SECURITIES AND EXHCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934 FOR THE TRANSITION PERIOD FROM TO .
Commission file number 0-8328
-----------------------
DYNAMIC MATERIALS CORPORATION
(Exact name of Registrant as Specified in its Charter)
DELAWARE 84-0608431
(State of Incorporation or Organization) (I.R.S. Employer Identification No.)
551 ASPEN RIDGE DRIVE, LAFAYETTE, COLORADO 80026
(Address of principal executive offices, including zip code)
(303) 665-5700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes X No
------- -------
The number of shares of Common Stock outstanding was 2,842,429 as of
April 30, 2000.
ITEM 1. FINANCIAL STATEMENTS
DYNAMIC MATERIALS CORPORATION
CONDENSED BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
ASSETS 2000 1999
------ ------------ ------------
CURRENT ASSETS:
Accounts receivable, net of allowance for doubtful
accounts of $124,000 and $112,000, respectively $ 4,306,997 $ 3,816,879
Inventories 4,653,378 3,410,828
Prepaid expenses and other 306,887 310,477
Income tax receivable 1,326,762 1,360,000
------------ ------------
Total current assets 10,594,024 8,898,184
------------ ------------
PROPERTY, PLANT AND EQUIPMENT 17,132,811 18,867,796
Less-Accumulated depreciation (3,477,772) (4,538,838)
------------ ------------
Property, plant and equipment-net 13,655,039 14,328,958
------------ ------------
CONSTRUCTION IN PROCESS 350,346 389,795
RESTRICTED CASH AND INVESTMENTS 336,819 424,312
RECEIVABLE FROM RELATED PARTY -- 354,588
INTANGIBLE ASSETS, net of accumulated amortization
of $866,308 and $786,077, respectively 5,201,312 5,281,543
OTHER ASSETS 613,353 409,938
------------ ------------
TOTAL ASSETS $ 30,750,893 $ 30,087,318
============ ============
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS
DYNAMIC MATERIALS CORPORATION
CONDENSED BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
- ------------------------------------ ------------ ------------
CURRENT LIABILITIES:
Bank overdraft $ 734,689 $ 193,471
Accounts payable 2,249,962 1,810,577
Accrued expenses 1,079,301 1,096,796
Current maturities on long-term debt 17,075,000 16,785,000
Current portion of capital lease obligation 29,740 35,230
------------ ------------
Total current liabilities 21,168,692 19,921,074
CAPITAL LEASE OBLIGATION -- 3,069
DEFERRED GAIN ON SWAP TERMINATION 124,810 133,192
------------ ------------
Total liabilities 21,293,502 20,057,335
------------ ------------
STOCKHOLDERS' EQUITY:
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; 2,842,429 shares issued and
outstanding as of both dates 142,122 142,122
Additional paid-in capital 7,122,553 7,122,553
Deferred compensation (33,751) (37,970)
Retained earnings 2,226,467 2,803,278
------------ ------------
9,457,391 10,029,983
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 30,750,893 $ 30,087,318
============ ============
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS
2
DYNAMIC MATERIALS CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the three months
ended March 31,
--------------------------
2000 1999
----------- -----------
NET SALES $ 6,386,623 $ 9,706,259
COST OF PRODUCTS SOLD 5,551,787 7,844,063
----------- -----------
Gross profit 834,836 1,862,196
----------- -----------
COSTS AND EXPENSES:
General and administrative expenses 867,531 954,362
Selling expenses 367,029 394,451
New facility start up costs -- 65,224
----------- -----------
1,234,560 1,414,037
----------- -----------
(LOSS) INCOME FROM OPERATIONS (399,724) 448,159
OTHER INCOME (EXPENSE):
Gain on sale of property and other income 185,610 6,731
Interest income (expense), net (362,697) (208,048)
----------- -----------
(Loss) income before income taxes (576,811) 246,842
INCOME TAX PROVISION -- (102,000)
----------- -----------
NET (LOSS) INCOME $ (576,811) $ 144,842
=========== ===========
NET (LOSS) INCOME PER SHARE
Basic $ (0.20) $ 0.05
=========== ===========
Diluted $ (0.20) $ 0.05
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING
Basic 2,842,429 2,813,455
=========== ===========
Diluted 2,842,429 2,839,705
=========== ===========
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS
3
DYNAMIC MATERIALS CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
Common Stock Additional
------------------------- Paid-In Deferred Retained
Shares Amount Capital Compensation Earnings
----------- ----------- ------------- ------------ -----------
Balances, December 31, 1999 2,842,429 $ 142,122 $ 7,122,553 $ (37,970) $ 2,803,278
Amortization of deferred
compensation -- -- -- 4,219 --
Net loss -- -- -- -- (576,811)
----------- ----------- ------------- ----------- -----------
Balances, March 31, 2000 2,842,429 $ 142,122 $ 7,122,553 $ (33,751) $ 2,226,467
=========== =========== ============= =========== ===========
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS
4
DYNAMIC MATERIALS CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the three months
ended March 31,
--------------------------
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (576,811) $ 144,842
Adjustments to reconcile net income
to net cash from operating activities-
Depreciation 296,339 256,239
Amortization 80,231 83,187
Amortization of deferred gain on swap termination (8,382) --
Amortization of deferred compensation 4,219 4,220
Gain on sale of property, plant and equipment (185,570) --
Change in (excluding acquisitions)-
Accounts receivable, net (490,118) (795,229)
Inventories (1,242,550) 639,590
Prepaid expenses and other (49,976) (55,175)
Income tax receivable 33,238 95,482
Accounts payable 439,385 (254,679)
Accrued expenses (17,495) (539,602)
----------- -----------
Net cash flows from operating activities (1,717,490) (421,125)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Release of restricted cash and investments 87,493 1,124,290
Cash paid in connection with the construction
of the new facility (228,836) (1,645,506)
Acquisition of property, plant and equipment (55,035) (217,508)
Loan to related party -- (22,769)
Proceeds from repayment of loan to related party 354,588 --
Change in other non-current assets (203,415) 27,261
Proceeds from sale of property, plant and equipment 940,036 --
----------- -----------
Net cash flows from investing activities 894,831 (734,232)
----------- -----------
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS
5
DYNAMIC MATERIALS CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the three months
ended March 31,
--------------------------
2000 1999
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on line of credit, net 455,000 1,250,000
Payment on industrial development revenue bonds (165,000) --
Payments on long-term debt -- (5,742)
Payments on capital lease obligation (8,559) (7,864)
Net proceeds from issuance of common stock -- 53,125
Bank overdraft 541,218 --
Repayment of bank overdraft -- (134,162)
----------- -----------
Net cash flows from financing activities 822,659 1,155,357
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS -- --
CASH AND CASH EQUIVALENTS, beginning of the period -- --
----------- -----------
CASH AND CASH EQUIVALENTS, end of the period $ -- $ --
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for-
Interest, net of amounts capitalized $ 305,657 $ 283,191
=========== ===========
Income taxes $ -- $ 6,518
=========== ===========
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS
6
DYNAMIC MATERIALS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The information included in the Condensed Financial Statements is
unaudited but includes all normal and recurring adjustments which, in the
opinion of management, are necessary for a fair presentation of the interim
periods presented. These Condensed Financial Statements should be read in
conjunction with the financial statements that are included in the Company's
Annual Report filed on Form 10-K for the year ended December 31, 1999.
Certain prior period amounts have been reclassified to conform to the current
period presentation.
2. GOING CONCERN ISSUES
The Company has suffered losses from operations during 1999 and through
the first quarter of 2000 and is in default of its debt obligations.
Consequently, the accompanying condensed balance sheet reflects a net working
capital deficiency that raises substantial doubt about the Company's ability to
continue as a going concern. In order to meet its financial needs during 2000,
the Company must obtain some form of debt or equity financing or combination
thereof, or complete a sale of assets, a merger or other transaction. Presently,
management is attempting to raise funds to pay down its bank debt which is
currently due on June 30, 2000. In connection with the Company's efforts to
re-capitalize its balance sheet, the Company entered into a Stock Purchase
Agreement with SNPE, Inc. (SNPE) on January 20, 2000 under which SNPE will
invest $7.0 million in the Company. The agreement provides for a $5.8 million
cash payment to the Company in exchange for 2,109,091 shares of the Company's
common stock at a price of $2.75 per share and an additional $1.2 million in
cash borrowed under a convertible subordinated note that is due five years from
the issue date and convertible into common stock of the Company at a conversion
price of $6.00 per share. SNPE currently owns 14.3% of the Company's outstanding
common stock and will acquire a controlling interest in the Company as a result
of the proposed transaction. The proposed transaction is subject to approval by
the Company's stockholders and satisfaction of certain other conditions. Company
management believes that the necessary stockholder approval will be received at
the special meeting of stockholders to be held on June 14, 2000 and expects to
close the transaction late in the second quarter of 2000.
Assuming that the proposed transaction with SNPE closes as expected,
the Company expects to utilize the $7.0 million cash infusion to repay bank
debt, finance working capital requirements and make selective capital
investments. Company management believes that this cash infusion would enable
the Company to restructure its current credit facility and financial covenants
relating to its bank credit agreement and the bonds to ensure compliance with
underlying covenants or obtain replacement financing. Additionally, the Company
believes that proceeds from this contemplated equity sale, cash flow from its
operations and funds expected to be available under a restructured or new credit
facility will be sufficient to fund working capital
7
and capital expenditure requirements of its current business operations for the
foreseeable future. However, if this contemplated equity sale transaction does
not close and the Company is unsuccessful in restructuring its currently
outstanding debt or obtaining replacement financing, the Company may be required
to liquidate certain assets outside of the normal course of business which could
result in a loss on the disposition of those assets. The financial statements do
not include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
3. NEW ACCOUNTING PRINCIPLE
The FASB recently issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), which requires that companies recognize all derivatives as either assets
or liabilities in the balance sheet at fair value. Under SFAS 133, accounting
for changes in fair value of a derivative depends on its intended use and
designation. SFAS 133 is effective for fiscal years beginning after June 15,
2000. The Company is currently assessing the effect of this new standard.
In December 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101 ("SAB 101") "Views on Selected Revenue
Recognition Issues" which provides the staff's views in applying generally
accepted accounting principles to selected revenue recognition issues. The
Company is required to implement SAB 101 during the second quarter of 2000. The
Company is currently assessing the effect of implementing SAB 101.
4. INVENTORIES
This caption on the Condensed Balance Sheet includes the following:
March 31, December 31,
2000 1999
---------- ------------
Raw Materials $1,449,036 $1,311,345
Work-in-Process 3,130,410 2,001,784
Supplies 73,932 97,699
---------- ----------
$4,653,378 $3,410,828
========== ==========
5. CONSTRUCTION IN PROCESS
The construction in process balance of $350,346 as of March 31, 2000,
represents costs incurred on the remaining manufacturing equipment not yet in
service at the Company's new manufacturing facility in Pennsylvania. This
remaining manufacturing equipment is expected to be ready for service during the
second quarter of 2000. Building and equipment costs of $268,285 related to the
Company's new manufacturing facility were transferred from construction in
process to property, plant and equipment during the three months ended March 31,
2000.
8
Construction began in September 1998 and was largely completed during the third
quarter of 1999. The project is being financed using proceeds from the issuance
of industrial development revenue bonds. The portion of the borrowings on the
bonds not yet expended for construction was $336,819 (which includes accrued
interest) as of March 31, 2000 and is classified as restricted cash and
investments (non-current) in the accompanying balance sheet. The proceeds are
being held by a trustee until qualified expenditures are made and reimbursed to
the Company.
6. LONG-TERM DEBT
Long-term debt consists of the following at March 31, 2000 and
December 31, 1999:
March 31, December 31,
2000 1999
----------- ------------
Lines of credit $10,555,000 $10,100,000
Industrial development revenue bonds 6,520,000 6,685,000
----------- -----------
Total long-term debt (classified as current) $17,075,000 $16,785,000
=========== ===========
LOAN COVENANTS AND RESTRICTIONS
The Company's loan agreements include various covenants and
restrictions, certain of which relate to the payment of dividends or other
distributions to stockholders, redemption of capital stock, incurrence of
additional indebtedness, mortgaging, pledging or disposition of major assets and
maintenance of specified financial ratios.
Due largely to the operating losses the Company incurred during 1999
and the first quarter of 2000, the Company violated certain financial covenants
under both its amended and restated credit facility with its bank and its
reimbursement agreement relating to the letter of credit with its bank that
supports payment of the principal and interest under the bonds.
As a first step in the restructuring of its bank credit facility and
the reimbursement agreement relating to the bonds, the Company entered into a
Deferral and Waiver Agreement with its bank that (i) defers certain principal
payments that were due on September 30, 1999, December 31, 1999 and March 31,
2000 ($777,273 under the Company's acquisition line and $690,000 under its
accommodation line), (ii) waives covenant defaults until June 30, 2000,
(iii) revises interest rates and (iv) decreases maximum borrowings under the
working capital line from $6,000,000 to $5,000,000. Since the bank deferral and
waiver agreement extends only through June 30, 2000 and the Company does not
expect to restructure its existing credit facility until the proposed
transaction with SNPE closes, the subject debt is classified as a current
liability in the March 31, 2000 financial statements.
9
7. BUSINESS SEGMENTS
The Company is organized in the following two segments: the Explosive
Metalworking Group and the Aerospace Group. The Explosive Metalworking Group
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.
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. Segment information is presented for the three
months ended March 31, 2000 and 1999 as follows:
Explosive
Manufacturing Aerospace Total
------------- ----------- -----------
For the three months ended March 31, 2000:
Net sales $ 3,305,345 $ 3,081,278 $ 6,386,623
=========== =========== ===========
Depreciation and amortization $ 163,539 $ 213,031 $ 376,570
=========== =========== ===========
Loss from operations $ (388,437) $ (11,287) $ (399,724)
Unallocated amounts:
Other income 185,610
Interest expense, net (362,697)
-----------
Consolidated income before income taxes $ (576,811)
===========
Explosive
Manufacturing Aerospace Total
------------- ----------- -----------
For the three months ended March 31, 1999:
Net sales $ 6,365,486 $ 3,340,773 $ 9,706,259
=========== =========== ===========
Depreciation and amortization $ 165,527 $ 173,897 $ 339,424
=========== =========== ===========
Income from operations $ 34,984 $ 413,175 $ 448,159
Unallocated amounts:
Other income 6,731
Interest expense (209,577)
Interest income 1,529
-----------
Consolidated income before income taxes $ 246,842
===========
10
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 three months
ended March 31,
-----------------------
2000 1999
---------- ----------
United States $5,624,234 $8,725,273
Canada 202,957 679,750
Australia -- 112,826
Korea 380,244 1,000
Other foreign countries 179,188 187,410
---------- ----------
Total consolidated net sales $6,386,623 $9,706,259
========== ==========
During the three months ended March 31,2000, sales to no one customer
accounted for more than 10% of total net sales. During the three months ended
March 31, 1999, sales to one customer represented approximately $1,320,000 (14%)
of total net sales.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GOING CONCERN CONSIDERATIONS
The Company has suffered losses from operations during 1999 and through
the first quarter of 2000 and is in default of its debt obligations.
Consequently the Company's March 31, 2000 balance sheet reflects a net working
capital deficiency that raises substantial doubt about the Company's ability to
continue as a going concern. In order to meet its financial needs during 2000,
the Company must obtain some form of debt or equity financing or combination
thereof, or complete a sale of assets, a merger or other transaction. Presently,
management is attempting to raise funds to pay down its bank debt. The overdue
principal payments totaling approximately $1,467,000 are currently due on the
earlier of June 30, 2000 or the closing of the transaction contemplated by the
Stock Purchase Agreement with SNPE, Inc., discussed below under the heading
"Liquidity and Capital Resources." The Company is actively pursuing a common
stock sale through the form of a definitive stock purchase agreement. However,
there are no assurances that the Company will be successful in its fund raising
efforts or, if successful, that it will be able to successfully restructure or
refinance its existing debt obligations. In conjunction with attempts to secure
financing, the Company may need to initiate further reductions in its workforce
and other areas of costs to reduce future financial obligations.
GENERAL
Dynamic Materials Corporation ("DMC" or the "Company") is a worldwide
leader in explosive metalworking and, through its new Aerospace Group, is
involved in a variety of metal forming, machining, welding, and assembly
activities. The explosive metalworking business includes the use of explosives
to perform metallurgical bonding, or "metal cladding" and shock synthesis of
synthetic diamonds. The Company performs metal cladding using its proprietary
Dynaclad(TM) and Detaclad(R) technologies. The Company's revenues from its
explosive metalworking businesses, as a proportion of total Company revenues,
have declined as a result a significant slowdown in global market demand for
explosion bonded clad metal plate and the 1998 acquisitions of AMK Welding, Spin
Forge and Precision Machined Products. The Company's Aerospace Group was formed
from these three acquisitions and accounted for 22% and 42% of the Company's
1998 revenues and 1999 revenues, respectively. The proportion of revenues
accounted for by the Aerospace Group for the quarter ended March 31, 2000 was
48%, compared to 34% in the first quarter of 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, 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
12
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 shock synthesis of synthetic diamonds.
AEROSPACE MANUFACTURING. Formed metal products are made from sheet
metal and forgings that are subsequently formed into precise, three-dimensional
shapes that are held to tight tolerances. Metal forming is accomplished through
the use of traditional forming technologies, including spinning, machining,
rolling and hydraulic expansion. DMC also performs welding services utilizing a
variety of manual and automatic welding techniques that include electron beam
and gas tungsten arc welding processes. The Company's forming and welding
operations are often performed to support the manufacture of completed
assemblies and sub-assemblies required by its customers. Fabrication and
assembly services are performed utilizing the Company's close-tolerance
machining, forming, welding, inspection and other special service capabilities.
The Company's forming, machining, welding and assembly operations serve a
variety of product applications in the commercial aircraft, aerospace, defense
and power generation industries. Product applications include tactical missile
motor cases, titanium pressure tanks for launch vehicles, and complex, high
precision component parts for satellites.
Due largely to the operating loss the Company incurred during 1999, the
Company violated certain financial covenants under its debt agreements. Once it
became apparent that financial covenant violations under its debt agreements
would continue, the Company began to evaluate various business strategies and
financing alternatives in connection with the need to restructure its debt
agreements and/or re-capitalize the Company's balance sheet. These efforts
culminated in the Company entering into a Stock Purchase Agreement (the
"Agreement") with SNPE, Inc. ("SNPE") that was signed on January 20, 2000. Under
the Agreement, SNPE would make a $5.8 million cash payment to the Company in
exchange for 2,109,091 shares of the Company's common stock at a price of $2.75
per share and would lend the Company an additional $1.2 million under a
convertible subordinated note that carries a 5% interest rate, is due five years
from date of issuance and is convertible into common stock of the Company at a
conversion price of $6.00 per share. SNPE currently owns 14.3% of the Company's
outstanding common stock and would acquire a controlling interest in the Company
as a result of the proposed transaction. The proposed transaction is subject to
approval by the Company's stockholders and satisfaction of certain other
conditions. Company management believes that the necessary stockholder approval
will be received at the special meeting of stockholders to be held on June 14,
2000 and expects to close the transaction late in the second quarter of 2000.
In 1999, the Company experienced significant operating losses as a
result of a significant slowdown in global market demand for explosion bonded
clad metal plate and non-recurring charges associated with plant closing costs,
new facility start-up costs, asset impairment write-downs and expenses incurred
in connection with efforts to sell the Explosive Metalworking Group. In the
first quarter of 2000, the Company again experienced an operating loss due
principally to the continued slowdown in global market demand for explosion
bonded clad metal plate. The Company expects the reduced demand for these
products to continue at least through the end of 2000. The Company also
experienced, and expects to continue to experience, quarterly fluctuations in
operating results caused by various factors, including the timing and size
13
of orders from major customers, customer inventory levels, shifts in product
mix, the occurrence of acquisition and divestiture-related costs, and general
economic conditions. The Company typically does not obtain long-term volume
purchase contracts from its customers. Quarterly sales and operating results
therefore depend on the volume and timing of backlog as well as bookings
received during the quarter. A significant portion of the Company's operating
expenses is fixed, and planned expenditures are based primarily on sales
forecasts and product development programs. If sales do not meet the Company's
expectations in any given period, the adverse impact on operating results may be
magnified by the Company's inability to adjust operating expenses sufficiently
or quickly enough to compensate for such a shortfall. In addition, the Company
uses numerous suppliers of alloys, steels and other materials for its
operations. The Company typically bears a short-term risk of alloy, steel and
other component price increases, which could adversely affect the Company's
gross profit margins. Although the Company will work with customers and
suppliers to minimize the impact of any component shortages, component shortages
have had, and are expected from time to time to have, short-term adverse effects
on the Company's business. Results of operations in any period should not be
considered indicative of the results to be expected for any future period.
Fluctuations in operating results may also result in fluctuations in the price
of the Company's common stock.
QUARTER ENDED MARCH 31, 2000 COMPARED TO MARCH 31, 1999
The following table sets forth for the periods indicated the percentage
relationship to net sales of certain income statement data:
PERCENTAGE OF NET SALES
THREE MONTHS ENDED MARCH 31,
2000 1999
------ ------
Net Sales 100.0% 100.0%
Cost of Products Sold Manufactured 86.9% 80.8%
------ ------
Gross Margin 13.1% 19.2%
General & Administrative 13.6% 9.8%
Selling Expenses 5.7% 4.1%
Start up Costs 0.0% 0.7%
(Loss) Income from Operations (6.3)% 4.6%
Interest Expense 5.7% 2.1%
Income Tax Provision 0.0% 1.1%
Net (Loss) Income (9.0)% 1.5%
NET SALES. Net sales for the quarter ended March 31, 2000 decreased
34.2% to $6,386,623 from $9,706,259 in the first quarter of 1999. The Company's
Aerospace Group, which was formed in 1998 as a result of the acquisitions of
AMK, Spin Forge and PMP, contributed $3,081,278 (48.2% of total sales) to 2000
first quarter sales versus sales of $3,340,773 (34.4% of total sales) in the
first quarter of 1999. Sales by the Company's Explosive
14
Metalworking Group, which includes explosion bonding of clad metal and shock
synthesis of synthetic diamonds, decreased 48.1% from $6,365,486 in the first
quarter of 1999 to $3,305,345 in the first quarter of 2000. The large decrease
in Explosive Metalworking Group sales reflects a significant slowdown in global
market demand for clad metal plate that is expected to continue for at least the
remainder of the year 2000.
GROSS PROFIT. The Company's gross profit for the quarter ended March
31, 2000 decreased by 55.2% to $834,836 from $1,862,196 in the first quarter of
1999. The gross profit margin for the quarter ended March 31, 2000 was 13.1%,
representing a 31.8% decline from the gross profit margin of 19.2% for the first
quarter of 1999. The gross profit margin for the Company's Explosive
Metalworking Group decreased from 13.5% in the first quarter of 1999 to 7.8% in
the first quarter of 2000. The decrease in the gross profit margin for the
Explosive Metalworking Group is due to unfavorable absorption of fixed
manufacturing overhead cost into cost of products sold as a result of the 48.1%
decline in Explosive Metalworking Group net sales. The Explosive Metalworking
Group's low sales level more than offset the positive impact of the significant
reduction in fixed manufacturing overhead costs that resulted from the July 1999
closing of the Group's Colorado manufacturing facility and consolidation of all
of the Group's manufacturing activities in its new Mount Braddock, Pennsylvania
plant. The gross profit margin for the Aerospace Group was 18.8% for the quarter
ended March 31, 2000 as compared to 29.9% in the first quarter of 1999. This
decrease relates principally to product mix differences between the two quarters
and unfavorable absorption of fixed manufacturing expenses into cost of products
sold at Spin Forge due to year-to-year sales decreases at this location.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
quarter ended March 31, 2000 decreased 9.1% to $867,531 from $954,362 in the
first quarter of 1999. The decrease in general and administrative expenses is
largely due to reductions in salaries, payroll taxes and benefits as well as
reductions in legal expenses. General and administrative expenses as a
percentage of net sales increased from 9.8% in the first quarter of 1999 to
13.6% for the quarter ended March 31, 2000. This increased percentage is largely
attributable to the significant decrease in sales by the Company's Explosive
Metalworking Group.
SELLING EXPENSES. Selling expenses decreased by 7.5% to $367,029 for
the quarter ended March 31, 2000 from $394,451 in the first quarter of 1999.
This decrease is principally due to continued reductions in salaries, payroll
taxes and benefits associated with Explosive Metalworking Group sales staff
reductions. Due to the 34.2% decrease in sales, selling expenses as a percentage
of net sales increased from 4.1% in the first quarter of 1999 to 5.7% for the
quarter ended March 31, 2000.
START-UP COSTS. In 1998, the Company began to separately report the
start-up costs associated with the construction of the new facility in
Pennsylvania for the manufacture of clad metal plates. Start-up costs for the
quarter ended March 31, 1999 totaled $65,224 and included 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
new facility commenced operations in August 1999 at which time all operating
costs associated with this new
15
facility began to be recorded as manufacturing overhead that is included in the
computation of cost of products sold.
LOSS/INCOME FROM OPERATIONS. Income from operations decreased by 189.2%
to a loss of $399,724 for the quarter ended March 31, 2000 from income from
operations of $448,159 in the first quarter of 1999. This decrease reflects a
gross profit decrease of $1,027,360 primarily associated with lower sales by the
Company's Explosive Metalworking Group and lower gross margins by the Aerospace
Group, partly offset by a decrease in total operating expenses of $179,477.
Income from operations for the Explosive Metalworking Group declined by $423,421
from $34,984 for the first quarter of 1999 to a loss from operations of $388,437
for the first quarter of 2000. The decrease in income from operations for the
Explosive Metalworking Group is due primarily to the unfavorable absorption of
fixed manufacturing overhead costs in to costs of products sold that resulted
from the 48.1% decline in Explosive Metalworking Group net sales. Income from
operations for the Aerospace Group declined by $424,462 from $413,175 for the
first quarter of 1999 to a loss from operations of $11,287 for the first quarter
of 2000. This decrease relates principally to product mix differences between
the two quarters and unfavorable absorption of fixed manufacturing expenses into
cost of products sold at Spin Forge due to the year-to-year sales decrease at
this location.
INTEREST EXPENSE. Interest expense increased to $362,697 for the
quarter ended March 31, 2000 from $209,577 in the first quarter of 1999. This
increase is due to increases in interest rates and average borrowings
outstanding under the Company's revolving credit facility. In addition the
increase reflects the interest on the industrial development revenue bonds being
recorded in interest expense for the quarter ended March 31, 2000 versus being
capitalized during the quarter ended March 31, 1999. The Company began to record
interest on the industrial development revenue bonds as expense once the new
facility commenced operations in August 1999. Prior to the commencement of
operations, interest on the industrial development revenue bonds was being
capitalized.
INCOME TAX PROVISION. No tax benefit has been recorded for the quarter
ended March 31, 2000 since the Company utilized all of its tax loss carry-backs
in 1999 and the Company's current financial position and near-term operations
outlook make the future realization of tax benefits associated with tax loss
carry-forwards uncertain. The income tax provision for the quarter ended March
31, 1999 was $102,000, representing an effective tax rate of 41.3%
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has obtained most of its operational
financing from a combination of operating activities and an asset-backed
revolving credit facility. Due primarily to the operating losses the Company
incurred during 1999 and the first quarter of 2000, the Company violated certain
financial covenants under both its revolving credit facility and the
reimbursement agreement related to the letter of credit supporting payment of
principal and interest under the Company's industrial revenue development bonds
(the "Bonds"), used to finance the construction of its manufacturing facilities
in Pennsylvania. The Company has entered
16
into an agreement with its bank under which (i) certain principal payments due
September 30, 1999, December 31, 1999 and March 31, 2000 totaling approximately
$1,467,000 have been deferred until the earlier of June 30, 2000 or the closing
date of the transaction with SNPE, Inc. described below; (ii) covenant defaults
under both the revolving credit facility and reimbursement agreement are waived
until June 30, 2000; (iii) interest rates on the revolving credit facility have
been increased to prime plus 1% on the acquisition and working capital lines and
prime plus 2.25% on the accommodation line; and (iv) maximum borrowings
permitted under the working capital line have been decreased to from $6 million
to $5 million. The working capital line expires by its terms on November 30,
2000.
As of March 31, 2000, borrowings outstanding under the $13 million
revolving credit line totaled $4.93 million on the acquisition line, $2.3
million on the accommodation line and $3.325 million on the working capital
line, and borrowings outstanding on the Bonds totaled $6.52 million. In April
2000, the Company received approximately $1.35 million in loss carrybacks
related to federal income taxes. These proceeds were used to partially pay down
the working capital line. The Company expects the outstanding working capital
line balance to be in the $1.5 to $2.5 million range until such time that the
Company is able to close the proposed transaction with SNPE, Inc. Since the
current bank deferral and waiver extends only through June 30, 2000 and certain
financial covenant violations are likely to continue beyond this date, all of
the foregoing debt has been classified as a current liability in the Company's
March 31, 2000 financial statements.
On January 20, 2000, the Company entered into the Agreement with SNPE
under which SNPE would acquire 2,109,091 shares of the Company's common stock
for a $5.8 million cash payment and would lend the Company an additional $1.2
million pursuant to a convertible subordinated note due five years from the
issue date. Completion of the transaction is subject to certain regulatory
approvals and approval by the stockholders of the Company at a special to be
held on June 14, 2000. SNPE currently owns 14.3% of the Company's common stock
and would acquire a controlling interest in the Company as a result of this
transaction. The Company expects to complete the transaction late in the second
quarter of 2000. In anticipation of closing the SNPE transaction, the Company is
in current discussions with its bank to amend both the revolving credit facility
and reimbursement agreement with the bank. Amendment to both agreements would
contain new financial covenants that reflect the Company's current financial
position and projected results for the year 2000 and 2001. The Company expects
the amended revolving credit facility to have a term of twelve to eighteen
months and consist of a working capital component and a term component with
fixed quarterly principal payments. The current maturity schedule for the Bonds
is expected to remain unchanged. There can be no assurance that the waivers and
deferrals currently in effect will be extended, that the Company will be
successful in closing the transaction with SNPE, or that it will be able to
successfully restructure or refinance its existing debt obligations.
The Company believes that its cash flow from operations and funds the
Company expects to be available under its revolving credit facility will be
sufficient to fund working capital and capital expenditure requirements of its
current operations at least until the SNPE transaction is completed late in the
second quarter of 2000. If the bank were to refuse to amend the agreement
17
as described above, or to make further funds available to the Company as
permitted under that agreement, the Company's ability to meet its cash
requirements would be adversely affected.
Assuming that the proposed SNPE transaction closes as expected, the
Company expects to utilize the $7.0 million cash infusion to repay bank debt,
finance working capital requirements and make selective capital investments.
Company management believes that this cash infusion would enable the Company to
restructure its current credit facility and financial covenants relating to its
bank credit agreement and the bonds to ensure compliance with underlying
covenants or obtain replacement financing. Additionally, the Company believes
that proceeds from this contemplated equity sale, cash flow from its operations
and funds expected to be available under a restructured or new credit facility
will be sufficient to fund working capital and capital expenditure requirements
of its current business operations for the foreseeable future. However, if this
contemplated equity sale transaction does not close and the Company is
unsuccessful in restructuring its currently outstanding debt or obtaining
replacement financing, the Company may be required to liquidate certain assets
outside of the normal course of business which could result in a loss on the
disposition of those assets. The financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern.
FORWARD-LOOKING STATEMENTS
Statements which are not historical facts contained in this report are
forward-looking statements that involve risks and uncertainties that could cause
actual results to differ materially from projected results. Factors that could
cause actual results to differ materially include, but are not limited to the
following: the ability to obtain new contracts at attractive prices; the size
and timing of customer orders; fluctuations in customer demand; competitive
factors; the timely completion of contracts; whether and when the contemplated
transaction with SNPE is completed; any actions which may be taken by SNPE as
the controlling shareholder of the Company with respect to the Company and its
businesses; the ability of the Company to successfully restructure or refinance
its existing debt obligations; the ability of the Company to continue to obtain
payment deferrals and covenant waivers from its lenders; the timing and size of
expenditures; the timely receipt of government approvals and permits; the
adequacy of local labor supplies at the Company's facilities; the availability
and cost of funds; and general economic conditions, both domestically and
abroad. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof. The Company undertakes no obligation to publicly release the
results of any revision to these forward-looking statements which may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In October 1999, the Company was named as a third party defendant in a
civil action brought in the United States District Court, District of Wyoming by
The Industrial Company of Wyoming, Inc., plaintiff, and Process Partners, Inc.,
d/b/a International Alliance Group, defendant and third party plaintiff.
Additional information regarding this litigation was included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1999. The
Company reached a settlement in May pursuant to which the Company made a payment
of $10,000 to the third party plaintiff in exchange for dismissal of the
litigation with prejudice and a general release of claims.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6.
(a) Reports on Form 8-K
None.
(b) Exhibits
10.1 Amendment No. 1 to Stock Purchase Agreement dated as of
April 20, 2000 between Dynamic Materials Corporation and
SNPE, Inc.
10.2 Third Amendment to Deferral and Waiver Agreement dated as of
May 2, 2000 between the Company and Key Bank National
Association.
27 Financial Data Schedule
19
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
DYNAMIC MATERIALS CORPORATION
(Registrant)
Date: May 12, 2000 /s/ RICHARD A. SANTA
------------------------------------------
Richard A. Santa, Vice President of
Finance and Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)