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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
( 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, 1998 COMMISSION FILE NUMBER 0-8328
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
For the transition period from __________ to ____________________.
------------------------
DYNAMIC MATERIALS CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 84-0608431
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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
Check whether the issuer: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 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
--- ---
Check if no disclosure of delinquent filers in response to Item 405
of Regulation S-B is contained in this form, and no disclosure will be
contained, to the best of the issuer's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. _____
The issuer's revenues for its most recent fiscal year were:
$38,212,051.
The aggregate market value of the voting stock held by
non-affiliates of the issuer was $6,091,141 as of March 22, 1999.*
The number of shares of Common Stock outstanding was 2,834,641 as of
March 22, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III (Items 10, 11, 12 AND 13) is
incorporated by reference to portions of the issuer's definitive proxy statement
for the 1999 Annual Meeting of Shareholders which will be filed with the
Securities and Exchange Commission within 120 days after the fiscal year ended
December 31, 1998.
- - --------------------
* Excludes 1,124,847 shares of Common Stock held by directors and officers
and stockholders whose beneficial ownership exceeds five percent of the
shares outstanding at March 22, 1999. Exclusion of shares held by any
person should not be construed to indicate that such person possesses the
power, direct or indirect, to direct or cause the direction of the
management or policies of the issuer, or that such person is controlled by
or under common control with the issuer.
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section, as well as in
the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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 both metallurgical bonding,
or metal "cladding," and metal forming. The Company performs metal cladding
using its proprietary Dynaclad(TM) and Detaclad(R) technologies and performs
metal forming using its proprietary Dynaform(TM) technology. 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.
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 commercial aircraft, aerospace, defense and power generation
industries. Product applications include torque box webs for jet engine
nacelles, tactical and ballistic missile motor cases and titanium pressure
tanks.
The Company is continually working to generate solutions to the
materials needs of customers in its target markets. Key elements of the
Company's strategy include continual improvement of its basic processes and
product offerings, the internal development of new cladding and forming products
and the acquisition of businesses that broaden or complement the Company's
existing product lines. In July 1996, the Company completed its first strategic
acquisition when it acquired the assets of the Detaclad(R) Division ("Detaclad")
of E.I. du Pont de Nemours and Company ("DuPont"), a complementary explosion
cladding business with expertise in cladding thin metals and heat exchanger
components primarily for the chemical processing, power generation and
petrochemical industries.
In January 1998, the Company completed its acquisition 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 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 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.
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, and in others could cause the
Company's results to differ materially from those expressed in any
forward-looking statements made by the Company and could otherwise affect, the
Company's business, results of operations and financial condition. Certain of
these factors are further discussed below and should be considered in evaluating
the Company's forward-looking statements and any investment in the Company's
common stock.
Fluctuations in Operating Results. The Company 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
acquisition-related costs 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, 1998, the
Company's cladding business accounted for approximately 72% of its net sales.
The explosion bonded clad metal products industry in which the Company currently
operates is mature with 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. Although the
Company's aerospace manufacturing business accounted for approximately 22% of
its net sales in the fiscal year ended December 31, 1998, this percentage will
likely increase in the future as the result of the full integration of recent
acquisitions (discussed below) and additional acquisitions. 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 and additional acquisitions, there can
be no assurances that such a strategy or any other strategy will prove
successful, and such failure could have a material adverse effect on the
Company's business, financial condition and results of operations.
Integration of Recently Acquired Operations; Risks Associated with
Future Acquisitions. In the third quarter of fiscal 1996, the Company completed
the acquisition of the Detaclad division of DuPont located in Dunbar,
Pennsylvania. In the first quarter of 1998, the Company completed the
acquisitions of AMK, located in
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South Windsor, Connecticut and Spin Forge, located in El Segundo, California. In
the fourth quarter of 1998, the Company completed its acquisition of PMP,
located in Fort Collins, Colorado. The Company expects to pursue additional
acquisitions of complementary technologies, product lines or businesses in the
future, however, there can be no assurances regarding the Company's ability to
locate suitable acquisition candidates and negotiate acceptable acquisition
terms. In connection with the acquisitions of Detaclad, AMK, Spin Forge and PMP,
the Company has maintained operations at each of the Company's existing
facilities. The integration of any future acquisitions will require special
attention from management that may temporarily distract its attention from the
day-to-day business of the Company. Any future acquisitions will also require
integration of the companies' product offerings and coordination of sales and
marketing activities. Furthermore, as a result of acquisitions, the Company may
enter markets in which it has little or no direct prior experience. There can be
no assurance that the Company will be able to effectively manage geographically
dispersed operations. There can also be no assurance that the Company will be
able to retain key personnel of an acquired company or recruit new management
personnel for the acquired businesses, or that the Company will, or may in the
future, realize any benefits as a result of such acquisitions. Future
acquisitions by the Company may also result in potentially dilutive issuances of
equity securities, the incurrence of debt, one-time acquisition charges and
amortization expenses related to goodwill and intangible assets, each of which
could adversely affect the Company's financial condition and results of
operations. In addition, in connection with the acquisitions of Detaclad, AMK,
Spin Forge and PMP, the Company has expanded and enhanced its financial and
management controls, reporting systems and procedures as it integrates these
companies' operations and may need to do so again with respect to future
acquisitions. There can be no assurance that the Company will be able to do so
effectively, and failure to do so when necessary would have a material adverse
effect upon the Company's business, financial condition and results of
operations. See "Acquisitions" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Availability of Suitable Cladding Sites. The cladding process
involves the detonation of large amounts of explosives. As a result, the sites
where the Company performs cladding must meet certain criteria, including lack
of proximity to a 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 obtaining permits because of resistance from residents in
the vicinity of proposed sites. The Company recently announced plans to build a
new manufacturing facility at its Dunbar, Pennsylvania location which will
require certain governmental approvals and permits. While the Company believes
it will be able to obtain such approvals and permits, there is no assurance that
it will be able to do so. The Company currently leases its principal cladding
site in Deer Trail, Colorado and its second cladding site in Dunbar,
Pennsylvania. The lease for the Colorado property will expire in 1999 and the
lease for the Pennsylvania facility will expire in 2005. There can be no
assurances that the Company will be successful in negotiating new leases for
either site on acceptable terms, or in identifying suitable additional or
alternate sites should the Company fail to renew its current leases or require
additional sites to support its planned growth. The failure to obtain required
governmental approvals or permits, or the failure to renew current leases 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. Companies in the explosion metal
working business use alternative technologies, as well as 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.
Moreover, the aerospace industry is extremely fragmented. 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 and Regal Manufacturing in explosion
bonded clad metal products, and in clad metal products fabricated using
alternative technologies, Lukens Steel, Japan Steel Works, the Metallurgical
Materials Division of Texas Instruments and Ametek in roll bonding, and Nooter
Corporation, Struthers Industries, Inc., Joseph Oat Corporation
3.
and Taylor Forge in weld overlay. The Company believes that its primary
competitors in the aerospace industry are Aircraft, Welding and Manufacturing
Company, Inc., Lynn Wedling Company, Inc., Pressure Systems, Inc., Kaiser
Electroprecision, Lucas Aerospace, and Alliant Techsystems. 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.
The Company believes that its primary competitors for formed metal
products are McStarlight Co., Globe Engineering Co., Inc., Klune Industries,
Exotic Metals Forming Company and Spincraft. These companies use a variety of
aerospace forming technologies, including bulge forming, deep draw forming, drop
hammer forming, hydroforming, spinforming and other forming technologies. The
Company competes against formed metal product 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 more than 10% of the
Company's revenues: in 1996, Nooter Corporation (11%); in 1997, Australian
Submarine Corporation Pty. Limited (13%); and none in 1998. Large customers also
accounted for a significant portion of the Company's backlog at March 22, 1999.
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.
In addition, approximately 75% of the Company's revenues historically have been
derived from customers in the chemical processing, power generation and
petrochemical industries. An economic downturn in any of these industries could
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, the Company's sales of formed metal
products and industrial diamond services are derived from a relatively small
number of customers. As the sales of formed metal products and industrial
diamond services carry higher margins than sales of clad metal products, the
loss of one or more of these customers, a change in their pricing or buying
patterns could have a material effect on the Company's business, financial
condition and results of operations.
Dependence on Key Personnel; Need to Attract and Retain Employees and
Availability of Unskilled Labor. 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. In addition, the availability of unskilled workers in the
Denver, Colorado metropolitan area, the site of the Company's primary
manufacturing facility is limited due to a relatively low unemployment rate.
Historically, the Company has experienced a significant rate of attrition for
its unskilled labor as a result of the high demand for unskilled labor in the
Denver metropolitan area. The Company will need to continue to hire and train a
substantial number of new manufacturing workers to support its current
operations and proposed growth, including at its proposed new manufacturing
facility in Dunbar, Pennsylvania. 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.
Expansion of Operations Internationally. The Company is considering
expanding its operations to include facilities located outside of the United
States. Any such expansion would require devotion of significant
4.
management time and financial resources. Foreign markets may be influenced by
factors that are different from those prevailing in the United States. The
Company has limited experience in business operations outside the United States,
and there can be no assurance that the Company can operate effectively and
compete successfully in such markets. International operations are also subject
to certain political and economic risks, including political instability,
currency controls, trade restrictions, regulatory requirements, exchange rate
fluctuations and changes in import and export regulations, any of which could
have a material adverse effect on the Company's business, results of operations
and financial condition.
Government Regulation; Safety. The Company's explosion metal working
business is subject to extensive government regulation in the United States and
in other countries, 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. Licensing and regulations for the purchase, transport,
manufacture and use of explosives may vary significantly among states and
municipalities. 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 ("CERCLA") as amended, including the
regulations issued and laws enforced by the Colorado Labor and Employment
Department, the U.S. Department of Commerce, the U.S. Environmental Protection
Agency and by state and county health and safety agencies. While the Company
believes that it is currently in compliance with these regulations, 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 operations involve 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 ("OSHA")
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.
THE METAL WORKING BUSINESS
The metal working 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(TM) 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.
5.
EXPLOSIVE METAL FORMING
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. 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 one of the Company's bonding sites where
a blasting agent is loaded on top of the assembly and detonated in a carefully
controlled environment using a remote system. The Company immediately transports
the now-bonded metal plates to one of the Company's facilities or to a
subcontractor 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 DuPont's production
of industrial grade diamond abrasives.
Explosive metal forming is performed by using explosions to generate
high-energy shockwaves that are transmitted through water to force a metal blank
into the contours of a die. Explosive metal forming can eliminate or reduce
metal welding operations by creating a single part in place of an assembly of
multiple components. Using its Dynaform(TM) technology the Company can
manufacture large and thicker metal components than other conventional forming
technologies, including metal with difficult contours and virtually unlimited
shapes. The primary advantages of products manufactured using the Dynaform(TM)
process include the manufacture of large metal parts, lower assembly and
inspection costs, improved reliability, reduced overall weight, and increased
strength.
AEROSPACE MANUFACTURING
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
a customers specifications. Metal forming is accomplished through both the use
of explosives and traditional metal forming technologies.
In particular, DMC forms metals by other traditional forming
technologies such as spinning, machining, rolling, and hydraulic expansion.
These technologies were acquired in the recent purchase 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 thin wall,
close tolerance parts. Formed metal products include tactical and ballistic
missile cases, high strength, light weight pressurant tanks utilizing specialty
aerospace alloys and high precision, high quality and complex part. The
industries served include commercial aircraft, space launch, stationary power
generation, satellite, medical and nuclear and missile defense.
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 resides 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
6.
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 (EB) and gas tungsten arc
welding (GTAW) 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 (NDE)
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 aggressively expand 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 Businesses. The Company seeks to add new
product lines through the internal development of new cladding and forming
products and the acquisition of businesses that broaden or complement its
existing product lines. For example, during 1996 the Company completed its first
strategic acquisition when it acquired Detaclad. During 1996, the Company also
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 is currently focusing on expanding its metal forming business
through internal sales and marketing efforts and has adopted a strategy of
acquiring complementary metal forming businesses. In 1998, the Company completed
the acquisition of three complementary businesses, AMK, Spin Forge and PMP. AMK
supplies commercial aircraft and aerospace-related automatic and manual, gas
tungsten and arc welding services. Spin Forge is one of the countries leading
manufacturers of tactical missile motor cases and titanium pressure vessels for
the commercial aerospace and defense industries. 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's future expansion 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 expansion through
acquisitions.
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 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.
Maintain Technology and Manufacturing Leadership. The Company seeks
to maintain its technology leadership in the metal working business through the
continual improvement of its basic processes and product offerings. The Company
has a research and development program which 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.
7.
ACQUISITIONS
The Company is seeking to expand its revenue base by increasing its
product offerings through the acquisition of businesses that broaden or
complement the Company's existing product lines. In July 1996 the Company
completed its first strategic acquisition when it acquired the assets of
Detaclad. Detaclad manufactures and distributes explosion-bonded clad metal
plates and provides explosive shock synthesis services to DuPont in connection
with DuPont's production of industrial diamonds. Through the Detaclad
acquisition, the Company acquired expertise in cladding thin metals and heat
exchanger components primarily for the chemical processing, power generation and
petrochemical industries. In 1998, the Company completed the acquisition of
three complementary businesses, AMK, Spin Forge and PMP. AMK supplies commercial
aircraft and aerospace-related automatic and manual, gas tungsten and arc
welding services. Spin Forge is one of the countries leading manufacturers of
tactical missile motor cases and titanium pressure vessels for the commercial
aerospace and defense industries. 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
evaluates acquisition candidates on an ongoing basis and expects to pursue
additional acquisitions of complementary technologies, product lines or
businesses in the future, however, there can be no assurances regarding the
Company's ability to locate suitable acquisition candidates and negotiate
acceptable acquisition terms.
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. 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. Companies in the explosion metal
working business use alternative technologies, as well as 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.
Moreover, the aerospace industry is extremely fragmented. 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 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., Lynn Wedling
Company, Inc., Pressure Systems, Inc., Kaiser Electroprecision, Lucas Aerospace,
and Alliant Techsystems. 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.
The Company believes that its primary competitors for formed metal
products are McStarlight Co., Globe Engineering Co., Inc., Klune Industries,
Exotic Metals Forming, Inc. and Spincraft. These companies use a variety of
forming technologies, including bulge forming, deep draw forming, drop hammer
forming, hydroforming, spinforming and other forming technologies. The Company
competes against formed metal product 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.
8.
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 more than 10% of the
Company's revenues: in 1996, Nooter Corporation (11%); in 1997, Australian
Submarine Corporation Pty. Limited (13%); and none in 1998. Large customers also
accounted for a significant portion of the Company's backlog at March 22, 1999.
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 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."
The Company extends its internal selling efforts by marketing its
services to potential customers through senior management, direct sales
personnel, program managers and independent sales representatives. Prospective
accounts in specific industries are identified through networking in the
industry, cooperative relationships with suppliers, public relations, customer
references, inquiries from technical articles and seminars and trade shows. The
Company markets its 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 $15.8 million at December 31,
1998 compared with approximately $12.7 million and $12.2 million at December 31,
1997 and 1996, respectively. Backlog consists of firm purchase orders and
commitments which are expected to be filled within the next 12 months. The
Company expects most of the backlog at December 31, 1998 to be filled during
1998, 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 240 employees as of March 22, 1999,
the majority of whom are engaged in manufacturing operations. The Company
believes that its relations with its employees are good.
9.
PROTECTION OF PROPRIETARY INFORMATION
The Company holds 11 United States patents and has filed one patent
application 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
between 1999 and 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 Louisville, Colorado. The Company leases additional
manufacturing facilities in Louisville, Colorado and Dunbar, Pennsylvania. The
lease for the Colorado property will expire in 1999 and the lease for the
Pennsylvania facility will expire in 2005. The Company also leases office space
in Lafayette, Colorado and property located in Deer Trail, Colorado that is used
as an explosion site. The Company acquired the land and buildings housing the
operations of AMK, in South Windsor, Connecticut. The Company leases the land
and building occupied by it's 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,
extendable under certain conditions. The Company also leases the land and
building occupied by its newly acquired PMP operations in Fort Collins,
Colorado. The Company 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 they 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
The Company had been named as a defendant in a lawsuit filed in
France by a French company with which the Company had preliminary acquisition
discussions during 1997. Subsequent to December 31, 1998, the Company reached a
settlement with the plaintiff that effectively dropped all claims by each party
and provided no damages to either party related to the lawsuit. Each party was
deemed to be responsible for only its own legal costs. The Company is not a
party to any other legal proceedings, the adverse outcome of which would, in
management's opinion, have a material adverse effect on the Company's business,
operation results and financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
10.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Common Stock of the Company has been publicly traded on The
Nasdaq Stock Market (National Market) under the symbol "BOOM" since January 3,
1997. Prior thereto, the Common Stock was publicly traded on Nasdaq's SmallCap
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.
1996 HIGH LOW
First Quarter $ 4 1/4 $ 2 5/8
Second Quarter $ 5 7/8 $ 3 3/4
Third Quarter $ 7 1/8 $ 4 3/4
Fourth Quarter $10 1/2 $ 6 3/4
1997
First Quarter $19 1/4 $ 9 1/8
Second Quarter $12 1/8 $ 7 5/8
Third Quarter $12 3/4 $ 9 7/16
Fourth Quarter $12 3/8 $ 7 1/2
1998
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
As of March 22, 1999 there were approximately 314 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.
11.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below has been derived from the
financial statements of the Company.
Year Ended December 31,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------------------------------
STATEMENT OF INCOME
Net sales $38,212,051 $32,119,585 $29,165,289 $19,521,133 $15,327,488
Cost of products sold 30,343,637 24,459,168 23,187,155 15,281,973 11,167,327
----------- ----------- ----------- ----------- -----------
Gross profit 7,868,414 7,660,417 5,978,134 4,239,160 4,160,161
Costs and expenses 5,332,458 4,370,091 3,302,602 3,133,640 3,089,313
----------- ----------- ----------- ----------- -----------
Income from operations 2,535,956 3,290,326 2,675,532 1,105,520 1,070,848
Other income (expense) (263,200) (61,413) (92,878) (43,181) 4,875
----------- ----------- ----------- ----------- -----------
Income before income tax provision 2,272,756 3,228,913 2,582,654 1,062,339 1,075,723
Income tax provision (887,000) (1,221,000) (959,000) (391,145) (293,785)
----------- ----------- ----------- ----------- -----------
Net income $ 1,385,756 $ 2,007,913 $ 1,623,654 $ 671,194 $ 781,938
=========== =========== =========== =========== ===========
Net income per share:
Basic $0.50 $0.75 $0.64 $0.27 $0.31
Diluted $0.49 $0.70 $0.59 $0.26 $0.31
Weighted average number of shares outstanding:
Basic 2,770,139 2,681,943 2,522,305 2,496,487 2,491,626
Diluted 2,852,547 2,875,703 2,741,868 2,547,797 2,554,125
FINANCIAL POSITION
Current assets $11,145,995 $ 9,809,503 $11,653,968 $ 7,813,704 $ 6,082,472
Total assets 33,201,578 14,405,809 16,485,240 10,040,668 8,373,579
Current liabilities 6,069,050 3,455,700 4,111,784 3,350,039 2,084,029
Non-current liabilities 14,503,617 90,632 4,147,696 184,460 464,950
Stockholders' equity 12,628,911 10,859,477 8,225,760 6,506,169 5,824,600
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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", metal forming and shock
synthesis of synthetic diamonds. The Company performs metal cladding using its
proprietary Dynaclad(TM) and Detaclad(R) technologies and performs metal forming
using its proprietary Dynaform(TM) technology. Historically, the Company has
generated approximately 85% to 90% of its revenues from its metal cladding
business and approximately 10% to 15% of its revenues from its metal forming and
shock synthesis businesses. The Company expects revenues from its explosive
metalworking businesses, as a proportion of total Company revenues, to decline
as a result of the recent AMK Welding, Spin Forge and Precision Machined
Products acquisitions. The Company's new aerospace group was formed from these
three acquisitions and accounted for 22% of the Company's 1998 revenues, a
percentage that should increase significantly in 1999.
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,
12.
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
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 and
ballistic missile motor cases, titanium pressure tanks for launch vehicles, and
complex, high precision component parts for satellites.
The Company is continually working to generate solutions to the
materials needs of customers in its target markets. Key elements of the
Company's strategy include continual improvement of its basic processes and
product offerings, the internal development of new cladding and forming products
and the acquisition of businesses that broaden or complement the Company's
existing product lines. In July 1996, the Company completed its first strategic
acquisition when it acquired the assets of the Detaclad(R) Division ("Detaclad")
of E.I. du Pont de Nemours and Company ("DuPont"), a complementary explosion
cladding business with expertise in cladding thin metals and heat exchanger
components primarily for the chemical processing, power generation and
petrochemical industries.
The Company completed three separate business acquisitions during
1998. On January 5, 1998, the Company acquired certain assets of AMK Welding,
Inc. ("AMK") for a cash purchase price of approximately $940,000. Assets
acquired consisted primarily of machinery and equipment, land and the building
that houses AMK's operations. 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") for a purchase price of
approximately $3,826,000 that was paid with a combination of approximately
$2,616,000 in cash, assumption of approximately $760,000 in liabilities and
50,000 shares of DMC Common Stock valued at $449,800. 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. Principal assets acquired included machinery and
equipment and inventories. The Company leases land and buildings from Spin
Forge, LLC and holds an option to purchase such property for approximately $2.9
million, 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 $2.9 million.
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 that 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
exclusive 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 an exclusive right of first offer to purchase the land and
building at fair market value. This right of first offer is exercisable through
December 2008.
13.
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 from major customers, customer inventory levels,
shifts in product mix, the occurrence of acquisition-related costs 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. 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, 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 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 2.7% to $7,868,414 from $7,660,417 in 1997. The Company's
gross profit margin for 1998 was 20.6%, a 13.4% decline from the gross profit
margin of 23.8% in 1997. Gross profit margin for the Company's explosion
metalworking group decreased from 23.8% 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. Selling expenses as a percentage of net sales
decreased from 6.1% in 1997 to 4.8% in 1998.
14.
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.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased to $28,963
in 1998 from $68,029 in 1997. The Company is currently utilizing its engineering
resources to support current manufacturing activities, including plant design
and equipment acquisition activities associated with a new manufacturing
facility that is under construction in Pennsylvania, and does not expect to
significantly increase spending on research and development projects in the near
future.
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 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.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
NET SALES. Net sales for 1997 increased by 10.1% to $32,119,585 from $29,165,289
in 1996. This increase was attributable to a $2.1 million increase in sales of
the Company's formed metal products and a $979,000 increase in sales of
industrial diamond services (a direct result of the Company's July 1996
acquisition of Detaclad). Sales of clad metal products remained flat from 1996
to 1997.
GROSS PROFIT. As a result of the Company's increase in net sales and an
improvement in the gross margin rate, gross profit for 1997 increased by 28.1%
to $7,660,417 from $5,978,134 in 1996. The 1997 gross profit margin rate of
23.8% represented a 16.1% increase from the 1996 gross profit margin rate of
20.5%. This increase in the gross margin rate is attributable to proportionately
higher 1997 sales of formed metal products and industrial diamond services, both
of which carry significantly higher margins than sales of clad metal plates.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for 1997
increased 28.5% to $2,338,355 from $1,818,366 in 1996. This increase reflects
higher spending levels in a number of categories, including compensation and
benefits, legal fees including certain litigation matters and fees associated
with the Company's re-
15.
incorporation in Delaware, and amortization of goodwill and intangibles. General
and administrative expenses are expected to remain at these higher 1997 levels
to support current operations, business acquisition activities and other
strategic business initiatives. As a percentage of net sales, general and
administrative expenses increased from 6.2% in 1996 to 7.3% in 1997.
SELLING EXPENSE. Selling expense increased by 35.3% to $1,963,707 in 1997 from
$1,451,036 in 1996. This increase reflects higher spending levels in a number of
categories, including compensation and benefits, advertising and promotion, and
travel and entertainment expenses. These increased spending levels are primarily
attributable to staffing increases associated with the July 1996 Detaclad
acquisition, general business growth, and expansion of the Company's domestic
and international marketing activities. Selling expense, as a percentage of net
sales, increased from 5.0% in 1996 to 6.1% in 1997.
RESEARCH AND DEVELOPMENT. Research and development expenses increased to $68,029
in 1997 from $33,200 in 1996. This increase reflects increased contract labor
and travel expenses associated with current year new product and process
development programs.
INCOME FROM OPERATIONS. Income from operations increased by 23.0% to $3,290,326
in 1997 from $2,675,532 in 1996. This increase was primarily due to increased
net sales and a significant improvement in the Company's gross margin rate, and
was partially offset by increased operating expenses as discussed above. Income
from operations, as a percentage of net sales, increased to 10.2% in 1997 from
9.2% in 1996.
INTEREST EXPENSE. Net interest expense decreased 23.1% to $78,590 in 1997 from
$102,185 in 1996. This decrease reflects the pay-down during the first half of
1997 of borrowings under the Company's revolving line of credit facility with
KeyBank of Colorado that were required during the last half of 1996 and first
few months of 1997. These borrowings were required to finance a portion of the
Detaclad acquisition and working capital requirements associated with two large
orders that accounted for a significant portion of accounts receivable and
inventory balances during the fourth quarter of 1996 and first quarter of 1997.
INCOME TAX PROVISION. The Company's income tax provision increased by 27.3% to
$1,221,000 in 1997 from $959,000 in 1996, and follows the increase in sales,
operating income and income before income taxes. The effective tax rate was
37.8% in 1997 and 37.1% in 1996.
NET INCOME. Net income for 1997 increased by 23.7% to $2,007,913 from $1,623,654
in 1996 and, as a percentage of net sales, was 6.3% in 1997 compared to 5.6% in
1996. This increase was primarily attributable to increased net sales and
improved gross profit margins.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has secured the major portion of its
operational financing from operating activities and an asset-backed revolving
credit facility. In connection with the Detaclad acquisition, the Company
entered into a $7,500,000 asset-backed revolving credit facility ("Original
Line") with KeyBank National Association ("KeyBank") in July of 1996. 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 which would mature
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 which was further
amended on December 31, 1998. The amended credit facility allows 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
16.
thereafter, the maximum borrowings available under the acquisition line become
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 become
permanently reduced by $230,000, with ultimate maturity on December 31, 2001.
The working capital line expires on November 30, 2000. At the Company's option,
the borrowings under the acquisition line and working capital line may be in the
form of loans bearing an interest rate of 1 to 2% above the LIBOR rate,
depending on certain financial ratios, or loans bearing an interest rate of 2%
above the Federal Funds rate. Loans under the accommodation line bear interest
of 1/4% above the bank's Prime rate. The lines of credit are secured by the
Company's accounts receivable, inventory and property, plant and equipment.
Outstanding borrowings at December 31, 1998 on the acquisition line,
accommodation line and working capital line totaled $5,700,000, $2,300,000 and
$600,000, respectively.
In March 1998, the Company's Board of Directors approved the
Company's proposal to build a new manufacturing facility in Pennsylvania at a
cost of approximately $6.8 million. The project is being financed with proceeds
from $6,850,000 in industrial development revenue bonds issued by Fayette County
Industrial Development Authority ("IDA"). The Company closed its loan agreement
with Fayette County IDA on September 17, 1998 and has established a bank letter
of credit in favor of the bond trustee for the principal amount of the bonds
plus 98 days of accrued interest. The letter of credit is secured by the
Company's accounts receivable, inventory, property, plant and equipment, and
bond proceeds not yet expended for construction of the facility and purchase of
related equipment. Construction of the new facility began during the third
quarter of 1998, and the new facility should become fully operational during the
second half of 1999.
During 1998, the Company generated $3,591,851 in cash flows from
operating activities as compared to $3,972,310 in the prior year. The principal
sources of cash flow from operations in 1998 were net income of $1,385,756,
depreciation and amortization charges of $1,107,651, a decrease in accounts
receivable of $578,209, and increases in accrued expenses and bank overdraft of
$602,883 and $805,304, respectively. These sources of operating cash flow were
partially offset by a $204,938 increase in income tax receivable and a $786,769
decrease in accounts payable. The current ratio was 1.8 at December 31, 1998 as
compared to 2.8 at December 31, 1997. Investing activities in 1998 used
$18,960,624 of cash, including $10,425,579 to fund the purchase of the PMP, Spin
Forge and AMK assets, $2,814,815 to fund capital expenditures, and $5,048,981 to
temporarily invest proceeds from the industrial development revenue bond issue.
Capital expenditures included $1,853,723 on the new Pennsylvania manufacturing
facility. Financing activities provided $15,314,964 of net cash in 1998. These
financing cash flows included line of credit borrowings in the amount of
$8,600,000 to finance the purchase of Spin Forge, AMK and PMP, and $6,850,000
from the issuance of industrial development revenue bonds that are being used to
finance construction of the Company's new manufacturing facility in Pennsylvania
and the purchase of related equipment.
The Company believes that its cash flow from operations, funds
expected to be available under its amended credit facility and proceeds from the
industrial development revenue bond financing for the new Pennsylvania
manufacturing facility will be sufficient to fund working capital and capital
expenditure requirements of its current business operations, including those of
the recently acquired AMK, Spin Forge and PMP businesses, for the foreseeable
future. However, a significant portion of the Company's sales is derived from a
relatively small number of customers; therefore, the failure to perform existing
contracts on a timely basis, and to receive payment for such services in a
timely manner, or to enter into future contracts at projected volumes and
profitability levels could adversely affect the Company's ability to meet its
cash requirements exclusively through operating activities. Consequently, any
restriction on the availability of borrowing under the line of credit could
negatively affect the Company's ability to meet its future cash requirements.
The Company's expenditures for the Pennsylvania manufacturing facility could
exceed its estimates due to construction delays, the delay in the receipt of any
required government approvals and permits, labor shortages or other factors. In
addition, the Company plans to grow both internally and through the acquisition
of complementary businesses. Increased expenditures for the Pennsylvania
manufacturing facility and/or a significant acquisition may require the Company
to secure additional debt or equity financing. While the Company believes it
would be able to secure such additional financing at reasonable terms, there is
no assurance that this would be the case.
17.
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. For the past year, the Company has pursued a two-prong
approach to the Year 2000 issue.
The first prong has and continues to involve an internal evaluation
of the Company's computer systems. The Company has completed a risk assessment
to identify Year 2000 priorities by analyzing and determining whether the Year
2000 related risks were low, medium or high and whether the business impact
would be marginal, manageable, critical or fatal for each system and device that
may be affected by the Year 2000 issue. Based on this risk assessment, the
Company determined that its first priority would be evaluating its MRP software.
The Company found this software to be Year 2000 compliant as certified by the
vendor and through internal testing. The Company continued this procedure for
each of the areas identified during its risk assessment as follows. The
Company's hardware was tested by advancing dates and checking for power-off date
changes and power-on date changes as well as software and hardware operation at
the advanced dates. Based upon those tests the Company believes its hardware to
be Year 2000 compliant. The Company's network operating system became Year 2000
compliant with the installation of a from the vendor in January 1999. The
Company expects that its desktop applications will be Year 2000 compliant by mid
1999 with the announced patches that are forthcoming from various vendors.
Finally, the Company has determined through testing that its various computer
controlled manufacturing equipment is either Year 2000 compliant or will not
have any adverse effects on manufacturing processes in the Year 2000.
The second prong of the Company's approach, which the Company began
to emphasize in the second and third quarter of 1998 and expects to complete by
mid 1999, is an integrated process of working with suppliers and customers to
ensure that the flow of goods, services or payments will not be interrupted
because of Year 2000 issues. To achieve this, the Company has been working to
implement mechanical or manual workarounds even if Year 2000 problems arise. In
many cases, such workarounds are already in place. Additionally, the Company is
requesting that its suppliers and customers include language in their material
subcontractor and consulting agreements that request these third parties to be
"internally" Year 2000 capable.
However, there can be no assurance that the failure of the Company's
suppliers and customers to be Year 2000 compliant would not have a material
adverse effect on the Company's business, financial condition or results of
operations. In addition, the Company may be adversely affected by disruptions in
the operations of other companies with which the Company does business, from
general widespread problems or an economic crisis resulting from non-compliant
Year 2000 systems.
The Company has not incurred any material historical Year 2000 costs
to date. Management does not have an estimate of future Year 2000 project costs
that may be incurred but expects such costs to be minimal since all Year 2000
compliance work is expected to be performed by Company employees. Management
expects, but makes no assurance that, future Year 2000 project costs will not
have a material adverse effect on its financial condition and results of
operations.
18.
The Company has not formulated contingency plans in the event that
systems are not Year 2000 compliant. While management does not believe there to
be significant year 2000 risks for the Company, manual workarounds will be
developed as part of the Company's Year 2000 compliance program. There can be no
assurance that the Company's systems will be Year 2000 compliant in time.
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; construction-related delays and
associated costs; 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.
ITEM 7.A 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,
1998
----------------------
Fixed rate $ 5,742
Interest rate 8.37%
Line of credit - variable rate $ 8,600,000
Weighted average interest rate 7.36%
Industrial development revenue
Bonds - variable rate $ 6,850,000
Interest rate 3.10%
19.
The table below presents principal cash flows and related
weighted-average interest rates by expected maturity dates for the Company's
debt obligations.
As of December 31, 1998
-------------------------------------------------------------------------------------
2003 and
1999 2000 2001 2002 thereafter Total
-------------------------------------------------------------------------------------
Fixed Rate $ 5,742 $ - $ - $ - $ - $ 5,742
Interest rate 8.37% - - - - 8.37%
Line of credit $ 978,182 $2,556,364 $1,956,364 $1,036,364 $2,072,726 $8,600,000
Weighted average interest rate 7.36% 7.36% 7.36% 7.36% 7.36% 7.36%
Industrial development
revenue bonds - $ 165,000 $ 680,000 $ 725,000 $ 795,000 $4,485,000 $6,850,000
Interest rate 3.10% 3.10% 3.10% 3.10% 3.10% 3.10%
During the year ended December 31, 1998, the Company entered into two
interest rate swap agreements to manage interest rate risk on its variable rate
debt. The swap agreements, which convert a portion of the Company's variable
rate acquisition line of credit borrowings and all of its industrial development
revenue bond borrowings to interest rates that are largely fixed, were entered
into based on Management's assessment of the interest rate market. Interest
differentials paid or received under these swap agreements are recognized over
the life of the contracts as adjustments to the effective yield of the
associated debt, and related amounts payable to, or received from, the
counterparties are included in the Company's balance sheet.
The swap agreement associated with the Company's acquisition line of
credit converts $4,000,000 of the $5,700,000 outstanding at December 31, 1998 to
a rate that is largely fixed. The agreement expires on December 31, 2004. As of
December 31, 1998, the effective rate under this swap agreement was 7.27%. As
this swap agreement was entered into on December 1, 1998, the resultant
additional interest expense which was incurred during the year ended December
31, 1998 was insignificant.
The swap agreement associated with the Company's industrial
development revenue bonds, which expires on September 1, 2013, converts the
$6,850,000 obligation to an interest rate that is largely fixed. As of December
31, 1998, the effective rate under this swap agreement was 3.73% and the
additional interest incurred during the year ended December 31, 1998 as a result
of the swap agreement was approximately $9,600.
20.
ITEM 8. FINANCIAL STATEMENTS
DYNAMIC MATERIALS CORPORATION
INDEX TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997
PAGE
Report of Independent Public Accountants......................... 22
Financial Statements:
Balance Sheets............................................. 23
Statements of Operations................................... 25
Statements of Stockholders' Equity......................... 26
Statements of Cash Flows................................... 28
Notes to Financial Statements.............................. 29
21.
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, 1998 and 1997, and the related
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1998, 1997 and 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Dynamic Materials Corporation
as of December 31, 1998 and 1997, and the results of its operations and its cash
flows for the years ended December 31, 1998, 1997 and 1996, in conformity with
generally accepted accounting principles.
Arthur Andersen, LLP
Denver, Colorado,
February 5, 1999.
22.
Page 1 of 2
DYNAMIC MATERIALS CORPORATION
BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
ASSETS 1998 1997
------ ------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ - $ 53,809
Accounts receivable, net of allowance for doubtful
accounts of $225,000 and $150,000, respectively 4,832,658 4,936,350
Inventories (Note 3) 5,373,829 4,029,559
Prepaid expenses and other 214,776 73,517
Income tax receivable (Note 6) 499,932 294,994
Deferred tax assets (Note 6) 224,800 200,000
Receivable from related party (Note 8) - 221,274
---------- ----------
Total current assets 11,145,995 9,809,503
---------- ----------
PROPERTY, PLANT AND EQUIPMENT (Note 3) 12,729,209 5,831,687
Less- Accumulated depreciation (3,931,495) (2,988,807)
---------- ----------
Property, plant and equipment-net 8,797,714 2,842,880
---------- ----------
CONSTRUCTION IN PROCESS (Note 3) 1,853,723 -
RESTRICTED CASH AND INVESTMENTS (Note 4) 5,048,981 -
RECEIVABLE FROM RELATED PARTY (Note 8) 280,000 -
INTANGIBLE ASSETS, net of accumulated amortization
of $459,759 and $307,451 respectively (Note 3) 5,607,861 1,230,464
OTHER ASSETS, net (Note 3) 467,304 522,962
---------- ----------
$33,201,578 $14,405,809
========== ==========
The accompanying notes to financial statements are
an integral part of these balance sheets.
23.
Page 2 of 2
DYNAMIC MATERIALS CORPORATION
BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
------------------------------------ ------------- -------------
CURRENT LIABILITIES:
Bank overdraft $ 805,304 -
Accounts payable 2,348,090 2,328,867
Accrued expenses 1,734,282 1,012,908
Current maturities on long-term debt (Note 4) 1,148,924 84,037
Current portion of capital lease obligation (Note 7) 32,450 29,888
---------- ----------
Total current liabilities 6,069,050 3,455,700
LONG-TERM DEBT (Note 4) 14,306,818 6,083
CAPITAL LEASE OBLIGATION (Note 7) 38,299 70,749
DEFERRED TAX LIABILITIES (Note 6) 158,500 13,800
---------- ----------
Total liabilities 20,572,667 3,546,332
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY (Note 5):
Convertible 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; 2,798,391 and 2,718,708 shares
issued and outstanding, respectively 139,920 135,936
Additional paid-in capital 7,022,450 6,587,911
Deferred compensation (54,845) -
Retained earnings 5,521,386 4,135,630
---------- ----------
12,628,911 10,859,477
---------- ----------
$33,201,578 $14,405,809
========== ==========
The accompanying notes to financial statements are
an integral part of these balance sheets.
24.
DYNAMIC MATERIALS CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
----------- ----------- -----------
NET SALES (Note 9) $38,212,051 $32,119,585 $29,165,289
COST OF PRODUCTS SOLD 30,343,637 24,459,168 23,187,155
---------- ---------- ----------
Gross profit 7,868,414 7,660,417 5,978,134
---------- ---------- ----------
COSTS AND EXPENSES:
General and administrative expenses 3,262,993 2,338,355 1,818,366
Selling expenses 1,850,973 1,963,707 1,451,036
New facility start up costs 189,529 - -
Research and development costs 28,963 68,029 33,200
---------- ---------- ----------
Total costs and expenses 5,332,458 4,370,091 3,302,602
---------- ---------- ----------
INCOME FROM OPERATIONS 2,535,956 3,290,326 2,675,532
OTHER INCOME (EXPENSE):
Other income 8,921 17,177 9,307
Interest expense (283,706) (117,372) (173,715)
Interest income 11,585 38,782 71,530
---------- ---------- ----------
Income before income tax provision 2,272,756 3,228,913 2,582,654
INCOME TAX PROVISION (Note 6) (887,000) (1,221,000) (959,000)
---------- ---------- ----------
NET INCOME $ 1,385,756 $ 2,007,913 $ 1,623,654
---------- ---------- ----------
NET INCOME PER SHARE (Note 3)
Basic $ 0.50 $ 0.75 $ 0.64
========== ========== ==========
Diluted $ 0.49 $ 0.70 $ 0.59
========== ========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING (Note 3)
Basic 2,770,139 2,681,943 2,522,305
========= ========= =========
Diluted 2,852,547 2,875,703 2,741,868
========= ========= =========
The accompanying notes to financial statements are
an integral part of these statements.
25.
Page 1 of 2
DYNAMIC MATERIALS CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Common Stock Additional
------------------------ Paid-In Deferred Retained
Shares Amount Capital Compensation Earnings
----------- ----------- ------------ -------------- --------------
BALANCES, December 31, 1995 2,500,923 $ 125,047 $ 5,877,059 $ - $ 504,063
Common stock issued for stock
option exercises 38,400 1,920 94,017 - -
Net income - - - - - 1,623,654
--------- --------- ---------- ---------- ----------
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
The accompanying notes to financial statements are
an integral part of these statements.
26.
Page 2 of 2
DYNAMIC MATERIALS CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Common Stock Additional
------------------------ Paid-In Deferred Retained
Shares Amount Capital Compensation Earnings
----------- ----------- ------------ -------------- --------------
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 (Note 2) - - 20,021 - -
Shares issued in connection
with the purchase of
Spin Forge 50,000 2,500 447,300 - -
Restricted stock grant related
to the purchase of
Spin Forge 7,500 375 67,125 (67,500) -
Shares issued in connection
with the purchase of
PMP (Note 2) 40,000 2,000 213,680 - -
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
========= ======== ========== ========= ==========
The accompanying notes to financial statements are
an integral part of these statements.
27.
Page 1 of 2
DYNAMIC MATERIALS CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
------------- ------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,385,756 $2,007,913 $ 1,623,654
Adjustments to reconcile net income
to net cash from operating activities-
Depreciation 942,688 561,937 442,517
Amortization 152,308 119,107 70,399
Amortization of deferred compensation 12,655 - -
Provision (benefit) for deferred income taxes 119,900 74,550 (58,950)
Compensation expense related to the accelerated
vesting of certain options - 34,700 -
Change in (excluding acquisitions)-
Accounts receivable, net 578,209 1,240,239 (478,708)
Inventories 18,090 799,269 (499,408)
Prepaid expenses and other (34,235) 77,434 (48,545)
Income tax receivable (204,938) (294,994) -
Bank overdraft 805,304 (743,471) 743,471
Accounts payable (786,769) 73,677 38,268
Accrued expenses 602,883 21,949 497,714
---------- --------- ----------
Net cash flows from operating activities 3,591,851 3,972,310 2,330,412
---------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment and earnings on bond proceeds (6,550,707) - -
Reimbursement of bond proceeds from trustee 1,501,726 - -
Cash paid in connection with the construction
of the new facility (1,853,723) - -
Purchase of Detaclad assets (Note 2) - - (5,274,809)
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 (961,092) (410,007) (221,759)
Loan to related party (280,000) (221,274) -
Investment in patent - (12,091) -
Change in other noncurrent assets 34,036 (23,980) (227,108)
---------- --------- ----------
Net cash flows from investing activities (18,535,339) (667,352) (5,723,676)
---------- --------- ----------
The accompanying notes to financial statements are
an integral part of these statements.
28.
Page 2 of 2
DYNAMIC MATERIALS CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
------------- ------------ -------------
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 8,600,000 (3,930,000) 3,330,000
Payments on long-term debt (84,378) (94,373) (86,880)
Payments on capital lease obligation (29,888) (27,530) (23,322)
Payment of deferred financing costs (100,216) - (200,394)
Cash paid in connection with the shares repurchased
from related party (425,285) - -
Net proceeds from issuance of common stock 255,145 322,723 95,937
Tax benefit related to non-statutory options 20,021 268,381 -
----------- ---------- ----------
Net cash flows from financing activities 14,889,679 (3,460,799) 3,115,341
----------- ---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (53,809) (155,841) (277,923)
CASH AND CASH EQUIVALENTS, beginning of the period 53,809 209,650 487,573
----------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of the period $ - $ 53,809 $ 209,650
=========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for-
Interest, net of amounts capitalized $ 138,677 $ 140,240 $ 121,175
=========== ========== ===========
Income taxes $ 952,017 $ 1,407,700 $ 826,000
=========== ========== ===========
NONCASH INVESTING ACTIVITIES:
During 1996, the Company entered into a capital lease agreement acquiring
equipment in the amount of $151,489. 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):
1998 1997 1996
Accounts receivable $ 474,517 $ - $1,218,682
Inventories 1,362,360 - 1,746,294
Prepaids and other 31,500 - -
Property, plant and equipment 5,617,460 - 975,500
Intangible assets 4,529,705 - 1,381,374
Liabilities assumed (924,483) - (47,041)
Common stock issued (665,480) - -
----------- -------- ---------
Net cash paid $ 10,425,579 $ - $5,274,809
======== =========
The accompanying notes to financial statements are
an integral part of these statements.
29.
DYNAMIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(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.
(2) ACQUISITIONS
DETACLAD BUSINESS OF E.I. DUPONT DE NEMOURS AND COMPANY
On July 22, 1996, the Company acquired certain assets of the Detaclad Business
("Detaclad") of E.I. DuPont de Nemours and Company ("DuPont"). Detaclad designs,
manufactures and distributes explosion bonded clad metal plates and also
provides explosive shock syntheses services to DuPont in connection with
DuPont's production of industrial diamonds. The total purchase price of
approximately $5,322,000 included approximately $5,024,000 in cash payments to
DuPont, approximately $251,000 in acquisition related expenses and the
assumption of accrued liabilities in the amount of approximately $47,000. Assets
acquired consisted principally of trade accounts receivable, inventories,
machinery and equipment, leasehold improvements and trade names used in the
business, as well as subleases of Detaclad manufacturing and office facilities.
The acquisition was financed with Company cash and borrowings under a revolving
credit facility.
The acquisition was accounted for using the purchase method of accounting. The
purchase price was allocated to the assets acquired based on their approximate
fair values at the purchase date. The results of operations of Detaclad since
the July 22, 1996 purchase date are included in the Company's financial
statements.
The following unaudited pro forma results of operations of the Company for the
year ended December 31, 1996 assume that the acquisition of Detaclad had
occurred on January 1, 1996. 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.
30.
Year Ended
December 31, 1996
-------------------
Revenues $35,090,000
Net income $ 1,703,000
Net income per share - basic $.68
Net income per share - diluted $.62
In addition, concurrent with the acquisition of Detaclad, the Company entered
into a Tolling/Services Agreement with DuPont whereby the Company is to provide
services and materials to DuPont for use in the production of industrial
diamonds. The agreement may be terminated by either party, without cause,
beginning January 1999, with nine months written notice.
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.
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 $2.9 million, 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 $2.9 million.
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.
31.
The following unaudited pro forma results of operations of the Company for the
years ended December 31, 1998 and 1997 assumes that the acquisitions of AMK,
Spin Forge and PMP had occurred on January 1, 1997. 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
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, 1998 and 1997:
1998 1997
------------ ------------
Raw materials $1,534,800 $ 984,788
Work in process 3,614,485 2,865,164
Supplies 224,544 179,607
--------- ---------
$5,373,829 $4,029,559
========= =========
32.
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, 1998 and
1997:
1998 1997
----------- ----------
Land $ 387,308 145,708
Building and improvements 3,022,967 2,024,809
Manufacturing equipment and tooling 7,507,302 2,506,125
Furniture, fixtures and computer equipment 1,556,158 926,470
Other 255,474 228,575
---------- ---------
$12,729,209 $5,831,687
========== =========
CONSTRUCTION IN PROCESS
The construction in process balance of $1,853,723 represents costs incurred
through December 31, 1998 related to the construction of the Company's new
manufacturing facility and acquisition of related manufacturing equipment for
the Company's explosion metalworking business. Construction began in September
1998 and is expected to be completed during the year ended December 31, 1999, at
which time the assets placed in service will be depreciated consistent with
other similar assets of the Company. The project is being financed using
proceeds from the issuance of industrial development revenue bonds ("the Bonds")
(see Note 4). The Company is capitalizing the interest expense related to the
Bonds net of the interest earned on the investments purchased with the excess
proceeds. During 1998, interest expense on the Bonds approximated interest
income earned by the restricted investments.
INTANGIBLE ASSETS
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.
33.
As a result of the Detaclad acquisition discussed in Note 2, $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 included in intangible assets and are being
amortized over five years.
As a result of the PMP acquisition discussed in Note 2, $4,329,705 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 is also included in intangible assets and is being
amortized over 4 years.
OTHER ASSETS
Included in other assets are deferred financing costs of $224,866 and $158,945,
net of accumulated amortization of $75,743 and $41,449, for the years ended
December 31, 1998 and 1997, 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, 1998 are bond issue costs of $195,720
associated with the industrial development revenue bonds used to finance the
Company's new manufacturing facility (see Note 4). The Company is amortizing
these costs over the life of the bonds. The December 31, 1997 balance in other
assets also included in-process system implementation costs of $318,969. The
costs were transferred to property, plant and equipment during 1998 upon
completion of the system implementation project.
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.
RESEARCH AND DEVELOPMENT COSTS
Research and development expenditures for the creation and application of new
and improved products and processes are expensed as incurred and consist of
labor, materials and related overhead expenses.
34.
NET 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 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 difference between basic
and diluted weighted average number of shares outstanding is due to dilutive
effects of stock options.
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.
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.
The carrying amounts and estimated fair values of the Company's financial
instruments are as follows:
December 31, 1998 December 31, 1997
------------------------------ ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- -------------- ------------- -------------
Financial Assets-
Cash and cash equivalents $ - $ - $ 53,809 $ 53,809
Accounts receivable $ 4,832,658 $ 4,832,658 $ 4,936,350 $ 4,936,350
Receivable from related party $ 280,000 $ 211,725 $ 221,274 $ 221,274
Financial Liabilities-
Accounts payable and accrued
expenses $ 4,082,372 $ 4,082,372 $ 3,341,775 $ 3,341,775
Debt $ 15,455,742 $ 15,455,742 $ 90,120 $ 90,120
Unrecognized financial instruments-
Interest rate swap agreements $ - $ (192,688) $ - $ -
35.
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.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the current
period presentation.
NEW ACCOUNTING PRINCIPLES
The Financial Accounting Standards Board ("FASB") recently issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and related information" ("SFAS 131"), which requires that a public
business enterprise report certain financial and descriptive information about
its reportable segments. The Company adopted SFAS 131 for the year ended
December 31, 1998. See Note 9 for required disclosures.
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, 1999. The Company is currently assessing the effect of
this new standard.
The American Institute of Certified Public Accountants ("AICPA") recently issued
Statement of Position 98-5, "Reporting on the cost of Start-Up Activities" ("SOP
98-5"), which is required to be adopted by affected companies for fiscal years
beginning after December 15, 1998. SOP 98-5 defines start-up and organization
costs, which must be expensed as incurred. In addition, all deferred start-up
and organization costs existing as of January 1, 1999 must be written-off and
accounted for as a cumulative effect of an accounting change. The Company
elected to early adopt SOP 98-5 during 1998.
The AICPA also recently issued Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"),
which is required to be adopted by affected companies for financial statements
for fiscal years beginning after December 15, 1998. SOP 98-1 provides guidance
on accounting for the costs of computer software developed or obtained for
internal use and identifies the characteristics of internal-use software. In
general, SOP 98-1 requires that these costs are to be capitalized. These
requirements are to be applied prospectively from the date of adoption. The
Company believes SOP 98-1 will not materially impact its financial statements.
36.
(4) LONG-TERM DEBT
LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1998 and 1997:
1998 1997
------------- ------------
Lines of credit $ 8,600,000 $ -
Industrial development revenue bonds 6,850,000 -
Note payable to a financial institution payable
in monthly installments of $3,104 including
interest at 8.85% through June 30, 1998,
secured by selected Company assets; paid in
full during 1998 - 13,203
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 in full subsequent to December 31, 1998 5,742 76,917
---------- ---------
15,455,742 90,120
Less-Current maturities (1,148,924) (84,037)
---------- ---------
$14,306,818 $ 6,083
========== =========
LINES OF CREDIT
During fiscal year 1996, the Company secured a $7,500,000 revolving line of
credit ("Original Line") which had no outstanding balance as of December 31,
1997. The Original Line was to expire on July 19, 1999 at which point all or
part of the outstanding balance could have been converted to a term loan which
would mature on July 19, 2003. On November 30, 1998 the Company and its bank
entered into an amended and restated credit facility and security agreement
which was further amended on December 31, 1998. The amended credit facility
allows 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). The borrowings at December 31, 1998 on the acquisition line,
accommodation line and working capital line totaled $5,700,000, $2,300,000 and
$600,000, respectively. Of the $8,600,000 outstanding under these lines of
credit at December 31, 1998, $978,182 represent current maturities. Beginning on
September 30, 1999 and on the last day of each calendar quarter thereafter, the
maximum borrowings available under the acquisition line become permanently
reduced by $259,091, with ultimate maturity on November 30, 2004. Beginning on
September 30, 1999 and on the last day of each calendar quarter thereafter, the
maximum borrowings available under the accommodation line become permanently
reduced by $230,000, with ultimate maturity on December 31, 2001. The working
capital line expires on November 30, 2000. At the Company's option, the
borrowings under the acquisition line and working capital line may be in the
form of loans bearing an interest rate of 1 to 2% above the LIBOR rate,
depending on certain financial ratios, or loans bearing an interest rate of 2%
above the Federal Funds rate. Loans under the
37.
accommodation line bear interest of 1/4% above the bank's Prime rate. The
weighted average interest rate on all line of credit borrowings at December 31,
1998 was 7.36%. 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 is largely fixed. The amount of the swap
agreement decreases by $181,818 beginning on September 30, 1999 and at the end
of each quarter thereafter, and ultimately matures on December 31, 2004. Under
the swap agreement, the Company has 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 rate (5.28%
at December 31, 1998). Since the interest payments received under the swap
agreement and the interest paid on the acquisition line of credit are both based
on the LIBOR rate, the interest rate on $4,000,000 of the $5,700,000 acquisition
line of credit is 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.
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 principal balance outstanding at December
31, 1998 was $6,850,000, including a current portion of $165,000. 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, 1998 was
3.10%. 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 $5,048,981 (which includes accrued interest of $89,692) as of
December 31, 1998 and was classified as restricted cash and investments
(non-current) 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
has 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. Since the current weekly tax-exempt
rate (3.10% at December 31, 1998) is lower than 76% of the commercial paper rate
(3.78% at December 31, 1998), the Company's effective rate is lower than the
fixed rate of 4.41%. If the weekly tax-exempt rate should increase above 76% of
the commercial paper rate in the future, the Company's effective interest rate
would increase above the 4.41% fixed rate.
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.
Aggregate maturities for debt outstanding are as follows:
38.
1999 $ 1,148,924
2000 3,236,364
2001 2,681,364
2002 1,831,364
Thereafter 6,557,726
----------
Total debt $15,455,742
==========
(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 331,125 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 1998, 1997 and 1996, using an
acceptable option pricing model and the following weighted average assumptions:
1998 1997 1996
----------- ----------- -----------
Risk-free interest rate 5.4% 6.5% 5.9%
Expected lives 4.0 years 4.0 years 4.0 years
Expected volatility 68.0% 71.0% 54.4%
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.
39.
The total fair value of options granted was computed to be approximately
$2,211,800, $147,200 and $695,500 for the years ended December 31, 1998, 1997
and 1996, 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 $520,200, $312,700 and $101,800 for 1998, 1997
and 1996, 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,
---------------------------------------
1998 1997 1996
---------- ---------- ----------
Net income:
As reported $1,385,756 $2,007,913 $1,623,654
Pro forma $ 865,556 $1,738,013 $1,521,854
Pro forma basic earnings per common share:
As reported $.50 $.75 $.64
Pro forma $.31 $.65 $.60
Pro forma diluted earnings per common share:
As reported $.49 $.70 $.59
Pro forma $.31 $.62 $.57
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, 1998, 1997
and 1996 is as follows:
Weighted Average
Exercise
Options Price
Outstanding at December 31, 1995 400,000 $2.13
Granted 190,500 $7.64
Canceled (44,600) $2.57
Exercised (38,400) $2.50
-------
Outstanding at December 31, 1996 507,500 $4.12
Granted 21,000 $9.20
Exercised (179,385) $1.80
-------
40.
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
=======
The following table summarizes information about employee stock options
outstanding and exercisable at December 31, 1998:
Options Outstanding Options Exercisable
------------------------------------------------ -------------------------------
Number of Weighted
Options Average Weighted Number Weighted
Range of Outstanding at Remaining Average Exercisable at Average
Exercise December 31, Contractual Exercise December 31, Exercise
Prices 1998 Life in Years Price 1998 Price
-------------- ---------------- --------------- ---------- ---------------- -----------
$1.88 - 3.88 76,500 6.06 $2.80 58,750 $2.69
$5.10 - 6.69 41,500 9.62 $5.52 1,000 $5.88
$7.01 - 7.63 109,500 8.67 $7.10 43,337 $7.17
$7.88 - 8.25 233,125 8.60 $7.90 50,875 $7.91
$8.38 - 9.63 80,000 8.87 $8.62 25,500 $8.96
------- -------
540,625 179,462
======= =======
41.
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. During the year ended
December 31, 1998, 23,068 shares of the Company's common stock were purchased in
connection with the ESPP.
The 1998 pro forma net income calculation above reflects $46,800 in compensation
expense associated with the ESPP. 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: risk free
interest rate of 5.24%; expected lives of one year; expected volatility of 71.0%
and an expected dividend yield of 0%. The weighted-average per share value of
the purchase rights granted in 1998 was $2.80.
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 1998, 1997 and
1996. Total Company contributions were $158,890, $90,140 and $55,160 for the
years ended December 31, 1998, 1997 and 1996, respectively.
(6) INCOME TAXES
The components of the provision for income taxes are as follows:
1998 1997 1996
---------- ------------ ------------
Current $747,079 $ 878,069 $1,017,950
Deferred 119,900 74,550 (58,950)
Tax effect of deduction for exercised stock
options credited to paid-in capital 20,021 268,381 -
------- --------- ---------
Income tax provision $887,000 $1,221,000 $ 959,000
======= ========= =========
42.
The Company's deferred tax assets and liabilities at December 31, 1998 and 1997
consist of the following:
1998 1997
----------- ----------
Deferred tax assets-
Inventory $ 25,700 $ 35,100
Allowance for doubtful accounts 85,500 55,500
Repair reserve 47,500 55,500
Vacation accrual 49,600 50,000
Accrual for unbilled services - 5,300
Other 5,400 17,900
-------- -------
213,700 219,300
Deferred tax liability-
Depreciation (147,400) (33,100)
-------- -------
Net deferred tax assets $ 66,300 $186,200
======== =======
Net current deferred tax assets $ 224,800 $200,000
Net long-term deferred tax liability (158,500) (13,800)
-------- -------
$ 66,300 $186,200
======== =======
A reconciliation of the Company's income tax provision computed by applying the
federal statutory income tax rate of 34% to income before taxes is as follows:
1998 1997 1996
---------- ------------ ----------
Federal income tax at statutory rate $772,700 $1,097,800 $878,100
State taxes, net of federal tax effect 93,400 99,000 77,800
Nondeductible expenses 20,900 24,200 3,100
------- --------- -------
Provision for income taxes $887,000 $1,221,000 $959,000
======= ========= =======
43.
(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, 1998 are as follows:
1999 $ 37,078
2000 37,078
2001 3,090
-------
77,246
Less- Amount representing interest (6,497)
-------
70,749
Less- Current portion of capital
lease obligation (32,450)
-------
$ 38,299
=======
(8) RECEIVABLE FROM RELATED PARTY
The receivable from related party of $221,274 at December 31, 1997 represented a
loan to an officer of the Company during 1997. The loan accrued interest at 6.8%
per year. In October 1998, as part of a separation agreement with the officer,
the Company forgave $147,998 of the loan which totaled $241,351 at that date,
including accrued interest. The remaining balance of $93,085 and a new
receivable in the amount of $51,253 relating to payroll taxes associated with
the debt forgiveness was satisfied through the transfer of 24,832 shares of the
Company's stock by this officer to the Company.
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's promissory note from the
seller, which matures on January 1, 2002, bears no interest, is secured by a
pledge of 50,000 shares of the Company's common stock held by the seller and is
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, metal forming and shock synthesis. The most significant product of
this group is clad metal which is used in the fabrication of pressure vessels,
heat exchangers and transition joints used in the hydrocarbon processing,
chemical processing, power generation, petrochemical, pulp and paper, mining,
shipbuilding and heat, ventilation and air conditioning industries. The
Aerospace Group machines, forms and welds parts for the commercial aircraft,
aerospace and defense industries.
44.
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 year ended December
31, 1998 as follows:
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 include $1,853,723
of costs incurred related to the construction of the Company's new manufacturing
facility and the acquisition of related manufacturing equipment.
45.
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,
1998 1997 1996
------------- ------------- -------------
United States $32,478,791 $24,092,908 $21,624,465
Canada 3,818,968 2,532,983 1,656,585
Australia 38,428 4,735,542 3,728,645
Other foreign countries 1,875,864 758,152 2,155,594
---------- ---------- ----------
Total consolidated net sales $38,212,051 $32,119,585 $29,165,289
========== ========== ==========
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
and, during the year ended December 31, 1996, sales to another customer
represented approximately $3,146,000 (11%) of total net sales.
(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-
1999 $ 540,529
2000 400,589
2000 286,939
2002 97,510
2003 and thereafter 89,384
---------
$1,414,951
=========
Total rental expense included in operations was $713,731, $394,875 and $348,174
in the years ended December 31, 1998, 1997 and 1996, 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.
46.
LITIGATION
During 1997, the Company was named as a defendant in a lawsuit filed by a French
company with which the Company had merger/acquisition discussions, seeking
damages of approximately $1.3 million. Subsequent to December 31, 1998, the
Company reached a settlement with the plaintiff that effectively dropped all
claims by each party and provided no damages to either party related to the
lawsuit. Each party was deemed to be responsible only for its own legal costs.
47.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
48.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning directors and executive officers is set
forth in the Proxy Statement for the 1999 Annual Meeting of Shareholders of the
Company under the headings "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance", which information is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information concerning executive compensation is set forth in the
Proxy Statement for the 1999 Annual Meeting of Shareholders of the Company under
the heading "Executive Compensation", which information is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning security ownership of certain beneficial
owners and management is set forth in the Proxy Statement for the 1999 Annual
Meeting of Shareholders of the Company under the heading "Security Ownership of
Certain Beneficial Owners and Management", which information is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information concerning certain relationships and related
transactions is set forth in the Proxy Statement for the 1999 Annual Meeting of
Shareholders of the Company under the heading "Certain Transactions", which
information is incorporated herein by reference.
49.
ITEM 14. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
2.1 Asset Purchase Agreement, dated January 1998, between the Registrant
and AMK Inc. (Incorporated by reference on Form 10-Q as filed with
the Commission as of May 15, 1998.)
10.1 Credit Facility and Security Agreement. Dated as of March 18, 1998,
between the Registrant and KeyBank National Association.
(Incorporated by reference on Form 10-Q as filed with the Commission
as of May 15, 1998.)
10.2 First Amendment to Loan Documents, dated as of March 18, 1998,
between the Registrant and KeyBank National Association.
(Incorporated by reference on Form 10-Q as filed with the Commission
as of May 15, 1998.)
10.3 Loan Agreement, dated as of September 1, 1998, between the Registrant
and Fayette County Industrial Development Authority. (Incorporated
by reference on Form 10-Q as filed with the Commission as of
November 14, 1998.)
10.4 Reimbursement Agreement, dated as of September 1, 1998, between
the Registrant and KeyBank National Association. (Incorporated by
reference on Form 10-Q as filed with the Commission as of November
14, 1998.)
10.5 Master Agreement, dated as of September 15, 1998, between the
Registrant and KeyBank National Association. (Incorporated by
reference on Form 10-Q as filed with the Commission as of
November 14, 1998.)
10.6 Separation Agreement, dated as of September 1, 1998, between the
Registrant and Paul Lange. (Incorporated by reference on Form 10-Q
as filed with the Commission as of November 14, 1998.)
10.7 First Amendment to Amended and Restated Credit Facility and
Security Agreement, dated as of December 31, 1998, between
the Registrant and Keybank National Association.
10.8 Amended and Restated Credit Facility and Security
Agreement, dated as of November 30, 1998, between the
Registrant and Keybank National Association.
27 Financial Data Schedule
50.
(b) REPORTS ON FORM 8-K
EXHIBIT
NUMBER DESCRIPTION
2.1 Asset Purchase Agreement, dated as of March 18, 1998, between the
Registrant, Spin Forge, LLC, Joseph Allwein and Darleen Bauer Allwein.
(Incorporated by reference on Form 8-K as filed with the Commission as
of April 2, 1998.)
2.2 Asset Purchase Agreement, dated as of November 18, 1998, between the
Registrant, Precision Machined Products, Inc., Richard B. Bellows and
Michelle L. Bellows. (Incorporated by reference on Form 8-K as filed
with the Commission as of January 8, 1998.)
4.1 Rights Agreement, dated as of January 8, 1999, between the Registrant
and Harris Trust and Savings Bank which includes the Certificate of
Designation for the Series A Junior Participant Preferred Stock as
Exhibit A and the form of Right Certificate as Exhibit B.
(Incorporated by reference on Form 8-K as filed with the Commission as
of January 21, 1999.)
10.1 Option Agreement, dated as of March 18, 1998, between the Registrant
and Spin Forge, LLC. (Incorporated by reference on Form 8-K as filed
with the Commission as of April 2, 1998.)
10.2 Operating Lease, dated as of March 18, 1998, between the Registrant
and Spin Forge, LLC. (Incorporated by reference on Form 8-K as filed
with the Commission as of April 2, 1998.)
10.3 Loan Agreement, dated as of March 18, 1998, between the Registrant and
Spin Forge, LLC. (Incorporated by reference on Form 8-K as filed with
the Commission as of April 2, 1998.)
10.4 Personnel Services Agreement, dated as of March 18, 1998, between the
Registrant and Joseph Allwein. (Incorporated by reference on Form 8-K
as filed with the Commission as of April 2, 1998.)*
10.5 Stock Agreement, dated as of March 18,1998, between the Registrant and
Spin Forge, LLC. (Incorporated by reference on Form 8-K as filed with
the Commission as of April 2, 1998.)
10.6 Stock Agreement, dated as of March 18, 1998, between the Registrant
and Joseph Allwein. (Incorporated by reference on Form 8-K as filed
with the Commission as of April 2, 1998.)*
10.7 Non-Competition Agreement, dated as of March 18, 1998, between the
Registrant and Joseph Allwein. (Incorporated by reference on Form 8-K
as filed with the Commission as of April 2, 1998.)
51.
10.8 Master Promissory Note, dated as of March 18, 1998 by Spin Forge, LLC.
(Incorporated by reference on Form 8-K as filed with the Commission as
of April 2, 1998.)
10.9 Personal Guaranty, dated as of March 18, 1998, between the Registrant,
Joseph Allwein and Darleen Bauer Allwein. (Incorporated by reference
on Form 8-K as filed with the Commission as of April 2, 1998.)
10.10 Option and Right of First Offer Agreement, dated as of December 11,
1998, between the Registrant and JEA Property, LLC. (Incorporated by
reference on Form 8-K as filed with the Commission as of January 8,
1998.)
10.11 Operating Lease, dated as of December 1, 1998, between the Registrant
and JEA Property, LLC. (Incorporated by reference on Form 8-K as filed
with the Commission as of January 8, 1998.)
99.1 Press release dated March 18, 1998. (Incorporated by reference on Form
8-K as filed with the Commission as of April 2, 1998.)
99.1 Press release dated December 3, 1998. (Incorporated by reference on
Form 8-K as filed with the Commission as of January 8, 1998.)
* Indicates compensation agreement for executive management.
52.
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 31, 1999 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 Officer and Director March 31, 1999
- - ---------------------------- (Principal Executive Officer)
Joseph P. Allwein
/s/ Richard A. Santa
- - ---------------------------- Vice President of Finance and Chief Financial Officer March 31, 1999
Richard A. Santa (Principal Financial and Accounting Officer)
/s/ Dean K. Allen
- - ---------------------------- Director March 31, 1999
Dean K. Allen
/s/ David E. Bartlett
- - ---------------------------- Director March 31, 1999
David E. Bartlett
/s/ George W. Morgenthaler
- - ---------------------------- Director March 31, 1999
George W. Morgenthaler
/s/ Michael C. Franson
- - ---------------------------- Director March 31, 1999
Michael C. Franson
53.
DYNAMIC MATERIALS CORPORATION
INDEX TO SCHEDULE II
AS OF DECEMBER 31, 1998
PAGE
Report of Independent Public Accountants......................... 55
Schedule II(a)................................................... 56
Schedule II(b)................................................... 56
54.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Dynamic Materials Corporation:
We have audited in accordance with generally accepted auditing standards, the
financial statements of Dynamic Materials Corporation included in this form 10K
and have issued our report thereon dated February 5, 1999. Our audit was made
for the purpose of forming an opinion on the basic financial statements taken
as a whole. The following schedule is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the
audit of the basic financial statements as indicated in our report with respect
thereto and, in our opinion, based on our audit, fairly states in all material
respects the financial data required to be set forth therein in relation to
the basic financial statements taken as a whole.
Arthur Andersen, LLP
Denver, Colorado
February 5, 1999
55.
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, 1996 $ 150,000 $ 34,650 $ (16,720) $ 2,070 $ 170,000
December 31, 1997 $ 170,000 $ 5,921 $ (8,171) $ (17,750) $ 150,000
December 31, 1998 $ 150,000 $ 78,732 $ (3,732) $ - $ 225,000
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, 1996 $ 100,000 $ 137,330 $ (87,330) $ 150,000
December 31, 1997 $ 150,000 $ 69,513 $ (69,513) $ 150,000
December 31, 1998 $ 150,000 $ 30,582 $ (55,582) $ 125,000
56.
CROSS-REFERENCE SHEET
Annual Proxy
Report Page Statement Page
----------- --------------
PART I
ITEM 1. Business............................................................... -- N/A
ITEM 2. Properties............................................................. -- N/A
ITEM 3. Legal Proceedings...................................................... -- N/A
ITEM 4. Submission of Matters to a Vote of Security Holders.................... -- N/A
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters............... -- N/A
ITEM 6. Selected Financial Data................................................ -- N/A
ITEM 7. Management's Discussion and Analysis or Plan of Operation.............. -- N/A
ITEM 7.A Quantative and Qualitive Disclosure About Market Risk.................. -- N/A
ITEM 8. Financial Statements................................................... -- N/A
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................... -- N/A
PART III
ITEM 10. Directors and Executive Officers of the Registrant..................... N/A --
ITEM 11. Executive Compensation................................................. N/A --
ITEM 12. Security Ownership of Certain Beneficial Owners and Management......... N/A --
ITEM 13. Certain Relationships and Related Transactions......................... N/A N/A
ITEM 14. Exhibits, List and Reports on Form 8-K................................. -- N/A