("Nitro Metall"), operate cladding businesses located in Rivesaltes,
France and Likenas, Sweden, respectively. NEF is wholly owned by Groupe SNPE and
is a sister company to SNPE, Inc., which owns 55% of the Company's common stock.
NEF is wholly owned by Groupe SNPE and is a sister company to SNPE, Inc., which
owns 55% of the Company's common stock. The purchase price of approximately $5.3
million was financed through a $4.0 million intercompany note agreement between
the Company and SNPE, Inc. and the assumption of approximately $1.23 million in
third party bank debt associated with Nobelclad's planned acquisition of Nitro
Metall from NEF prior to the Company's purchase of Nobelclad stock. The SNPE
credit facility extended in June 2000 was replaced by a bank credit facility in
December 2001.
John Banker, Vice President, Marketing and Sales, Clad Metal Division,
receives a 1% commission on sales of certain roll-bond products. During the
year-ended December 31, 2002, these commissions totaled approximately $49,000 of
which the full amount is payable at December 31, 2002 and is included in accrued
expenses.
-62-
ITEM 14. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's Exchange
Act reports is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms, and that such information is
accumulated and communicated to the Company's management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and the Company's
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on this evaluation, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect the internal controls subsequent to the date the
Company completed its evaluation.
-63-
ITEM 15. Exhibits, List and Reports on Form 8-K
Exhibits
Exhibit
Number Description
- ------------ -----------
4.1 Shareholders Rights Plan, dated January 8, 1999 (incorporated by
reference to the Company's Registration Statement filed with the
Commission on January 21, 1999).
10.1 Employment Agreement between Company and Richard Santa dated
October 21, 1996 (incorporated by reference to the Company's
Form 10-K filed with the Commission on March 30, 2000).
10.3 Employee Stock Purchase Plan, dated January 9, 1998
(incorporated by reference to the Company's Definitive Proxy
Statement filed with the Commission on April 22, 1998).
10.4 Operating Lease, dated as of March 18, 1998, between Company and
Spin Forge, LLC (incorporated by reference to the Company's Form
8-K filed with the Commission on April 2, 1998).
10.5 Option Agreement, dated as of March 18, 1998, between Company
and Spin Forge, LLC (incorporated by reference to the Company's
Form 8-K filed with the Commission on April 2, 1998).
10.6 Loan Agreement between Company and Fayette County Industrial
Development Authority, dated September 1, 1998 (incorporated by
reference to the Company's Form 10-Q filed with the Commission
on November 17, 1998).
10.7 Option and Right of First Offer Agreement, dated as of December
1, 1998, between the Company and JEA Property, LLC (incorporated
by reference to the Company's Form 8-K filed with the Commission
on December 8, 1998).
10.8 Operating Lease, dated as of December 1, 1998, between the
Company and JEA Property, LLC (incorporated by reference to the
Company's Form 8-K filed with the Commission on December 8,
1998).
10.9 Amended and Restated Employee Stock Option Plan approved by the
Directors of the Company on March 26, 1999 (incorporated by
reference to the Company's Definitive Proxy Statement filed with
the Commission on April 26, 1999).
10.10 Stock Purchase Agreement, dated January 20, 2000, between the
Company and SNPE, Inc. (incorporated by reference to the
Company's Form 8-K filed with the Commission on January 31,
2000).
10.11 Agreement and Amendment to Operating Lease, dated as of February
1, 2000 between the Company and Spin Forge, LLC (incorporated by
reference to the Company's Form 10-K filed with the Commission
on March 30, 2000).
10.12 Letter Agreement, dated February 1, 2000 terminating a Loan
Agreement between the Company and Spin Forge, LLC, which Loan
Agreement was dated as of March 18, 1998 (incorporated by
reference to the Company's Form 10-K filed with the Commission
on March 30, 2000).
10.13 Second Amendment to Deferral and Waiver Agreement, dated as of
March 27, 2000, between Company and Key Bank National
Association (incorporated by reference to the Company's Form
10-K filed with the Commission on March 30, 2000).
10.14 Form of Directors and Officers Indemnification Agreement
(incorporated by reference to the Company's Form 10-K filed with
the Commission on March 30, 2000).
10.15 Stock Purchase Agreement, dated as of January 20, 2000, between
the Company and SNPE, Inc. (incorporated by reference to the
Company's Definitive Proxy Statement filed with the Commission
on May 9, 2000).
10.16 Amendment Number One to Stock Purchase Agreement, dated as of
April 20, 2000, between the Company and SNPE, Inc. (incorporated
by reference to the Company's Form 10-Q filed with the
Commission on May 12, 2000).
10.17 Third Amendment to Deferral and Waiver Agreement, dated as of
May 2, 2000, between the Company and Keybank National
Association (incorporated by reference to the Company's Form
10-Q filed with the Commission on May 12, 2000).
-64-
10.18 Registration Rights Agreement, dated as of June 14, 2000,
between the Company and SNPE, Inc. (incorporated by reference to
the Company's Form 8-K filed with the Commission on June 22,
2000).
10.19 First Amendment to Rights Agreement, dated as of June 13, 2000,
between the Company and Harris Trust & Savings Bank
(incorporated by reference to the Company's Form 8-K filed with
the Commission on June 22, 2000).
10.20 Credit Facility and Security Agreement, dated as of June 14,
2000, between the Company and SNPE, Inc. (incorporated by
reference to the Company's Form 8-K filed with the Commission on
June 22, 2000).
10.21 Convertible Subordinated Note, dated as of June 14, 2000,
between the Company and SNPE, Inc. (incorporated by reference to
the Company's Form 8-K filed with the Commission on June 22,
2000).
10.22 First Amendment to Reimbursement Agreement, dated as of June 14,
2000, between the Company and Keybank National Association
(incorporated by reference to the Company's Form 8-K filed with
the Commission on June 22, 2000).
10.23 Personal Services Agreement, dated as of June 16, 2000, between
the Company and John G. Banker (incorporated by reference to the
Company's Form 8-K filed with the Commission on June 22, 2000).
10.24 Stock Purchase Agreement, dated June 28, 2001, between DMC and
Nobel Explosifs France (incorporated by reference to the
Company's Form 8-K filed with the Commission on July 16, 2001).
10.25 Term Loan Agreement, dated July 3, 2001, between DMC and SNPE,
Inc. (incorporated by reference to the Company's Form 10-K filed
with the Commission on March 26, 2002).
10.26 Stock Pledge Agreement, dated July 3, 2001, between DMC and
SNPE, Inc. (incorporated by reference to the Company's Form 10-K
filed with the Commission on March 26, 2002).
10.27 Credit and Security Agreement, dated December 4, 2001, between
DMC and Wells Fargo Business Credit, Inc. (incorporated by
reference to the Company's Form 10-K filed with the Commission
on March 26, 2002).
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Information regarding Consent of Arthur Andersen LLP
99.1 Letter from DMC to the SEC regarding the Company's Auditors
(incorporated by reference to the Company's Form 10-K filed with
the Commission on March 26, 2002).
99.2 Certification of the President and Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.3 Certification of the Vice President and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(B) Reports on Form 8-K
None.
-65-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DYNAMIC MATERIALS CORPORATION
March 31, 2003 By: /s/ Richard A. Santa
-----------------------------
Richard A. Santa
Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Yvon Pierre Cariou President and Chief Executive Officer March 31, 2003
- --------------------------------
Yvon Pierre Cariou (Principal Executive Officer)
/s/ Richard A. Santa Vice President and Chief Financial Officer March 31, 2003
- --------------------------------
Richard A. Santa (Principal Financial and Accounting Officer)
/s/ Michel Philippe Chairman and Director March 31, 2003
- --------------------------------
Michel Philippe
/s/ Dean K. Allen Director March 31, 2003
- --------------------------------
Dean K. Allen
/s/ Yves Charvin Director March 31, 2003
- --------------------------------
Yves Charvin
/s/ Bernard Fontana Director March 31, 2003
- --------------------------------
Bernard Fontana
/s/ Bernard Hueber Director March 31, 2003
- --------------------------------
Bernard Hueber
/s/ Gerard Munera Director March 31, 2003
- --------------------------------
Gerard Munera
-66-
CERTIFICATIONS
I, Yvon Pierre Cariou, certify that:
1. I have reviewed this annual report on Form 10-K of Dynamic Materials
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: March 31, 2003
/s/ Yvon Pierre Cariou
--------------------------------------
Yvon Pierre Cariou
President and Chief Executive Officer
of Dynamic Materials Corporation
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CERTIFICATIONS
I, Richard A. Santa, certify that:
1. I have reviewed this annual report on Form 10-K of Dynamic Materials
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Dated: March 31, 2003
/s/ Richard A. Santa
---------------------------------------
Richard A. Santa
Vice President and Chief Financial Officer
of Dynamic Materials Corporation
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DYNAMIC MATERIALS CORPORATION
INDEX TO SCHEDULE II
AS OF DECEMBER 31, 2002
PAGE
Report of Independent Auditor................................................70
Report of Independent Public Accountants.....................................71
Schedule II (a)..............................................................72
Schedule II (b)..............................................................72
Schedule II (c) .............................................................72
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REPORT OF INDEPENDENT AUDITOR
To the Stockholders and the
Board of Directors of Dynamic Materials Corporation:
We have audited the consolidated financial statements of Dynamic Materials
Corporation as of December 31, 2002, and for the year then ended, and have
issued our report thereon dated February 14, 2003 (included elsewhere in this
Form 10-K). Our audit also included the financial statement schedules listed in
Item 15 of this Form 10-K. These schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audit.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Denver, Colorado
February 14, 2003
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Dynamic Materials Corporation:
We have audited in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements of Dynamic Materials
Corporation and subsidiary as of December 31, 2001 and 2000 and for the three
years in the period then ended, included in this Form 10-K and have issued our
report thereon dated February 25, 2002. Our audits were made for the purpose of
forming an opinion on the basic consolidated financial statements taken as a
whole. The schedules listed in the index of consolidated financial statements
are presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic consolidated financial
statements. These schedules have been subjected to the auditing procedures
applied in the audit of the basic consolidated financial statements and, in our
opinion, fairly state in all material respects the financial data required to be
set forth therein in relation to the basic consolidated financial statements
taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado
February 25, 2002
This is a copy of the audit report previously issued by Arthur Andersen LLP in
connection with Dynamic Materials Corporation's filing on Form 10-K for the year
ended December 31, 2001. This audit report has not been reissued by Arthur
Andersen LLP in connection with this filing on Form 10-K.
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DYNAMIC MATERIALS CORPORATION
SCHEDULE II(a) - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Balance at Additions Accounts Balance at
beginning Charged to receivable Other end of
of period income written off Adjustments period
Year ended -
December 31, 2000 $ 112,000 $ 45,756 $ (27,756) $ - $ 130,000
December 31, 2001 $ 130,000 $ 101,304 $ (14,036) $ 17,036 $ 234,304
December 31, 2002 $ 234,304 $ 133,688 $ (122,923) $ 10,708 $ 255,769
DYNAMIC MATERIALS CORPORATION
SCHEDULE II(b) - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
WARRANTY RESERVE
Balance at Additions Balance at
beginning charged to Repairs end of
of period income Allowed period
Year ended -
December 31, 2000 $ 153,000 $ 50,526 $(123,526) $ 80,000
December 31, 2001 $ 80,000 $ 48,325 $ (53,325) $ 75,000
December 31, 2002 $ 75,000 $ 96,840 $ (21,840) $ 150,000
DYNAMIC MATERIALS CORPORATION
SCHEDULE II(c) - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
INVENTORY RESERVE
Balance at Additions Balance at
beginning charged to Inventory end of
of period income Write-offs period
Year ended -
December 31, 2000 $ - $ - $ - $ -
December 31, 2001 $ - $ - $ - $ -
December 31, 2002 $ - $ 75,000 $ - $ 75,000
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