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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, 1999
( ) 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
DYNAMIC MATERIALS CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 84-0608431
(State or Incorporation (I.R.S. Employer
or Organization) Identification No.)
551 ASPEN RIDGE DRIVE, LAFAYETTE, COLORADO 80026
(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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation SK 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 10K.
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The approximate aggregate market value of the voting stock held by
nonaffiliates of the registrant was $3,162,930 as of March 15, 2000.
The number of shares of Common Stock outstanding was 2,842,429 as of
March 15, 2000.
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
Dynaclad( and Detaclad(R) technologies. DMC believes that the characteristics of
its high energy metal working processes will enable the development of new
applications for products in a wide variety of industries. The Company
established its Aerospace Group in 1998 after acquiring three businesses that
provide a variety of metal forming, fabrication welding and assembly services to
the aerospace industry.
Explosive Metalworking. Clad metal products are used in manufacturing
processes or environments which involve highly corrosive chemicals, high
temperatures and/or high pressure conditions. For example, the Company
fabricates 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,
the Company has produced titanium clad plates used in the fabrication of metal
autoclaves to replace autoclaves made of brick and lead for two customers in the
mining industry. The Company believes that its 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 metal forming and shock synthesis of synthetic diamonds.
Aerospace Manufacturing. Formed metal products are made from sheet metal
and forgings that are subsequently formed into precise, three-dimensional shapes
that are held to tight tolerances. Metal forming is accomplished through
traditional forming 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 forming 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 and power generation
industries. Product applications include torque box webs for jet engine
nacelles, tactical and ballistic missile motor cases and titanium pressure
tanks.
In January 1998, the Company completed its acquisition of the assets of
AMK Welding ("AMK"), a supplier of commercial aircraft and aerospace-related
automatic and manual gas tungsten and arc welding services. The Company
completed its acquisition of the assets of Spin Forge, LLC ("Spin Forge"), one
of the country's leading manufacturers 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 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 January 20, 2000, the Company
entered into a Stock Purchase Agreement (the "Agreement") with SNPE, Inc.
("SNPE"). Under the Agreement, SNPE would make a $5.8 million cash payment to
the Company in exchange for 2,109,091 shares of the Company's common stock at a
price of $2.75 per share and would lend the Company an additional $1.2 million
under a convertible subordinated note that is due five years from date of
issuance and is convertible into common stock of the Company at a conversion
price of $6.00 per share. SNPE currently owns 14.3% of the Company's outstanding
common stock and would acquire a controlling interest in the Company as a result
of the proposed transaction. SNPE S.A., also known as SNPE Group, the French
parent company to SNPE, operates a competing explosion bonded clad metal plate
business in Europe. The proposed transaction is subject to approval by the
Company's stockholders and certain regulatory approvals. Company
management believes that the necessary stockholder and regulatory approvals
will be received and expects to close the transaction in the second quarter of
2000.
Dynamic Materials Corporation, formerly Explosive Fabricators, Inc., was
incorporated in Colorado in 1971 and was reincorporated in Delaware in 1997.
INVESTMENT CONSIDERATIONS
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. In 1999, the Company experienced
significant operating losses as a result of a significant slowdown in global
market demand for explosion bonded clad metal plate and non-recurring charges
associated with plant closing costs, new facility start-up costs, asset
impairment write-downs and expenses incurred in connection with efforts to sell
the Explosive Metalworking Group. The Company expects the reduced demand for
these products to continue at least through 2000. The Company has 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 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. A significant portion 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. 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. In the year ended December 31, 1999, the
Company's cladding business accounted for approximately 58% 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 approximately
35% of the market for its explosion bonded clad metal products. Demand for clad
metal products has declined in recent years. There can be no assurance that the
demand for clad metal products will improve in the future, and such result could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Increasing Importance of Aerospace Manufacturing. The Company's
aerospace manufacturing business was established in 1998 and accounted for
approximately 42% of the Company's net sales for the fiscal year ended December
31, 1999. 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 currently estimates that it services a very small percentage of the
aerospace industry. While the Company believes that it will be able to 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.
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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 dense population, 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
cladding site in Dunbar, Pennsylvania. The lease for the Pennsylvania site will
expire in 2005. There can be no assurance that the Company will be successful in
negotiating a new lease for the Pennsylvania site on acceptable terms, or in
identifying suitable additional or alternate sites should the Company fail to
renew its current lease. The failure to obtain required governmental approvals
or permits, or to renew the current lease on acceptable terms would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Competition. Competition in the explosion metal working business,
including both metal cladding and metal forming, and the aerospace business is,
and is expected to remain, intense. The competitors in both industries include
major 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 believes that its primary competitors for clad metal
products are Nobelclad and Asahi Chemical in explosion bonded clad metal
products and in clad metal products fabricated using alternative technologies,
Lukens Steel, Japan Steelworks and AMETEK, Inc. in roll bonding, and Nooter
Corp., Struthers Industries, Inc., Joseph Oat Corp., and Taylor Forge in welding
overlay. The Company believes that its primary competitors in the aerospace
industry are Aircraft Welding and Manufacturing Company, Inc., Pressure Systems,
Inc., Kaiser Electroprecision, Eagle-Picher, Custom Microwave and Alliant
Techsystems Inc. The Company competes against clad metal product manufacturers
and 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 "Supplies."
Customer Concentration. A significant portion of the Company's net sales
is derived from a relatively small number of customers. For the periods
indicated, each of the following customers accounted for 10% or more of the
Company's revenues: in 1997, Australian Submarine Corporation Pty. Limited
(13%); in 1998, none; and in 1999, Atlantic Research Corporation (10%). Large
customers also accounted for a significant portion of the Company's backlog in
March 2000. 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, approximately 60% to 75% of the Company's
revenues have been derived from customers in the chemical processing, power
generation and petrochemical industries. As was evidenced by the operating
losses the Company incurred in 1999, 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.
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Leverage - Defaults on Debt. The Company has suffered losses from
operations in 1999 due to reduced demand for its explosion bonded clad metal
products and is in default of its debt obligations. Consequently, the Company's
December 31, 1999 balance sheet reflects a net working capital deficiency that
raises substantial doubt about the Company's ability to continue as a going
concern. The Company expects the reduced demand for its bonded products to
continue at least through the year 2000. In order to meet its financial needs
during 2000, the Company must obtain some form of debt or equity financing or
combination thereof, or complete a sale of assets, a merger or other
transaction. The Company is actively pursuing a common stock sale through the
form of a definitive stock purchase agreement with SNPE. Presently, management
is attempting to raise funds to pay down its bank debt, a portion of which is
currently due the earlier of May 15, 2000 or the closing date of the transaction
with SNPE. However, there are no assurances that the Company will be successful
in closing this transaction or, if successful, that it will be able to
successfully restructure or refinance it existing debt obligations. In
conjunction with attempts to secure financing, the Company may need to initiate
further reductions in its workforce and other areas of costs to reduce future
financial obligations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Possibility of New Controlling Stockholder. On January 20, 2000, the
Company entered into the Agreement with SNPE. Under the terms of the Agreement,
SNPE would acquire a controlling interest in the Company. SNPE, as the holder of
greater than 50% of the Company's outstanding common stock, would be able to
elect all of the directors of DMC standing for election at each annual
stockholders' meeting and to direct corporate policy.
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,
including guidelines and regulations for the safe handling and transport of
explosives provided by the U.S. Bureau of Tobacco and Fire Arms, 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, 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 shrapnel and facility deterioration as well as exposure
to sound and ground vibration.
-4-
EXPLOSIVE METALWORKING
The explosive metalworking business includes the use of explosives to
perform metal cladding, metal forming, and shock synthesis. DMC believes that
the characteristics of its high-energy metal working processes will enable the
development of new applications for products in a wide variety of industries.
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 molecular 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 an electron-sharing
metallurgical bond between the two metal components. The metals used can include
metals of the same type, for example steel to steel, as well as metals with
substantially different densities, melting points, and/or yield strengths, such
as titanium and aluminum alloys with stainless and low carbon steels; copper and
aluminum alloys with kovar or stainless steel; zirconium alloys with low carbon
steel and nickel alloys. DMC manufactures clad metal for uses such as the
fabrication of pressure vessels, heat exchangers and transition joints for the
hydrocarbon processing, chemical processing, power generation, petrochemical,
pulp and paper, mining, shipbuilding and heat, ventilation and air conditioning
(HVAC) industries and other industries that require metal products that can
withstand exposure to corrosive materials, high temperatures and high pressures.
In addition, DMC's Dynaclad( and Detaclad(R) technologies have enabled the use
of metal products in new applications such as the manufacture of metal
autoclaves for use in the mining industry.
The Company's clad metal 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 clad metal from a customer, the Company identifies
sources for the specified raw materials. The Company obtains the raw materials
from a variety of sources based on quality, availability, transportation costs
and unit price. After the Company receives the materials they are inspected for
conformity to the order specification and product quality criteria. The raw
materials are then prepared for bonding at the Company's new Mount Braddock,
Pennsylvania manufacturing facility. Bonding preparation includes abrasive
cleaning of the mating surfaces of each plate, preparation of the assembly,
metal scoring and trimming. In some cases, plates may be seam welded to create
large parts from readily available standard sizes. The completed assemblies are
transported to the Company's Dunbar, Pennsylvania bonding site where a blasting
agent is loaded on top of the assembly and detonated in a carefully controlled
environment using a remote system. The Company returns the now-bonded metal
plates to the Company's Mount Braddock manufacturing facility for further
processing. This processing might include heat-treating, flattening, beveling,
stripping, milling, cutting and/or special surface preparation to comply with
customer specifications. The Company completes the bonding process by performing
testing for final certification of the product to the customer's specifications.
Shock Synthesis. In connection with the 1996 acquisition of the Detaclad
division of DuPont, DMC entered into an agreement to provide 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
Metal Forming. The Company currently manufactures formed metal parts for
the commercial aircraft, aerospace and power generation industries. Formed metal
products are made from sheet metal or forgings that are subsequently formed into
precise, three-dimensional shapes that are held to tight tolerances according to
customers' specifications. Metal forming is accomplished through the use of
traditional metal forming technologies.
Traditional forming 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 metal products include
tactical and ballistic missile motor cases, high strength, light weight
pressurant tanks utilizing specialty aerospace
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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.
The Company's formed metal 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 formed metal 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 forming process, the Company treats the metal parts by
using operations such as anodizing, heat-treating and painting. The Company
completes the forming 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 in the recent acquisitions of 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 metal forming 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:
Add New Product Lines or Customers. The Company seeks to grow its sales
base by adding new product lines through the internal development of new
cladding products and by adding new customers and/or programs to its Aerospace
Group through recently initiated sales and marketing programs. During 1996, the
Company completed production of a new product ( titanium clad plates used in the
fabrication of metal autoclaves to replace autoclaves made of brick and lead.
The Company has recently identified select new customers for transition joints
made from clad plate and believes that it may benefit from additional focus in
this marketplace. The Company is currently focusing on expanding its metal
forming and machining businesses through sales and marketing efforts. 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.
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 and Korea. The Company is working to
establish relationships with independent sales representatives, end users,
engineering contractors and metal fabricators in these markets and has developed
the capacity in its sales and marketing department to address these markets. The
Company is also considering expanding its operations to include facilities
located outside of the United
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States. The Company's plans to expand internationally depend 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.
Take Advantage of Recent Investments in New Technology and Manufacturing
Leadership. The Company seeks to take advantage of its technology leadership in
the metal working business. In 1998 and 1999, the Company invested nearly $7
million in new manufacturing equipment and technologies that Company management
believes has substantially reduced the fixed costs of manufacturing clad plates.
Management believes this new clad plate manufacturing facility this will provide
a significant advantage to the Company in the increasingly competitive global
marketplace for explosion bonded clad metal plates. The Company has a research
and development program that is focused on identifying new raw materials which
may be useful in high energy metal working, identifying new product offerings,
and expanding the Company's production capabilities.
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.
COMPETITION
Competition in the explosion metal working business and the aerospace
business is, and is expected to remain, intense. The competitors in both
industries include major domestic and international companies. Competitors in
the explosion metal working business use alternative technologies; additionally
certain of DMC's customers and suppliers who have some in-house metal working
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 metal forming
customers in these industries 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. For the periods
indicated, each of the following customers accounted for 10% or more of the
Company's revenues: in 1997, Australian Submarine Corporation Pty. Limited
(13%); in 1998, none; and in 1999, Atlantic Research Corporation (10%). Large
customers also accounted for a significant portion of the Company's backlog in
March 2000. 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
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suppliers, public relations, customer references, inquiries from technical
articles and seminars and trade shows. The Company markets its 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.
BACKLOG
The Company's backlog was approximately $11.8 million at December 31,
1999 compared with approximately $15.8 million and $12.7 million at December 31,
1998 and 1997, 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, 1999 to be filled during
2000. 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 170 full-time employees as of March
15, 1999, the majority of whom are engaged in manufacturing operations. The
Company believes that its relations with its employees are good.
PROTECTION OF PROPRIETARY INFORMATION
The Company holds 11 United States 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) and EFTEK(R). The
Company's current patents expire on various dates through 2012; however, 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.
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. The Company is
in the process of obtaining a 25 year extension of the lease. The Company also
leases office space in Lafayette, Colorado under a lease that expires in
February 2001. 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 2002, and the Company holds an option to purchase the land
and building housing the Spin Forge operations through January 2002. Both the
lease and option may be extended under certain conditions. 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 an
option to purchase the land and building housing the PMP operations through
December 2000, after which time the Company holds a first right of offer to
purchase the land and building through December 2008. The Company believes that
its current facilities are adequate for its existing operations and are in good
condition. See "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
On October 15, 1999, the Company was named as a third party defendant in
a civil action brought in the United States District Court, District of Wyoming.
The additional parties to the action are the plaintiff, The Industrial Company
of Wyoming, Inc. ("TIC"), and the defendant and third party plaintiff, Process
Partners, Inc., d/b/a International Alliance Group ("IAG"). As stated in the
Complaint, IAG entered into a contract with Mark Steel
-8-
Corporation ("Mark Steel") under which Mark Steel was obligated to supply a
Disengager/Stripper unit (the "Unit") to IAG in connection with certain work IAG
was performing at a Wyoming oil refinery. Mark Steel in turn entered into a
contract with the Company to supply a head for the Unit. The Company entered
into a contract with Trinity Industries, Inc. ("Trinity") to form the head for
the Unit. IAG claims that the Company breached its contract with Mark Steel by
failing to supply the head for the Unit on a timely basis.
In the lawsuit, TIC's damages claims against IAG total approximately
$700,000. IAG has filed an answer which denies responsibility for such damages
and has asserted claims against the Company for breach of contract, breach of
the implied warranty of workmanlike performance and/or negligence, including
consequential damages. IAG asserts that, to the extent that IAG is liable for
damages sought by TIC, the Company is responsible for some of such damages. To
date, IAG has not asserted a specific dollar amount of the damages it seeks to
recover from the Company. The Company has filed an answer which denies IAG's
claims and has asserted a fourth-party complaint against Trinity for breach of
contract. Pursuant to these claims, the Company asserts that, if the Company is
responsible for damages to IAG, Trinity is responsible for some or all of such
damages. Trinity has denied responsibility for such damages.
At this time, the parties are engaged in discovery with regard to the
above claims. A jury trial is scheduled for August 2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote by security holders during the
fourth quarter of the fiscal year ended December 31, 1999.
-9-
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.
1998 HIGH LOW
---- ---- ---
First Quarter $ 10 1/2 $ 7 7/8
Second Quarter $ 9 5/8 $ 7 7/8
Third Quarter $ 9 $ 5 1/4
Fourth Quarter $ 6 $ 3 9/16
1999
-----
First Quarter $ 6 7/32 $ 3 1/4
Second Quarter $ 5 $ 3
Third Quarter $ 4 1/8 $ 1 5/16
Fourth Quarter $ 1 7/8 $ 27/32
As of March 15, 2000 there were approximately 318 holders of record of
the Common Stock.
The Company has never declared or paid 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 the foreseeable future.
-10-
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,
-----------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-----------------------------------------------------------------------------------------
STATEMENT OF INCOME
Net sales $ 29,131,289 $ 38,212,051 $32,119,585 $29,165,289 $19,521,133
Cost of products sold 25,419,287 30,343,637 24,459,168 23,187,155 15,281,973
------------ ------------ ----------- ----------- -----------
Gross profit 3,712,002 7,868,414 7,660,417 5,978,134 4,239,160
Costs and expenses 6,608,895 5,332,458 4,370,091 3,302,602 3,133,640
------------ ------------ ----------- ----------- -----------
Income from operations (2,896,893) 2,535,956 3,290,326 2,675,532 1,105,520
Other income (expense) (975,215) (263,200) (61,413) (92,878) (43,181)
------------ ------------ ----------- ----------- -----------
Income before income tax provision (3,872,108) 2,272,756 3,228,913 2,582,654 1,062,339
Income tax (provision) benefit 1,154,000 (887,000) (1,221,000) (959,000) (391,145)
------------ ------------ ----------- ----------- -----------
Net income $ (2,718,108) $ 1,385,756 $ 2,007,913 $ 1,623,654 $ 671,194
============= ============ =========== =========== ===========
Net income per share:
Basic $(0.96) $0.50 $0.75 $0.64 $0.27
Diluted $(0.96) $0.49 $0.70 $0.59 $0.26
Weighted average number of shares
outstanding:
Basic 2,822,184 2,770,139 2,681,943 2,522,305 2,496,487
Diluted 2,822,184 2,852,547 2,875,703 2,741,868 2,547,797
FINANCIAL POSITION
Current assets $ 8,898,184 $ 11,145,995 $ 9,809,503 $11,653,968 $ 7,813,704
Total assets 30,087,318 33,201,578 14,405,809 16,485,240 10,040,668
Current liabilities 19,921,074 6,069,050 3,455,700 4,111,784 3,350,039
Non-current liabilities 136,261 14,503,617 90,632 4,147,696 184,460
Stockholders' equity 10,029,983 12,628,911 10,859,477 8,225,760 6,506,169
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GOING CONCERN CONSIDERATIONS
The Company has suffered losses from operations in 1999 and is in
default of its debt obligations. Consequently the Company's December 31, 1999
balance sheet reflects a net working capital deficiency that raises substantial
doubt about the Company's ability to continue as a going concern. In order to
meet its financial needs during 2000, the Company must obtain some form of debt
or equity financing or combination thereof, or complete a sale of assets, a
merger or other transaction. Presently, management is attempting to raise funds
to pay down its bank debt. The overdue principal payments totaling approximately
$1,467,000 are currently due on the earlier of May 15, 2000 or the closing of
the transaction contemplated by the Stock Purchase Agreement with SNPE, Inc.,
discussed below under the heading "Liquidity and Capital Resources." The Company
is actively pursuing a common stock sale through the form of a definitive stock
purchase agreement. However, there are no assurances that the Company will be
successful in its fund raising efforts or, if successful, that it will be able
to successfully restructure or refinance its existing debt obligations. In
conjunction with attempts to secure financing, the Company may need to initiate
further reductions in its workforce and other areas of costs to reduce future
financial obligations.
-11-
GENERAL
Dynamic Materials Corporation ("DMC" or the "Company") is a worldwide
leader in explosive metalworking and, through its new 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. The Company performs metal cladding using its proprietary
Dynaclad( and Detaclad(R) technologies. The Company's revenues from its
explosive metalworking businesses, as a proportion of total Company revenues,
have declined as a result a significant slowdown in global market demand for
explosion bonded clad metal plate and the 1998 acquisitions of AMK Welding, Spin
Forge and Precision Machined Products. The Company's Aerospace Group was formed
from these three acquisitions and accounted for 22% and 42% of the Company's
1998 revenues and 1999 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, the Company
fabricates 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,
the Company has produced titanium clad plates used in the fabrication of metal
autoclaves to replace autoclaves made of brick and lead for two customers in the
mining industry. The Company believes that its clad metal products are an
economical, high-performance alternative to the use of sol id
corrosion-resistant alloys. In addition to clad metal products, the explosive
metalworking business includes shock synthesis of synthetic diamonds.
Aerospace Manufacturing. Formed metal products are made from sheet metal
and forgings that are subsequently formed into precise, three-dimensional shapes
that are held to tight tolerances. Metal forming is accomplished through the use
of traditional forming 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 forming and welding operations are
often performed to support the manufacture of completed assemblies and
sub-assemblies required by its customers. Fabrication and assembly 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 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.
The Company completed three separate business acquisitions during 1998.
On January 5, 1998, the Company acquired certain assets of AMK Welding, Inc.
(AMK). AMK supplies commercial aircraft and aerospace-related automatic and
manual, gas tungsten and arc welding services. On March 18, 1998, the Company
completed the acquisition of certain assets of Spin Forge, LLC (Spin Forge). The
Company's management believes Spin Forge is one of the country's leading
manufacturers of tactical missile motor cases and titanium pressure vessels for
the commercial aerospace and defense industries. On December 1, 1998, the
Company acquired substantially all of the assets of Precision Machined Products,
Inc. ("PMP"). PMP is a contract machining shop specializing in high-precision,
high-quality, complex machined parts used in the aerospace, satellite and high
technology industries.
On January 8, 1999, the Board of Directors of DMC declared a dividend of
one preferred share purchase right (a "Right") for each outstanding share of
common stock. The dividend was paid on January 15, 1999, the rights record date,
to the stockholders of record on that date. Each Right entitles the registered
holder to purchase from DMC one one-hundredth of a share of Series A Junior
Participating Preferred Stock, par value $.05 per share, of DMC at a purchase
price of $22.50, subject to adjustment.
On June 23, 1999, the Company announced that it had entered into an
asset sale agreement to sell certain assets of its Explosive Metalworking Group
to AMETEK, Inc. (AMETEK) for an approximate purchase price of $17 million.
Company management believed that the sale of DMC's explosive metalworking
business would enable the Company to eliminate the majority of its outstanding
debt, thus strengthening the Company's balance sheet and
-12-
enabling the Company to focus its business strategy on consolidating suppliers
in the aerospace industry through the acquisition of complementary businesses.
The closing of the transaction was expected to occur during the latter part of
1999, pending the satisfaction of certain conditions. However, in a letter dated
October 20, 1999, AMETEK notified the Company that it was terminating the Asset
Purchase Agreement between the two companies. The Company does not believe that
AMETEK had a legal basis for terminating the Agreement and is evaluating its
course of action relating to such termination.
Due largely to the operating loss the Company incurred during 1999, the
Company violated certain financial covenants under its debt agreements. Once it
became apparent that AMETEK might terminate the Asset Purchase Agreement and
that financial covenant violations under its debt agreements would continue, the
Company began to evaluate various business strategies and financing alternatives
in connection with the need to restructure its debt agreements and/or
re-capitalize the Company's balance sheet. These efforts culminated in the
Company entering into a Stock Purchase Agreement (the "Agreement") with SNPE,
Inc. ("SNPE") that was signed on January 20, 2000. Under the Agreement, SNPE
would make a $5.8 million cash payment to the Company in exchange for 2,109,091
shares of the Company's common stock at a price of $2.75 per share and would
lend the Company an additional $1.2 million under a convertible subordinated
note that carries a 5% interest rate, is due five years from date of issuance
and is convertible into common stock of the Company at a conversion price of
$6.00 per share. SNPE currently owns 14.3% of the Company's outstanding common
stock and would acquire a controlling interest in the Company as a result of the
proposed transaction. The proposed transaction is subject to approval by the
Company's stockholders and certain regulatory approvals. Company management
believes that the necessary stockholder and regulatory approvals will be
received and expects to close the transaction in the second quarter of 2000.
In 1999, the Company experienced significant operating losses as a
result of a significant slowdown in global market demand for explosion bonded
clad metal plate and non-recurring charges associated with plant closing costs,
new facility start-up costs, asset impairment write-downs and expenses incurred
in connection with efforts to sell the Explosive Metalworking Group. The Company
expects the reduced demand for these products to continue at least through 2000.
The Company 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. 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. A significant portion of the Company's
operating expenses is 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. In addition,
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 from time to time to have, short-term adverse effects
on the Company's 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 the Company's common stock.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
NET SALES. Net sales for 1999 decreased 23.8% to $29,131,289 from $38,212,051 in
1998. The Company's new Aerospace Group, which was formed in 1998 as a result of
the acquisitions of AMK, Spin Forge and PMP, contributed $12,116,650 to 1999
sales (41.6% of total sales) sales versus sales of $8,484,778 in 1998 (22.2% of
total sales). This 42.8% increase in Aerospace Group sales is largely due to the
December 1, 1998 acquisition of PMP whose results are included in Aerospace
Group sales for all of 1999 but only one month of 1998. The increase in
Aerospace Group sales was more than offset by a $12,712,634 decline in sales by
the Company's Explosion Metalworking Group. Sales by this Group, whose
operations include explosion bonding of clad metal and shock synthesis of
synthetic diamonds,
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decreased 42.8% from $29,727,273 in 1998 (77.8% of total sales) to $17,014,639
in 1999 (58.4% of total sales). The large decrease in Explosive Metalworking
Group sales reflects a significant slowdown in global market demand for
explosion bonded clad metal plate that is expected to continue for the year
2000.
GROSS PROFIT. As a result of the sharp decline in the Company's net sales, gross
profit for 1999 decreased by 52.6% to $3,712,002 from $7,839,451 in 1998. The
Company's gross profit margin for 1999 was 12.7%, a 38.0% decline from the gross
profit margin of 20.5% in 1998. Gross profit margin for the Company's Explosion
Metalworking Group decreased from 18.1% in 1998 to 4.4% in 1999, while the 1999
gross profit margin for the Aerospace Group decreased to 24.5% from 29.2% in
1998. The large decrease in the gross profit margin for the Explosive
Metalworking Group is principally due to unfavorable fixed manufacturing
overhead cost variances associated with the sharp declines in production and
sales of clad plates. Fixed manufacturing overhead costs for the Explosive
Metalworking Group have been significantly reduced through the July 1999 closing
of the Group's Colorado manufacturing facility and consolidation of all of the
Group's manufacturing activities in its new Mount Braddock, Pennsylvania plant.
The decline in the gross margin rate for the Aerospace Group reflects a decrease
in year-to-year sales at Spin Forge and related unfavorable absorption of fixed
manufacturing overhead expenses into cost of products sold.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by
$273,457, or 8.4%, to $3,536,450 in 1999 from $3,262,993 in 1998. This increase
includes a $556,108 increase in direct Aerospace Group general and
administrative expenses. The increase in direct general and administrative
expenses of the Aerospace Group relates to the timing of the 1998 acquisitions
of AMK, Spin Forge and PMP that were completed on January 5, March 18 and
December 1, 1998, respectively. As a percentage of net sales, general and
administrative expenses increased from 8.5% in 1998 to 12.1% in 1999. This
increased percentage is largely attributable to the significant decrease in
sales by the Explosive Metalworking Group.
SELLING EXPENSE. Selling expenses decreased by 23.0% to $1,424,774 in 1999 from
$1,850,973 in 1998. This decrease reflects lower expense levels in a number of
categories, including compensation and benefits, advertising and promotion,
reserves for bad debts and travel and entertainment expenses. Compensation and
benefit expense decreases are associated with reduced staffing levels in
response to the decline in demand for explosion bonded clad metal plate.
However, due to the 23.8% decrease in 1999 sales, selling expenses as a
percentage of net sales increased slightly from 4.8% in 1998 to 4.9% in 1999.
START-UP COSTS. In the third quarter of 1998, the Company began to separately
report the start-up costs associated with the construction of a new facility in
Pennsylvania for the manufacture of clad metal plates. Start-up costs increased
from $189,529 in 1998 to $334,372 in 1999. These start-up costs included
salaries, benefits and travel expenses for Company employees assigned to this
project, field office expenses and other operating expenses directly associated
with this construction project. The new facility commenced operations in August
1999 at which time all operating costs associated with this new facility began
to be recorded as manufacturing overhead that is included in the computation of
cost of products sold.
PLANT CLOSING COSTS. On April 23, 1999, the Company announced that it would be
closing its Louisville, Colorado-based explosion bonded clad metal plate
manufacturing facility in the third quarter of 1999 and consolidating all of its
Explosive Metalworking Group operations into the new Pennsylvania-based clad
metal plate manufacturing facility. For the year ended December 31, 1999, the
Company recorded non-recurring charges of $812,197 related to costs associated
with this plant closing. Plant closing costs include severance pay to terminated
employees, outplacement service fees and certain expenses incurred in connection
with final plant shutdown, clean-up and site reclamation work subsequent to the
discontinuation of manufacturing activities at this facility in July.
IMPAIRMENT OF LONG-LIVED ASSETS. In connection with the plant closing discussed
above, the Company identified certain long-lived assets associated with its
Colorado manufacturing operations that were to be abandoned and that had
negligible fair market values. Accordingly, the Company recorded asset
impairment write-down charges in the aggregate amount of $179,004 during 1999.
-14-
The Company also identified certain inventory that was determined to have little
value as a result of the plant closing. This inventory, which totaled
approximately $108,000, was consequently written off in 1999 as a charge to cost
of products sold.
COSTS RELATED TO ATTEMPTED ASSET DISPOSITION. On June 23, 1999, the Company
announced that it had entered into an agreement to sell certain assets relating
to its Explosive Metalworking Group to AMETEK for approximately $17 million.
However, on October 20, 1999, AMETEK notified the Company that it was
terminating the Asset Purchase Agreement. In connection with the Company's
efforts during 1999 to sell its Explosive Metalworking Group, the Company
recorded non-recurring expenses of $322,098. These expenses related principally
to investment banking, legal and other third party fees associated with the
terminated AMETEK transaction.
INCOME (LOSS) FROM OPERATIONS. The Company reported a $2,896,893 loss from
operations in 1999 compared to income from operations of $2,535,956 in 1998. The
1999 operating loss is a result of the 23.8% decrease in net sales discussed
above and non-recurring charges in the aggregate amount of $1,647,671 associated
with plant closing costs, new facility start-up costs, asset impairment
write-downs and expenses incurred in connection with efforts to sell the
Explosive Metalworking Group. The Company's Aerospace Group reported income from
operations of $862,323 in 1999 as compared to $1,283,338 in 1998; with this
decrease being largely attributable to unfavorable product mix changes that
resulted decreased gross margin levels. The Explosive Metalworking Group
reported a loss from operations of $3,437,118 in 1999, including $1,325,573 of
non-recurring expenses associated with new facility start-up costs, plant
closing costs and asset impairment write-downs, as compared to income from
operations of $1,252,618 in 1998. Non-recurring corporate costs in the amount of
$322,098 that were incurred in connection with the attempted sale of the
Explosive Metalworking Group were not allocated to either of the Company's two
business segments in computing the above business segment income (loss) from
operations amounts for 1999.
INTEREST EXPENSE. Interest expense increased by 356% to $1,009,911 in 1999 from
$283,706 in 1998. This large increase is attributable to borrowings under the
Company's revolving line of credit with the Company's bank that were required to
finance the 1998 acquisitions of AMK, Spin Forge and PMP and that were
outstanding for a full year in 1999 and to interest expense under the Company's
industrial development revenue bonds that were used to finance the new clad
metal plate manufacturing facility in Pennsylvania. Interest expense on the
bonds was capitalized during the construction period, which ended on August 1,
1999, and expensed thereafter as the facility became operational.
INCOME TAX PROVISION. Due to losses before income taxes and the ability to
carry-back the major portion of these losses to prior years in which the Company
generated taxable income, the Company recorded an income tax benefit of
$1,154,000 in 1999 as compared to a tax provision of $887,000 in 1998. The
effective tax rates for recording the 1999 tax benefit and the 1998 tax
provision were 29.8% and 39.0%, respectively. The 1999 tax loss exceeded the
amount of Federal tax that can be carried back to the 1997 and 1998 tax years
and the Company did not recognize a tax benefit with respect to the portion of
the 1999 tax loss that can be carried forward. Additionally, the 1999 tax loss
cannot be carried back for state tax purposes. As a result of the foregoing
factors, the effective tax benefit rate for 1999 was significantly lower than
the Company's effective tax rate for 1998.
NET INCOME (LOSS). The Company recorded a net loss of $2,718,108 in 1999 as
compared to net income of $1,385,756 in 1998. The significant decrease in net
earnings was primarily attributable to decreased gross profit from the Company's
explosion metalworking group, non-recurring expenses in the aggregate amount of
$1,647,671 associated with plant closing costs, new facility start-up costs,
asset impairment write-downs and expenses incurred in connection with efforts to
sell the Explosive Metalworking Group and increased interest expense.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
NET SALES. Net sales for 1998 increased 19.0% to $38,212,051 from $32,119,585 in
1997. The Company's new aerospace group, which was formed in 1998 as a result of
the acquisitions of AMK, Spin Forge and PMP, contributed $8,484,778 to 1998
sales and thus accounted for the entire sales increase. Sales by the Company's
explosion metalworking group, which includes explosion bonding of clad metal,
explosively formed metal products and shock
-15-
synthesis of synthetic diamonds, decreased 7.5% from $32,119,585 in 1997 to
$29,727,273 in 1998. This decrease reflects a decrease in sales of explosively
formed products to $2,097,425 in 1998 from $3,832,209 in 1997 due to a
significant reduction in orders from a customer that accounts for a majority of
such sales. As a result of this customer no longer ordering explosively formed
parts from the Company, the Company expects sales of explosively formed products
to be less than $300,000 in 1999.
GROSS PROFIT. As a result of the Company's increase in net sales, gross profit
for 1998 increased by 3.3% to $7,839,451 from $7,592,388 in 1997. The Company's
gross profit margin for 1998 was 20.5%, a 13.1% decline from the gross profit
margin of 23.6% in 1997. Gross profit margin for the Company's explosion
metalworking group decreased from 23.6% in 1997 to 18.1% in 1998, while the 1998
gross profit margin for the new aerospace group was 29.2%. The large decrease in
the gross profit margin for the explosion metalworking group is principally due
to proportionately lower sales of explosively formed products that carry
significantly higher margins than sales of clad metal plates. As discussed
above, a large explosion forming customer no longer orders product from the
Company and 1999 sales of explosively formed products are expected to be less
than $300,000.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by
$924,638, or 39.5%, to $3,262,993 in 1998 from $2,338,355 in 1997. The largest
portion of this increase relates to $553,618 of new general and administrative
expenses associated with the operations of AMK, Spin Forge and PMP which were
acquired on January 5, 1998, March 18, 1998 and December 1, 1998, respectively.
Expenses in 1998 also include $262,524 of non-recurring expenses relating to the
departure of the Company's former president and chief executive officer in the
third quarter of 1998. General and administrative expenses are expected to
increase in 1999 to support a full year of operations for the three aerospace
group acquisitions and other strategic business initiatives. After adjustment
for non-recurring expenses related to the departure of the Company's former CEO,
general and administrative expenses as a percentage of net sales increased from
7.3% in 1997 to 7.9% in 1998.
SELLING EXPENSE. Selling expenses decreased by 5.7% to $1,850,973 in 1998 from
$1,963,707 in 1997. This decrease reflects lower expense levels in a number of
categories, including compensation and benefits, advertising and promotion, and
consulting. Decreases in these categories were partially offset by an increase
in the provision for bad debts. The Company's allowance for doubtful accounts
increased from $150,000 as of December 31, 1997 to $225,000 as of December 31,
1998 due to a specific provision in the amount of $137,698 for an outstanding
receivable from a customer that was experiencing significant financial
difficulty. The customer filed for bankruptcy in 1999 and the Company was
required to record a write-off for the full amount of the receivable during 1999
since liquidation proceeds from the bankruptcy proceeding were inadequate to
satisfy any obligations to unsecured creditors. Selling expenses as a percentage
of net sales decreased from 6.1% in 1997 to 4.8% in 1998.
START-UP COSTS. In the third quarter of 1998, the Company began to separately
report the start-up costs associated with the construction of a new facility in
Pennsylvania for the manufacture of clad metal plates. Start-up costs for 1998
totaled $189,529 and include salaries, benefits and travel expenses for Company
employees assigned to this project, field office expenses and other operating
expenses directly associated with this project. The Company will continue to
incur and separately report start-up costs in 1999 until the new facility
commences operations during the last half of 1999.
INCOME FROM OPERATIONS. Income from operations decreased by 22.9% to $2,535,956
in 1998 from $3,290,326 in 1997. This decrease is a direct result of decreased
sales and gross profits from the Company's explosion metalworking group,
non-recurring expenses in the amount of $262,524 relating to the departure of
the Company's former president and chief executive officer, and $189,529 in
start-up costs discussed above. Income from operations in 1998 for the Company's
explosion metalworking group and aerospace group was $1,252,618 and $1,283,338,
respectively, versus 1997 income from operations of $3,290,326 that was
generated entirely by the explosion metalworking group.
INTEREST EXPENSE. Net interest expense increased more than threefold to $272,121
in 1998 from $78,590 in 1997. This increase is due to borrowings under the
Company's revolving line of credit with KeyBank of Colorado that were required
to finance the AMK, Spin Forge and PMP acquisitions. Interest expense is
expected to increase in 1999 as a result of revolving credit loans used to
finance the PMP acquisition being outstanding for the full year and the initial
recording of interest expense on the industrial development revenue bond
financing for the new Pennsylvania
-16-
manufacturing facility. Interest on the industrial development revenue bonds is
being capitalized during the construction period and will not be expensed until
the new facility becomes operational during the second half of 1999.
INCOME TAX PROVISION. The Company's income tax provision decreased by 27.4% to
$887,000 in 1998 from $1,221,000 in 1997, and follows the decrease in income
from operations and income before income taxes. The effective tax rate was 39.0%
in 1998 and 37.8% in 1997.
NET INCOME. Net income decreased by 31.0% to $1,385,756 in 1998 from $2,007,913
in 1997 and, as a percentage of net sales, was 3.6% in 1998 compared to 6.3% in
1997. This decrease was primarily attributable to decreased gross profit from
the Company's explosion metalworking group and increased general and
administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company 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 loss the Company incurred during 1999,
the Company violated certain financial covenants under both its revolving credit
facility and the reimbursement agreement related to the letter of credit
supporting payment of principal and interest under the Company's industrial
revenue development bonds (the "Bonds"), used to finance the construction of its
manufacturing facilities in Pennsylvania. The Company has entered into an
agreement with its bank under which (i) certain principal payments due September
30, 1999, December 31, 1999 and March 31, 2000 totaling approximately $1,467,000
have been deferred until the earlier of May 15, 2000 or the closing date of the
transaction with SNPE, Inc. described below; (ii) covenant defaults under both
the revolving credit facility and reimbursement agreement are waived until May
15, 2000; (iii) interest rates on the revolving credit facility have been
increased to prime plus 1% on the acquisition and working capital lines and
prime plus 2.25% on the accommodation line; and (iv) maximum borrowings
permitted under the working capital line have been decreased to from $6 million
to $5 million. The working capital line expires by its terms on November 30,
2000.
As of December 31, 1999, borrowings outstanding under the $13 million
revolving credit line totaled $5.7 million on the acquisition line, $2.3 million
on the accommodation line and $2.1 million on the working capital line, and
borrowings outstanding on the Bonds totaled approximately $6.7 million. In
January of 2000, the Company used proceeds from the sale of its Louisville,
Colorado manufacturing facility to pay the acquisition line down to $4.93
million. Borrowings under the accommodation line remained at $2.3 million and
borrowings under the working capital line increased to $2.55 million as of March
15, 2000. The Company expects working capital borrowings to remain in the $2.0
to $3.0 million range until such time that the Company is able to close the
proposed transaction with SNPE, Inc. Since the current bank deferral and waiver
extends only through May 15, 2000 and certain financial covenant violations are
likely to continue beyond this date, all of the foregoing debt has been
classified as a current liability in the Company's December 31, 1999 financial
statements.
On January 20, 2000, the Company entered into the Agreement with SNPE
under which SNPE would acquire 2,109,091 shares of the Company's common stock
for a $5.8 million cash payment and would lend the Company an additional $1.2
million pursuant to a convertible subordinated note due five years from the
issue date. Completion of the transaction is subject to certain regulatory
approvals and approval by the stockholders of the Company at a special meeting
expected to occur in the second quarter of 2000. SNPE currently owns 14.3% of
the Company's common stock and would acquire a controlling interest in the
Company as a result of this transaction. The Company expects to complete the
transaction in the second quarter of 2000. In anticipation of closing the SNPE
transaction, the Company is in current discussions with its bank to amend both
the revolving credit facility and reimbursement agreement with the bank.
Amendment to both agreements would contain new financial covenants that reflect
the Company's current financial position and projected results for the year 2000
and 2001. The Company expects the amended revolving credit facility to have a
term of twelve to eighteen months and consist of a working capital component and
a term component with fixed quarterly principal payments. The current maturity
schedule for the Bonds is expected to remain unchanged. There can be no
assurance that the waivers and deferrals currently in effect will be extended,
that the
-17-
Company will be successful in closing the transaction with SNPE, or that it will
be able to successfully restructure or refinance its existing debt obligations.
The Company believes that its cash flow from operations and funds the
Company expects to be available under its revolving credit facility will be
sufficient to fund working capital and capital expenditure requirements of its
current operations at least until the SNPE transaction is completed in the
second quarter of 2000. If the bank were to refuse to amend the agreement as
described above, or to make further funds available to the Company as permitted
under that agreement, the Company's ability to meet its cash requirements would
be adversely affected.
Assuming that the proposed SNPE transaction closes as expected, the
Company expects to utilize the $7.0 million cash infusion to repay bank debt,
finance working capital requirements and make selective capital investments.
Company management believes that this cash infusion would enable the Company to
restructure its current credit facility and financial covenants relating to its
bank credit agreement and the bonds to ensure compliance with underlying
covenants or obtain replacement financing. Additionally, the Company believes
that proceeds from this contemplated equity sale, cash flow from its operations
and funds expected to be available under a restructured or new credit facility
will be sufficient to fund working capital and capital expenditure requirements
of its current business operations for the foreseeable future. However, if this
contemplated equity sale transaction does not close and the Company is
unsuccessful in restructuring its currently outstanding debt or obtaining
replacement financing, the Company may be required to liquidate certain assets
outside of the normal course of business which could result in a loss on the
disposition of those assets. The financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of many computer programs being
written such that they will malfunction when reading a year of "00." This
problem could cause system failure or miscalculations causing disruptions of
business processes. During the latter part of 1998 and throughout 1999, the
Company pursued a two-prong approach to the Year 2000 issue. The first prong
involved an internal evaluation of the Company's computer systems. The second
prong of the Company's approach involved an integrated process of working with
suppliers and customers to ensure that the flow of goods, services or payments
would not be interrupted because of Year 2000 issues. Tests performed by the
Company indicated that the Company's computer hardware and software systems were
Year 2000 compliant, and the Company did not encounter any problems during the
transition to the year 2000. Additionally, the Company did not experience any
disruption in the flow of goods, services or payments as a result of Year 2000
problems encountered by suppliers and customers. Finally, the Company did not
incur any material 2000 costs because Company employees performed all Year 2000
compliance work.
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; whether and when the contemplated
transaction with SNPE is completed; any actions which may be taken by SNPE as
the controlling shareholder of the Company with respect to the Company and its
businesses; the ability of the Company to successfully restructure or refinance
its existing debt obligations; the ability of the Company to continue to obtain
payment deferrals and covenant waivers from its lenders; 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.
-18-
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,
1999
-----------------------
Line of credit - variable rate $10,100,000
Weighted average interest rate 8.94%
Industrial development revenue
Bonds - variable rate $ 6,685,000
Interest rate 5.70%
As of December 31,
1998
-----------------------
Fixed rate $ 5,742
Interest rate 8.37%
Line of credit - variable rate $ 8,600,000
Weighted average interest rate 6.78%
Industrial development revenue
Bonds - variable rate $ 6,850,000
Interest rate 3.10%
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, 1998
------------------------------------------------------------------------------------
2004 and
2000 2001 2002 2003 thereafter Total
------------------------------------------------------------------------------------
Line of credit $ 5,034,546 $1,956,364 $1,036,364 $1,036,364 $1,036,362 $10,100,000
Weighted average interest rate 8.37% 8.37% 8.37% 8.37% 8.37% 8.37%
Industrial development
revenue bonds - $ 680,000 $ 725,000 $ 795,000 $ 855,000 $3,630,000 $ 6,685,000
Interest rate 5.70% 5.70% 5.70% 5.70% 5.70% 5.70%
-19-
ITEM 8. FINANCIAL STATEMENTS
DYNAMIC MATERIALS CORPORATION
INDEX TO FINANCIAL STATEMENTS
As of December 31, 1999 and 1998
Page
Report of Independent Public Accountants................................... 21
Financial Statements:
Balance Sheets.......................................................... 22
Statements of Operations................................................ 24
Statements of Stockholders' Equity...................................... 25
Statements of Cash Flows................................................ 27
Notes to Financial Statement ........................................... 29
The financial statement schedules required by
Regulation S-X are filed under item 14 "Exhibits,
Financial Statement Schedules and Reports on Form 8K".
-20-
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Dynamic Materials Corporation:
We have audited the accompanying balance sheets of DYNAMIC MATERIALS CORPORATION
(a Delaware corporation) as of December 31, 1999 and 1998, and the related
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1999, 1998 and 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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 financial statements referred to above present fairly, in
all material respects, the financial position of Dynamic Materials Corporation
as of December 31, 1999 and 1998, and the results of its operations and its cash
flows for the years ended December 31, 1999, 1998 and 1997, in conformity with
accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Notes 1 and 4 to the
financial statements, the Company has suffered losses from operations in 1999
and is in default on its debt obligations. Consequently, the accompanying
balance sheet reflects a net working capital deficiency that raises substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1. The accompanying
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
ARTHUR ANDERSEN LLP
Denver, Colorado
February 16, 2000
-21-
Page 1 of 2
DYNAMIC MATERIALS CORPORATION
BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
ASSETS 1999 1998
------ ------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ -- $ --
Accounts receivable, net of allowance for doubtful
accounts of $112,000 and $225,000, respectively 3,816,879 4,832,658
Inventories (Note 3) 3,410,828 5,373,829
Prepaid expenses and other 310,477 214,776
Income tax receivable (Note 6) 1,360,000 499,932
Deferred tax assets (Note 6) -- 224,800
------------ ------------
Total current assets 8,898,184 11,145,995
------------ ------------
PROPERTY, PLANT AND EQUIPMENT (Note 3) 18,867,796 12,729,209
Less- Accumulated depreciation (4,538,838) (3,931,495)
------------ ------------
Property, plant and equipment--net 14,328,958 8,797,714
------------ ------------
CONSTRUCTION IN PROCESS (Note 3) 389,795 1,853,723
RESTRICTED CASH AND INVESTMENTS (Note 4) 424,312 5,048,981
RECEIVABLE FROM RELATED PARTY (Note 8) 354,588 280,000
INTANGIBLE ASSETS, net of accumulated amortization
of $786,077 and $459,759, respectively (Note 3) 5,281,543 5,607,861
OTHER ASSETS, net (Note 3) 409,938 467,304
------------ ------------
$ 30,087,318 $ 33,201,578
============ ============
The accompanying notes to financial statements are
an integral part of these balance sheets.
-22-
Page 2 of 2
DYNAMIC MATERIALS CORPORATION
BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
------------------------------------ ------------ ------------
CURRENT LIABILITIES:
Bank overdraft $ 193,471 $ 805,304
Accounts payable 1,810,577 2,348,090
Accrued expenses 1,096,796 1,734,282
Current maturities on long-term debt (Note 4) 16,785,000 1,148,924
Current portion of capital lease obligation
(Note 7) 35,230 32,450
------------ ------------
Total current liabilities 19,921,074 6,069,050
LONG-TERM DEBT (Note 4) -- 14,306,818
CAPITAL LEASE OBLIGATION (Note 7) 3,069 38,299
DEFERRED TAX LIABILITIES (Note 6) -- 158,500
DEFERRED GAIN ON SWAP TERMINATION (Note 4) 133,192 --
------------ ------------
Total liabilities 20,057,335 20,572,667
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY (Note 5):
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; 2,842,429 and 2,798,391 shares
issued and outstanding, respectively 142,122 139,920
Additional paid-in capital 7,122,553 7,022,450
Deferred compensation (37,970) (54,845)
Retained earnings 2,803,278 5,521,386
------------ ------------
10,029,983 12,628,911
------------ ------------
$ 30,087,318 $ 33,201,578
============ ============
The accompanying notes to financial statements are
an integral part of these balance sheets.
-23-
DYNAMIC MATERIALS CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
------------ ------------ ------------
NET SALES (Note 9) $ 29,131,289 $ 38,212,051 $ 32,119,585
COST OF PRODUCTS SOLD 25,419,287 30,372,600 24,527,197
------------ ------------ ------------
Gross profit 3,712,002 7,839,451 7,592,388
------------ ------------ ------------
COSTS AND EXPENSES:
General and administrative expenses 3,536,450 3,262,993 2,338,355
Selling expenses 1,424,774 1,850,973 1,963,707
New facility start up costs 334,372 189,529 --
Plant closing costs 812,197 -- --
Impairment of long-lived assets 179,004 -- --
Costs related to attempted asset disposition 322,098 -- --
------------ ------------ ------------
Total costs and expenses 6,608,895 5,303,495 4,302,062
------------ ------------ ------------
(LOSS) INCOME FROM OPERATIONS (2,896,893) 2,535,956 3,290,326
OTHER INCOME (EXPENSE):
Other income 14,784 8,921 17,177
Interest expense, net of amounts
capitalized (1,009,911) (283,706) (117,372)
Interest income 19,912 11,585 38,782
------------ ------------ ------------
(Loss) income before income taxes (3,872,108) 2,272,756 3,228,913
INCOME TAX BENEFIT (EXPENSE) (Note 6) 1,154,000 (887,000) (1,221,000)
------------ ------------ ------------
NET (LOSS) INCOME $ (2,718,108) $ 1,385,756 $ 2,007,913
============ ============ ============
NET (LOSS) INCOME PER SHARE (Note 3)
Basic $ (0.96) $ 0.50 $ 0.75
============ ============ ============
Diluted $ (0.96) $ 0.49 $ 0.70
============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING (Note 3)
Basic 2,822,184 2,770,139 2,681,943
============ ============ ============
Diluted 2,822,184 2,852,547 2,875,703
============ ============ ============
The accompanying notes to financial statements
are an integral part of these statements.
-24-
Page 1 of 2
DYNAMIC MATERIALS CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Common Stock Additional Deferred
----------------------- Paid-In Compen- Retained
Shares Amount Capital sation Earnings
---------- ---------- ---------- ---------- ----------
BALANCES, December 31, 1996 2,539,323 $ 126,967 $ 5,971,076 $ -- $2,127,717
Common stock issued for stock
option exercises 179,385 8,969 313,754 -- --
Tax benefit related to non-
statutory options -- -- 268,381 -- --
Compensation expense related
to the accelerated vesting of
certain options -- -- 34,700 -- --
Net income -- -- -- -- 2,007,913
---------- ---------- ---------- ---------- ----------
BALANCES, December 31, 1997 2,718,708 135,936 6,587,911 -- 4,135,630
Common stock issued for stock
option exercises 57,115 2,856 139,865 -- --
Common stock issued in
connection with the
Employee Stock Purchase
Plan (Note 5) 23,068 1,153 111,271 -- --
Tax benefit related to non-
statutory options -- -- 20,021 -- --
Shares issued in connection
with the purchase of
Spin Forge (Note 2) 50,000 2,500 447,300 -- --
Restricted stock grant related
to the purchase of
Spin Forge (Note 2) 7,500 375 67,125 (67,500) --
Shares issued in connection
with the purchase of
PMP (Note 2) 40,000 2,000 213,680 -- --
The accompanying notes to financial statements are
an integral part of these statements.
-25-
Page 2 of 2
DYNAMIC MATERIALS CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Common Stock Additional Deferred
----------------------- Paid-In Compen- Retained
Shares Amount Capital sation Earnings
---------- ---------- ---------- ---------- ----------
Amortization of deferred
compensation -- $ -- $ -- $ 12,655 $ --
Shares repurchased from
related party (73,168) (3,658) (421,627) -- --
Shares received from related
party in partial satisfaction of
related party receivable (Note 8) (24,832) (1,242) (143,096) -- --
Net income -- -- -- -- 1,385,756
---------- ---------- ----------- ---------- ----------
BALANCES, December 31, 1998 2,798,391 139,920 7,022,450 (54,845) 5,521,386
Common stock issued for stock
option exercises 19,500 975 52,150 -- --
Common stock issued in
connection with the
Employee Stock Purchase
Plan (Note 5) 24,538 1,227 47,953 -- --
Amortization of deferred
compensation -- -- -- 16,875 --
Net loss -- -- -- -- (2,718,108)
---------- ----------- ----------- ---------- ----------
BALANCES, December 31, 1999 2,842,429 $ 142,122 $ 7,122,553 $ (37,970) $2,803,278
========== ========== =========== ========== ==========
The accompanying notes to financial statements are
an integral part of these statements.
-26-
Page 1 of 2
DYNAMIC MATERIALS CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ (2,718,108) $ 1,385,756 $ 2,007,913
Adjustments to reconcile net income
to net cash from operating activities-
Depreciation 1,187,785 942,688 561,937
Amortization 326,318 152,308 119,107
Amortization of deferred compensation 16,875 12,655 --
Amortization of deferred gain on swap termination (17,708) -- --
Provision for deferred income taxes 66,300 119,900 74,550
Compensation expense related to the accelerated
vesting of certain options -- -- 34,700
Impairment of long-lived assets 179,004 -- --
Change in (excluding acquisitions)-
Accounts receivable, net 1,015,779 578,209 1,240,239
Inventories 1,963,001 18,090 799,269
Prepaid expenses and other (95,701) (34,235) 77,434
Income tax receivable (860,068) (204,938) (294,994)
Accounts payable (537,513) (786,769) 73,677
Accrued expenses (637,486) 602,883 21,949
------------ ------------ ------------
Net cash flows from operating activities (111,522) 2,786,547 4,715,781
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment and earnings on bond proceeds (110,693) (6,550,707) --
Release of bond proceeds by trustee 4,735,362 1,501,726 --
Cash paid in connection with the construction
of the new facility (5,082,680) (1,853,723) --
Purchase of AMK assets (Note 2) -- (939,968) --
Purchase of Spin Forge assets (Note 2) -- (2,615,691) --
Purchase of PMP assets (Note 2) -- (6,869,920) --
Acquisition of property, plant and equipment (351,425) (961,092) (410,007)
Loan to related party (74,588) (280,000) (221,274)
Investment in patent -- -- (12,091)
Change in other noncurrent assets 57,366 34,036 (23,980)
------------ ------------ ------------
Net cash flows from investing activities (826,658) (18,535,339) (667,352)
------------ ------------ ------------
The accompanying notes to financial statements
are an integral part of these statements.
-27-
Page 2 of 2
DYNAMIC MATERIALS CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Industrial development revenue bond proceeds $ -- $ 6,850,000 $ --
Bond issue costs paid -- (195,720) --
Borrowings/(payments) on line of credit, net 1,500,000 8,600,000 (3,930,000)
Payment on industrial development revenue bonds (165,000) -- --
Payments on long-term debt (5,742) (84,378) (94,373)
Payments on capital lease obligation (32,450) (29,888) (27,530)
Payment of deferred financing costs -- (100,216) --
Cash received upon termination of swap agreements 150,900 -- --
Repayment of bank overdraft (611,833) -- (743,471)
Bank overdraft -- 805,304 --
Cash paid in connection with the shares repurchased
from related party -- (425,285) --
Net proceeds from issuance of common stock 102,305 255,145 322,723
Tax benefit related to non-statutory options -- 20,021 268,381
------------ ------------ ------------
Net cash flows from financing activities 938,180 15,694,983 (4,204,270)
------------ ------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS -- (53,809) (155,841)
CASH AND CASH EQUIVALENTS, beginning of the period -- 53,809 209,650
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of the period $ -- $ -- $ 53,809
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for-
Interest, net of amounts capitalized $ 951,507 $ 138,677 $ 140,240
============ ============ ============
Income taxes $ 145,307 $ 952,017 $ 1,407,700
============ ============ ============
NON-CASH INVESTING ACTIVITIES:
During 1998, $144,338 of the shares acquired from a related party were in satisfaction of a
receivable from that party (Note 8).
Acquisitions (Note 2):
1999 1998 1997
------------ ------------ ------------
Accounts receivable $ -- $ 474,517 --
Inventories -- 1,362,360 --
Prepaids and other -- 31,500 --
Property, plant and equipment -- 5,617,460 --
Intangible assets -- 4,529,705 --
Liabilities assumed -- (924,483) --
Common stock issued -- (665,480) --
------------ ------------ ------------
Net cash paid $ -- $10,425,579 $ --
============ =========== ============
The accompanying notes to financial statements
are an integral part of these statements.
-28-
DYNAMIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(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
based in the United States and has customers 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, shaped or altered by using explosives, and aerospace, in which parts are
machined, formed or welded primarily for the commercial aircraft and aerospace
industries.
GOING CONCERN ISSUES
The Company has suffered losses from operations in 1999 and is in default of its
debt obligations (Note 4). Consequently, the accompanying balance sheet reflects
a net working capital deficiency that raises substantial doubt about the
Company's ability to continue as a going concern. In order to meet its financial
needs during 2000, the Company must obtain some form of debt or equity financing
or combination thereof, or complete a sale of assets, a merger or other
transaction. Presently, management is attempting to raise funds to pay down its
bank debt which is currently due on March 31, 2000. The Company is actively
pursuing a common stock sale through the form of a definitive stock purchase
agreement (Note 12). However, there are no assurances that the Company will be
successful in its fund raising efforts or, if successful, that it will be able
to successfully restructure or refinance it existing debt obligations. In
conjunction with attempts to secure financing, the Company may need to initiate
further reductions in its workforce and other areas of costs to reduce future
financial obligations.
Assuming that the proposed equity sale transaction closes as expected (Note 12),
the Company expects to utilize the $7.0 million cash infusion to repay bank
debt, finance working capital requirements and make selective capital
investments. Company management believes that this cash infusion would enable
the Company to restructure its current credit facility and financial covenants
relating to its bank credit agreement and the bonds to ensure compliance with
underlying covenants or obtain replacement financing. Additionally, the Company
believes that proceeds from this contemplated equity sale, cash flow from its
operations and funds expected to be available under a restructured or new credit
facility will be sufficient to fund working capital and capital expenditure
requirements of its current business operations for the foreseeable future.
However, if this contemplated equity sale transaction does not close and the
Company is unsuccessful in restructuring its currently outstanding debt or
obtaining replacement financing, the Company may be required to liquidate
certain assets outside of the normal course of business which could result in a
loss on the disposition of those assets. The financial statements do not include
any adjustments relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that might
result should the Company be unable to continue as a going concern.
(2) ACQUISITIONS
AMK WELDING, INC.
On January 5, 1998, the Company acquired certain assets of AMK Welding, Inc.
("AMK"). AMK supplies commercial aircraft and aerospace-related automatic and
manual, gas tungsten and arc welding services. The total purchase price of
approximately $940,000 included a cash payment made to the seller of $900,000
and transaction costs paid of approximately $40,000. Assets acquired consisted
primarily of machinery and equipment, land and the building that houses AMK's
operations.
-29-
SPIN FORGE, LLC
On March 18, 1998, the Company acquired certain assets of Spin Forge, LLC ("Spin
Forge") for a purchase price of approximately $3,826,000 that was paid with a
combination of approximately $2,616,000 in cash (which includes approximately
$146,000 in transaction related costs), assumption of approximately $760,000 in
liabilities and 50,000 shares of the Company's stock valued at $449,800. Spin
Forge manufactures tactical missile motor cases and titanium pressure vessels
for the commercial aerospace and defense industries. Principal assets acquired
included machinery and equipment and inventories. The Company leases the land
and buildings from Spin Forge, LLC and holds an option to purchase such property
for approximately $2,900,000, subject to certain adjustments, exercisable under
certain conditions through January 2002. The option may be extended beyond this
date under specified conditions provided that the option price must be adjusted
upwards in the event that the fair market value of the property at the time of
exercise is higher than $2,900,000.
As part of a Personal Services Agreement between the Company and one of the
former owners of Spin Forge, the Company granted 7,500 shares of restricted
stock to that former owner. In connection with this acquisition, the former
owner became an officer of the Company. The restricted stock grant was recorded
as deferred compensation and is being amortized to expense over the four year
vesting period of the grant.
PRECISION MACHINED PRODUCTS, INC.
On December 1, 1998, the Company acquired substantially all of the assets of
Precision Machined Products, Inc. ("PMP") for a purchase price of approximately
$7,073,000 (including approximately $57,000 in transaction related costs) which
was paid with a combination of $6,800,000 in cash payments to the seller and the
delivery of 40,000 shares of the Company's stock valued at approximately
$216,000. PMP is a contract machining shop specializing in high precision, high
quality, complex machined parts used in the aerospace, satellite, medical
equipment and high technology industries. The Company is leasing the land and
building used in the operation of PMP and holds an option to purchase such land
and building at fair market value exercisable through December 2000. Subsequent
to the expiration of the option term, the Company has a right of first offer to
purchase the land and building at fair market value. This right of first offer
is exercisable through December 2008.
The following unaudited pro forma results of operations of the Company for the
years ended December 31, 1998 and 1997 assume that the acquisitions of AMK, Spin
Forge and PMP had occurred on January 1, 1998 and 1997, respectively. These pro
forma results are not necessarily indicative of the actual results of operations
that would have been achieved nor are they necessarily indicative of future
results of operations.
For the years ended December 31,
--------------------------------
1998 1997
------------- -------------
Revenues $43,580,636 $43,832,655
Net income $ 2,036,607 $ 2,533,711
Net income per share - basic $ .71 $ .91
Net income per share - diluted $ .69 $ .85
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
-30-
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
Cost elements included in inventory are material, labor, subcontract costs and
factory overhead.
Inventories consist of the following at December 31, 1999 and 1998:
1999 1998
---------- ----------
Raw materials $1,311,345 $1,534,800
Work in process 2,001,784 3,614,485
Supplies 97,699 224,544
---------- ----------
$3,410,828 $5,373,829
========== ==========
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 3-20 years
Manufacturing equipment and tooling 3-15 years
Furniture, fixtures and computer equipment 3-10 years
Other 3-5 years
Property, plant and equipment consists of the following at December 31, 1999 and
1998:
1999 1998
----------- -----------
Land $ 387,308 $ 387,308
Building and improvements 6,699,198 3,022,967
Manufacturing equipment and tooling 9,736,646 7,507,302
Furniture, fixtures and computer equipment 1,802,751 1,556,158
Other 241,893 255,474
----------- -----------
$18,867,796 $12,729,209
=========== ===========
CONSTRUCTION IN PROCESS
The construction in process balance of $389,795 as of December 31, 1999,
represents costs incurred on the remaining manufacturing equipment not yet in
service at the Company's new manufacturing facility. Building and equipment
costs of $6,546,608 related to the Company's new manufacturing facility, were
transferred from construction in process to property, plant and equipment during
the year ended December 31, 1999. Construction began in September 1998 and was
largely completed during the third quarter of 1999. The project is being
financed using proceeds from the issuance of industrial development revenue
bonds ("the Bonds") (see Note 4). Total net interest expense incurred on the
bonds during 1999 and 1998 was $188,648 and $(10,560), respectively (net of
interest earned on the related invested bond proceeds held in trust of $110,693
and $89,693 during 1999 and 1998, respectively). Of the total net bond interest
incurred during 1999, $96,222 was incurred prior to the new facility being ready
for service and was, therefore, capitalized.
-31-
INTANGIBLE ASSETS AND GOODWILL
The Company holds numerous United States 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 1999 and 2010;
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.
As a result of the Detaclad acquisition in 1996, $1,081,375 of excess cost over
assets acquired was recorded. These costs are being amortized over a 25-year
period using the straight-line method. The Company also acquired certain
tradenames and entered into a non-compete agreement in connection with the
Detaclad acquisition, which are included in intangible assets in the
accompanying balance sheets. Such costs are being amortized over three and five
years, respectively.
As a result of the AMK acquisition discussed in Note 2, the Company entered into
two non-compete agreements which are valued at $50,000 each and are included in
intangible assets and are being amortized over five years.
As a result of the PMP acquisition discussed in Note 2, $4,334,723 of excess
cost over assets acquired was recorded and is being amortized over a 25-year
period using the straight-line method. In addition, the Company entered into a
non-compete agreement related to the acquisition of PMP. The value attributable
to the non-compete agreement of $100,000 is also included in intangible assets
and is being amortized over 4 years.
Intangible assets and goodwill are summarized as follows as of December 31, 1999
and 1998:
1999 1998
----------- -----------
Goodwill $ 5,416,098 $ 5,416,098
Non-compete agreements 400,000 400,000
Other 251,522 251,522
----------- -----------
$ 6,067,620 $ 6,067,620
Accumulated amortization (786,077) (459,759)
----------- -----------
$ 5,281,543 $ 5,607,861
=========== ===========
The Company evaluates the carrying value of its goodwill in accordance with the
asset impairment accounting policy discussed below. However, if no events
trigger a review under the asset impairment policy, the Company evaluates
goodwill recoverability by reviewing whether ongoing events and circumstances
throughout the year warrant revised estimates of goodwill useful lives. If
estimates are changed and the useful life is shortened, the unamortized goodwill
is allocated to the reduced number of remaining periods in the revised useful
life, and the excess is expensed as a cost of operations. The Company has
recorded no such revision to the carrying value of its goodwill during the years
presented.
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, and 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.
-32-
PLANT CLOSING COSTS
On April 22, 1999, the Company announced that it would be closing its
Louisville, Colorado-based explosion bonded clad metal plate manufacturing
facility in the third quarter of 1999 and consolidating all of its Explosive
Metalworking Group operations into the new Pennsylvania-based clad plate
manufacturing facility. The Company recorded a total of $812,197 in
non-recurring charges during the year ended December 31, 1999 to cover costs
associated with this plant closing. Plant closing costs include severance pay to
terminated employees, outplacement service fees and certain expenses incurred in
connection with final plant shutdown, clean-up and site reclamation work
subsequent to the discontinuation of manufacturing activities at this facility.
The Company had a remaining accrual of approximately $20,000 as of December 31,
1999 related to plant closing costs.
In connection with the plant closing discussed above, the Company identified
certain long-lived assets associated with its Colorado manufacturing operations
that will be abandoned and have negligible fair market values. Accordingly, the
Company recorded asset impairment write-downs of $179,004 during the second and
third quarters of 1999. The impaired assets, which after the write-down have no
carrying value, have largely been disposed of.
The Company also identified certain inventory that was determined to have little
value as a result of the plant closing. This inventory, which totaled
approximately $108,000, was consequently written off in the second quarter of
1999. This charge is included in cost of products sold.
OTHER ASSETS
Included in other assets are deferred financing costs of $144,842 and $224,866,
net of accumulated amortization of $155,767 and $75,743, for the years ended
December 31, 1999 and 1998, respectively. The deferred financing costs were
incurred in connection with obtaining the Company's lines of credit (see Note 4)
and are being amortized over the applicable terms of the lines of credit. Also
included in other assets at December 31, 1999 and 1998 are bond issue costs of
$156,194 and $195,720, respectively, associated with the industrial development
revenue bonds used to finance the Company's new manufacturing facility (Note 4).
The Company is amortizing these costs over the life of the bonds. As of
December 31, 1999 also included in other assets is $75,359 of costs related to
the issuance of stock to SNPE, Inc. (Note 12). These costs are primarily
professional fees associated with the proposed transaction and will ultimately
be offset against additional paid-in capital upon closing of the transaction.
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.
NET (LOSS) INCOME PER SHARE
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per
Share" superseded APB Opinion No. 15 ("APB 15") and is effective for interim and
annual periods after December 15, 1997. SFAS 128 replaced primary earnings per
share ("EPS") with basic EPS and replaced fully diluted EPS with diluted EPS.
Basic 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:
-33-
For the year ended December 31, 1997
Per share
Income Shares Amount
Net Income $2,007,913
==========
Basic earnings per share:
Income available to common
shareholders $2,007,913 2,681,943 $ 0.75
========
Dilutive effect of options to purchase
common stock -- 193,760
---------- ----------
Dilutive earnings per share:
Income available to common
shareholders $2,007,913 2,875,703 $ 0.70
========== ========== ========
For the year ended December 31, 1997
Per share
Income Shares Amount
Net Income $1,385,756
==========
Basic earnings per share:
Income available to common
shareholders $1,385,756 2,770,139 $ 0.50
========
Dilutive effect of options to purchase common
stock -- 82,408
---------- ----------
Dilutive earnings per share:
Income available to common
shareholders $1,385,756 2,852,547 $ 0.49
========== ========== ========
During the year ended December 31, 1999, 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 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. The fair values of the interest swap
agreements were estimated by assuming that the difference between the interest
being received and the interest the Company is paying remains constant for the
remaining term of the interest rate swaps. The amount resulting from the
difference in the interest amounts were then discounted.
-34-
The carrying amounts and estimated fair values of the Company's financial
instruments are as follows:
December 31, 1999 December 31, 1998
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
Financial Assets-
Accounts receivable $ 3,816,879 $ 3,816,879 $ 4,832,658 $ 4,832,658
Receivable from related party $ 354,588 $ 354,588 $ 280,000 $ 280,000
Financial Liabilities-
Accounts payable and accrued
expenses $ 2,907,373 $ 2,907,373 $ 4,082,372 $ 4,082,372
Debt $ 16,785,000 $ 16,785,000 $ 15,455,742 $ 15,455,742
Unrecognized financial
instruments- interest rate
swap agreements (i) $ -- $ -- $ -- $ (192,688)
(i) Terminated in 1999 for which the Company received $150,900 in cash proceeds.
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).
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers highly
liquid investments purchased with an original maturity of three months or less
to be cash equivalents.
INTEREST RATE SWAP AGREEMENTS
The differential to be paid or received is accrued as interest rates change and
is recognized over the life of the agreements.
START-UP COSTS
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the
Costs of Start-up Activities", ("SOP 98-5"), which provides for guidance on the
financial reporting for start-up and organization costs. It requires costs of
start-up activities and organization costs to be expensed as incurred. SOP 98-5
was effective for financial statements for fiscal years beginning after December
15, 1998, however, the Company elected to adopt SOP 98-5 in 1998.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the current
period presentation.
NEW ACCOUNTING PRINCIPLES
In addition, the FASB recently issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), which requires that companies recognize all
derivatives as either assets or liabilities in the balance sheet at fair value.
Under SFAS 133, accounting for changes in fair value of a derivative depends on
its intended use and designation. SFAS 133 is effective for fiscal years
beginning after June 15, 2000. The Company is currently assessing the effect of
this new standard.
-35-
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 ("SAB 101") "Views on Selected Revenue
Recognition Issues" which provides the staff's views in applying generally
accepted accounting principles to selected revenue recognition issues. The
Company is required to implement SAB 101 during the second quarter of 2000. The
Company is currently assessing the effect of implementing SAB 101.
(4) LONG-TERM DEBT
LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1999 and 1998:
1999 1998
------------ ------------
Lines of credit $ 10,100,000 $ 8,600,000
Industrial development revenue bonds 6,685,000 6,850,000
Note payable to a financial institution payable in monthly
installments of $5,786 including interest at 8.37% through
January 31, 1999, secured by selected Company assets; paid
during 1999 -- 5,742
------------ ------------
16,785,000 15,455,742
Less- Current maturities (16,785,000) (1,148,924)
------------ ------------
$ -- $ 14,306,818
============ ============
LINES OF CREDIT
During 1996, the Company entered into a $7,500,000 asset-backed revolving credit
facility ("Original Line") with its bank. The Original Line was to expire on
July 19, 1999, at which time all or part of the outstanding balance could have
been converted to a term loan maturing on July 19, 2003. The maximum amount
available under the line of credit was subject to borrowing base restrictions
that were a function of defined balances in accounts receivable, inventory, real
property and equipment.
On November 30, 1998 the Company and its bank entered into an amended and
restated credit facility and security agreement that was further amended on
December 31, 1998. The amended credit facility allowed for maximum borrowings of
$14,000,000 under the following three separate lines of credit: an "acquisition
line" of $5,700,000, an "accommodation line" of $2,300,000 and a "working
capital line" of $6,000,000 (subject to borrowing base restrictions). Beginning
on September 30, 1999 and on the last day of each calendar quarter thereafter,
the maximum borrowings available under the acquisition line were to be
permanently reduced by $259,091, with ultimate maturity on December 31, 2004.
Beginning on September 30, 1999 and on the last day of each calendar quarter
thereafter, the maximum borrowings available under the accommodation line were
to be permanently reduced by $230,000, with ultimate maturity on December 31,
2001. The working capital line expires on November 30, 2000.
Initially, at the Company's option, borrowings under the acquisition line and
working capital line were either in the form of loans bearing an interest rate
of 100 to 200 basis points above the LIBOR rate, depending on certain financial
ratios, or loans bearing an interest rate of 200 basis points above the Federal
Funds rate. Loans under the accommodation line initially carried an interest
rate equal to 25 basis points above the bank's prime rate. Under a Deferral and
Waiver Agreement between the Company and its bank that was signed on October 15,
1999, the interest rate on the acquisition line and working capital line was
increased by 100 basis points and the interest rate on the accommodation line
was increased by 200 basis points to prime plus 225 basis points. Subsequently,
under the First Amendment to Deferral and Waiver Agreement that was signed on
December 30, 1999, the interest rate on the acquisition line and working capital
line was established at the prime rate plus 100 basis points. The weighted
average
-36-
interest rate on all line of credit borrowings at December 31, 1999 was
8.94%. The lines of credit are secured by the Company's accounts receivable,
inventory and property, plant and equipment.
On December 1, 1998, the Company entered into an interest rate swap agreement
with its bank under which the Company converted $4,000,000 of the acquisition
line of credit loans to a rate that was largely fixed. The amount of the swap
agreement was to decrease by $181,818 beginning on September 30, 1999 and at the
end of each quarter thereafter, and was to ultimately mature on December 31,
2004. Under the swap agreement, the Company had agreed to pay the bank a fixed
interest rate of 5.49% over the life of the swap agreement and, in return,
receive interest payments from the bank in an amount equal to the then current
LIBOR. Since the interest payments received under the swap agreement and the
interest paid on the acquisition line of credit were both based on the LIBOR
rate, the interest rate on $4,000,000 of the $5,700,000 acquisition line of
credit was largely fixed at 5.49% plus the then current premium over the LIBOR
rate the Company is required to pay based upon certain financial ratios. The
Company terminated this swap agreement in the third quarter of 1999 resulting in
a deferred gain of $45,600 that is being amortized over the terms of the
acquisition line of credit.
INDUSTRIAL DEVELOPMENT REVENUE BONDS
During September 1998, the Company began construction on a new manufacturing
facility in Fayette County, Pennsylvania. This project is being financed with
proceeds from industrial development revenue bonds issued by the Fayette County
Industrial Development Authority. The Company closed on this financing
arrangement on September 17, 1998. 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, 1999 and 1998 was 5.7% and 3.1%,
respectively. The Company has established a bank letter of credit in the
trustee's favor for the principal amount of $6,850,000 plus 98 days accrued
interest on the bonds. The letter of credit is secured by the Company's accounts
receivable, inventory, property, plant and equipment and the bond proceeds not
yet expended for construction. The portion of the borrowings not yet expended
for construction was $424,312 (which includes accrued interest of $200,385) as
of December 31, 1999 and was classified as restricted cash and investments in
the accompanying balance sheet. The proceeds are held by a trustee until
qualified expenditures are made and reimbursed to the Company. The Company may
redeem the bonds prior to maturity at an amount equal to the outstanding
principal plus any accrued interest. The bonds mature on September 1, 2013 at
which time all amounts become due and payable.
On September 17, 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. Under the swap agreement, the Company
had agreed to pay the bank a fixed interest rate of 4.41% over the life of the
bonds and, in return, receive interest payments from the bank in an amount equal
to 76% of the 30-day commercial paper rate. 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.
LOAN COVENANTS AND RESTRICTIONS
The Company's 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.
Due largely to the operating loss the Company incurred during 1999, the Company
violated certain financial covenants under both its amended and restated credit
facility with its bank and its reimbursement agreement relating to the letter of
credit with its bank that supports payment of the principal and interest under
the bonds. On June 23, 1999, the Company announced that it had entered into an
asset sale agreement to sell certain assets of its Explosive Metalworking Group
to AMETEK, Inc. for an approximate purchase price of $17 million. The closing of
the transaction was expected to occur during the latter part of 1999, pending
the satisfaction of certain conditions. The Company had planned to apply a
portion of the proceeds from the sale to retire the majority of the Company's
borrowings under its credit facility and to redeem in full the outstanding
bonds. However, in a letter dated October 20, 1999, AMETEK notified the Company
that it was terminating the Asset Purchase Agreement between the two companies.
-37-
Once it became apparent that AMETEK might terminate the Asset Purchase
Agreement, the Company began to evaluate various business strategies and
financing alternatives in connection with the need to restructure the Company's
bank financing and/or re-capitalize the Company's balance sheet. As a first step
in the restructuring of its bank credit facility and the reimbursement agreement
relating to the bonds, the Company entered into a Deferral and Waiver Agreement
with its bank that (i) defers certain principal payments that were due on
September 30, 1999 and December 31, 1999 ($518,182 under the Company's
acquisition line and $460,000 under its accommodation line), (ii) waives
covenant defaults until March 30, 2000, (iii) revises interest rates as
discussed above and (iv) decreases maximum borrowings under the working capital
line from $6,000,000 to $5,000,000. As the waiver extends only through March 30,
2000 and certain covenant violations are likely to continue beyond this date,
the subject debt is classified as a current liability in the December 31, 1999
financial statements.
In connection with the Company's efforts to re-capitalize its balance sheet, the
Company entered into a Stock Purchase Agreement with SNPE, Inc. ("SNPE") on
January 20, 2000 under which SNPE would invest $7.0 million in the Company (Note
12). Completion of the transaction is subject to certain regulatory approvals
and approvals by the stockholders of the Company.
(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 Nonemployee 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 311,916 remain available for
future grants.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 ("SFAS 123")
SFAS 123, "Accounting for Stock-Based Compensation," defines a fair value based
method of accounting for employee stock options or similar equity instruments.
However, SFAS 123 allows the continued measurement of compensation cost for such
plans using the intrinsic value based method prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), provided that pro forma
disclosures are made of net income and net income per share, assuming the fair
value based method of SFAS 123 had been applied. The Company has elected to
account for its stock-based compensation plans under APB 25; accordingly, for
purposes of the pro forma disclosures presented below, the Company has computed
the fair values of all options granted during 1999, 1998 and 1997, using an
acceptable option pricing model and the following weighted average assumptions:
1999 1998 1997
------------ ------------ ------------
Risk-free interest rate 4.8% 5.4% 6.5%
Expected lives 4.0 years 4.0 years 4.0 years
Expected volatility 82.2% 68.0% 71.0%
Expected dividend yield 0% 0% 0%
To estimate expected lives of options for this valuation, it was assumed options
will be exercised upon becoming fully vested at the end of four years. All
options are initially assumed to vest. Cumulative compensation cost recognized
in pro forma net income with respect to options that are forfeited prior to
vesting is adjusted as a reduction of pro forma compensation expense in the
period of forfeiture.
-38-
The total fair value of options granted was computed to be approximately
$260,900, $2,211,800 and $147,200 for the years ended December 31, 1999, 1998
and 1997, respectively. These amounts are amortized on a straight-line basis
over the vesting periods of the options. Pro forma stock-based compensation, net
of the effect of forfeitures, was $568,000, $520,200 and $312,700 for 1999, 1998
and 1997, respectively.
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS 123, the Company's net income and pro forma net income per
common share would have been reported as follows:
Year Ended December 31,
------------------------------------------
1999 1998 1997
------------ ---------- ----------
Net income:
As reported $(2,718,108) $1,385,756 $2,007,913
Pro forma $(3,286,108) $ 865,556 $1,738,013
Pro forma basic earnings per common share:
As reported $ (.96) $ .50 $ .75
Pro forma $ (1.16) $ .31 $ .65
Pro forma diluted earnings per common share:
As reported $ (.96) $ .49 $ .70
Pro forma $ (1.16) $ .31 $ .62
Weighted average shares used to calculate pro forma diluted earnings per share
were determined as described in Note 3, except in applying the treasury stock
method to outstanding options, net proceeds assumed received upon exercise were
increased by the amount of compensation cost attributable to future service
periods and not yet recognized as pro forma expense and the amount of any tax
benefits upon assumed exercise that would be credited to additional paid-in
capital.
A summary of stock option activity for the years ended December 31, 1999, 1998
and 1997 is as follows:
Weighted
Average
Exercise
Options Price
-------- --------
Outstanding at December 31, 1996 507,500 $4.12
Granted 21,000 $9.20
Exercised (179,385) $1.80
--------
Outstanding at December 31, 1997 349,115 $5.62
Granted 490,000 $7.41
Cancelled (241,375) $7.07
Exercised (57,115) $2.50
--------
Outstanding at December 31, 1998 540,625 $6.94
Granted 102,500 $4.27
Cancelled (83,291) $6.49
Exercised (19,500) $2.72
--------
Outstanding at December 31, 1999 540,334 $6.66
========
-39-
The following table summarizes information about employee stock options
outstanding and exercisable at December 31, 1999:
Options Outstanding Options Exercisable
------------------------------------------------------- -----------------------------------
Number of Options Remaining Weighted Number Weighted
Range of Exercise Outstanding at Contractual Life Average Exercisable at Average
Prices December 31, 1999 in Years Exercise Price December 31, 1999 Exercise Price
----------------- ---------------- ---------------- -------------- ----------------- --------------
$1.88 - 2.81 27,500 4.43 $2.42 27,500 $2.42
$3.13 - 4.19 104,500 8.70 $4.02 6,750 $3.32
$5.10 - 5.44 34,000 8.79 $5.23 9,500 $5.25
$7.01 - 7.92 267,334 7.69 $7.59 161,212 $7.55
$8.00 - 9.63 107,000 7.63 $8.43 58,000 $8.53
------- -------
540,334 262,962
======= =======
EMPLOYEE STOCK PURCHASE PLAN
During 1998, the Company adopted an Employee Stock Purchase Plan ("ESPP") which
was approved by the Company's stockholders in May of 1998. The Company is
authorized to issue up to 50,000 shares under the ESPP. The initial offering
under the ESPP was January 1, 1998 and ended June 30, 1998. Subsequent 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 lessor 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, 24,538 and 23,068 shares of the Company's stock were purchased during the
years ended December 31, 1999 and 1998, respectively.
The pro forma net income calculation above reflects $29,200 and $46,800 in
compensation expense associated with the ESPP for 1999 and 1998, 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,
-----------------------------
1999 1998
---------- ---------
Risk-free interest rate 4.50% 5.24%
Expected lives 1.0 year 1.0 year
Expected volatility 131.0% 71.0%
Expected dividend yield 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 at 50% of the employees'
contribution for the first 8% of the employees' compensation for 1999, 1998 and
1997. Total Company contributions were $185,747, $158,890 and $90,140 for the
years ended December 31, 1999, 1998 and 1997, respectively.
-40-
(6) INCOME TAXES
The components of the (benefit) provision for income taxes are as follows:
1999 1998 1997
----------- ----------- -----------
Current $(1,220,300) $ 747,079 $ 878,069
Deferred 66,300 119,900 74,550
Tax effect of deduction for exercised stock
options credited to paid-in capital -- 20,021 268,381
----------- ----------- -----------
Income tax (benefit) provision $(1,154,000) $ 887,000 $ 1,221,000
=========== =========== ===========
The Company's deferred tax assets and liabilities at December 31, 1999 and 1998
consist of the following:
1999 1998
--------- ---------
Deferred tax assets-
Federal net operating loss carry-forward $ 270,000 $ --
Federal AMT tax credit carry-forward 102,000 --
State net operating loss carry-forward 248,000 --
Inventory 14,000 25,700
Allowance for doubtful accounts 43,700 85,500
Repair reserve 59,600 47,500
Vacation accrual 43,100 49,600
Accrual for unbilled services 3,900 --
Other 29,100 5,400
--------- ---------
813,400 213,700
Deferred tax liability-
Depreciation (556,400) (147,400)
Valuation allowance (257,000) --
--------- ---------
Net deferred tax assets $ -- $ 66,300
========= =========
Net current deferred tax assets $ 189,000 $ 224,800
Net long-term deferred tax asset 68,000 --
Net long-term deferred tax liability -- (158,500)
Valuation allowance (257,000) --
--------- ---------
$ -- $ 66,300
========= =========
-41-
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:
1999 1998 1997
----------- ----------- -----------
Federal income tax at statutory rate $(1,316,500) $ 772,700 $ 1,097,800
State tax items, net (3,800) 93,400 99,000
Nondeductible expenses 4,300 20,900 24,200
Federal tax net operating loss in excess
of book net operating loss (121,000) -- --
Federal AMT tax credit carry-forward -
not recognized 26,000 -- --
Change in valuation allowance 257,000 -- --
----------- ----------- -----------
Provision for income taxes $(1,154,000) $ 887,000 $ 1,221,000
=========== =========== ===========
(7) CAPITAL LEASE
In February 1996, the Company entered into an agreement to lease a phone system.
The lease has been capitalized using an implicit interest rate of 8.25%. Future
minimum lease payments under the lease as of December 31, 1999 are as follows:
2000 $ 37,078
2001 3,090
--------
40,168
Less- Amount representing interest (1,869)
--------
38,299
Less- Current portion of capital
lease obligation (35,230)
--------
$ 3,069
========
(8) RECEIVABLE FROM RELATED PARTY
In connection with the acquisition of Spin Forge, the Company advanced $280,000
to the seller. At the time, Spin Forge was owned and controlled by an individual
who was not an officer of the Company, and his spouse. The advance was made to
allow the seller to retire certain debt that was outstanding on land and
buildings that the Company currently leases from the seller and on which the
Company holds a purchase option as discussed in Note 2 above. The Company also
agreed to make additional advances to the seller in connection with future
principal payments that the seller is required to make to satisfy debt
obligations relating to the property. The Company made additional advances
totaling $74,588 during 1999, bringing the balance outstanding to $354,588 as of
December 31, 1999. The outstanding balance was paid in full subsequent to
December 31, 1999. The Company's promissory note from the seller, which was to
mature on January 1, 2002, earned no interest, was secured by a pledge of 50,000
shares of the Company's common stock held by the seller and was personally
guaranteed by the seller's two owners. One of these two owners was named
President and CEO of the Company during 1998.
(9) 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
-42-
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. The Aerospace Group 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.
The Aerospace segment was formed in 1998 as a result of the Company's
acquisitions of AMK, Spin Forge and PMP during the year ended December 31, 1998.
Explosive Manufacturing was the Company's only segment prior to 1998.
Accordingly segment information is presented only for the years ended
December 31, 1999 and 1998 as follows:
Explosive
Manufacturing Aerospace Total
============ ============ ============
As of and for the year ended December 1999:
Net sales $ 17,014,639 $ 12,116,650 $ 29,131,289
============ ============ ============
Depreciation and amortization $ 785,958 $ 728,145 $ 1,514,103
============ ============ ============
Segment (loss) income from operations $ (3,437,118) $ 862,323 $ (2,574,795)
Corporate non-recurring charge (322,098)
------------
Loss from operations $ (2,896,893)
Unallocated amounts:
Other income 14,784
Interest expense (1,009,911)
Interest income 19,912
------------
Consolidated loss before income tax benefit $ (3,872,108)
============
Segment assets $ 15,250,163 $ 12,561,020 $ 27,811,183
============ ============ ============
Assets not allocated to segments:
Prepaid expenses and other 151,609
Income tax receivable 1,360,000
Other long-term corporate assets 764,526
------------
Consolidated total assets $ 30,087,318
============
Capital expenditures $ 5,244,292 $ 189,813 $ 5,434,105
============ ============ ============
-43-
Explosive
Manufacturing Aerospace Total
============ ============ ============
As of and for the year ended December 1998:
Net sales $ 29,727,273 $ 8,484,778 $ 38,212,051
============ ============ ============
Depreciation and amortization $ 861,769 $ 233,227 $ 1,094,996
============ ============ ============
Income from operations $ 1,252,618 $ 1,283,338 $ 2,535,956
Unallocated amounts:
Other income 8,921
Interest expense (283,706)
Interest income 11,585
------------
Consolidated income before income tax provision $ 2,272,756
============
Segment assets $ 18,086,015 $ 13,428,751 $ 31,514,766
============ ============ ============
Assets not allocated to segments:
Prepaid expenses and other 214,776
Income tax receivable 499,932
Current deferred tax asset 224,800
Other long-term corporate assets 747,304
------------
Consolidated total assets $ 33,201,578
============
Capital expenditures $ 2,442,041 $ 372,774 $ 2,814,815
============ ============ ============
Capital expenditures for the Explosive Manufacturing segment included $5,082,680
and $1,853,723 of costs incurred related to the construction of the Company's
new manufacturing facility and the acquisition of related manufacturing
equipment during the years ended December 31, 1999 and 1998, respectively.
All of the Company's sales are shipped from domestic locations and all of the
Company's assets are located within the United States. The following represents
the Company's net sales based on the geographic location of the customer:
For the years ended December 31,
--------------------------------
1999 1998 1997
----------- ----------- -----------
United States $26,563,764 $32,478,791 $24,092,908
Canada 1,516,580 3,818,968 2,532,983
Australia 149,626 38,428 4,735,542
Mexico 449,405 305,398 368,288
Other foreign countries 451,914 1,570,466 389,864
----------- ----------- -----------
Total consolidated net sales $29,131,289 $38,212,051 $32,119,585
=========== =========== ===========
During the year ended December 31, 1999, sales to one customer represented
approximately $2,968,000 (10%) of total net sales and during the year ended
December 31, 1998, no one customer accounted for more than 10% of the Company's
net sales. During the year ended December 31, 1997, sales to one customer
represented approximately $4,074,000 (13%) of total net sales.
-44-
(10) 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 noncancelable operating leases are as follows:
Year ended December 31-
2000 $ 605,370
2001 452,535
2002 257,923
2003 230,717
2004 and thereafter 248,897
----------
$1,795,442
==========
Total rental expense included in operations was $843,690, $713,731 and $394,875
in the years ended December 31, 1999, 1998 and 1997, 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.
(11) STOCKHOLDERS' EQUITY
The Company's authorized capital consists of 15,000,000 shares of common stock,
$.05 par value, of which 2,842,429 shares are outstanding as of December 31,
1999 and 4,000,000 shares of preferred stock, $.05 par value, of which no shares
are issued and outstanding.
On January 8, 1999, the Board of Directors of the Company declared a dividend of
one preferred share purchase right for each outstanding share of common stock of
the Company to record holders of common stock at the close of business on
January 15, 1999. The rights are neither presently exercisable nor separable
from the common stock. If they become exercisable following the occurrence of
certain specified events, each right will entitle the holder, within certain
limitations, to purchase one one-hundredth of a share of Series A Junior
Participating Preferred Stock for $22.50 subject to certain anti-dilution
adjustments. If a person or group acquires 15 percent of the Company's common
stock, every other holder of a right will be entitled to buy at the right's
then-exercise price a number of shares of the Company's common stock having a
value of twice such exercise price. After the threshold is crossed, the rights
become non-redeemable, except that, prior to the time a person or group acquires
50% or more of the common stock, the rights other than those held by such person
or group can be exchanged at a ratio of one share of common stock for each
right. In the event of certain extraordinary transactions, including mergers,
the rights entitle holders to buy at the right's then-exercise price equity in
the acquiring company having a value of twice such exercise price. The rights do
not have any voting rights nor are they entitled to dividends. The rights are
redeemable by the Company at $.001 each until a person or group acquires 15% of
the Company's common stock or until the rights expire.
(12) SUBSEQUENT EVENT
In connection with the Company's efforts to re-capitalize its balance sheet, the
Company entered into a Stock Purchase Agreement with SNPE, Inc. (SNPE) on
January 20, 2000 under which SNPE will invest $7.0 million in the Company. The
agreement provides for a $5.8 million cash payment to the Company in exchange
for 2,109,091 shares of the Company's common stock at a price of $2.75 per share
and an additional $1.2 million in cash borrowed under a convertible subordinated
note that is due five years from the issue date and convertible into common
stock of the Company at a conversion price of $6.00 per share. SNPE currently
owns 14.3% of the Company's outstanding common stock and will acquire a
controlling interest in the Company as a result of the proposed transaction. The
proposed transaction is subject to approval by the Company's stockholders and
certain regulatory approvals. Company
-45-
management believes that the necessary stockholder and regulatory approvals will
be received and expects to close the transaction early in the second quarter of
2000. If the transaction is not completed, the Company may be required to
liquidate certain assets outside the normal course of business which could
result in a loss on the disposition of those assets.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
-46-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
MR. DAVID E. BARTLETT. Mr. Bartlett, age 47, has served the Company as a
director since February 1996, and his current term will expire at the annual
meeting of stockholders in 2000. Mr. Bartlett has been a principal of Strategic
Alliances Holding LLC, a venture capital firm, since February 1999 and has
served as General Counsel and Secretary of mDiversity.com Inc., a wireless
communications technology company, since April 1999. He is also a founder and
has served on the board of Cistant.com since its inception in November 1999.
From November 1997 through February 1999, he was a partner with the law firm of
Davis, Graham & Stubbs LLP. He was Vice President of Business Development and
General Counsel of Netsage Corporation from September 1996 until approximately
October 1997. Mr. Bartlett was a partner in the law firm of Cooley Godward LLP
in its Palo Alto, California office from August 1987 to August 1993 and in its
Boulder, Colorado office from August 1993 to August 1996.
MR. JOSEPH P. ALLWEIN. Mr. Allwein, age 48, has served the Company as a
director since January 1999, and his current term will expire at the annual
meeting of stockholders in 2000. He has served as the Company's President and
Chief Executive Officer since September 1998. Mr. Allwein became Vice President
and General Manager of Spin Forge, a division of the Company, in March 1998,
when the Company acquired certain assets of Spin Forge, LLC. Mr. Allwein was a
principal shareholder of and served as President of Spin Forge, LLC from March
1996 until March 1998. From 1991 to March 1996, Mr. Allwein was President of
Hoover Containment Systems, Inc. ("HCS"), a subsidiary of Hoover Group, Inc.
("Hoover"). Mr. Allwein served as the President and principal shareholder of HCS
(then known as Lube Cube Inc.) from 1988 until its acquisition by Hoover in
1991.
MR. MICHAEL C. FRANSON. Mr. Franson, age 45, has served the Company as a
director since May 1998, and his current term will expire at the annual meeting
of stockholders in 2001. Since 1993, Mr. Franson has been an Executive Vice
President of The Wallach Company, an investment banking firm, where he is
responsible for its Information Technology investment banking practice and has
served in various positions since 1988. Mr. Franson is a member of the advisory
board for the Center for Entrepreneurship at the University of Colorado at
Boulder and a member of the Board of Directors of Koala Corporation, a
manufacturer of child protection products. He is also a Chartered Financial
Analyst.
DR. GEORGE W. MORGENTHALER. Dr. Morgenthaler, age 73, has served as a
director of the Company since June 1986, and his current term will expire at the
annual meeting of stockholders in 2001. 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. DEAN K. ALLEN. Mr. Allen, age 64, has served the Company as a
director since July 1993, and his current term will expire at the annual meeting
of stockholders in 2002. Mr. Allen is President of Parsons Europe, Middle East
and South Africa, a position he has held since February 1996. Mr. Allen was Vice
President and General Manager of Raytheon Engineers and Constructors, Europe,
from February 1994 to December 1995.
-47-
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. Joseph P. Allwein President and Chief Executive Officer 48
Mr. Richard A. Santa Vice President, Finance, Chief
Financial Officer and Secretary 49
Mr. Mark W. Jarman Vice President of Corporate Development 39
MR. JOSEPH P. ALLWEIN. Information regarding Mr. Allwein appears above
under ITEM 10 - Directors.
MR. RICHARD A. SANTA. Mr. Santa has served as Vice President of Finance,
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 June 1992 to
August 1993 Mr. Santa was Chief Financial Officer of Scott USA. Earlier in his
career, Mr. Santa was a senior manager with Price Waterhouse where he was
employed for ten years.
MR. MARK W. JARMAN. Mr. Jarman has served as Vice President of Corporate
Development since September 1998 and served as Manager of New Business
Development from October 1996 to September 1998. Prior to joining the Company in
October 1996, Mr. Jarman was an Account Executive with Carl Thompson Associates
from January 1996 to October 1996. From May of 1995 to January of 1996 Mr.
Jarman was a principal of Smith Jarman, Inc., an investor relations consulting
firm. From March 1993 to May 1995 Mr. Jarman was Vice President of Marketing and
New Business Development at Nordby International.
-48-
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, 1999, 1998 and 1997:
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($)
- ---------------------- ----- ---------- --------- ------------------ ----------- ----------------
Joseph P. Allwein..... 1999 209,167 - 51,701(3) 40,000 5,379(4)
President and 1998 127,381 75,000 - 62,500 5,966(5)
Chief Executive
Officer (2)
Richard A. Santa...... 1999 136,930 - - 10,000 6,021(6)
Vice President, 1998 124,730 30,000 - 40,000 6,305(7)
Finance, Chief 1997 120,000 34,800 - - 3,629(8)
Financial Officer and
Secretary
Mark W. Jarman........ 1999 87,333 - 10,000 3,760(11)
Vice President, 1998 67,481 15,000 9,209(10) 23,750 2,662(12)
Corporate Development(9)
(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. Allwein joined the Company in March 1998.
(3) Includes $42,817 for the cost of a Company-provided apartment and $8,884
for the cost of a Company-provided automobile.
(4) Includes $1,212 of life insurance premiums and $4,167 of matching
contributions under the 401(k) plan.
(5) Includes $995 of life insurance premiums and $4,971 of matching
contributions under the 401(k) plan.
(6) Includes $1,021 of life insurance premiums and $5,000 of matching
contributions under the 401(k) plan.
(7) Includes $1,306 of life insurance premiums and $5,000 of matching
contributions under the 401(k) plan.
(8) Includes $1,044 of life insurance premiums and $2,585 of matching
contributions under the 401(k) plan.
(9) Mr. Jarman joined the Company in October 1996 and became a Named Executive
Officer in September 1998.
(10) Includes $9,209 for the cost of a Company-provided automobile.
(11) Includes $237 of life insurance premiums and $3,493 of matching
contributions under the 401(k) plan.
(12) Includes $23 of life insurance premiums and $3,493 of matching
contributions under the 401(k) plan.
-49-
STOCK OPTION EXERCISES
The Company grants options to its executive officers under its 1997
Equity Incentive Plan (the "1997 PLAN"). As of March 15, 2000, options to
purchase a total of 588,000 shares were outstanding under the 1997 Plan and
options to purchase 264,250 shares remained available for grant thereunder.
The following table shows for the fiscal year ended December 31, 1999,
certain information regarding options exercised by, and held at year-end by, the
Named Executive Officers:
OPTION EXERCISES IN FISCAL 1999 AND FISCAL YEAR-END OPTION VALUES
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
DECEMBER 31, 1999 DECEMBER 31, 1999 (1)
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
Joseph P. Allwein........ - - 18,750/83,750 -/-
Richard A. Santa......... - - 35,000/40,000 -/-
Mark W. Jarman........... - - 16,167/23,583 -/-
- -------------------
(1) i.e., value of options for which the fair market value of the Company's
Common Stock at December 31, 1999 ($1.187) exceeds the exercise price.
-50-
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 15, 2000 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
- ------------------------------------ --------- --------
Heartland Advisors, Inc.
790 North Milwaukee Street
Milwaukee, WI 53202................................................. 537,200 18.90%
SNPE, Inc./(3)/
5 Vaughan Drive
Suite 111
Princeton, NJ 08540................................................ 406,400 14.30%
Mr. Joseph P. Allwein /(4)(5)/......................................... 100,000 3.47%
Mr. Richard A. Santa /(5)/............................................. 44,533 1.54%
Mr. Mark W. Jarman /(5)/............................................... 22,053 *
Mr. Dean K. Allen/(5)/................................................. 19,500 *
Mr. David E. Bartlett/(5)/............................................. 22,500 *
Mr. Michael C. Franson/(5)/............................................ 8,500 *
Dr. George W. Morgenthaler/(5)/........................................ 100,278 3.51%
All executive officers and directors as a group (7 persons)/(6)/....... 317,364 10.54%
- -------------------------
*Less than 1%
/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
-51-
the shares indicated as beneficially owned. Applicable percentages are
based on 2,842,429 shares outstanding on March 15, 2000 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, 551 Aspen Ridge Drive, Lafayette, Colorado
80026.
/3/ The information reported is based solely on information contained in the
Schedule 13D filed by each of SNPE, Inc., SOFIGEXI, and SNPE. Each
reported that it had shared voting and investment power and beneficial
ownership of 406,400 shares.
/4/ Of the shares reported, DMC has the option to purchase 12,500 shares if
Mr. Allwein ceases to be employed by DMC after March 18, 2000 and before
March 18, 2001. Of the shares reported, 3,750 shares are subject to
forfeiture if Mr. Allwein ceases to be employed by DMC. Of these shares,
1,875 shares will cease to be subject to forfeiture on March 18 in each
of the years 2001 and 2002, assuming Mr. Allwein continues to be employed
by DMC on such date.
/5/ Amounts reported include shares subject to stock options exercisable
within 60 days of March 15, 2000 as follows: Mr. Allwein, 37,500 shares;
Mr. Santa, 43,750 shares; Mr. Jarman, 21,167 shares; Mr. Allen, 17,500
shares; Mr. Bartlett, 22,500 shares; Mr. Franson, 7,500 shares; and Mr.
Morgenthaler, 17,500 shares.
/6/ The amount reported includes 167,417 shares subject to stock options
exercisable within 60 days of March 15, 2000.
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, 1999, all Section 16(a)
filing requirements applicable to its officers, directors and greater than 10%
beneficial owners were complied with, except that SNPE and its affiliate, Nobel
Explosifs France, jointly made late filings of one Form 3 reporting one
transaction and one Form 4 reporting one transaction.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On March 18, 1998, the Company entered into an Asset Purchase Agreement
whereby it purchased certain assets of Spin Forge, LLC (the "Seller"), of which
Mr. Allwein was the managing member, for a total purchase price of $3,860,411,
including cash, stock and assumption of certain debt of the seller by the
Company. The Company and Mr. Allwein entered into a Personnel Services Agreement
whereby Mr. Allwein received a two year employment agreement with the Company as
Vice President and General Manager of the Spin Forge/Aerospace Division for an
initial monthly base salary of $11,250. The Personal Services Agreement expired
on March 18, 2000. Mr. Allwein also received 7,500 shares of Common Stock of the
Company. The terms and conditions of the Asset Purchase Agreement and the
Personnel Services Agreement were determined by the Board of Directors and
various officers of the Company at the time. Mr. Allwein was named President and
CEO of the Company during 1998.
In connection with the acquisition of Spin Forge, the Company advanced
$280,000 to the Seller. At the time, the Seller was owned and controlled by Mr.
Allwein and his spouse. The advance was made to allow the Seller to retire
certain debt that was outstanding on land and buildings that the Company
currently leases from the Seller and on which the Company holds a purchase
option. The Company also agreed to make additional advances to the Seller in
connection with future principal payments that the Seller was required to make
to satisfy debt obligations relating to the property. The Company made
additional advances totaling $74,588 during 1999, bringing the balance
outstanding to $354,588 as of December 31, 1999. The outstanding balance was
paid in full subsequent to December 31, 1999 and the lease rate was increased to
a fair market rate of $30,244 per month based upon an independent appraisal
completed in November of 1999. The Company's promissory note from the seller,
which was to mature on January 1, 2002, earned no interest, was secured by a
pledge of 50,000 shares of the Company's common stock held by the seller and was
personally guaranteed by the seller's two owners. The promissory note was
cancelled and the pledge agreement and personal guarantee were terminated in
connection with the full repayment of the promissory note in February 2000.
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Mr. Franson, a Director of the Company, is a principal of The Wallach
Company ("TWC"), the financial advisor to DMC in connection with the Agreement
between the Company and SNPE (the "Transaction"). The Company has agreed to pay
TWC a total fee of $300,000 in connection with its services related to the
Transaction, of which $95,000 has been paid through January 31, 2000 at the rate
of $7,500 per month. Fees continue to accrue at the rate of $7,500 per month,
but TWC has permitted the Company to defer the payment of these fees. If the
Transaction were to close on May 15, 2000, total additional fees of $26,250 will
have accrued. The remaining fee owed to TWC, $190,000 as of the date of this
10-K or $178,850 if the Transaction were to close on May 15, 2000, is contingent
upon the closing of the Transaction.
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ITEM 14. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
3.1 Articles of Incorporation (incorporated by reference to the
Company's Definitive Proxy Statement filed with the Commission on
July 14, 1997).
3.2 Bylaws of the Company (incorporated by reference to the Company's
Definitive Proxy Statement filed with the Commission on July 14,
1997).
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.
10.2 1997 Equity Incentive Plan, adopted by the Directors on March
4, 1997, and approved by the Company's Shareholders on May 23,
1997 (incorporated by reference to the Company's Definitive Proxy
Statement filed with the Commission on April 17, 1997).
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 Asset Purchase Agreement, dated January 1998, between the
Company and AMK, Inc. (incorporated by reference to the Company's
Form 10-Q filed with the Commission on May 15, 1998).
10.5 Stock Agreement, dated as of March 18, 1998, between Company and
Joseph Allwein (incorporated by reference to the Company's Form
8-K filed with the Commission on April 2, 1998).
10.6 Stock 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).
10.7 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).
10.8 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).
10.9 Non-Competition Agreement, dated as of March 18, 1998, between
Company and Joseph Allwein (incorporated by reference to the
Company's Form 8-K filed with the Commission on April 2, 1998).
10.10 Asset Purchase Agreement between the Company, Spin Forge, LLC,
Joseph Allwein and Darlene Bauer Allwein (incorporated by
reference to the Company's Form 8-K filed with the Commission on
April 2, 1998).
10.11 Reimbursement Agreement between the Company and KeyBank National
Association, dated September 1, 1998 (incorporated by reference to
the Company's Form 10-Q filed with the Commission on November 17,
1998).
10.12 Separation Agreement between the Company and Paul Lang, dated as
of September 1, 1998 (incorporated by reference to the Company's
Form 10-Q filed with the Commission on November 14, 1998).
10.13 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).
10.14 Asset Purchase Agreement, dated as of November 18, 1998, between
Company, Precision Machined Products, Inc., Richard B. Bellows and
Michelle L. Bellows (incorporated by reference to the Company's
Form 8-K filed with the Commission on December 8, 1998).
10.15 Amended and Restated Credit Facility and Security Agreement, dated
as of November 30, 1998, between the Company and Key Bank National
Association (incorporated by reference to the Company's Form 10-K
filed with the Commission on April 1, 1999).
10.16 Option and Right of First Offer Agreement, dated as of December 1,
1998, between the Company and
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JEA Property, LLC (incorporated by reference to the Company's Form
8-K filed with the Commission on December 8, 1998).
10.17 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).
10.18 First Amendment to Amended and Restated Credit Facility and
Security Agreement, dated as of December 31, 1998, between Company
and Key Bank National Association (incorporated by reference to
the Company's Form 10-K filed with the Commission on April 1,
1999).
10.19 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).
10.20 Change in Control Agreement between Company and Mark Jarman, dated
March 26, 1999 (incorporated by reference to the Company's Form
10-Q filed with the Commission on August 13, 1999).
10.21 Change in Control Agreement between Company and Richard Santa,
dated March 26, 1999 (incorporated by reference to the Company's
Form 10-Q filed with the Commission on August 13, 1999).
10.22 Change of Control Agreement between Company and Joseph Allwein,
dated March 26, 1999 (incorporated by reference to the Company's
Form 10-Q filed with the Commission on August 13, 1999).
10.23 Deferral and Waiver Agreement, dated as of October 15, 1999,
between Company and Key Bank National Association (incorporated by
reference to the Company's Form 10-Q filed with the Commission on
November, 15, 1999).
10.24 First Amendment to Deferral and Waiver Agreement, dated as of
December 30, 1999, between Company and Key Bank National
Association (incorporated by reference to the Company's Form 8-K
filed with the Commission on January 11, 2000).
10.25 Stock Purchase Agreement, dated January 20, 2000, between the
Company and SNPE, Inc. (incorporated by reference to out Form 8-K
filed with the Commission on January 31, 2000).
10.26 Agreement and Amendment to Operating Lease, dated as of February
1, 2000 between the Company and Spin Forge, LLC.
10.27 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.
10.28 Second Amendment to Deferral and Waiver Agreement, dated
as of March 27, 2000, between Company and Key Bank National
Association.
10.29 Form of Directors and Officers Indemnification Agreement.
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
The Company filed a report on Form 8-K dated October 22, 1999, reporting
under Item 7 the termination of the Asset Purchase Agreement, dated on
or about June 23, 1999, by AMETEK.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Company
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
DYNAMIC MATERIALS CORPORATION
March 22, 2000 By: /s/ RICHARD A. SANTA
-----------------------------------
Richard A. Santa
Vice President of Finance and Chief
Financial Officer
In accordance with the Exchange Act, 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/ Joseph P. Allwein President, Chief Executive March 22, 2000
- ---------------------------------- Officer and Director
Joseph P. Allwein (Principal Executive Officer)
/s/ Richard A. Santa Vice President of Finance and March 22, 2000
- ---------------------------------- Chief Financial Officer
Richard A. Santa (Principal Financial and
Accounting Officer)
/s/ Dean K. Allen Director March 22, 2000
- ----------------------------------
Dean K. Allen
/s/ David E. Bartlett Director March 22, 2000
- ----------------------------------
David E. Bartlett
/s/ George W. Morgenthaler Director March 22, 2000
- ----------------------------------
George W. Morgenthaler
/s/ Michael C. Franson Director March 22, 2000
- ----------------------------------
Michael C. Franson
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DYNAMIC MATERIALS CORPORATION
INDEX TO SCHEDULE II
AS OF DECEMBER 31, 1999
PAGE
Report of Independent Public Accountants....................................57
Schedule II (a).............................................................58
Schedule II (b).............................................................58
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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 financial statements of Dynamic Materials Corporation
included in this Form 10-K and have issued our report thereon dated February 16,
2000. Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the index of
financial statements are presented for purposes of complying with the Securities
and Exchange Commission's rules and are not part of the basic financial
statements. These schedules have been subjected to the auditing procedures
applied in the audit of the basic 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 financial statements taken as a whole.
Our report on the financial statements includes an explanatory paragraph with
respect to the Company's ability to continue as a going concern in 1999 as
discussed in Note 1 to the financial statements.
ARTHUR ANDERSEN LLP
Denver, Colorado
February 16, 2000
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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, 1997 $ 170,000 $ 5,921 $ (8,171) $ (17,750) $ 150,000
December 31, 1998 $ 150,000 $ 78,732 $ (3,732) $ -- $ 225,000
December 31, 1999 $ 225,000 $ 24,698 $(137,698) $ -- $ 112,000
DYNAMIC MATERIALS CORPORATION
SCHEDULE II(b) - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
REPAIR RESERVE
Balance at Additions Balance at
beginning charged to Repairs end of
of period income allowed period
---------- ---------- ----------- ----------
Year ended -
December 31, 1997 $150,000 $ 69,513 $(69,513) $150,000
December 31, 1998 $150,000 $ 30,582 $(55,582) $125,000
December 31, 1999 $125,000 $ 80,296 $(52,296) $153,000
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