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.
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* 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.
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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.
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(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
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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
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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.
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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
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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.
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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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below has been derived from the
financial statements of the Company.
<TABLE>
Year Ended December 31,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------------------------------
STATEMENT OF INCOME
<S> <C> <C> <C> <C> <C>
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
</TABLE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
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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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
The table below presents principal cash flows and related
weighted-average interest rates by expected maturity dates for the Company's
debt obligations.
<TABLE>
As of December 31, 1998
-------------------------------------------------------------------------------------
2003 and
1999 2000 2001 2002 thereafter Total
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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%
</TABLE>
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.
<PAGE>
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.
<PAGE>
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>
Page 1 of 2
DYNAMIC MATERIALS CORPORATION
BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
<TABLE>
ASSETS 1998 1997
------ ------------- -------------
CURRENT ASSETS:
<S> <C> <C>
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
========== ==========
</TABLE>
The accompanying notes to financial statements are
an integral part of these balance sheets.
23.
<PAGE>
Page 2 of 2
DYNAMIC MATERIALS CORPORATION
BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
------------------------------------ ------------- -------------
<S> <C> <C>
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
========== ==========
</TABLE>
The accompanying notes to financial statements are
an integral part of these balance sheets.
24.
<PAGE>
DYNAMIC MATERIALS CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
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
========= ========= =========
</TABLE>
The accompanying notes to financial statements are
an integral part of these statements.
25.
<PAGE>
Page 1 of 2
DYNAMIC MATERIALS CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
Common Stock Additional
------------------------ Paid-In Deferred Retained
Shares Amount Capital Compensation Earnings
----------- ----------- ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
The accompanying notes to financial statements are
an integral part of these statements.
26.
<PAGE>
Page 2 of 2
DYNAMIC MATERIALS CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
Common Stock Additional
------------------------ Paid-In Deferred Retained
Shares Amount Capital Compensation Earnings
----------- ----------- ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
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
========= ======== ========== ========= ==========
</TABLE>
The accompanying notes to financial statements are
an integral part of these statements.
27.
<PAGE>
Page 1 of 2
DYNAMIC MATERIALS CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
1998 1997 1996
------------- ------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
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)
---------- --------- ----------
</TABLE>
The accompanying notes to financial statements are
an integral part of these statements.
28.
<PAGE>
Page 2 of 2
DYNAMIC MATERIALS CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
1998 1997 1996
------------- ------------ -------------
<S> <C> <C> <C>
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
=========== ========== ===========
</TABLE>
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):
<TABLE>
1998 1997 1996
<S> <C> <C> <C>
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
======== =========
</TABLE>
The accompanying notes to financial statements are
an integral part of these statements.
29.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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:
<TABLE>
December 31, 1998 December 31, 1997
------------------------------ ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
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) $ - $ -
</TABLE>
35.
<PAGE>
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.
<PAGE>
(4) LONG-TERM DEBT
LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1998 and 1997:
<TABLE>
1998 1997
------------- ------------
<S> <C> <C>
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
========== =========
</TABLE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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:
<TABLE>
Year Ended December 31,
---------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
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
</TABLE>
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.
<PAGE>
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:
<TABLE>
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
-------------- ---------------- --------------- ---------- ---------------- -----------
<S> <C> <C> <C> <C> <C> <C>
$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
======= =======
</TABLE>
41.
<PAGE>
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:
<TABLE>
1998 1997 1996
---------- ------------ ------------
<S> <C> <C> <C>
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
======= ========= =========
</TABLE>
42.
<PAGE>
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:
<TABLE>
1998 1997 1996
---------- ------------ ----------
<S> <C> <C> <C>
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
======= ========= =======
</TABLE>
43.
<PAGE>
(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.
<PAGE>
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:
<TABLE>
Explosive
Manufacturing Aerospace Total
--------------- ------------- -------------
<S> <C> <C> <C>
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
========== ========== ==========
</TABLE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
48.
<PAGE>
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.
<PAGE>
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.
<PAGE>
(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.
<PAGE>
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.
<PAGE>
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.
<TABLE>
SIGNATURE TITLE DATE
<S> <C> <C>
/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
</TABLE>
53.
<PAGE>
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.
<PAGE>
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.
<PAGE>
DYNAMIC MATERIALS CORPORATION
SCHEDULE II(a) - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
Balance at Additions Accounts Balance at
beginning charged to receivable Other end of
of period income written off adjustments period
<S> <C> <C> <C> <C> <C>
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
</TABLE>
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.
<PAGE>
CROSS-REFERENCE SHEET
<TABLE>
Annual Proxy
Report Page Statement Page
----------- --------------
PART I
<S> <C> <C> <C>
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
</TABLE>
FIRST AMENDMENT TO AMENDED AND RESTATED
CREDIT FACILITY AND SECURITY AGREEMENT
THIS FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT FACILITY AND SECURITY
AGREEMENT (this "FIRST AMENDMENT"), effective as of the 31st day of December,
1998, is entered into by and between DYNAMIC MATERIALS CORPORATION, a Delaware
corporation (the "COMPANY"), and KEYBANK NATIONAL ASSOCIATION, a national
banking association (the "BANK").
R E C I T A L S:
A. On November 30, 1998, the Company and the Bank entered into an
Amended and Restated Credit Facility and Security Agreement (the "Credit
Agreement") pursuant to which the Bank agreed to provide reducing, revolving
credit facilities in an aggregate principal amount of up to $14,000,000.
B. The Company desires to restructure the credit facilities provided
under the Credit Agreement by reducing the maximum principal amount of the
Acquisition Line from $8,000,000 to $5,700,000 and by adding a new reducing,
revolving credit facility with a maximum principal amount of $2,300,000, and the
Bank is willing to do so on the terms and subject to the conditions set forth
herein.
NOW, THEREFORE, in consideration of the foregoing premises and other good
and valuable consideration, the receipt, adequacy and sufficiency of which are
hereby acknowledged, the parties hereto covenant and agree as follows:
1. CREDIT AGREEMENT AMENDMENTS. The Credit Agreement is hereby
amended as follows:
(A) Section 1.2 of the Credit Agreement is hereby amended by
amending the definitions of the terms "Acquisition Line Credit Limit",
"Borrowing Base", "Interest Period", "Note", "Notes" and "Working Capital Line
Credit Limit" contained therein to read in their entirety as follows:
"ACQUISITION LINE CREDIT LIMIT" shall mean $5,700,000 less any permanent
reductions to such amount resulting from (i) principal payments required to be
made under Section 2.7(a) hereof and (ii) Free Cash Flow recapture payments made
under Section 2.8(c) hereof.
"BORROWING BASE" shall mean an amount equal to the sum of:
(a) 80% of Eligible Accounts Receivable; plus
(b) the lesser of (i) the sum of (A) 50% of Eligible Inventory
consisting of raw materials, plus (B) 50% of Eligible Inventory consisting of
work-in-process previously purchased by the
<PAGE>
Company from Spin Forge LLC or purchased from Precision Machined Products
pursuant to the Acquisition, plus (C) 30% of Eligible Inventory consisting of
work-in-process other than work-in-process previously purchased by the Company
from Spin Forge LLC or purchased from Precision Machined Products pursuant to
the Acquisition, plus (D) 50% of Eligible Inventory consisting of finished
product, or (ii) 80% of Eligible Accounts Receivable.
"INTEREST PERIOD" means, with respect to any LIBOR Rate Loan, the period
commencing on the date such Loan is made, continued, or converted and ending on
the last day of such period as selected by the Company pursuant to the
provisions below and, thereafter, each subsequent period commencing on the last
day of the immediately preceding Interest Period and ending on the last day of
such period as selected by the Company pursuant to the provisions below. The
duration for any LIBOR Rate Loan which is a Credit Loan shall be 1 month, 2
months, or 3 months, as selected by the Company; PROVIDED, HOWEVER, that
whenever the last day of any Interest Period would otherwise occur on a day
other than a Business Day, the last day of such Interest Period shall occur on
the next succeeding Business Day, and; PROVIDED, FURTHER, HOWEVER, that if such
extension of time would cause the last day of such Interest Period for a LIBOR
Rate Loan to occur in the next following calendar month, the last day of such
Interest Period shall occur on the next preceding Business Day
"NOTE" shall mean the Accommodation Note, the Acquisition Note or the
Working Capital Note; "NOTES" shall mean the Accommodation Note, the Acquisition
Note and the Working Capital Note.
"WORKING CAPITAL LINE CREDIT LIMIT" shall mean $6,000,000.
(B) Section 1.2 of the Credit Agreement is hereby further amended by
adding the following new definitions thereto:
"ACCOMMODATION LINE" shall mean the line of credit provided by the Bank
pursuant to Section 2.1(c) hereof.
"ACCOMMODATION LINE CREDIT LIMIT" shall mean $2,300,000 less any permanent
reductions to such amount resulting from (i) principal payments required to be
made under Section 2.7(b) hereof and (ii) Free Cash Flow recapture payments made
under Section 2.8(c) hereof.
"ACCOMMODATION LINE MATURITY DATE" shall mean December 31, 2001.
"ACCOMMODATION NOTE" shall mean the promissory note of the Company
evidencing amounts advanced by the Bank pursuant to Section 2.1(c) hereof.
"CREDIT LINE" shall mean the Accommodation Line, the Acquisition Line or
the Working Capital Line.
"PRIME RATE" shall mean the rate of interest publicly announced from time
to time by the Bank as its "prime rate" (which rate is not necessarily the
lowest rate of interest charged by the Bank
2
<PAGE>
to its customers) or, if the Bank ceases to announce a rate so designated, any
similar successor rate designated by the Bank.
"PRIME RATE LOAN" shall mean any Loan that bears interest with reference
to the Prime Rate.
(C) Section 1.2 of the Credit Agreement is hereby further amended by
deleting in their entirety the definitions of the terms "Acceptable Real Estate"
and "Eligible Equipment" contained therein.
(D) Sections 2.1 through 2.3 of the Credit Agreement are hereby
amended and restated to read in their entirety as follows:
SECTION 2.1 AMOUNT AND TERMS OF THE CREDIT FACILITIES.
(a) ACQUISITION LINE. The Bank hereby agrees, subject to the terms and
conditions of this Agreement, to make Credit Loans consisting of LIBOR Rate
Loans or Federal Funds Effective Rate Loans available to the Company from time
to time on and after the date of this Agreement through and including the
Acquisition Line Maturity Date, in an aggregate principal amount not to exceed
the Acquisition Line Credit Limit. Until the Acquisition Line Maturity Date, the
Company may borrow, repay, and reborrow such Credit Loan up to the maximum
amount thereof, subject to the mandatory principal reductions set forth in
Sections 2.7(a) and 2.8(c) hereof.
(b) WORKING CAPITAL LINE. The Bank hereby agrees, subject to the terms and
conditions of this Agreement, to make Credit Loans consisting of LIBOR Rate
Loans or Federal Funds Effective Rate Loans available to the Company from time
to time on and after the date of this Agreement through and including the
Working Capital Line Maturity Date, in an aggregate principal amount not to
exceed the lesser of (i) the Working Capital Line Credit Limit or (ii) the
Borrowing Base. Until the Working Capital Line Maturity Date, the Company may
borrow, repay, and reborrow such Credit Loans up to the maximum amount thereof,
subject to the mandatory principal reductions set forth in Section 2.8(b) hereof
and sufficient Borrowing Base availability. Notwithstanding anything to the
contrary set forth herein, the Company may utilize proceeds of Credit Loans
obtained by the Company under the Working Capital Line to pay down outstanding
amounts owing in connection with the Accommodation Line, subject to sufficient
Borrowing Base availability.
(c) ACCOMMODATION LINE. The Bank hereby agrees, subject to the terms and
conditions of this Agreement, to make Credit Loans consisting of Prime Rate
Loans available to the Company from time to time on and after the date of this
Agreement through and including the Accommodation Line Maturity Date, in an
aggregate principal amount not to exceed the Accommodation Line Credit Limit.
Until the Accommodation Line Maturity Date, the Company may borrow, repay, and
reborrow such Credit Loans up to the maximum amount thereof, subject to the
mandatory principal reductions set forth in Sections 2.7(b) and 2.8(c) hereof.
SECTION 2.2 [INTENTIONALLY LEFT BLANK]
3
<PAGE>
SECTION 2.3 LIBOR, FEDERAL FUNDS EFFECTIVE RATE AND PRIME RATE LOANS. Each
Credit Loan made under the Acquisition Line or the Working Capital Line shall be
either a LIBOR Rate Loan or a Federal Funds Effective Rate Loan, and each Credit
Loan made under the Accommodation Line shall be a Prime Rate Loan, subject to
the following conditions:
(a) Each Loan that is made or continued as or converted into a LIBOR Rate
Loan shall be made, continued, or converted on such Business Day, in such amount
(equal to $100,000 or an integral multiple thereto), and with such an Interest
Period as the Company shall request by written notice given to the Bank no later
than 11:00 a.m. (Denver, Colorado time) on the third Business Day prior to the
date of disbursement or continuation of or conversion into the requested LIBOR
Rate Loan. Each written notice of any LIBOR Rate Loan shall be irrevocable and
binding on the Company and the Company shall indemnify the Bank against any loss
or expense incurred by the Bank as a result of any failure by the Company to
consummate such LIBOR Rate Loan, including, without limitation, any loss
(including loss of anticipated profits) or expense incurred by reason of
liquidation or reemployment of deposits or other funds acquired by the Bank to
fund the LIBOR Rate Loan. A certificate as to the amount of such loss or expense
submitted by the Bank to the Company shall be conclusive and binding for all
purposes, absent manifest error. In the event that the Company fails to provide
the Bank with the required written notice, the Company shall be deemed to have
given a written notice that such LIBOR Rate Loan shall be converted to a Federal
Funds Effective Rate Loan on the last day of the applicable Interest Period. In
no event shall the Company be permitted to select a LIBOR Rate Loan having an
Interest Period ending after the maturity date of the Credit Line under which
such Loan is requested.
(b) Each Loan that is made as or converted into a Federal Funds Effective
Rate Loan or a Prime Rate Loan shall be made or converted on such Business Day
and in such amount (equal to $10,000 or any integral multiple thereof) as the
Company shall request by written notice given to the Bank no later than 11:00
a.m. (Denver, Colorado time) on the date of disbursement of or conversion into
the requested Federal Funds Effective Loan or Prime Rate Loan.
(E) The first sentence of Section 2.4 of the Credit Agreement is
hereby amended to read in its entirety as follows:
Loans made under the Accommodation Line, the Acquisition Line and
the Working Capital Line shall be evidenced by the Accommodation Note, the
Acquisition Note and the Working Capital Note, respectively.
(F) Sections 2.5 through 2.8 of the Credit Agreement are hereby
amended and restated to read in their entirety as follows:
SECTION 2.5 INTEREST RATES. The Company shall pay interest on the unpaid
principal amount of each Credit Loan made by the Bank from the date of such
Credit Loan until such principal amount shall be paid in full as follows:
4
<PAGE>
(a) (i) During such periods as any LIBOR Rate Loan is outstanding, at a
rate per annum equal to the sum of the LIBOR Rate and the LIBOR Rate Margin (as
described in subpart (b) below) in effect from time to time from and after each
Margin Adjustment Date occurring on or prior to the date of the making, the
conversion or the continuation of such Loan, as the case may be, in accordance
with this Agreement, (ii) during such periods as any Federal Funds Effective
Rate Loan is outstanding, at a rate per annum equal at all times to the sum of
the Federal Funds Effective Rate plus two hundred (200) basis points, and (iii)
during such periods as any Prime Rate Loan is outstanding, at a rate per annum
equal at all times to the sum of the Prime Rate plus twenty five (25) basis
points.
(b) (i) Except as otherwise provided herein, the LIBOR Rate Margin in
effect shall be adjusted as of the first day of each calendar quarter, beginning
with January 1, 2000 (each a "Margin Adjustment Date"), in accordance with
Section 2.5(b)(ii) below. The LIBOR Rate Margin in effect shall be applicable to
new advances for Credit Loans as of the date of such advances, and to a
converted or continued Loan as of the date of conversion or continuation,
occurring within the calendar quarter in which such LIBOR Rate Margin is in
effect. With respect to any LIBOR Rate Loan for which the last day of the
Interest Period is a date subsequent to the Margin Adjustment Date, such LIBOR
Rate Margin shall not be applicable until the continuation date of such LIBOR
Rate Loan, if applicable, subsequent to the Margin Adjustment Date.
(ii) As of any Margin Adjustment Date, the LIBOR Rate Margin shall
be adjusted to be the percentage indicated in the following table corresponding
to the ratio of the Company's Indebtedness to its Tangible Net Worth, which
shall be calculated from the quarterly balance sheet most recently provided by
the Company to the Bank under Section 8.l(a) hereof:
Ratio LIBOR Rate Margin
----- -----------------
<1.00 to 1.00 100 Basis Points
>=1.00 to 1.00 but <2.00 to 1.00 125 Basis Points
>=2.00 to 1.00 but <3.00 to 1.00 150 Basis Points
>=3.00 to 1.00 200 Basis Points
(iii) Any such adjustment to the LIBOR Rate Margin shall only remain
effective until the earlier of the next Margin Adjustment Date or the date on
which an Event of Default shall occur. The LIBOR Rate Margin to be effective
from such earlier date and from time to time thereafter shall be the LIBOR Rate
Margin as adjusted pursuant to this Agreement, PROVIDED, HOWEVER, that: (i) if
the Company shall not deliver its financial statements in accordance with
Section 8.1 of this Agreement, the LIBOR Rate Margin shall be two hundred (200)
basis points per annum and (ii) if an Event of Default shall occur which has not
been waived in writing by the Bank, the interest rate shall be the interest rate
applicable pursuant to subsection (c) below.
(c) Upon the occurrence of any Event of Default and so long as such Event
of Default is continuing (excepting therefrom an Event of Default created by the
Company's failure to deliver
5
<PAGE>
its financial statements in accordance with Section 8.1 of this Agreement) (i)
the unpaid principal amount of each Federal Funds Effective Rate Loan or Prime
Rate Loan, and accrued interest thereon, or any fees or any and other sum
payable hereunder, shall thereafter until paid in full bear interest at a rate
per annum equal to six hundred (600) basis points in excess of the Federal Funds
Effective Rate in effect from time to time, and (ii) the unpaid principal amount
of each Prime Rate Loan, and accrued interest thereon, or any fees or any and
other sum payable hereunder, shall thereafter until paid in full bear interest
at a rate per annum equal to six hundred (600) basis points in excess of the
Prime Rate in effect from time to time.
SECTION 2.6 INTEREST PAYMENTS. The Company shall pay to the Bank interest
on the unpaid principal balance of each Federal Funds Effective Rate Loan on
either (i) the date such Loan is converted to a LIBOR Rate Loan, or (ii) the
last day of each March, June, September and December. The Company shall pay to
the Bank interest on the unpaid principal balance of each LIBOR Rate Loan on (i)
the date such Loan is converted to a Federal Funds Effective Rate Loan, or (ii)
the last day of the applicable Interest Period of such Loan, whichever is
earlier. The Company shall pay to the Bank interest on the unpaid principal
balance of each Prime Rate Loan on the last day of each March, June, September
and December.
SECTION 2.7 PRINCIPAL PAYMENTS.
(a) Commencing September 30, 1999, and on the last day of each calendar
quarter thereafter, the aggregate principal amount available under the
Acquisition Line shall be permanently reduced by the amount of $259,090.91, and
the Company shall immediately pay to the Bank the amount, if any, by which the
aggregate principal amount outstanding under the Acquisition Line exceeds such
reduced commitment of the Bank at that time. If, after giving effect to any such
payment any LIBOR Rate Loan would be prepaid prior to the end of its applicable
Interest Period, the Company shall pay the Bank the breakage fee required under
Section 2.11(c) hereof.
(b) Commencing September 30, 1999, and on the 1st day of each calendar
quarter thereafter, the aggregate principal amount available under the
Accommodation Line shall be permanently reduced by the amount of $230,000 and
the Company shall immediately pay to the Bank the amount, if any, by which the
aggregate principal amount outstanding under the Accommodation Line exceeds such
reduced commitment of the Bank at that time.
(c) On the Accommodation Line Maturity Date, the Acquisition Line Maturity
Date and the Working Capital Line Maturity Date, all amounts outstanding under
the Accommodation Line, the Acquisition Line and the Working Capital Line,
respectively, shall be immediately due and payable. If payment of the
outstanding Loans at maturity causes any LIBOR Rate Loan to be prepaid prior to
the end of its applicable Interest Period, the Company shall pay the Bank the
breakage fee required under Section 2.11(c) hereof.
6
<PAGE>
SECTION 2.8 PREPAYMENT.
(a) VOLUNTARY PREPAYMENT. The Company may prepay any Federal Funds
Effective Rate Loan or Prime Rate Loan in whole, or in part, at any time or
times. The Company may prepay any LIBOR Rate Loan, in whole or in part, only on
the last day of the Interest Period applicable to such LIBOR Rate Loan upon not
less than three (3) Business Days' prior written notice given to the Bank.
(b) MANDATORY PREPAYMENT. Without notice or demand, if the sum of the
outstanding principal balance of Loans made under Section 2.1(b) hereof shall at
any time exceed the Borrowing Base, the Company shall immediately prepay such
Loans to the extent necessary to eliminate such excess. Any payment received by
the Lender under this Section 2.8(b) or under 2.8(a) may be applied to the
Obligations, in such order and in such amounts as the Bank, in its discretion,
may from time to time determine. If, after giving effect to any such payment any
LIBOR Rate Loan would be prepaid prior to the end of its applicable Interest
Period, the Company shall pay the Bank the breakage fee required under Section
2.11(c) hereof.
(c) FREE CASH FLOW RECAPTURE. Within ninety (90) days of the end of each
fiscal year of the Company commencing with the Company's fiscal year ending on
December 31, 1999, the Company shall make a principal payment in respect of the
outstanding Loans in an amount equal to fifty percent (50%) of the Company's
Free Cash Flow for such fiscal year. Such payment shall be applied first to the
Accommodation Line and any remainder shall be applied to the Acquisition Line,
and the aggregate principal amount available under the Accommodation Line and
the Acquisition Line, as applicable, shall be permanently reduced in such
amount. If, after giving effect to any such payment any LIBOR Rate Loan would be
prepaid prior to the end of its applicable Interest Period, the Company shall
pay the Bank the breakage fee required under Section 2.11(c) hereof.
(d) PREPAYMENT UPON SIGNIFICANT SALE OF ASSETS. Without notice or demand,
if the Company sells, leases, transfers or otherwise disposes of any plant or
any manufacturing facility or other assets in any single transaction involving
amounts exceeding $250,000, the Company shall immediately prepay the Loans in
the full amount of the consideration (whether cash or otherwise) received by the
Company in respect of such sale. Such prepayment shall be applied to the Credit
Lines in such proportions as the Company shall direct, but such application
shall not effect a permanent reduction to the applicable credit facility. If,
after giving effect to any such prepayment, any LIBOR Rate Loan would be prepaid
prior to the end of its applicable Interest Period, the Company shall pay the
Bank the breakage fee required under Section 2.11(c) hereof.
2. AMENDMENT TO BORROWING BASE CERTIFICATE. Exhibit D to the Credit
Agreement (containing the form of Borrowing Base Certificate) is hereby amended
to read in its entirety as set forth in Exhibit A hereto.
3. DOCUMENT RATIFICATION. Except as explicitly set forth herein, all of
the terms and conditions contained in the Credit Agreement and the other Loan
Documents (as that term is defined in the Credit Agreement) shall remain
unmodified and in full force and effect.
7
<PAGE>
4. RELEASE. Except as specifically set forth herein, the execution of this
First Amendment by the Bank does not and shall not constitute a waiver of any
rights or remedies to which the Bank is entitled pursuant to the Loan Documents,
nor shall the same constitute a waiver of any default now existing or which may
occur in the future with respect to the Loan Documents. The Company hereby
agrees that the Bank has fully performed its obligations pursuant to the Loan
Documents through the date hereof and hereby waives, releases and relinquishes
any and all known claims whatsoever that it may have against the Bank with
respect to the Loan Documents through the date hereof.
5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY. The Company
represents, warrants and covenants to the Bank:
(a) No default or event of default under any of the Loan Documents
as modified herein, nor any event that, with the giving of notice or the passage
of time or both, would be a default or an event of default under the Loan
Documents as modified herein has occurred and is continuing.
(b) There has been no material adverse change in the financial
condition of the Company or any other person whose financial statement has been
delivered to the Bank in connection with the Loans from the most recent
financial statement received by the Bank.
(c) Each and all representations and warranties of the Company in
the Loan Documents are accurate on the date hereof.
(d) The Company has no known claims, counterclaims, defenses, or
set-offs with respect to the Loans or the Loan Documents as modified herein.
(e) The Loan Documents as modified herein are the legal, valid, and
binding obligation of the Company, enforceable against the Company in accordance
with their terms.
(f) The Company shall execute, deliver, and provide to the Bank such
additional agreements, documents, and instruments as reasonably required by the
Bank to effectuate the intent of this Agreement.
6. CONTROLLING LAW. The terms and provisions of this First Amendment shall
be construed in accordance with and governed by the laws of the State of
Colorado.
7. BINDING EFFECT. This First Amendment shall be binding upon and inure to
the benefit of the parties hereto, their successors and assigns.
8. CAPTIONS. The paragraph captions utilized herein are in no way intended
to interpret or limit the terms and conditions hereof, rather, they are intended
for purposes of convenience only.
8
<PAGE>
9. COUNTERPARTS. This First Amendment may be executed in any number of
counterparts, each of which shall be effective only upon delivery and thereafter
shall be deemed an original, and all of which shall be taken to be one and the
same instrument, for the same effect as if all parties hereto had signed the
same signature page. Any signature page of this First Amendment may be detached
from any counterpart of this First Amendment without impairing the legal effect
of any signatures thereon and may be attached to another counterpart of this
First Amendment identical in form hereto but having attached to it one or more
additional signature pages.
10. DEFINED TERMS. Capitalized terms not defined herein shall have the
same meaning as set forth in the Credit Agreement.
11. EFFECTIVENESS. This First Amendment shall be effective only upon (i)
the Company's execution of an Accommodation Note in substantially the form of
Exhibit B hereto, (ii) the Company's payment of an origination fee in the amount
of $30,000, and (iii) the Company's delivery of a legal opinion of counsel to
the Company acceptable to the Bank.
IN WITNESS WHEREOF, the parties hereto have executed this First Amendment
as of the day and year first above written.
BANK:
KEY BANK NATIONAL ASSOCIATION
By:___________________________________
Title: __________________________
COMPANY:
DYNAMIC MATERIALS CORPORATION
By:___________________________________
Title:____________________________
9
<PAGE>
EXHIBIT A
BORROWING BASE CERTIFICATE
DYNAMIC MATERIALS CORPORATION
BORROWING BASE CERTIFICATE
AS OF ____________
The undersigned officer of Dynamic Materials Corporation, hereby certifies
that the following is a true and accurate calculation of the Borrowing Base as
of the date specified above, determined in accordance with the requirements of
the Amended and Restated Credit Facility and Security Agreement dated November
30, 1998, as amended, between Dynamic Materials Corporation, a Delaware
corporation ("Borrower") and KeyBank National Association ("Lender").
Name:__________________________________
Title:_________________________________
Date:__________________________________
Accounts Receivable Aging Schedule:
1-30 Day 31-61 Day 61-90 Day 90+Day Total
------ ------ ------ ------ ------
----------------------------------------------------------------------------
BORROWING BASE CALCULATION:
ACCOUNTS RECEIVABLE PORTION:
Accounts Receivable/1/
Less:
A. Accounts Receivable to which Borrower does
not have valid title ________
- - -------------------
/1/ Reference is made to the definitions of "Eligible Accounts Receivable" in
Section 1.2 of the Credit Agreement. Information must be provided in accordance
with such definitions. Captions set forth below are for reference purposes only
and may not reflect the actual definition in the Credit Agreement.
A-1
<PAGE>
B. Accounts Receivable which are not the binding
obligation of the account debtor ________
C. Accounts Receivable arising from services provided
by Borrower to an Affiliate of Borrower ________
D. Accounts Receivable which are unpaid more than the
earlier of ninety (90) days after the original
invoice date or one hundred five (105) days after
the services were provided ________
E. Accounts Receivable which, when aggregated with all
other Accounts Receivable of the same account debtor
or Affiliate, exceed 50% in face value of all Accounts
Receivable of Borrower ________
F. Accounts Receivable (i) wherein the account debtor
is also a creditor of the Borrower, (ii) which are
subject to dispute or (iii) which are or are likely
to become subject to any right of setoff or other
claim or defense ________
G. Accounts Receivable wherein the debtor has commenced
a voluntary case under applicable bankruptcy laws, or
made an assignment for the benefit of creditors, or a
decree has been entered in respect of the debtor in an
involuntary case under federal bankruptcy laws ________
H. Accounts Receivable in which the Lender does not
have a valid perfected first priority security
interest ________
I. Accounts Receivable for which the sale to the
account debtor is on a consignment, bill-and hold,
sale on approval, guaranteed sale or sale-and-return
basis ________
J. Accounts Receivable from the same account debtor in
which 50% or more of the other Account Receivables
from such account debtor are unpaid within the
applicable period of time set forth above ________
K. Accounts Receivable for which 75% or more of other
Accounts Receivable from the same account debtor are
not deemed Eligible Accounts Receivable ________
A-2
<PAGE>
L. Accounts Receivable which have not been shipped and
delivered to and accepted or the services giving
rise to such Account Receivable have not been
performed or the Account Receivable otherwise does
not represent a final sale ________
M. Accounts Receivable for which the principal place
of business of the debtor is located outside of
the United States ________
N. Accounts Receivable which do not comply in all
material respects with all applicable legal
requirements ________
O. Accounts Receivable arising out of unbilled
cooperative advertising activities ________
Eligible Accounts Receivable
========
BORROWING BASE:
80% of Eligible Accounts Receivable ________
Revolving Credit Availability
========
INVENTORY PORTION:
Eligible Inventory/2/
========
BORROWING BASE:
50% of Eligible Inventory consisting of raw
materials ________
50% of Eligible Inventory consisting of
work-in-process purchased by the Company from
Spin Forge LLC or Precision Machined Products ________
- - ----------------
/2/ Reference is made to the definition of "Eligible Inventory" in Section
1.2 of the Credit Agreement. Information must be provided in accordance with
such definition.
A-3
<PAGE>
30% of Eligible Inventory consisting of
work-in-process other than work-in-process
referred to in the immediately preceding
category ________
50% of Eligible Inventory consisting of finished
product ________
Revolving Credit Availability ________
Lesser of Inventory Portion of Revolving Credit
Availability or 80% of Eligible Accounts Receivable
========
AGGREGATE REVOLVING CREDIT
AVAILABILITY
========
A-4
<PAGE>
EXHIBIT B
ACCOMMODATION NOTE
$2,300,000.00 December ____, 1998
For value received, DYNAMIC MATERIALS CORPORATION, a Delaware corporation
(the "Company") promises to pay to the order of KEYBANK NATIONAL ASSOCIATION,
(the "Bank"), its successor and assigns, at its main office, on the date or
dates and in the manner specified in Article II of the Credit Agreement (as
defined below), the aggregate principal amount of the Loans outstanding under
the Accommodation Line, as shown on any ledger or other record of the Bank,
which shall be rebuttably presumptive evidence of the principal amount owing and
unpaid on this Note.
The Company promises to pay to the order of the Bank interest on the
unpaid principal amount of each Loan evidenced by this Note from the date of
such Loan until such principal amount is paid in full at such interest rate(s)
and at such times as are specified in Article II of the Credit Agreement.
This Note is the Accommodation Note referred to in, and is entitled to the
benefits of, the Amended and Restated Credit Facility and Security Agreement
("Credit Agreement") by and between the Bank and the Company dated November 30,
1998, as the same was amended on December ____, 1998. This Note may be declared
forthwith due and payable in the manner and with the effect provided in the
Credit Agreement, which contains provisions for acceleration of the maturity
hereof upon the happening of any Event of Default and also for prepayment on
account of principal hereof prior to the maturity hereof upon the terms and
conditions therein specified.
Each defined term used in this Note shall have the meaning ascribed
thereto in Section 1.2 of the Credit Agreement.
The Company expressly waives presentment, demand, protest, and notice of
dishonor.
The Company acknowledges that this Note was signed in the City of Denver,
in the State of Colorado.
COMPANY: DYNAMIC MATERIALS CORPORATION
By:_______________________________________
Title:____________________________________
B-1
AMENDED AND RESTATED
CREDIT FACILITY AND
SECURITY AGREEMENT
THIS AGREEMENT is made by and between the Company (as herein defined) and
the Bank (as herein defined).
WHEREAS, the Company and the Bank entered into a Credit Facility and
Security Agreement dated as of July 19, 1996, (the "Receivables Line") which, as
amended, provided for loans up to five million dollars ($5,000,000) to be
supported by the Company's eligible accounts receivable and inventory; and
WHEREAS, the Company and the Bank entered into a Credit Facility and
Security Agreement dated as of March 18, 1998, (the "Reducing Revolving Credit")
which, as amended, provided for loans of up to four million dollars
($4,000,000); and
WHEREAS, the Company has entered into an Asset Purchase Agreement dated as
of November 18, 1998 which contemplates the acquisition (the "Acquisition") by
the Company of certain of the assets of Precision Machined Products, a Colorado
corporation, and the Company has requested that the Bank restructure the
Receivables Line and the Reducing Revolving Credit to provide financing for the
Acquisition and a working line of capital; and
WHEREAS, the Bank is willing to restructure the above-referenced credit
facilities on the terms and subject to the conditions set forth herein.
NOW THEREFORE, in consideration of the covenants and agreements contained
herein, the Company and the Bank hereby mutually agree that the Receivables Line
and the Reducing Revolving Credit are amended and restated in their entirety as
follows:
ARTICLE I. DEFINITIONS
SECTION 1.1 GENERAL. Any accounting term used but not specifically defined
herein shall be construed in accordance with GAAP. The definition of each
agreement, document, and instrument set forth in Section 1.2 hereof shall be
deemed to mean and include such agreement, document, or instrument as amended,
restated, or modified from time to time.
SECTION 1.2 DEFINED TERMS. As used in this Agreement:
"ACCEPTABLE REAL ESTATE" shall mean only such real property of the
Company, valued at the lower of cost or fair market value, as the Bank in its
reasonable discretion, shall from time to time consider eligible to support
advances under the Acquisition Line or the Working Capital Line.
<PAGE>
"ACCOUNT" shall mean (a) any account as defined in the UCC, and (b) any
right to payment for Goods sold or leased or for services rendered which is not
evidenced by an Instrument or Chattel Paper, whether or not it has been earned.
"ACCOUNT DEBTOR" shall mean the Person who is obligated on an Account
Receivable.
"ACCOUNT RECEIVABLE" shall mean:
(a) any account receivable, Account, Chattel Paper, Contract Right,
General Intangible Document, or Instrument owned, acquired, or received by a
Person,
(b) any other indebtedness owed to or receivable owned, acquired, or
received by a Person of whatever kind and however evidenced, and
(c) any right, title, and interest in a Person's Goods which were sold,
leased, or furnished by that Person and gave rise to either (a) or (b) above, or
both of them, including, without limitation (i) any rights of stoppage in
transit of a Person's sold, leased, or furnished Goods, (ii) any rights to
reclaim a Person's sold, leased, or furnished Goods, and (iii) any rights a
Person has in such sold, leased, or furnished Goods that have been returned.
"AFFILIATE" shall mean, with respect to a specified Person, any other
Person: (a) which directly or indirectly through one or more intermediaries
controls, or is controlled by, or is under common control with such Person, (b)
which beneficially owns or holds with power to vote five percent (5 %) or more
of any class of the voting stock of such Person, (c) five percent (5 %) or more
of the voting stock of which other Person is beneficially owned or held by such
Person, or (d) who is an officer or director of such Person.
"ACQUISITION" shall have the meaning set forth in the recitals hereto.
"ACQUISITION LINE" shall mean the line of credit provided by the Bank
pursuant to Section 2.1(a) hereof.
"ACQUISITION LINE CREDIT LIMIT" shall mean $8,000,000 less any permanent
reductions to such amount resulting from (i) conversion of Credit Loans to Term
Loans pursuant to Section 2.2 hereof, (ii) principal payments required to be
made under Section 2.7(a) hereof and (iii) Free Cash Flow recapture payments
made under Section 2.8(c) hereof.
"ACQUISITION LINE MATURITY DATE" shall mean the last day of the sixth
(6th) Contract Year.
"ACQUISITION NOTE" shall mean the promissory note of the Company in
substantially the form of Exhibit A hereto, evidencing amounts advanced by the
Bank pursuant to Section 2.1(a) hereof.
"BANK" shall mean KeyBank National Association, a national banking
association, and its successors and assigns.
2
<PAGE>
"BORROWING BASE" shall mean an amount equal to the sum of:
(a) the lesser of (i) 50% of the net book value of all Eligible Equipment
of the Company, or (ii) 70% of the orderly liquidation value of all Eligible
Equipment of the Company, or (iii) 80% of the forced sale value of all Eligible
Equipment of the Company, each as determined in accordance with an appraisal
performed prior to the inclusion of such Equipment in the Borrowing Base by a
licensed appraiser satisfactory to the Bank, in its reasonable discretion; plus
(b) 75% of Acceptable Real Estate; plus
(c) 80% of Eligible Accounts Receivable; plus
(d) the sum of (i) 50% of Eligible Inventory consisting of raw materials
and Eligible Inventory consisting of work-in-process previously purchased by the
Company from Spin Forge LLC or purchased from Precision Machined Products
pursuant to the Acquisition, plus (ii) 30% of Eligible Inventory consisting of
work-in-process other than work-in-process previously purchased by the Company
from Spin Forge LLC or purchased from Precision Machined Products pursuant to
the Acquisition, plus (iii) 50% of Eligible Inventory consisting of finished
product.
Each dollar of Borrowing Base availability shall support one dollar of Loans
under either the Acquisition Line or the Working Capital Line, and the Borrowing
Base shall be utilized to support borrowings under the Acquisition Line and the
Working Capital Line in such amounts and in such proportions as the Bank and the
Company shall agree.
"BORROWING BASE CERTIFICATE" shall mean the Borrowing Base Certificate in
the form of Exhibit D attached hereto.
"BUSINESS CONDITION" shall mean the financial condition, business and
assets of a Person.
"BUSINESS DAY" shall mean a day of the year on which banks are not
required or authorized to close in Denver, Colorado and, if the applicable
Business Day relates to any LIBOR Rate Loan, on which dealings are carried on in
the London interbank eurodollar market.
"CAPITAL EXPENDITURES" shall mean any and all amounts invested, expended
or incurred by a Person in respect of the purchase, improvement, renovation or
expansion of any land and depreciable or amortizable property of such Person
(including expenditures required to be capitalized in accordance with GAAP but
excluding expenditures relating to the Company's Pennsylvania Industrial
Development Revenue Bond Project).
"CASH COLLATERAL ACCOUNT" shall mean a commercial Deposit Account
designated "cash collateral account" and maintained by the Company with Bank,
without liability by Bank to pay interest thereon, from which account Bank shall
have the exclusive right to withdraw funds until all Obligations are paid,
performed, satisfied, enforced, and observed in full.
3
<PAGE>
"CASH SECURITY" shall mean all cash, Instruments, Deposit Accounts, and
other cash equivalents, whether matured or unmatured, whether collected or in
the process of collection, upon which Company presently has or may hereafter
have any claim, that are presently or may hereafter be existing or maintained
with, issued by, drawn upon, or in the possession of Bank.
"CHATTEL PAPER" shall mean "chattel paper" as defined in the UCC.
"CODE" shall mean the Internal Revenue Code of 1986, as amended from time
to time.
"COLLATERAL" shall have the meaning described in Section 3.1 hereof
"COLLECTIONS" shall have the meaning described in Section 4.1 hereof.
"COMMONLY CONTROLLED ENTITY" shall mean a Person, whether or not
incorporated, which is under common control with the Company within the meaning
of Section 414(b) or (c) of the Code.
"COMPANY" shall mean Dynamic Materials Corporation, a Delaware
corporation, with its principal office located at 551 Aspen Ridge Dr.,
Lafayette, Colorado 80026, and its successors.
"CONTRACT RIGHT" shall mean (a) any contract right, and (b) any right to
payment under a contract not yet earned by performance and not evidenced by an
Instrument or Chattel Paper.
"CONTRACT YEAR" shall mean the each twelve (12) month period which
commences on the date hereof and on each anniversary of the date of execution of
the Agreement.
"CREDIT LOAN" shall mean a revolving Loan described in Section 2.1 of this
Agreement.
"CURRENT ASSETS" and "CURRENT LIABILITIES" shall mean the amounts as
determined in accordance with GAAP not inconsistent with present accounting
procedures.
"DEBT SERVICE COVERAGE RATIO" shall mean the ratio of (i) the sum of (A)
net income after taxes, exclusive of extraordinary gains and gains on the sale
of assets, plus (B) depreciation and amortization, plus (C) interest expense
(including the portion of any capitalized lease obligation allocable to interest
expense), to (ii) the sum of (A) current maturities of long-term debt and
capitalized leases, plus (B) interest expense (including the portion of any
capitalized lease obligation allocable to interest expense), plus (C) dividends
and distributions, plus (D) unfinanced Capital Expenditures.
"DEPOSIT ACCOUNT" shall mean (a) any deposit account, and (b) any demand,
time, savings, passbook, or a similar account maintained with a bank, savings
and loan association, credit union, or similar organization, other than an
account evidenced by a certificate of deposit.
"DOCUMENT" shall mean (a) any document, (b) any document of title,
including a bill of lading, dock warrant, dock receipt, warehouse receipt or
order for the delivery of Goods, and any other document which in the regular
course of business or financing is treated as adequately
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evidencing that the Person in possession of it is entitled to receive, hold, and
dispose of the document and the Goods it covers, and (c) any receipt covering
Goods stored under a statute requiring a bond against withdrawal or a license
for the issuance of receipts in the nature of warehouse receipts even though
issued by a Person who is the owner of the Goods and is not a warehouseman.
"EBITDA" of the Company for any period shall mean the Company's earnings
(including one-time or extraordinary adjustments relating to the Paul Lange
Separation Agreement and one-time start-up costs associated with the Company's
Pennsylvania Industrial Development Revenue Bond- backed project) plus interest,
taxes, depreciation and amortization, each as calculated for such period in
accordance with GAAP.
"ELIGIBLE ACCOUNTS RECEIVABLE" means, as at any applicable date of
determination, the aggregate face amount of the Accounts Receivable included in
the definition of Accounts Receivable hereunder without duplication, in each
case less (without duplication) the aggregate amount of all reserves,
limitations and deductions with respect to such Accounts Receivable set forth
below or as otherwise provided in this Agreement and less the aggregate amount
of all returns, discounts, claims, credits, charges and allowances of any nature
with respect to such Accounts Receivable (whether issued, owing, granted or
outstanding). Unless otherwise approved in writing by the Bank in its sole
discretion, no individual Account Receivable shall be deemed to be an Eligible
Account Receivable if:
(a) the Company does not have legal and valid title to the Account
Receivable; or
(b) the Account Receivable is not the valid, binding and legally
enforceable obligation of the Account Debtor subject, as to enforceability, only
to (i) applicable bankruptcy, insolvency, reorganization, moratorium or similar
laws at the time in effect affecting the enforceability of creditors' rights
generally and (ii) judicial discretion in connection with the remedy of specific
performance and other equitable remedies; or
(c) the Account Receivable arises out of sale made to any Affiliate of the
Company; or
(d) the Account Receivable or any portion thereof is unpaid more than the
earlier of (i) 90 days after the original invoice date, or (ii) 105 days after
the services were provided, or goods sold, which gave rise to such Account
Receivable; or
(e) the Account Receivable, when aggregated with all other Accounts
Receivable of the same Account Debtor (or any Affiliate thereof), exceeds fifty
percent (50%) in face value of all Accounts Receivable of the Company then
outstanding, to the extent of such excess;
(f) (i) the Account Debtor is also a creditor of the Company, to the
extent of the amount owed by the Company to the Account Debtor, (ii) the Account
Receivable is subject to any claim on the part of the Account Debtor disputing
liability under such Account Receivable in whole or in part, to the extent of
the amount of such dispute or (iii) the Account Receivable otherwise is or is
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reasonably likely to become subject to any right or setoff or any counterclaim,
claim or defense by the Account Debtor, to the extent of the amount of such
setoff or counterclaim, claim or defense; or
(g) the Account Debtor has commenced a voluntary case under applicable
bankruptcy laws, as now constituted or hereafter amended, or made an assignment
for the benefit of creditors or if a decree or order for relief has been entered
by a court having jurisdiction in the premises in respect of the Account Debtor
in an involuntary case under the federal bankruptcy laws, as now constituted or
hereafter amended, or if any other petition or other application for relief
under the Account Debtor, or if the Account Debtor has failed, suspended
business, ceased to be solvent, or consented to or suffered a receiver, trustee,
liquidator or custodian to be appointed for it or for all or a significant
portion of its assets or affairs; or
(h) the Bank does not have a valid and perfected first priority security
interest in such Account Receivable; or
(i) the sale to the Account Debtor is on a consignment, bill-and-hold,
sale on approval, guaranteed sale or sale-and-return basis or pursuant to any
written agreement providing for repurchase or return; or
(j) it is from the same Account Debtor (or any Affiliate thereof) and
fifty percent (50%) or more, in face amount, of other Accounts Receivable from
either such Account Debtor or any Affiliate thereof are ineligible pursuant to
paragraph (d) above; or
(k) seventy-five percent (75%) or more, in face amount, of other Accounts
Receivable from the same Account Debtor are not deemed Eligible Accounts
Receivable hereunder; or
(l) the Goods giving rise to such Account have not been shipped and
delivered to and accepted by the Account Debtor or the services giving rise to
such Account have not been performed by the Borrower and accepted by the Account
Debtor or the Account otherwise does not represent a final sale;
(m) the principal place of business of the Account Debtor is located
outside of the United States, unless the Account Receivable is (i) backed by a
bank letter of credit naming the Bank as beneficiary or assigned to the Bank, in
the Bank's possession and acceptable to the Bank in all respects, in its sole
discretion, or (ii) covered by a foreign receivables insurance policy acceptable
to the Bank in its sole discretion;
(n) the Account Receivable does not comply in all material respects with
all applicable legal requirements, including where applicable, the Federal
Consumer Credit Protection Act, the Federal Truth in Lending Act and Regulation
Z of the Board of Governors of the Federal Reserve System, in each case as
amended; or
(o) the Account Receivable arises out of unbilled cooperative advertising
activities.
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"ELIGIBLE EQUIPMENT" shall mean only such Equipment of the Company, valued
at the lower of (i) cost (on a first in, first out basis), or (ii) fair market
value, as the Bank, in its sole discretion, shall from time to time consider to
be Eligible Equipment.
"ELIGIBLE INVENTORY" shall mean only such Inventory of the Company, valued
at the lower of (i) cost (on a first in, first out basis), or (ii) fair market
value, as the Bank, in its sole discretion, shall from time to time consider to
be Eligible Inventory.
"ENVIRONMENTAL LAW" shall mean any federal, state, or local statute, law,
ordinance, code, rule, regulation, order or decree regulating, relating to, or
imposing liability upon a Person in connection with the use, release or disposal
of any hazardous toxic or dangerous substance, waste or material.
"EQUIPMENT" shall mean "equipment" (as defined in the UCC) and fixtures
(as defined in the UCC) including, without limitation, all machinery, equipment,
furniture, furnishings, fixtures, and packaging production equipment, parts,
material handling, supplies, and motor vehicles (titled or untitled) of every
kind and description, now or hereafter owned by the Company.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended from time to time.
"EVENT OF DEFAULT" shall mean any one or more of the occurrences described
in ARTICLE IX hereof.
"FEDERAL FUNDS EFFECTIVE RATE" shall mean, during any period, a
fluctuating interest rate per annum for each day during such period, that is the
rate determined by Bank to be the opening rate per annum paid or payable by it
on the day in question in its region market for federal funds purchased
overnight from other banking institutions.
"FEDERAL FUNDS EFFECTIVE RATE LOAN" shall mean any Loan that bears
interest with reference to the Federal Funds Effective Rate.
"FREE CASH FLOW" of the Company shall mean the difference between (i) the
sum of the Company's net income plus depreciation and amortization, and (ii) the
sum of (A) current maturities of long-term debt and capitalized leases of the
Company, and (B) unfinanced Capital Expenditures.
"FUNDED DEBT" of the Company shall mean the sum of (i) all outstanding
senior bank Indebtedness of the Company, (ii) all Indebtedness of the Company
relating to any bonds or other debt securities issued by the Company, (iii) all
Indebtedness in respect of the Letter of Credit Loan, and (iv) all Subordinated
Debt of the Company.
"GAAP" shall mean generally accepted accounting principles as then in
effect, which shall include the official interpretations thereof by the
Financial Accounting Standards Board, consistently applied.
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"GENERAL INTANGIBLE" shall mean (a) any "general intangible" (as defined
in the UCC), and (b) any personal property (including things in action) other
than Goods, Accounts, Contract Rights, Chattel Paper, Documents, Instruments,
and money.
"GOODS" shall mean (a) any "goods" (as defined in the UCC), and (b) all
things which are movable at the time the security interest granted Bank under
the Agreement attaches or which are fixtures but does not include money,
Instruments, Documents, Accounts, Chattel Paper, General Intangibles, or
Contract Rights.
"HAZARDOUS MATERIALS" shall mean any substance or material defined or
designated as a hazardous or toxic waste, hazardous or toxic material, hazardous
or toxic substance, or other similar term, by any United States federal, state
or local environmental statute, regulation or ordinance.
"INDEBTEDNESS" shall mean for any Person (i) all obligations to repay
borrowed money, direct or indirect, incurred, assumed, or guaranteed, (ii) all
obligations for the deferred purchase price of capital assets excluding trade
payables, (iii) all obligations under conditional sales or other title retention
agreements, and (iv) all lease obligations which have been or should be
capitalized on the books of such Person.
"INSTRUMENT" shall mean "instruments" (as defined in the UCC).
"INTEREST PERIOD" means, with respect to any LIBOR Rate Loan, the period
commencing on the date such Loan is made, continued, or converted and ending on
the last day of such period as selected by the Company pursuant to the
provisions below and, thereafter, each subsequent period commencing on the last
day of the immediately preceding Interest Period and ending on the last day of
such period as selected by the Company pursuant to the provisions below. The
duration for any LIBOR Rate Loan which is a Credit Loan shall be 1 month, 2
months, or 3 months, as selected by the Company; and the duration for any LIBOR
Rate Loan which is a Term Loan shall be 3 months; provided, however, that
whenever the last day of any Interest Period would otherwise occur on a day
other than a Business Day, the last day of such Interest Period shall occur on
the next succeeding Business Day, and; provided, further, however, that if such
extension of time would cause the last day of such Interest Period for a LIBOR
Rate Loan to occur in the next following calendar month, the last day of such
Interest Period shall occur on the next preceding Business Day.
"INVENTORY" shall mean all "inventory" (as defined in the UCC) now owned
or hereafter acquired by the Company, including, without limitation, all Goods,
merchandise, work-in-process, raw materials, finished Goods, and inventory held
for lease to other Persons; all other materials, supplies, and tangible personal
property of any kind, nature, or description held for sale or lease or for
display or demonstration; and all documents of title or other Documents
pertaining thereto, and all proceeds of the foregoing.
"LETTER OF CREDIT LOAN" shall mean the $7,000,000 loan to Company from
Bank, evidenced by the issuance of a Letter of Credit to provide a credit
enhancement for bond financing and which loan shall be secured by a lien on
certain property, plant and equipment of the Company located in Mount Braddock,
Pennsylvania.
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"LIBOR RATE" shall mean, for any Interest Period for any LIBOR Rate Loan,
an interest rate per annum (rounded upwards to the next higher whole multiple of
1/16% if such rate is not such a multiple) equal at all times during such
Interest Period to the quotient of (a) the rate per annum (rounded upwards to
the next higher whole multiple of 1/16 % if such rate is not such a multiple) at
which deposits in United States dollars are offered at 11:00 a.m. (London,
England time) (or as soon thereafter as is reasonably practicable) by prime
banks in the London interbank eurodollar market two Business Days prior to the
first day of such Interest Period in an amount and maturity of such LIBOR Rate
Loan, divided by (b) a number equal to 1.00 minus the aggregate (without
duplication) of the rates (expressed as a decimal fraction) of the LIBOR Reserve
Requirements current on the date two Business Days prior to the first day of
such Interest Period.
"LIBOR RATE LOAN" shall mean any Loan that bears interest with reference
to the LIBOR Rate.
"LIBOR RATE MARGIN" shall mean: (i) during the period prior to the first
Margin Adjustment Date, 200 basis points, and (ii) thereafter, the number of
basis points determined pursuant to Section 2.5(b)(ii) hereof.
"LIBOR RESERVE REQUIREMENTS" means, for any Interest Period for any LIBOR
Rate Loan, the maximum reserves (whether basic, supplemental, marginal,
emergency, or otherwise) prescribed by the Board of Governors of the Federal
Reserve System (or any successor) with respect to liabilities or assets
consisting of or including "Eurocurrency liabilities" (as defined in Regulation
D of the Board of Governors of the Federal Reserve System) having a term equal
to such Interest Period.
"LIEN" shall mean any mortgage, security interest, lien, charge,
encumbrance on, pledge or deposit of, or conditional sale or other title
retention agreement with respect to any property or asset.
"LOAN" or "LOANS" shall mean any of the loan advances to the Company
extended by the Bank in accordance with ARTICLE II hereof.
"LOAN DOCUMENTS" shall mean this Agreement, the Notes and any other
documents relating thereto.
"LOCKBOX" shall have the meaning specified in Section 4.1 of this
Agreement.
"MARGIN ADJUSTMENT DATE" shall have the meaning specified in Section
2.5(b)(i) hereof.
"MARGIN STOCK" shall have the meaning given to it under Regulation U of
the Board of Governors of the Federal Reserve System, as amended from time to
time.
"MATERIAL ADVERSE EFFECT" shall mean material adverse effect on (i) the
ability of the Company and any Subsidiaries taken as a whole to fulfill their
obligations under any of the Loan Documents or (ii) the Business Condition of
the Company and any Subsidiaries taken as a whole.
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"MATERIAL AGREEMENTS" shall mean (a) any agreement to which the Company is
a party which provides for the receipt or expenditure by the Company or any
Subsidiary of more than $500,000.00 in any 12-month period other than sales
orders in the ordinary course of business, and (b) any other agreement to which
the Company is a party which is material to the business of the Company.
"MULTIEMPLOYER PLAN" shall mean a Plan described in ERISA which covers
employees of the Company and employees of any other Person, which together would
be treated as a single employer for purposes of ERISA.
"NOTE" shall mean the Acquisition Note or the Working Capital Note;
"NOTES" shall mean the Acquisition Note and the Working Capital Note.
"OBLIGATIONS" shall mean any and all indebtedness, obligations,
liabilities, contracts, indentures, agreements, warranties, covenants,
guaranties, representations, provisions, terms, and conditions of whatever kind,
now existing or hereafter arising, and however evidenced, that are now or
hereafter owed, incurred, or executed by Company to, in favor of, or with Bank
or any Affiliate of the Bank.
"PBGC" shall mean the Pension Benefit Guaranty Corporation established
pursuant to subtitle A of Title IV or ERISA.
"PERMITTED INVESTMENT" shall mean the Company's:
(a) investments existing on the date hereof as disclosed in the Schedule
on Exhibit C hereto;
(b) extensions of credit in the nature of Accounts Receivable, or notes
receivable arising from the Company's sale or lease of goods or services in the
ordinary course of business;
(c) investments consisting of the endorsement of negotiable instruments
for deposit or collection or similar transactions in the ordinary course of
business;
(d) investments (excluding debt obligations) received in connection with
the bankruptcy or reorganization of the Company's customers or suppliers and in
settlement of delinquent obligations of, and other disputes with, such customers
or suppliers arising, form transactions in the ordinary course of business;
(e) investments consisting of (i) compensation of Company employees,
officers or directors so long as the Company's Board of Directors lawfully
determines that such compensation is in the Company's best interest, (ii) travel
advances, employee relocation loans and other employee loans and advances
lawfully made in the ordinary course of business, and (iii) loans lawfully made
to Company's employees, officers or directors relating to the purchase of equity
securities of Company;
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(f) investments in marketable U.S. Treasury and Agency obligations;
(g) investments in certificates of deposit and bankers' acceptances issued
or created by any domestic commercial bank;
(h) investments in instruments issued or enhanced by a member bank of the
Federal Reserve System;
(i) investments in debt obligations issued by a corporation, or state or
municipal entity rated Bb or better in accordance with a rating system employed
by either Moody's Investor's Service, Inc. or Standard & Poor's Corporation; or
(j) investments of types not enumerated in subparts (a) through (i)
aggregating not in excess of $100,000.
"PERMITTED LIEN" shall mean the following:
(a) Liens existing as of the date of this Agreement and disclosed in the
Schedule on Exhibit C hereto;
(b) Liens for taxes or governmental assessments, charges, or levies the
payment of which is not at the time required by any provision of this Agreement
or any other Loan Document unless such Liens are not delinquent or are being
contested in good faith by appropriate proceedings;
(c) Liens that secure the Company's Indebtedness for the purchase price of
any real or personal property and that only encumber the property purchased,
improvements or accessions thereto, and proceeds thereof;
(d) Liens securing capital lease obligations;
(e) Liens on Equipment leased by the Company pursuant to an operating
lease in the ordinary course of business (including proceeds thereof and
accessions thereto) incurred solely for the purpose of financing the lease of
such Equipment (including Liens arising from UCC financing statements regarding
leases permitted by this provision);
(f) Easements, reservations, rights-of-way, restrictions, minor defects or
irregularities in title and other similar Liens affecting real property not
interfering in any material respect with the ordinary conduct of the business of
the Company;
(g) Liens in favor of customs and revenue authorities arising as a matter
of law to secure payment of customs duties in connection with the importation of
Goods;
(h) Liens imposed by law, such as Liens of landlords, carriers,
warehousemen, mechanics, and materialmen arising in the ordinary course of
business for sums not yet due or being contested by appropriate proceedings
promptly initiated and diligently conducted, provided the
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Company has set aside proper amounts, determined in accordance with GAAP, for
the payment of all such Liens;
(i) Liens incurred or deposits made in the ordinary course of business in
conjunction with worker's compensation, unemployment insurance, and other types
of social security, or to secure the performance of tenders, statutory
obligations, and surety and appeal bonds, or to secure the performance and
return of money bonds and other similar obligations, but excluding Indebtedness;
(j) Liens in respect of judgments or awards with respect to which the
Company shall, in good faith, be prosecuting an appeal or proceeding for review
and with respect to which a stay of execution upon such appeal or proceeding for
review shall have been obtained;
(k) Liens in favor of the Bank or any Affiliate of the Bank; and
(l) Liens incurred in connection with the extension, renewal, refunding,
refinancing, modification, amendment or restatement of Indebtedness secured by
Liens of the type described in clauses (a), (c), (d) and (k) above, provided
that any extension, renewal or replacement Lien shall be limited to the property
encumbered by the existing Lien and the principal amount of the indebtedness
being extended, renewed or refinanced does not increase.
"PERSON" shall mean any natural person, corporation (which shall be deemed
to include business trust), association, limited liability company, partnership,
joint venture, political entity, or political subdivision thereof.
"PLAN" shall mean any plan (other than a Multiemployer Plan) defined in
ERISA in which the Company or any Subsidiary is, or has been at any time during
the preceding two (2) years, an "employer" or a "substantial employer" as such
terms are defined in ERISA.
"PROCEEDS" means any "proceeds" (as defined in the UCC).
"RELATED EXPENSES" means any and all reasonable costs, liabilities, and
expenses (including without limitation, losses, damages, penalties, claims,
actions, reasonable attorney's fees, legal expenses, judgments, suits, and
disbursements) incurred by, imposed upon, or asserted against, Bank in any
attempt by Bank:
(a) to obtain, preserve, perfect, or enforce any security interest
evidenced by (i) the Agreement, or (ii) any other pledge agreement, mortgage
deed, deed of trust, hypothecation agreement, guaranty, security agreement,
assignment, or security instrument executed or given by Company to or in favor
of Bank;
(b) to obtain payment, performance, and observance of any and all of the
Obligations;
(c) to maintain, insure, audit, collect, preserve, repossess, and dispose
of any of the Collateral; or
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(d) incidental or related to subparts (a) through (c) above.
"REMITTANCES" shall have the meaning described in Section 4.1 of this
Agreement.
"REPORTABLE EVENT" shall have the meaning assigned to that term in Section
4043 of ERISA for which the requirement of 30 days' notice to the PBGC has not
been waived by the PBGC.
"SINGLE EMPLOYER PLAN" shall mean any Plan as defined in Section
4001(a)(15) of ERISA.
"SUBORDINATED DEBT" shall mean Indebtedness of a Person which is
subordinated, in a manner satisfactory to the Bank, to the Obligations.
"SUBSIDIARY" shall mean any Person of which more than fifty percent (50%)
of (i) the voting stock entitling the holders thereof to elect a majority of the
Board of Directors, managers, or trustees thereof, or (ii) the interest in the
capital or profits of such Person, which at the time is owned or controlled,
directly or indirectly, by the Company or one or more other Subsidiaries.
"TANGIBLE NET WORTH" of the Company shall mean its net worth plus
Subordinated Debt, MINUS intangible assets and any notes, Accounts Receivable or
other obligations owed to the Company by any Affiliate or officer of the
Company.
"TERM LOAN" shall mean any of the term loans described in Section 2.2 of
this Agreement.
"TOTAL INDEBTEDNESS" of the Company shall mean the Company's aggregate
Indebtedness (including any Indebtedness in respect of the Letter of Credit
Loan) minus any Subordinated Debt of the Company.
"UCC" shall mean the Uniform Commercial Code in effect in the State of
Colorado from time to time.
"UNUSED AMOUNT" shall mean the difference between (i) the Working Capital
Line Credit Limit, and (ii) the aggregate amount of all outstanding Credit Loans
under the Working Capital Line.
"UNUSED LINE RATE" shall mean: (i) during the period prior to the first
Margin Adjustment Date, a rate of interest per annum equal to 37.5 basis points,
and (ii) thereafter, a rate of interest per annum, to be redetermined on each
Margin Adjustment Date, equal to the number of basis points indicated on the
following table corresponding to the ratio of the Company's Indebtedness to its
Tangible Net Worth:
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RATIO UNUSED LINE RATE
<1.00 to 1.00 12.5 Basis Points
>=1.00 to 1.00 but <2.00 to 1.00 25.0 Basis Points
>=2.00 to 1.00 but <3.00 to 1.00 25.0 Basis Points
>=3.00 to 1.00 37.5 Basis Points
"WORKING CAPITAL LINE" shall mean the line of credit provided by the Bank
pursuant to Section 2.1(b) hereof.
"WORKING CAPITAL LINE CREDIT LIMIT" shall mean $6,000,000 less any
permanent reductions to such amount resulting from (i) conversion of Credit
Loans to Term Loans pursuant to Section 2.2 hereof and (ii) principal payments
required to be made under Section 2.7(b) hereof.
"WORKING CAPITAL LINE MATURITY DATE" shall mean the last day of the second
(2nd) Contract Year.
"WORKING CAPITAL NOTE" shall mean the promissory note of the Company in
substantially the form of Exhibit B hereto, evidencing amounts advanced by the
Bank pursuant to Section 2.1(b) hereof.
The foregoing definitions shall be applicable to the singulars and plurals
of the foregoing defined terms. All accounting and financial terms used in this
Section and in this Agreement and not otherwise defined shall be determined in
accordance with GAAP consistently applied.
ARTICLE II. CREDIT FACILITIES
SECTION 2.1 AMOUNT AND TERMS OF THE CREDIT FACILITIES.
(a) ACQUISITION LINE. The Bank hereby agrees, subject to the terms and
conditions of this Agreement, to make a Credit Loan or Credit Loans available to
the Company from time to time on and after the date of this Agreement through
and including the Acquisition Line Maturity Date, in an aggregate principal
amount not to exceed the lesser of (i) the Acquisition Line Credit Limit and
(ii) that portion of the Borrowing Base which is utilized to support advances
under the Acquisition Line (which amount shall not be greater than the
difference between (i) the Borrowing Base, and (ii) the aggregate principal
amount outstanding under the Working Capital Line). Until the Acquisition Line
Maturity Date, the Company may borrow, repay, and reborrow such Credit Loan up
to the maximum amount thereof, subject to the mandatory principal reductions set
forth in Sections 2.7(a) and 2.8(b) hereof and sufficient Borrowing Base
availability.
(b) WORKING CAPITAL LINE. The Bank hereby agrees, subject to the terms and
conditions of this Agreement, to make a Credit Loan or Credit Loans available to
the Company from time to time on and after the date of this Agreement through
and including the Working Capital Line Maturity Date, in an aggregate principal
amount not to exceed the lesser of (i) the Working Capital
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Line Credit Limit and (ii) that portion of the Borrowing Base which is utilized
to support advances under the Working Capital Line (which amount shall not be
greater than the difference between (i) the Borrowing Base, and (ii) the
aggregate principal amount outstanding under the Acquisition Line). Until the
Working Capital Line Maturity Date, the Company may borrow, repay, and reborrow
such Credit Loan up to the maximum amount thereof, subject to the mandatory
principal reductions set forth in Section 2.7(b) hereof and sufficient Borrowing
Base availability.
SECTION 2.2 CONVERSION OF CREDIT LOANS.
(a) If no Event of Default shall have occurred and be continuing, the
Company may elect to convert all or a portion of any Credit Loan made pursuant
to Section 2.1(a) or 2.1(b) hereof to a Term Loan, whereupon the aggregate
amount of Credit Loans available to be borrowed under the Acquisition Line and
the Working Capital Line, as applicable, shall be permanently and automatically
reduced. The Company shall make such election by written notice delivered to the
Bank not less than fifteen (15) days prior to the effective date of the Term
Loan, specifying the principal amount of the Term Loan and the initial interest
rate applicable thereto (i.e. whether the Term Loan is to be a LIBOR Rate Loan
or a Federal Funds Effective Rate Loan). Each Term Loan shall be in an amount of
$50,000.00 or an integral multiple thereof. The Company shall repay each Term
Loan on a fully amortized basis over a period commencing on the date of each
Term Loan and ending on a date not later than the Acquisition Line Maturity
Date, in the case of Term Loans made pursuant to Section 2.1(a) hereof, or the
Working Capital Line Maturity Date, in the case of Term Loans made pursuant to
Section 2.1(b) hereof. The principal amount of each Term Loan shall be payable
in consecutive and equal quarterly installments on the last day of each March,
June, September and December (commencing with the first such date following the
fixing of the Term Loan) until the maturity date of such Term Loan or the
earlier acceleration of the maturity of the Term Loan in accordance with ARTICLE
XI hereof, when any remaining principal balance shall be due and payable in
full. Each principal installment shall be an amount equal to the remaining
principal amount of such Term Loan divided by the number of remaining payments
(including the payment to be made at maturity).
SECTION 2.3 LIBOR AND FEDERAL FUNDS EFFECTIVE RATE LOANS. Each Credit Loan
or Term Loan shall be either a LIBOR Rate Loan or a Federal Funds Effective Rate
Loan, subject to the following conditions:
(a) Each Loan that is made or continued as or converted into a LIBOR Rate
Loan shall be made, continued, or converted on such Business Day, in such amount
(equal to $10,000 or an integral multiple thereto), and with such an Interest
Period as the Company shall request by written notice given to the Bank no later
than 11:00 a.m. (Denver, Colorado time) on the third Business Day prior to the
date of disbursement or continuation of or conversion into the requested LIBOR
Rate Loan. Each written notice of any LIBOR Rate Loan shall be irrevocable and
binding on the Company and the Company shall indemnify the Bank against any loss
or expense incurred by the Bank as a result of any failure by the Company to
consummate such LIBOR Rate Loan, including, without limitation, any loss
(including loss of anticipated profits) or expense incurred by reason of
liquidation or reemployment of deposits or other funds acquired by the Bank to
fund the LIBOR Rate Loan. A certificate as to the amount of such loss or expense
submitted by the Bank to the Company
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shall be conclusive and binding for all purposes, absent manifest error. In the
event that the Company fails to provide the Bank with the required written
notice, the Company shall be deemed to have given a written notice that such
LIBOR Rate Loan shall be converted to a Federal Funds Effective Rate Loan on the
last day of the applicable Interest Period. In no event shall the Company be
permitted to select a LIBOR Rate Loan having an Interest Period ending after the
maturity date of the credit facility under which such Loan is requested.
(b) Each Loan that is made as or converted into a Federal Funds Effective
Rate Loan shall be made or converted on such Business Day and in such amount
(equal to $10,000 or any integral multiple thereof) as the Company shall request
by written notice given to the Bank no later than 11:00 a.m. (Denver, Colorado
time) on the date of disbursement of or conversion into the requested Federal
Funds Effective Loan;
(c) Each LIBOR Rate Loan that is a Term Loan shall have an Interest Period
of three (3) months.
SECTION 2.4 LOAN EVIDENCED BY NOTES. All Loans made under the Acquisition
Line shall be evidenced by the Acquisition Note, and all Loans made under the
Working Capital Line shall be evidenced by the Working Capital Note. The Notes
shall be master notes, and the principal amount of all Loans outstanding under
each Note shall be evidenced by such Note or any ledger or other record of the
Bank, which shall be presumptive evidence of the principal owing and unpaid on
such Note.
SECTION 2.5 INTEREST RATES. The Company shall pay interest on the unpaid
principal amount of each Credit Loan and Term Loan made by the Bank from the
date of such Credit Loan or Term Loan, as the case may be, until such principal
amount shall be paid in full as follows:
(a) During such periods as any LIBOR Rate Loan comprising a Credit Loan or
Term Loan is outstanding, at a rate per annum equal to the sum of the LIBOR Rate
and the LIBOR Rate Margin (as described in subpart (b) below) in effect from
time to time from and after each Margin Adjustment Date occurring, on or prior
to the date of the making, the conversion or the continuation of such Loan, as
the case may be, in accordance with this Agreement, and (ii) during such periods
as any Federal Funds Effective Rate Loan comprising a Credit Loan or Term Loan
is outstanding, at a rate per annum equal at all times to the sum of the Federal
Funds Effective Rate plus two hundred (200) basis points.
(b) (i) Except as otherwise provided herein, the LIBOR Rate Margin in
effect shall be adjusted as of the first day of each calendar quarter, beginning
with January 1, 1999 (each a "Margin Adjustment Date"), in accordance with
Section 2.5(b)(ii) below. The LIBOR Rate Margin in effect shall be applicable to
new advances for Credit or Term Loans as of the date of such advances, and to a
converted or continued Loan as of the date of conversion or continuation,
occurring within the calendar quarter in which such LIBOR Rate Margin is in
effect. With respect to any LIBOR Rate Loan for which the last day of the
Interest Period is a date subsequent to the Margin Adjustment Date, such LIBOR
Rate Margin shall not be applicable until the continuation date of such LIBOR
Rate Loan, if applicable, subsequent to the Margin Adjustment Date.
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(ii) As of any Margin Adjustment Date, the LIBOR Rate Margin shall
be adjusted to be the percentage indicated in the following table corresponding
to the ratio of the Company's Indebtedness to its Tangible Net Worth, which
shall be calculated from the quarterly balance sheet most recently provided by
the Company to the Bank under Section 8. l(a) hereof:
RATIO LIBOR RATE MARGIN
<1.00 to 1.00 100 Basis Points
>=1.00 to 1.00 but <2.00 to 1.00 125 Basis Points
>=2.00 to 1.00 but <3.00 to 1.00 150 Basis Points
>=3.00 to 1.00 200 Basis Points
(iii) Any such adjustment to the LIBOR Rate Margin shall only remain
effective until the earlier of the next Margin Adjustment Date or the date on
which an Event of Default shall occur. The LIBOR Rate Margin to be effective
from such earlier date and from time to time thereafter shall be the LIBOR Rate
Margin as adjusted pursuant to this Agreement, PROVIDED, HOWEVER, that: (i) if
the Company shall not deliver its financial statements in accordance with
Section 8.1 of this Agreement, the LIBOR Rate Margin shall be two hundred (200)
basis points per annum and (ii) if an Event of Default shall occur which has not
been waived in writing by the Bank, the interest rate shall be the interest rate
applicable pursuant to subsection (c) below.
(c) Upon the occurrence of any Event of Default and so long as such Event
of Default is continuing (excepting therefrom an Event of Default created by the
Company's failure to deliver its financial statements in accordance with Section
8.1 of this Agreement), the unpaid principal amount of the Loan, and accrued
interest thereon, or any fees or any and other sum payable hereunder, shall
thereafter until paid in full bear interest at a rate per annum equal to six
hundred (600) basis points in excess of the Federal Funds Effective Rate in
effect from time to time.
SECTION 2.6 INTEREST PAYMENTS. The Company shall pay to the Bank interest
on the unpaid principal balance of each Federal Funds Effective Rate Loan on
either (i) the date such Loan is converted to a LIBOR Rate Loan, or (ii) the
last date of each March, June, September and December. The Company shall pay to
the Bank interest on the unpaid principal balance of each LIBOR Rate Loan on (i)
the date such Loan is converted to a Federal Funds Effective Rate Loan, or (ii)
the last day of the applicable Interest Period of such Loan, whichever is
earlier.
SECTION 2.7 PRINCIPAL PAYMENTS.
(a) Commencing September 30, 1999, and on the last day of each calendar
quarter thereafter, the aggregate principal amount available under the
Acquisition Line shall be permanently reduced by the amount of $363,637.00, and
the Company shall immediately pay to the Bank the amount, if any, by which the
aggregate principal amount outstanding under the Acquisition Line exceeds such
reduced commitment of the Bank at that time. If, after giving effect to any such
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payment any LIBOR Rate Loan would be prepaid prior to the end of its applicable
Interest Period, the Company shall pay the Bank the breakage fee required under
Section 2.11(c) hereof.
(b) The aggregate principal amount available under the Working Capital
Line shall be permanently reduced by the amount of $1,000,000 on the last day of
the first Credit Year, and the Company shall immediately pay to the Bank the
amount, if any, by which the aggregate principal amount outstanding under the
Working Capital Line exceeds such reduced commitment of the Bank at that time.
If, after giving effect to any such payment any LIBOR Rate Loan would be prepaid
prior to the end of its applicable Interest Period, the Company shall pay the
Bank the breakage fee required under Section 2.11(c) hereof.
(c) On the Acquisition Line Maturity Date, in the case of the Acquisition
Line, and on the Working Capital Line Maturity Date, in the case of the Working
Capital Line, all amounts outstanding under the Acquisition Line and the Working
Capital Line, respectively, shall be immediately due and payable. If payment of
the outstanding Loans at maturity causes any LIBOR Rate Loan to be prepaid prior
to the end of its applicable Interest Period, the Company shall pay the Bank the
breakage fee required under Section 2.11(c) hereof.
SECTION 2.8 PREPAYMENT.
(a) VOLUNTARY PREPAYMENT. The Company may prepay any Federal Funds
Effective Rate Loan in whole, or in part, at any time or times. The Company may
prepay any LIBOR Rate Loan, in whole or in part, only on the last day of the
Interest Period applicable to such LIBOR Rate Loan upon not less than three (3)
Business Days' prior written notice given to the Bank. Each prepayment of a Term
Loan shall be applied to the principal installments in the inverse order of
their respective maturities.
(b) MANDATORY PREPAYMENT. Without notice or demand, if the sum of the
outstanding principal balance of Loans made under Sections 2.1(a) and 2.1(b)
hereof shall at any time exceed the Borrowing Base, the Company shall
immediately prepay the Loans to the extent necessary to eliminate such excess.
Any payment received by the Lender under this Section 2.8(b) or under 2.8(a) may
be applied to the Obligations, in such order and in such amounts as the Bank, in
its discretion, may from time to time determine. If, after giving effect to any
such payment any LIBOR Rate Loan would be prepaid prior to the end of its
applicable Interest Period, the Company shall pay the Bank the breakage fee
required under Section 2.11(c) hereof.
(c) FREE CASH FLOW RECAPTURE. Within ninety (90) days of the end of each
fiscal year of the Company commencing with the Company's fiscal year ending on
December 31, 1999, the Company shall make a principal payment in respect of the
Acquisition Line in an amount equal to fifty percent (50%) of the Company's Free
Cash Flow for such fiscal year, and the aggregate principal amount available
under the Acquisition Line shall be permanently reduced in such amount. If,
after giving effect to any such payment any LIBOR Rate Loan would be prepaid
prior to the end of its applicable Interest Period, the Company shall pay the
Bank the breakage fee required under Section 2.11(c) hereof.
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(d) PREPAYMENT UPON SIGNIFICANT SALE OF ASSETS. Without notice or demand,
if the Company sells, leases, transfers or otherwise disposes of any plant or
any manufacturing facility or other assets in any single transaction involving
amounts exceeding $250,000, the Company shall immediately prepay the Loans in
the full amount of the consideration (whether cash or otherwise) received by the
Company in respect of such sale. Such prepayment shall be applied to the
Acquisition Line or the Working Capital Line in such proportions as the Company
shall direct, but such application shall not effect a permanent reduction to the
applicable credit facility. If, after giving effect to any such prepayment, any
LIBOR Rate Loan would be prepaid prior to the end of its applicable Interest
Period, the Company shall pay the Bank the breakage fee required under Section
2.11(c) hereof.
SECTION 2.9 FEES. The Company shall pay to the Bank:
(a) A commitment fee of $30,000 payable upon the execution of this
Agreement;
(b) An annual administrative fee of $5,000, payable on last day of each
Credit Year and on the Acquisition Line Maturity Date;
(c) Prior to maturity (whether by acceleration or otherwise), for each
payment of principal or interest not paid when due, a late fee equal to five
percent (5.00%) of such payment, not to exceed $100.00; and
(d) An unused line fee with respect to the Working Capital Line at the
Unused Line Rate on the average daily Unused Amount of the Working Capital Line
from the date of this Agreement to and including the Working Capital Line
Maturity Date, due and payable quarterly in arrears on the last day of each
calendar quarter and on the Working Capital Line Maturity Date.
SECTION 2.10 COMPUTATION OF INTEREST AND FEES. Interest on Loans and
unpaid fees, if any, shall be computed on the basis of a year of 360 days and
paid for the actual number of days elapsed.
SECTION 2.11 ADDITIONAL COSTS.
(a) If, due to either (i) the introduction of, or any change in, or in the
interpretation of, any law or regulation, or (ii) the compliance with any
guideline or request from any central bank or other governmental authority
(whether or not having the force of law), there shall be any increase in the
cost to the Bank of making, funding or maintaining LIBOR Rate Loans, then the
Company shall from time to time, upon demand by the Bank pay to the Bank
additional amounts sufficient to reimburse the Bank for any such additional
costs. A certificate of the Bank submitted to the Company as to the amount of
such additional costs, shall be conclusive and binding for all purposes, absent
manifest error. Notwithstanding anything to the contrary contained in this
Section 2.11(a), the Company shall not be obligated to indemnify or reimburse
the Bank for any additional costs which arose or were incurred during, or is
otherwise attributable to, any period of time more than 180 days prior to the
date on which the Bank delivered its written certificate for indemnification or
reimbursement for such additional costs and such costs shall be
nondiscriminatory in nature and will apply without exception to all Bank clients
of equal standing. Upon notice from the Company to the
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Bank within five (5) Business Days after the Bank notifies the Company of any
such additional costs pursuant to this Section 2.11(a), the Company may either
prepay in full all LIBOR Rate Loans so affected then outstanding, together with
interest accrued thereon to the date of such prepayment, or (ii) convert such
LIBOR Rate Loans so affected then outstanding into Federal Funds Effective Rate
Loans upon not less than four (4) Business Days' notice to the Bank.
(b) If either (i) the introduction of, or any change in, or in the
interpretation of, any law or regulation, or (ii) the compliance with any
guideline or request from any central bank or other governmental authority
(whether or not having the force of law), affects or would affect the amount of
capital required or expected to be maintained by the Bank or any corporation
controlling the Bank and the Bank determines that the amount of such capital is
increased by or based upon the existence of the Loan (or commitment to make the
Loan) and other extensions of credit (or commitments to extend credit) of
similar type, then, upon demand by the Bank, the Company shall pay to the Bank
from time to time as specified by the Bank additional amounts sufficient to
compensate the Bank in the light of such circumstances, to the extent that the
Bank reasonably determines such increase in capital to be allocable to the
existence of the Bank's Loan (or commitment to make the Loan). A certificate of
the Bank submitted to the Company as to such amounts shall be conclusive and
binding for all purposes, absent manifest error. Notwithstanding anything to the
contrary contained in this Section 2.11(b), the Company shall not be obligated
to indemnify or reimburse the Bank for any such additional amounts which arose
or were incurred during, or is otherwise attributable to, any period of time
more than 180 days prior to the date on which the Bank delivered its written
certificate for indemnification or reimbursement for such additional amounts and
such amounts shall be nondiscriminatory in nature and will apply without
exception to all Bank clients of equal standing. Upon notice from the Company to
the Bank within five (5) Business Days after the Bank notifies the Company of
any such additional costs pursuant to this Section 2.11(b), the Company may
either (A) prepay in full the Loan if so affected, together with interest
accrued thereon to the date of such prepayment, or (B) convert the Loan if so
affected into a Loan of any other type not so affected upon not less than four
(4) Business Days' notice to the Bank.
(c) If any prepayment or conversion of any LIBOR Rate Loan (including any
prepayment or conversion under this Section 2.11 or under Section 2.7 or
subparts (b), (c) or (d) of Section 2.8) occurs on any day other than the last
day of the applicable Interest Period for such Loan, the Company also shall pay
to the Bank such additional amounts sufficient to indemnify the Bank against any
loss, cost, or expense incurred by the Bank as a result of such prepayment or
conversion, including, without limitation, any loss (including loss of
anticipated profits), cost, or expense incurred by reason of the liquidation or
reemployment of deposits or other funds acquired by the Bank to fund any such
Loan, and a certificate as to the amount of any such loss, cost, or expense
submitted by the Bank to the Company shall be conclusive and binding for all
purposes, absent manifest error.
SECTION 2.12 ILLEGALITY. Notwithstanding any other provision of this
Agreement, if the introduction of or any change in or in the interpretation of
any law or regulation shall make it unlawful, or any central bank or other
governmental authority shall assert that it is unlawful, for the Bank to perform
its obligations hereunder to make, continue, or convert LIBOR Rate Loans
hereunder, then, (a) on notice thereof by the Bank to the Company, the
obligation of the Bank to
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make or continue a LIBOR Rate Loan or to convert any Federal Funds Effective
Rate Loan into a LIBOR Rate Loan shall terminate and the Bank shall thereafter
be obligated to make only Federal Funds Effective Rate Loans whenever any
written notice requests for any type LIBOR Rate Loan is received, and (b) upon
demand therefor by the Bank to the Company, the Company shall either (i)
forthwith prepay in full any LIBOR Rate Loan then outstanding, together with
interest accrued thereon, or request that the Bank, upon four (4) Business Days'
notice, convert any LIBOR Rate Loan then outstanding into a Federal Funds
Effective Rate Loan. If any such prepayment or conversion of any LIBOR Rate Loan
occurs on any day other than the last day of the applicable Interest Period for
such Loan, the Company also shall pay to the Bank such additional amounts
sufficient to indemnify the Bank against any loss, cost, or expense incurred by
the Bank as a result of such prepayment or conversion, including, without
limitation, any loss (including loss of anticipated profits), cost, or expense
incurred by reason of the liquidation or reemployment of deposits or other funds
acquired by the Bank to fund any such Loan, and a certificate as to the amount
of any such loss, cost, or expense submitted by the Bank to the Company shall be
conclusive and binding, for all purposes, absent manifest error.
SECTION 2.13 INTEREST RATE SWAP CONTRACTS. The Company shall have the
option at any time and from time to time to enter into one or more interest rate
swap contracts with Key Capital Markets, Inc. on any portion of the Loans
outstanding, on terms and conditions mutually agreeable to the Company and Key
Capital Markets, Inc. Such interest rate swaps may be entered into for periods
up to, but not extending beyond, the maturity date of the credit facility under
which such Loans were made.
ARTICLE III. SECURITY AGREEMENT
SECTION 3.1 GRANT OF SECURITY INTEREST. To secure the prompt payment and
performance of the Obligations, and in addition to any other collateral or Lien
securing the Obligations, the Company hereby grants to the Bank a continuing
security interest in and to and a pledge of all of the tangible and intangible
personal property and assets of the Company, whether now owned or existing or
hereafter acquired or arising and wheresoever located including, without
limitation (a) all Accounts Receivable, (b) all Inventory, (c) all Equipment,
(d) all General Intangibles (excluding patents), (e) any and all deposits or
other sums at any time credited by or due from the Bank to the Company, whether
in the Cash Collateral Account, another Depository Account, or other account,
(f) all Cash Security, (g) all Instruments, Documents, documents of title,
policies and certificates of insurance, securities, Goods, choses in action,
Chattel Paper, cash or other property, to the extent owned by the Company or in
which the Company has an interest, (h) all personal property or assets owned by
the Company which now or hereafter is at any time in the possession or control
of the Bank or in transit by mail or carrier to or from the Bank or in the
possession of any Person acting in the Bank's behalf, without regard to whether
the Bank received the same in pledge, for safekeeping, as agent for collection
or transmission or otherwise or whether the Bank had conditionally released the
same, and any and all balances, sums, proceeds and credits of the Company with,
and any claims of the Company against, the Bank, (i) all accessions to,
substitutions for, and all replacements, products and Proceeds, profits and
rents of the herein above-referenced property of the Company described in this
Section including, but not limited to, proceeds of insurance policies insuring
such property, (j) all books, records, and other property including, but not
limited to, credit files,
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programs, printouts, computer software (to the extent not disallowed by any
agreement between the Company and third parties), programs, and disks, magnetic
tape and other magnetic media, and other materials and records) of the Company
pertaining to any such above-referenced property of the Company, (k) all real
property, improvements, fixtures, appurtenances, leasehold interests and any
other property of similar kind or character, and (l) all "investment property"
(as defined in the UCC). Notwithstanding the foregoing, the Collateral shall not
include that certain sublease (the "Sublease") dated July 22, 1996 between the
Company and E.I. duPont de Nemours and Company ("DuPont") and those assets
located on the property covered by the Sublease or those assets used directly or
indirectly in connection with the services provided by the Company to DuPont
under that certain Tolling/Services Agreement for Industrial Diamonds dated July
22, 1996, all of which assets are located at the Company's facility in Dunbar,
Pennsylvania.
SECTION 3.2 GRANT OF LICENSE. The Company hereby grants to the Bank a
fully-paid, royalty-free, worldwide right and license to, upon the occurrence of
an Event of Default, (a) use, or sell or otherwise transfer, any and all of the
Company's Inventory; (b) use or sell any such work-in-process, raw materials or
completed or finished products, and (c) accept any and all orders or shipments
of products ordered by the Company from manufacturers and use or sell any such
products.
SECTION 3.3 PERFECTION. The Company shall execute such financing
statements provided for by applicable law, and otherwise take such other action
and execute such assignments or other instruments or documents, in each case as
the Bank may reasonably request, to evidence, perfect, or record the Bank's
security interest in the Collateral or to enable the Bank to exercise and
enforce its rights and remedies under this Agreement with respect to any
Collateral. The Company hereby authorizes the Bank to execute and file any such
financing statement or continuation statement on the Company's behalf. The
parties acknowledge that a carbon, photographic, or other reproduction of this
Agreement shall be sufficient as a financing statement to the extent permitted
by law.
SECTION 3.4 GENERAL REPRESENTATIONS AS TO COLLATERAL. The Company
represents that the Schedule attached as Exhibit C hereto sets forth: (a) the
principal place of business of the Company and the office where its chief
executive offices and accounting offices are located, (b) the office where
Company keeps its records concerning the Accounts Receivable and General
Intangibles, (c) the location of the Company's registered office, (d) each
location at which is located any Inventory, Equipment or other tangible
Collateral of the Company, including, without limitation, the location of any
warehouse, bailee or consignee at which Collateral is located, and (e) all trade
names, assumed names, fictitious names and other names used by the Company
during the five (5) years prior to the date hereof.
SECTION 3.5 TITLE TO COLLATERAL; LIENS; TRANSFERS. The Company has good,
clear and merchantable title to and ownership of the Collateral, free and clear
of all Liens, except for Permitted Liens. Except as otherwise provided herein or
in any other Loan Document, and except as to Permitted Liens and sale of
Inventory in the ordinary course of business, the Company shall not encumber,
pledge, mortgage, grant a security interest in, assign, sell, lease or otherwise
dispose of or transfer, whether by sale, merger, consolidation, liquidation,
dissolution or otherwise, any of the Collateral.
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SECTION 3.6 CHANGES AFFECTING PERFECTION. The Company shall not, without
giving the Bank thirty (30) days prior notice thereof: (a) make any change in
any location where Company's Equipment or material amounts of Company's
Inventory is maintained or locate any of the Company's Equipment or material
amounts of the Company's Inventory at any new locations, (b) make any change in
the location of its chief executive office, principal place of business or the
office where Company's records pertaining to its Accounts and General
Intangibles are kept, (c) add any new places of business or close any of its
existing places of business, (d) make any change in Company's name or adopt any
trade names, assumed names or fictitious names or otherwise add any name under
which the Company does business, or (e) make any other change (other than sales
of Inventory in the ordinary course of business) which might affect the
perfection or priority of the Bank's Lien in the Collateral.
SECTION 3.7 POWER OF ATTORNEY FOR INSURANCE. Upon request of the Bank, the
Company shall promptly deliver to the Bank true copies of all reports made to
insurance companies. The Company hereby irrevocably makes, constitutes, and
appoints the Bank (and all officers, employees, or agents designated by the
Bank) as its true and lawful attorney-in-fact and agent, with full power of
substitution, such that the Bank shall have the right and authority, upon the
occurrence and during the continuance of an Event of Default which has not been
waived in writing by the Bank as required by this Agreement, to make and adjust
claims under such policies of insurance, receive and endorse the name of the
Company on, any check, draft, instrument or other item of payment for the
proceeds of such policies of insurance and make all determinations and decisions
with respect to such policies of insurance. The Company hereby ratifies all that
said attorneys shall lawfully do or cause to be done by virtue hereof. This
power of attorney is a power coupled with an interest and shall be irrevocable.
Without waiving or releasing any obligation, Potential Default or Event of
Default by the Company under this Agreement, the Bank may (but shall not be
required to) at any time or times thereafter maintain such action with respect
thereto as the Bank deems advisable. All sums disbursed by the Bank in
connection therewith (including, but not limited to, reasonable attorneys' and
paralegals' fees and disbursements, court costs, expenses and other charges
relating thereto) shall be payable on demand, and until paid by the Company to
the Bank, with interest thereon at the then applicable Federal Funds Effective
Rate plus six hundred (600) basis points, and shall be additional Obligations
under this Agreement secured by the Collateral.
SECTION 3.8 PROTECTION OF COLLATERAL; REIMBURSEMENT. All insurance
expenses and all expenses of protecting, storing, warehousing, insuring,
handling, maintaining, and shipping any Collateral, any and all excise,
property, sales, use, or other taxes imposed by any state, Federal, or local
authority on any of the Collateral, or in respect of the sale thereof, or
otherwise in respect of the Company's business operations which, if unpaid,
could result in the imposition of any Lien upon the Collateral, shall be borne
and paid by the Company. If the Company fails to promptly pay any portion
thereof when due, except as may otherwise be permitted under this Agreement or
under any of the other Loan Documents, the Bank, at its option, may, but shall
not be required to, pay the same. All sums so paid or incurred by the Bank for
any of the foregoing and any and all other sums for which the Company may become
liable under this Agreement and all reasonable costs and expenses (including
reasonable attorneys' fees and paralegals' fees, legal expenses, and court
costs, expenses and other charges related thereto) which the Bank may incur in
enforcing or protecting its Liens on
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or rights and interests in the Collateral or any of its rights or remedies under
this Agreement or any other agreement between the parties to this Agreement or
in respect of any of the transactions to be had under this Agreement shall be
repayable within five (5) Business Days of demand and if not paid within said
five (5) Business Day period, which amount shall also accrue interest, until
paid by the Company to the Bank with interest thereon at a rate per annum equal
to the Federal Funds Effective Rate plus six hundred (600) basis points, shall
be additional Obligations under this Agreement secured by the Collateral. Unless
otherwise provided by law, neither the Bank nor any Affiliate of the Bank shall
be liable or responsible in any way for the safekeeping of any of the Collateral
or for any loss or damage thereto or for any diminution in the value thereof, or
for any act or default of any warehouseman, carrier, forwarding agency, or other
Person whomsoever.
SECTION 3.9 INSPECTION; VERIFICATION. During regular business hours and
with prior notice to the Company, the Bank (by any of its officers, employees,
agents, representatives, or designees) shall have the right to inspect the
Company's Collateral and to inspect and audit, all books, records, journals,
orders, receipts, or other correspondence related thereto (and to make extracts
or copies thereof as the Bank may desire) and to inspect the premises upon which
any of the Collateral is located for the purpose of verifying the amount,
quality, quantity, value, and condition of, or any other matter relating to, the
Collateral, provided, however, that upon the occurrence and during the
continuance of an Event of Default, the Bank may exercise such access and other
rights at any time the Bank deems such action necessary or desirable. In
addition to inspections as outlined above, the Bank or its designee shall have
the right to make test verifications of the Accounts Receivable and other
Collateral and physical verifications of the Inventory and other tangible items
of the Collateral in any manner and through any commercially reasonable medium
that the Bank considers advisable, and the Company agrees to furnish all such
assistance and information as the Bank may require in connection therewith. The
Company shall pay the costs for each of one such inspection and one such
verification in each 12-month period; PROVIDED, HOWEVER that if an Event of
Default has occurred and is continuing, the Company shall pay the costs of all
such inspections and verifications.
SECTION 3.10 ASSIGNMENTS, RECORDS AND SCHEDULES OF ACCOUNTS. On or before
the thirtieth (30th) calendar day of each month from and after the date of this
Agreement, the Company shall deliver to the Bank, in form and substance
acceptable to the Bank, a summary aged trial balance of the Company's Accounts
Receivables dated as of the last day of the preceding month (and upon the Bank's
request, a detailed aged trial balance, of all then existing Accounts Receivable
specifying the names, face value and dates of invoices for each Account Debtor
obligated on an Account Receivable so listed). In addition, upon the Bank's
request, the Company shall furnish the Bank with copies of proof of delivery and
the original copy, if available, of all documents relating to the Accounts
Receivable including, but not limited to, repayment histories and present status
reports, and such other matters and information relating to the status of then
existing Accounts Receivable as the Bank shall reasonably request. If, upon the
occurrence of an Event of Default, the Bank so requests, the Company shall
execute and deliver to the Bank, on forms supplied by the Bank and at such
intervals as the Bank may from time to time require, written assignments of all
of its Accounts after shipment of the subject goods, together with copies of
invoices and/or invoice registers related thereto.
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SECTION 3.11 REPORTING REGARDING INVENTORY. The Company shall report
inventory figures no later than thirty (30) days after the end of each month
based upon month-end balances reconciled to the period end balance sheet. The
Company's Inventory shall be reported based upon reconciliation of the financial
statements to the perpetual inventory system or a regular physical count as the
case may be, and: (a) the values shown on reports of Inventory shall be at the
lower of cost or market value determined in accordance with the Company's usual
cost accounting system, consistently applied, and (b) no later than thirty (30)
days after the end of each month, or more frequently, if the Bank shall so
request, the Company shall submit to the Bank an inventory report, the Company's
perpetual inventory records and its general ledger, broken down into such detail
and with such categories as the Bank shall require.
SECTION 3.12 OTHER COLLATERAL REPORTS. The Company shall furnish the Bank
with, on or before the thirtieth (30th) day of each month from and after the
date of this Agreement, a report listing the schedule of backlog of orders being
processed by the Company, and such other reports regarding other Collateral as
the Bank from time to time reasonably may request.
ARTICLE IV. COLLECTION OF ACCOUNTS AND LOCKBOX
SECTION 4.1 LOCKBOX; RECEIPT IN TRUST.
(a) MAINTENANCE OF LOCKBOX. The Company has rented and shall continue to
rent the post office boxes in the name of the Company (the "Lockboxes") as and
having the addresses set forth in the Schedule attached as Exhibit C hereto, and
such other Lockboxes and addresses as the Bank upon request of the Company may
approve from time to time. The Company shall notify all of its customers and
Account Debtors to forward all Collections of every kind due the Company to one
of the Lockboxes (such notices to be in such form and substance as the Bank may
require from time to time). The Company shall establish and, unless otherwise
directed by the Bank, maintain blocked accounts ("Blocked Accounts") with such
other banks as are acceptable to the Bank, as set forth in each case in the
Schedule attached as Exhibit C hereto (collectively, the "Lockbox Banks"). Each
Lockbox Bank and the Company shall have entered into a Lockbox Agreement with
respect to the Lockboxes controlled by such Lockbox Bank and with the Bank with
respect to the Blocked Account maintained as such Lockbox Bank, each such
Lockbox Agreement in form and substance satisfactory to the Bank. All
collections from Account Debtors ("Collections") sent directly to the Lockboxes
shall be deposited into the Blocked Account in accordance with the terms of the
applicable Lockbox Agreement. The Company will promptly deposit all remittances
from Account Debtors submitted to the Company ("Remittances"), in the identical
form in which such Remittances were made (except for any necessary
endorsements), whether by cash or check, into the applicable Blocked Account or
the Cash Collateral Account established pursuant to Section 4.2 below. Only the
Lockbox Banks, and to the extent not inconsistent with the applicable Lockbox
Agreement, the Bank, shall have at all times sole access to the Lockboxes. The
Company shall take all action necessary to grant the Lockbox Banks and, to the
extent not inconsistent with the applicable Lockbox Agreements, the Bank such
sole access. At no time shall the Company remove any item from any Lockbox
without the Bank's prior written consent. The Company shall notify all customers
or Account Debtors to pay all Collections to the Lockboxes and all payees to pay
all Remittances to the Lockboxes, the Blocked Accounts or such Cash Collateral
Account. The Company shall not instruct any Account Debtor or
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payee to pay any Collection or Remittance to any other place or address without
the Bank's prior written consent. If the Company neglects or refuses to notify
any customer or Account Debtor to pay any Collection to the applicable Lockbox,
the Bank shall be entitled to make such notification. To the extent not
inconsistent with the applicable Lockbox Agreement, the Company hereby grants to
the Bank an irrevocable power of attorney, coupled with an interest, to take in
the Company's name all action necessary to: (i) grant the Bank sole access to
the Lockbox, (ii) after the occurrence and during the continuance of an Event of
Default, contact Account Debtors to pay any Collections to the Lockbox or for
any other reason, and (iii) endorse each Collection or Remittance delivered to
the Lockbox for deposit to the Cash Collateral Account.
(b) RECEIPT IN TRUST. Any Collections or Remittances received directly by
the Company shall be deemed held by the Company in trust and as fiduciary for
the Bank. The Company immediately shall deposit any such Collection or
Remittance, in its original form, into one of the Blocked Accounts or into the
Cash Collateral Account. Pending such deposit, the Company agrees that it will
not commingle any such Collection or Remittance with any of the Company's other
funds or property, but will hold it separate and apart therefrom in trust and as
fiduciary for the Bank until deposit is made into a Blocked Account or the Cash
Collateral Account.
SECTION 4.2 CASH COLLATERAL ACCOUNT. Each Lockbox Bank shall acknowledge
and agree, in a manner satisfactory to the Bank, that: (i) all Collections and
Remittances deposited in the Blocked Accounts are the sole and exclusive
property of the Bank, and (ii) such Lockbox Bank shall have no right to setoff
(except as the Bank may expressly agree upon in writing) against the Blocked
Accounts. In accordance with the terms of the applicable Lockbox Agreements,
each Lockbox Bank will wire, or otherwise transfer immediately available funds
in a manner satisfactory to the Bank, all Collections and Remittances deposited
into the Blocked Accounts to the Cash Collateral Account on a daily basis as
soon as good funds in respect to such Collection and Remittances are collected.
All funds in the Cash Collateral Account shall be deemed to be the property of
the Bank and shall be subject only to the signing authority designated from time
to time by the Bank. The Company shall have no control over such funds. The Bank
shall have sole access to the Cash Collateral Account, and the Company shall
have no access thereto. The Company hereby grants to the Bank a security
interest in all funds held in any Lockbox and, to the extent funds in the Cash
Collateral Account were to be construed to be the property of the Company, all
funds held in the Cash Collateral Account as security for the Obligations. The
Cash Collateral Account shall not be subject to any deduction, set-off, banker's
lien or any other right in favor of any person or entity other than the Bank.
Prior to the occurrence of an Event of Default which is continuing, deposits to
the Cash Collateral Account shall be: (i) applied immediately against the
principal and/or interest of the Loans and/or other Obligations all in such
order and method of application as may be elected by the Bank in its sole
discretion; PROVIDED, HOWEVER, that the Bank will use reasonable efforts to
avoid applications that would cause early prepayment of a LIBOR Rate Loan prior
to the expiration of its applicable Interest Period, or (ii) to the extent not
so applied by the Bank, release to the Company for use in the Company's
business.
SECTION 4.3 CREDITING OF COLLECTIONS AND REMITTANCES. For the purpose of
calculating interest and determining the aggregate Loans outstanding and
resulting loan availability hereunder, all Collections and Remittances shall be
credited to the Company on the Business Day or on the next
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Business Day after which the Bank receives notice of the deposit of the proceeds
of such Collections and Remittances into the Cash Collateral Account, and is in
good funds with respect thereto, prior to 2:00 p.m. (Denver, Colorado time).
From time to time, upon advance written notice to the Company, the Bank may
adopt such additional or modified regulations and procedures as it may deem
reasonable and appropriate with respect to the operation of the Cash Collateral
Account and the services to be provided by the Bank under this Agreement.
SECTION 4.4 COST OF COLLECTION. All reasonable costs of collection of the
Company's Accounts Receivable, including out-of-pocket expenses, administrative
and record-keeping costs, reasonable attorney's fees, and all service charges
and costs related to the establishment and maintenance of the Cash Collateral
Account, shall be the sole responsibility of the Company, whether the same are
incurred by the Bank or the Company, and the Bank, in its sole discretion, may
charge the same against the Company and/or any account maintained by the Company
with the Bank and the same shall be deemed part of the Obligations hereunder.
The Company hereby indemnifies and holds the Bank harmless from and against any
loss or damage with respect to any Collection or Remittance deposited in the
Cash Collateral Account which is dishonored or returned for any reason. If any
Collection or Remittance deposited in the Cash Collateral Account is dishonored
or returned unpaid for any reason, the Bank, in its sole discretion, may charge
the amount of such dishonored or returned Collection or Remittance directly
against the Company and/or any account maintained by the Company with the Bank
and such amount shall be deemed part of the Obligations hereunder. The Bank
shall not be liable for any loss or damage resulting from any error, omission,
failure or negligence on the part of the Bank under this Agreement, except
losses or damages resulting from the Bank's gross negligence or willful
misconduct as determined by a final judgment of a court of competent
jurisdiction.
SECTION 4.5 RETURN OF FUNDS. Upon the payment in full of all Obligations:
(a) the Bank's security interests and other rights in funds in the Cash
Collateral Account under Section 4.2 of this Agreement shall terminate, (b) all
rights to such funds shall revert to the Company, and (c) the Bank will, at the
Company's expense, take such steps as the Company may reasonably request to
evidence the termination of such security interests and to effect the return to
the Company of such funds.
SECTION 4.6 NOTICE TO ACCOUNT DEBTORS. The Company hereby authorizes the
Bank, upon the occurrence and during the continuance of an Event of Default, in
accordance with the powers conferred upon the Bank pursuant to any applicable
provision of this Agreement, to: (a) notify any or all Account Debtors that the
Accounts Receivable have been assigned to the Bank, for the benefit of the Bank,
and that the Bank has a security interest therein, and (b) direct such Account
Debtors to make all payments due from them to the Company upon the Accounts
Receivable directly to the Bank or to a Lockbox designed by the Bank; provided,
however, that the Bank shall not exercise any of its rights under this sentence
unless: (i) the Company has failed to so notify or direct any such Account
Debtor following a request from the Bank to the Company for such notification or
direction, or (ii) the Bank reasonably believes that the Company has failed to
so notify or direct any such Account Debtor. The Bank shall promptly furnish the
Company with a copy of any such notice sent. Any such notice, in the Bank's sole
discretion, may be sent on the Company's stationery, in which event the Company
shall co-sign such notice with the Bank.
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SECTION 4.7 APPOINTMENT OF ATTORNEY-IN-FACT. The Company hereby
irrevocably appoints the Bank (and all persons designated by the Bank) as the
Company's true and lawful attorney (and agent-in-fact) authorized, upon the
occurrence and during the continuance of an Event of Default in the Company's or
the Bank's name, to (i) demand payment of the Accounts Receivable, (ii) enforce
payment of the Accounts Receivable, by legal proceedings or otherwise, (iii)
exercise all of the Company's rights and remedies with respect to the collection
of the Accounts and any other Collateral, (iv) settle, adjust, compromise,
extend, or renew the Accounts Receivable, (v) settle, adjust, or compromise any
legal proceedings brought to collect the Accounts Receivable, (vi) if permitted
by applicable law, sell or assign the Accounts Receivable and other Collateral
upon such terms, for such amounts, and at such time or times as the Bank deems
advisable, (vii) discharge and release the Accounts Receivable and any other
Collateral, (viii) take control, in any manner, of any item of payment or
proceeds relating to any Collateral, (ix) prepare, file, and sign the Company's
name on a proof of claim in bankruptcy or similar document against any Account
Debtor, (x) prepare, file, and sign the Company's name on any notice of Lien,
assignment, or satisfaction of Lien or similar document in connection with the
Accounts Receivable, (xi) do all acts and things necessary, in the Bank's
discretion, to fulfill the Company's obligations under this Agreement, (xii)
endorse the name of the Company upon any of the items of payment or proceeds
relating to any Collateral and deposit the same to the account of the Bank on
account of the Obligations, (xiii) endorse the name of the Company upon any
Chattel Paper, document, Instrument, invoice, freight bill, bill of lading, or
similar document or agreement relating to the Accounts Receivable, Inventory and
any other Collateral, (xiv) use the Company's stationery and sign the name of
the Company to verifications of the Accounts Receivable and notices thereof to
Account Debtors, (xv) use the information recorded on or contained in any data
processing equipment and computer hardware and software relating to the Accounts
Receivable, Inventory, and any other Collateral to which the Company has access,
and (xvi) notify post office authorities to change the address for delivery of
the Company's mail to an address designated by the Bank, receive and open all
mail addressed to the Company, and, after removing all Collections and
Remittances and other Proceeds of Collateral, forward the mail to the Company.
The Company hereby ratifies all that said attorneys shall lawfully do or cause
to be done by virtue hereof. This power of attorney is a power coupled with an
interest and shall be irrevocable.
ARTICLE V. SPECIFIC REPRESENTATIONS, WARRANTIES
AND COVENANTS RELATING TO COLLATERAL
SECTION 5.1 DISPUTES AND CLAIMS REGARDING ACCOUNTS. The Company shall
notify the Bank promptly of all material disputes and claims and settle or
adjust them at no expense to the Bank, but no material discount, credit or
allowance outside the ordinary course of business or material adverse extension,
compromise or settlement shall be granted to any customer or Account Debtor in
respect of an Account Receivable and no returns of merchandise outside the
ordinary course of business shall be accepted by the Company in settlement or
satisfaction of an Account Receivable which settlement or satisfaction would
have a Material Adverse Effect, without the Bank's consent which consent shall
not be unreasonably withheld.
SECTION 5.2 DEPOSIT ACCOUNTS. Other than: (a) the Blocked Accounts and the
Cash Collateral Account, and (b) those other Deposit Accounts disclosed on the
Schedule on Exhibit C
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hereto and consented to by the Bank, neither the Company nor any of its
Subsidiaries maintains a Deposit Account or trust account for the purpose of
collecting and depositing Collections and\or Remittances or otherwise holding
monies of the Company.
SECTION 5.3 COMPLIANCE WITH TERMS OF ACCOUNTS; GENERAL INTANGIBLES. The
Company will perform and comply in all material respects with all obligations in
respect of Accounts Receivable, Chattel Paper, General Intangibles and under all
other contracts and agreements to which it is a party or by which it is bound
relating to the Collateral where failure to so comply would result in any
material impairment in the value of the Collateral, unless the validity thereof
is being contested in good faith by appropriate proceedings and such proceedings
do not involve the material danger of the sale, forfeiture or loss of the
Collateral which is the subject of such proceedings or the priority of the lien
in favor of the Bank thereon.
SECTION 5.4 NO WAIVERS, EXTENSIONS, AMENDMENTS. The Company will not,
without the Bank's prior written consent, which consent shall not be
unreasonably withheld or delayed, grant any extension of the time of payment of
any of the Accounts, Chattel Paper or Instruments, compromise, compound or
settle the same for less than the full amount thereof, release, wholly or
partly, any person liable for the payment thereof, or allow any credit or
discount whatsoever thereon, other than in the ordinary course of business.
SECTION 5.5 LOCATION OF COLLATERAL. All of the locations of the Company
and its Subsidiaries and all locations of the Collateral are set forth in the
Schedule attached hereto as Exhibit C. Other than as otherwise set forth in the
Schedule on Exhibit C hereto, as amended or supplemented by written notice to
the Bank: (a) the Company does not keep, and shall not keep, any Collateral
owned by it on any property not owned in fee simple by the Company, and (b) each
of the Subsidiaries of the Company does not keep, and shall not keep, any
Collateral owned by it on any property not owned in fee simple by the Company
except to the extent permitted by this Agreement.
SECTION 5.6 LIEN PRIORITY. From and after the date of this Agreement, by
reason of the filing of financing statements and termination statements in all
requisite government offices, this Agreement and the Loan Documents will create
and constitute a valid and perfected first priority security interest (except as
permitted by this Agreement and subject to Permitted Liens) in and Lien on that
portion of the Collateral which can be perfected by such filing or delivery,
which security interest will be enforceable against the Company and all third
parties as security for payment of all Obligations.
SECTION 5.7 LIEN WAIVERS; LANDLORD, BAILEE AND CONSIGNEE WAIVERS,
WAREHOUSE RECEIPTS. The Company will not create, permit or suffer to exist and
will defend the Collateral against and take such other action as is necessary to
remove, any Lien, claim or right, in or to the Collateral, other than the
Permitted Liens. The Company shall defend the right, title and interest of the
Bank in and to any of the Company's rights to the Collateral and in and to the
Proceeds and products thereof against the claims and demands of all Persons. In
the event any Collateral of the Company comprising personal property subject to
the security interest or Lien in favor of the Bank is at any time located on any
real property not owned by the Company, the Company will obtain and maintain in
effect at all times while any such Collateral is so located valid and effective
lien waivers,
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in form and substance reasonably satisfactory to the Bank whereby each owner,
landlord, consignee, bailee and mortgagee having an interest in such real
property shall disclaim any interest in such Collateral, as the case may be, and
shall agree to allow the Bank reasonable access to such real property in
connection with any enforcement of the security interest granted hereunder.
SECTION 5.8 MAINTENANCE OF INSURANCE. The Company will maintain with
financially sound and reputable companies, insurance policies: (a) insuring the
real property portion of the Collateral, the Equipment, the Inventory, and all
equipment subject to any lease, against loss by fire, explosion, theft, flood
(if any such properties are located in a federally designated flood hazard area)
and such other casualties as are usually insured against by companies engaged in
the same or similar businesses, and (b) insuring the Company and the Bank
against liability for personal injury and property damage relating to such real
property, Equipment, Inventory and equipment covered by any equipment lease,
such policies to be in such form and in such amounts and coverage as may be
reasonably satisfactory to the Bank, with losses payable to the Company and the
Bank as their respective interests may appear. All insurance with respect to the
real property, Equipment and Inventory shall: (i) provide that no cancellation,
reduction in amount, change in coverage or expiration thereof, shall be
effective until at least thirty (30) days after written notice to the Bank
thereof. and (ii) be satisfactory in all respects to the Bank.
SECTION 5.9 MAINTENANCE OF EQUIPMENT. The Company will keep and maintain
each item of Equipment necessary for the operation of the Company's business in
good operating condition, ordinary wear and tear excepted, and the Company will
provide all maintenance and service, and all repairs necessary for such purpose.
SECTION 5.10 LIMITATIONS ON DISPOSITIONS OF INVENTORY AND EQUIPMENT. The
Company will not sell, transfer, lease or otherwise dispose of any of the
Inventory or Equipment, or attempt, offer or contract to do so, except for (a)
dispositions of Inventory in the ordinary course of business, and (b) so long as
no Event of Default has occurred, the disposition of obsolete or worn out
Equipment in the ordinary course of business and other dispositions of Equipment
permitted by this Agreement.
SECTION 5.11 GENERAL APPOINTMENT AS ATTORNEY-IN-FACT. The Company hereby
irrevocably constitutes and appoints the Bank and any officer or agent thereof,
with full power of substitution, as its true and lawful attorney-in-fact with
full irrevocable power and authority in the place and stead of the Company and
in the name of the Company or in its own name, from time to time following the
occurrence of an Event of Default and for such time as such Event of Default is
continuing, in the Bank's reasonable discretion, for the purpose of carrying out
the terms of this Agreement, without notice (except as specifically provided
herein) to or assent by the Company, to take any and all appropriate action and
to execute any and all documents and instruments which may be necessary or
desirable to effect the terms of this Agreement, including, without limiting the
generality of the foregoing, the power and right, on behalf of the Company, to
do the following, upon notice to the Company: (a) to pay or discharge taxes,
liens, security interests or other encumbrances levied or placed on or
threatened against the Collateral, to effect any repairs or any insurance,
called for by the terms of this Agreement and to pay all or any part of the
premiums therefor and the costs thereof, and otherwise to itself perform or
comply with, or otherwise cause performance or
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compliance with, any of the covenants or other agreements of the Company
contained in this Agreement which the Company has failed to perform or with
which the Company has not complied, (b) to commence and prosecute any suits,
actions or proceedings at law or in equity in any court of component
jurisdiction to collect the Collateral or any thereof and to enforce any other
right in respect of any Collateral; (c) to defend any suit, action or proceeding
brought against the Company with respect to any Collateral; (d) to settle,
compromise or adjust any suit, action or proceeding described above and, in
connection therewith, to give such discharges or releases as the Bank may deem
appropriate; (e) to sell, transfer, pledge, make any agreement with respect to
or otherwise deal with any of the Collateral as fully and completely as though
the Bank were the absolute owner thereof for all purposes; and (f) to do, at the
Bank's option and the Company's expense, at any time, or from time to time, all
acts and things which the Bank deems necessary, to protect, preserve or realize
upon the Collateral and the Bank's security interest therein, in order to effect
the intent of this Agreement, all as fully and effectively as the Company might
do. This power of attorney is a power coupled with an interest and shall be
irrevocable.
SECTION 5.12 BANK NOT LIABLE. The powers conferred on the Bank hereunder
are solely to protect its interests in the Collateral and shall not impose any
duty upon it to exercise any such powers. The Bank shall be accountable only for
amounts that it actually receives as a result of the exercise of such powers and
neither it nor any of its officers, directors, employees or agents shall be
responsible to the Company for any act or failure to act, except for its own
gross negligence or willful misconduct.
SECTION 5.13 AUTHORITY TO EXECUTE TRANSFERS. Without limitation of any
authorization granted to the Bank hereunder, the Company also hereby authorizes
the Bank, upon the occurrence of an Event of Default, to execute, in connection
with the exercise by the Bank of its remedies hereunder, any endorsements,
assignments or other instruments of conveyance or transfer with respect to the
Collateral.
SECTION 5.14 PERFORMANCE BY BANK OF THE COMPANY'S OBLIGATIONS. If the
Company fails to perform or comply with any of its agreements contained herein
and the Bank shall itself perform or comply, or otherwise cause performance or
compliance with, such agreement, the expenses of the Bank incurred in connection
with such performance or compliance together with, interest thereon at the
interest rate provided for in Section 2.5(c) hereof in effect from time to time,
shall be payable by the Company to the Bank within five (5) Business Days
following demand.
ARTICLE VI. GENERAL REPRESENTATIONS AND WARRANTIES
The Company represents and warrants to the Bank (which representations and
warranties will survive the delivery of the Notes and all extensions of credit
under this Agreement) that:
SECTION 6.1 ORGANIZATION; CORPORATE POWER.
(a) The Company is a corporation duly organized, validly existing, and in
good standing under the laws of the jurisdiction in which it is incorporated;
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(b) The Company has the corporate power and authority to own its
properties and assets and to carry on its business as now being conducted,
(c) The Company is qualified to do business in every jurisdiction in which
the ownership or leasing of its property or the doing of business requires such
qualification and the failure of such qualification would have a Material
Adverse Effect: and
(d) The Company has the corporate power to execute, deliver, and perform
its obligations under the Loan Documents and to borrow hereunder.
SECTION 6.2 AUTHORIZATION OF LOAN. The execution, delivery, and
performance of the Loan Documents and the Loans by Company have been duly
authorized by all requisite corporate action.
SECTION 6.3 NO CONFLICT. The execution, delivery, and performance of the
Loan Documents will not (a) violate any provision of any law, rule or
regulation, the Articles of Incorporation of Company, or By-Laws of Company, (b)
violate any order of any court or other agency of any federal or state
government or any provision of any material indenture, agreement, or other
instrument to which Company is a party or by which it or any of its properties
or assets are bound, (c) conflict with, result in a breach of, or constitute
(with passage of time or delivery of notice, or both), a default under any such
material indenture, agreement, or other instrument, or (d) result in the
creation or imposition of any Lien, other than a Permitted Lien, or other
encumbrance of any nature whatsoever upon any of the properties or assets of the
Company except in favor of the Bank.
SECTION 6.4 EXECUTION OF LOAN DOCUMENTS. The Loan Documents have been duly
executed and are valid and binding obligations of the Company fully enforceable
in accordance with their respective terms.
SECTION 6.5 FINANCIAL CONDITION. The following information with respect
to the Company has heretofore been furnished to the Bank:
(a) Audited annual financial statements of the Company for the periods
ended December 31, 1996 and December 31, 1997;
(b) Unaudited, internally prepared financial statements of the Company for
the ten-month period ending October 31, 1998; and
(c) Pro forma financial statements of the Company as of December 1, 1998,
including a consolidated opening balance sheet and a consolidated statement of
profit and loss of the Company, which pro forma financial statements reflect the
Company's purchase of the Precision Machined Products assets and the liabilities
incurred by the Company related to such purchase.
Each of the financial statements referred to above in this Section 6.5 was
prepared in accordance with GAAP (subject in the case of interim statements, to
the absence of footnotes and
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normal year-end adjustments) applied on a consistent basis, except as stated
therein. Each of the financial statements referred to above in this Section 6.5
fairly presents the financial condition or pro forma financial condition, as the
case may be, of the Company and is complete and correct in all material respects
and no Material Adverse Effect has occurred since the date thereof.
SECTION 6.6 LIABILITIES; LIENS. The Company has made no investment in,
advance to, or guarantee of, the obligations of any Person nor are the Company's
assets and properties subject to any claims, liabilities, Liens, or other
encumbrances, except as disclosed in the financial statements and related notes
thereto referred to in Section 6.5 hereof.
SECTION 6.7 LITIGATION. There is no action, suit, examination, review, or
proceeding by or before any governmental instrumentality or agency now pending
(including any claims alleging infringement of intellectual property rights of
others) or, to the knowledge of the Company, threatened against the Company or
against any property or rights of the Company, which, if adversely determined,
would materially impair the right of the Company to carry on its business as now
being conducted, would materially adversely affect the financial condition of
the Company, or would draw into question the legal existence of the Company or
the validity authorization or enforceability of any of the Loan Documents,
except for the litigation, if any, described in the notes to the financial
statements referred to in Section 6.5 hereof.
SECTION 6.8 PAYMENT OF TAXES. The Company has accurately prepared and
timely filed, or caused to be filed, all Federal, state, local, and foreign tax
returns required to be filed, and has paid, or caused to be paid, all taxes as
are shown on such returns, or on any assessment received by the Company, to the
extent that such taxes become due, except as otherwise contested in good faith.
The Company has set aside proper amounts on its books, determined in accordance
with GAAP, for the payment of all taxes for the years that have not been audited
by the respective tax authorities or for taxes being contested by the Company.
SECTION 6.9 ABSENCE OF ADVERSE AGREEMENTS. The Company is not a party to
any indenture, loan or credit agreement or any lease or other agreement or
instrument or subject to any corporate or partnership restriction which would be
reasonably likely to have a Material Adverse Effect.
SECTION 6.10 REGULATORY STATUS. Neither the making nor the performance of
this Agreement, nor any extension of credit hereunder, requires the consent or
approval of any governmental instrumentality or political subdivision thereof,
any other regulatory or administrative agency, or any court of competent
jurisdiction.
SECTION 6.11 FEDERAL RESERVE REGULATIONS: USE OF LOAN PROCEEDS. The
Company is not engaged principally, or as one of its important activities, in
the business of extending credit for the purpose of purchasing or carrying any
Margin Stock. No part of the proceeds of the Loans will be used, directly or
indirectly, for a purpose which violates any law, rule or regulation of any
governmental body, including without limitation the provisions of Regulations G,
U, or X of the Board of Governors of the Federal Reserve System, as amended. No
part of the proceeds of the
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Loans will be used, directly or indirectly, to purchase or carry any Margin
Stock or to extend credit to others for the purpose of purchasing or carrying
any Margin Stock.
SECTION 6.12 SUBSIDIARIES. The Company has no Subsidiaries.
SECTION 6.13 ERISA. The Company and any Commonly Controlled Entity do not
maintain or contribute to any Plan which is not in substantial compliance with
ERISA. Neither the Company nor any Commonly Controlled Entity maintains,
contributes to, or is required to make or accrue a contribution or has within
any of the six preceding years maintained, contributed to or been required to
make or accrue a contribution to any Plan subject to regulation under Title IV
of ERISA, any Plan that is subject to the minimum funding requirements of
Section 412 of the Code or Section 302 of ERISA, or any Multiemployer Plan.
SECTION 6.14 SOLVENCY. The Company has received consideration which is the
reasonable equivalent value of the obligations and liabilities that the Company
has incurred to the Bank. The Company is not insolvent as defined in any
applicable state or federal statute, nor will the Company be rendered insolvent
by the execution and delivery of this Agreement or the Notes. The Company is not
engaged or about to engage in any business or transaction for which the assets
retained by it shall be an unreasonably small capital, taking into consideration
the obligations to Bank incurred hereunder. The Company does not intend to, nor
does it believe that it will, incur debts beyond its ability to pay them as they
mature.
SECTION 6.15 SCHEDULE ON EXHIBIT C. The Schedule on Exhibit C accurately
and completely lists the location of all real property owned or leased by the
Company. The Company enjoys quiet possession under all material leases of real
property to which it is a party as a lessee, and all of such leases are valid,
subsisting and, in full force and effect. Except as specified in the Schedule in
Exhibit C hereto, none of the real property occupied by the Company is located
within any federal, state or municipal flood plain zone. Except as set forth in
the Schedule in Exhibit C, all of the material properties used in the conduct of
the Company's business (i) are in good repair, working order and condition
(reasonable wear and tear excepted) and reasonably suitable for use in the
operation of the Company's business; and (ii) are currently operated and
maintained, in all material respects, in accordance with the requirements of
applicable governmental authorities.
SECTION 6.16 ACCURACY OF REPRESENTATIONS AND WARRANTIES. None of the
Company's representations or warranties set forth in this Agreement or in any
document or certificate furnished pursuant to this Agreement or in connection
with the transactions contemplated hereby contains any untrue statement of a
material fact or omits to state a material fact necessary to make any statement
of fact contained herein or therein, in light of the circumstances under which
it was made not misleading.
SECTION 6.17 NO INVESTMENT COMPANY. The Company is not an "investment
company" or a Company "controlled" by an "investment company" as such terms are
defined in the Investment Company Act of 19409, as amended, which is required to
register thereunder.
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SECTION 6.18 APPROVALS. Except as set forth in the Schedule in Exhibit C
hereto, all approvals required of the Company from all Persons including without
limitation all governmental authorities with respect to the Loan Documents have
been obtained.
SECTION 6.19 LICENSES, REGISTRATIONS, COMPLIANCE WITH LAWS, ETC. The
Schedule in Exhibit C hereto accurately and completely describes all permits,
governmental licenses. registrations and approvals, material to carrying out of
the Company's businesses as presently conducted and required by law or the rules
and regulations of any federal, foreign governmental, state, county or local
association, corporation or governmental agency, body, instrumentality or
commission having jurisdiction over the Company, including but not limited to
the United States Environmental Protection Agency, the United States Department
of Labor, the United States Occupational Safety and Health Administration, the
United States Equal Employment Opportunity Commission, the Federal Trade
Commission and the United States Department of Justice and analogous and related
state and foreign agencies. All existing material authorizations, licenses and
permits are in full force and effect, are duly issued in the name of, or validly
assigned to the Company and the Company has full power and authority to operate
thereunder. There is no material violation or material failure of compliance or,
to the Company's knowledge, allegation of such violation or failure of
compliance on the part of the Company with any of the foregoing permits,
licenses, registrations, approvals, rules or regulations and there is no action,
proceeding or investigation pending or to the knowledge of the Company
threatened nor has the Company received any notice of such which might result in
the termination or suspension of any such permit, license, registration or
approval which in any case could have a Material Adverse Effect.
SECTION 6.20 COPYRIGHT. The Company has not violated any of the provisions
of the Copyright Revision Act of 1976, 17 U.S.C. ss. 101, ET SEQ. Except as set
forth on the Schedule on Exhibit C hereto, the Company has not filed any
registration statements, notices and statements of account with the United
States Copyright Office. The Schedule on Exhibit C hereto accurately and
completely sets forth all registered copyrights held by the Company and contains
exceptions to the representations contained in this Section 6.20. To the
Company's knowledge no inquiries regarding any such filings have been received
by the Copyright Office.
SECTION 6.21 ENVIRONMENTAL COMPLIANCE. Except as expressly set forth in
the Schedule on Exhibit C hereto, neither the Company, nor, to the knowledge of
management of the Company, any other Person has:
(a) ever caused, permitted, or suffered to exist any Hazardous Material to
be spilled, placed, held, located or disposed of on, under, or about, any of the
premises owned or leased by the Company (the "Premises"), or from the Premises
into the atmosphere, any body of water, any wetlands, or on any other real
property, nor does any Hazardous Material exist on, under or about the Premises,
or in respect of Hazardous Material used or disposed of in compliance with law;
(b) ever used (whether by the Company or by any other Person) as a
treatment, storage or disposal (whether permanent or temporary) site for any
Hazardous Waste as defined in 42 U.S.C.A. ss. 6901, ET SEQ. (the Resource
Recovery and Conservation Act); and
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(c) any knowledge of any notice of violation, lien or other notice issued
by any governmental agency with respect to the environmental condition of the
Premises or any other property occupied by the Company.
The Company is in compliance with all Environmental Laws and all other
applicable federal, state and local health and safety laws, regulations,
ordinances or rules, except to the extent that any non-compliance will not, in
the aggregate, have a Materially Adverse Effect on the Company or the ability of
the Company to fulfill its obligations under this Agreement or the Notes.
SECTION 6.22 MATERIAL AGREEMENTS, ETC. The Schedule on Exhibit C hereto
accurately and completely lists all Material Agreements, all of which are
presently in effect. All of the Material Agreements are legally valid, binding,
and to the Company's knowledge, in full force and effect and neither the Company
nor, to the Company's knowledge, any other parties thereto are in material
default thereunder.
SECTION 6.23 PATENTS, TRADEMARKS AND OTHER PROPERTY RIGHTS. The Schedule
on Exhibit C hereto contains a complete and accurate schedule of all registered
trademarks, registered copyrights and patents of the Company, and pending
applications therefor, and all other intellectual property in which the Company
has any rights other than "off-the-shelf" software which is generally available
to the general public at retail. Except as set forth in the Schedule on Exhibit
C hereto, the Company owns, possesses, or has licenses to use all the patents,
trademarks, service marks, trade names, copyrights and nongovernmental licenses,
and all rights with respect to the foregoing, necessary for the conduct of its
business as now conducted, without, to the Company's knowledge, any conflict
with the rights or others with respect thereto.
ARTICLE VII. CONDITIONS OF LENDING
SECTION 7.1 FIRST LOAN. The obligation of the Bank to make the initial
Loan or Loans shall be subject to satisfaction of the following conditions,
unless waived in writing by the Bank: (a) all legal matters and Loan Documents
incident to the transactions contemplated hereby shall be reasonably
satisfactory, in form and substance, to Bank's counsel; (b) the Bank shall have
received (i) certificates by an authorized officer of Company, upon which the
Bank may conclusively rely until superseded by similar certificates delivered to
the Bank, certifying (A) all requisite action taken in connection with the
transactions contemplated hereby, and (B) the names, signatures, and authority
of Company's authorized signers executing the Loan Documents, (ii) documentation
satisfactory to the Bank evidencing the Acquisition, and (iii) such other
documents as the Bank may reasonably require to be executed by, or delivered on
behalf of Company; (c) the Bank shall have received the Notes, with all blanks
appropriately completed, executed by an authorized signer of Company; (d) the
Company shall have paid to the Bank the fee(s) then due and payable in
accordance with ARTICLE II, of this Agreement; (e) the Bank shall have received
the written opinion of legal counsel selected by Company and satisfactory to the
Bank, dated the date of this Agreement, in form satisfactory to the Bank and
covering such other matter(s) as the Bank may reasonably require; (f) the Bank
shall have received a fixed asset appraisal, satisfactory to the Bank, of the
Precision Machined Products Assets performed by KeyCorp Leasing; (g) the Bank
shall have received documentation identifying assets of the Company which are
pledged to support the Letter
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of Credit Loan; (h) the Bank shall have received an initial Borrowing Base
Certificate and loan covenant compliance certificate; and (i) the Company shall
have entered into one or more interest rate swap contracts with Key Capital
Markets, Inc. fixing interest rates on a minimum of $5,000,000 in principal
amount of the Acquisition Line.
SECTION 7.2 EACH LOAN. The obligation of the Bank to make each Loan shall
be subject to satisfaction of the following additional conditions that at the
date of making such Loan, and after giving effect thereto: (a) no Event of
Default shall have occurred and be then continuing, (b) each representation and
warranty set forth in this Agreement and in each of the other Loan Documents is
true and correct as if then made, and (c) no event shall have occurred or failed
to occur which has or is reasonably likely to have a Material Adverse Effect.
ARTICLE VIII. COVENANTS
As long as credit is available hereunder or until all principal of and
interest on the Notes have been paid in full:
SECTION 8.1 ACCOUNTING: FINANCIAL STATEMENTS AND OTHER INFORMATION. The
Company will maintain a standard system of accounting, established and
administered in accordance which GAAP consistently followed throughout the
periods involved, and will set aside on its books for each fiscal month the
proper amounts or accruals for depreciation, obsolescence, amortization, bad
debts, current and deferred taxes, prepaid expenses, and for other purposes as
shall be required by GAAP. The Company will deliver to the Bank:
(a) As soon as practicable after the end of each calendar month in each
year and in any event within thirty (30) days thereafter, a consolidated and
consolidating balance sheet of the Company as of the end of such month, and
statements of income, changes in financial position, and shareholders' equity of
the Company for such month, certified as complete and correct by the principal
financial officer of the Company, subject to changes resulting from year-end
adjustments,
(b) As soon as practicable after the end of each fiscal year, and in any
event within ninety (90) days thereafter, a consolidated and consolidating
balance sheet of the Company as of the end of such year, and statements of
income, changes in financial position, and shareholders' equity of the Company
for such year, setting forth in each case in comparative form the figures for
the previous fiscal year, all in reasonable detail and accompanied by a report
and an unqualified opinion of independent certified public accountants of
recognized standing, selected by the Company and satisfactory to the Bank, which
report and opinion shall be prepared in accordance with generally accepted
auditing standards, together with a certificate by such accountants (i) briefly
setting forth the scope of their examination (which shall include a review of
the relevant provisions of this Agreement and stating that in their judgment
such examination is sufficient to enable them to give the certificate, and (ii)
stating whether their examination has disclosed the existence of any condition
or event which constitutes an Event of Default under this Agreement, and, if
their examination has disclosed such a condition or event, specifying the nature
and period of existence thereof;
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(c) promptly after the filing thereof, copies of the state and federal tax
returns of the Company and all schedules thereto;
(d) promptly upon their distribution, copies of all financial statements,
reports and proxy statements which the Company shall have sent to its
stockholders, and promptly after the sending or filing thereof, copies of all
regular and periodic reports which the Company shall file with the Securities
and Exchange Commission or any national securities exchange;
(e) As soon as practicable, and in any event within thirty (30) days of
the end of each calendar month in each year, a certificate by the Company and
all relevant facts in reasonable detail to evidence, and the computations as to,
whether or not the Company is in compliance with the financial covenants set
forth in Sections 8.15 through 8.19 hereof; and
(f) With reasonable promptness, such other data and information as from
time to time may be reasonably requested by the Bank.
SECTION 8.2 INSURANCE; MAINTENANCE OF PROPERTIES. The Company will
maintain with financially sound and reputable insurers, insurance with coverage
and limits as may be required by law or as may be reasonably required by the
Bank. The Company will, upon request from time to time, furnish to the Bank a
schedule of all insurance carried by it, setting forth in detail the amount and
type of such insurance. The Company will maintain in good repair, working order,
and condition, all properties used or useful in the business of the Company.
SECTION 8.3 EXISTENCE; BUSINESS. The Company will cause to be done all
things necessary to preserve and keep in full force and effect its existence and
rights, to conduct its business in a prudent manner, to maintain in full force
and effect, and renew from time to time, its franchises, permits, licenses,
patents, and trademarks that are necessary to operate its business. The Company
will comply in all material respects with all valid laws and regulations now in
effect or hereafter promulgated by any properly constituted governmental
authority having jurisdiction; PROVIDED, HOWEVER, that the Company shall not be
required to comply with any law or regulation which it is contesting in good
faith by appropriate proceedings as long as either the effect of such law or
regulation is stayed pending the resolution of such proceedings or the effect of
not complying with such law or regulation is not to jeopardize any franchise,
license, permit patent, or trademark necessary to conduct the Company's
business.
SECTION 8.4 PAYMENT OF TAXES. The Company will pay all taxes, assessments,
and other governmental charges levied upon any of its properties or assets or in
respect of its franchises, business, income, or profits before the same become
delinquent, except that no such taxes, assessments, or other charges need be
paid if contested by the Company in good faith and by appropriate proceedings
promptly initiated and diligently conducted and if the Company has set aside
proper amounts, determined in accordance with GAAP, for the payment of all such
taxes, changes, and assessments.
SECTION 8.5 LITIGATION; ADVERSE CHANGES. The Company will promptly notify
the Bank in writing of (a) any future event which, if it had existed on the date
of this Agreement, would have
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required qualification of any of the representations and warranties set forth in
this Agreement or any of the other Loan Documents, and (b) any Material Adverse
Effect.
SECTION 8.6 NOTICE OF DEFAULT. The Company will promptly notify the Bank
of any Event of Default hereunder and any demands made upon the Company by any
Person for the acceleration and immediate payment of any Indebtedness owed to
such Person.
SECTION 8.7 INSPECTION. The Company will make available for inspection by
duly authorized representatives of the Bank, or its designated agent, the
Company's books, records, and properties when reasonably requested to do so, and
will furnish the Bank such information regarding its business affairs and
financial condition within a reasonable time after written request therefor.
SECTION 8.8 ENVIRONMENTAL MATTERS. The Company:
(a) Shall comply with all Environmental Laws, and
(b) Shall deliver promptly to Bank (i) copies of any documents received
from the United States Environmental Protection Agency or any state, county or
municipal environmental or health agency, and (ii) copies of any documents
submitted by Company to the United States Environmental Protection Agency or any
state, county or municipal environmental or health agency concerning its
operations.
SECTION 8.9 SALE OF ASSETS. The Company will not, directly or indirectly
sell, lease, transfer, or otherwise dispose of any plant or any manufacturing
facility or other assets (i) without receipt of full and adequate consideration
therefor, or (ii) involving amounts exceeding $250,000 in any single transaction
without making the prepayment required by Section 2.8(d) hereof.
SECTION 8.10 LIENS. The Company will not, directly or indirectly, create,
incur, assume, or permit to exist any Lien with respect to any property or asset
of the Company now owned or hereafter acquired other than Permitted Liens.
SECTION 8.11 INDEBTEDNESS. The Company will not, directly or indirectly,
create, incur, or assume Indebtedness, or otherwise become liable with respect
to, any Indebtedness other than:
(a) Indebtedness now or hereafter payable, directly or indirectly, by the
Company to the Bank or any Affiliate of the Bank;
(b) Subordinated Debt of the Company;
(c) To the extent permitted by this Agreement, Indebtedness for the lease
or purchase price of any real or personal property, which is secured only by a
Permitted Lien;
(d) Unsecured Indebtedness and deferred liabilities incurred in the
ordinary course of business;
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(e) Indebtedness for taxes, assessments, governmental charges, liens, or
similar claims to the extent not yet due and payable;
(f) Indebtedness of the Company existing as of the date of this Agreement,
which is expressly disclosed on the Schedule on Exhibit C hereto;
(g) Other Indebtedness of the Company not covered under subparts (a)
through (f) of this Section 8.11 not exceeding $100,000 in the aggregate
outstanding at any time; and
(h) Extensions, renewals, refundings, refinancings, modifications,
amendments and restatements of any of the items listed in items (b) through (g)
above, provided that the principal amount thereof is not increased or the terms
thereof are not modified to impose more burdensome terms upon the Company.
SECTION 8.12 INVESTMENTS; LOANS. Except for Permitted Investments, the
Company will not, directly or indirectly, (a) purchase or otherwise acquire or
own any stock or other securities of any other Person, or (b) make or permit to
be outstanding any loan or advance (other than trade advances in the ordinary
course of business) or enter into any arrangement to provide funds or credit, to
any other Person.
SECTION 8.13 GUARANTIES. The Company will not guarantee, directly or
indirectly, or otherwise become surety (including, without limitation, liability
by way of agreement, contingent or otherwise, to purchase, to provide funds for
payment, to supply funds to, or otherwise invest in, any Person, or enter into
any working capital maintenance or similar agreement) in respect of any
obligation or Indebtedness of any other Person, except guaranties by endorsement
of negotiable instruments for deposit, collection, or similar transactions in
the ordinary course of business.
SECTION 8.14 MERGERS: CONSOLIDATION. The Company will not merge into or
consolidate with any other Person or permit any other Person to merge into or
consolidate with it, or sell all or substantially all of its assets; EXCEPT that
the Company may permit any other Person to merge into or consolidate with it if
(i) the Company shall be the corporation which survives such merger or results
from such consolidation, (ii) immediately after the consummation of the
transaction, and after giving effect thereto, the Company would be permitted by
the provisions of this ARTICLE VIII to incur additional Indebtedness, and (iii)
before and immediately after the consummation of the transaction, and after
giving effect thereto, no Event of Default, or event which with notice or lapse
of time or both would become an Event of Default, exists or would exist.
SECTION 8.15 CURRENT RATIO. On the last day of each month during the term
of this Agreement, the Company will have a ratio of Current Assets to Current
Liabilities (calculated without regard to current maturities of Funded Debt)
that is not less than 2.00 to 1.00.
SECTION 8.16 DEBT SERVICE COVERAGE RATIO. The Company shall maintain its
Debt Service Coverage Ratio, as measured on the last day of each calendar
quarter during the term of this Agreement for the twelve-month period ending on
such date of calculation, at a ratio of not less than 1.25 to 1.00.
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SECTION 8.17 DEBT TO TANGIBLE NET WORTH. The Company shall maintain the
ratio of its Total Indebtedness to its Tangible Net Worth, as measured on the
last day of each month during each period set forth below, at a ratio that is
less than the ratio set forth opposite such period:
PERIOD RATIO
Date hereof to and including
December 31, 1999 4.00 to 1.00
January 1, 2000 to and including
December 31, 2000 3.25 to 1.00
January 1, 2001 and thereafter 3.00 to 1.00
SECTION 8.18 FUNDED DEBT TO EBITDA. During each period set forth below,
the Company shall maintain the ratio of its Funded Debt to its EBITDA, as
measured on the last day of each calendar quarter for the twelve-month period
ending on the date of calculation, at a ratio that is less than the ratio set
forth opposite such period:
PERIOD RATIO
Date hereof to and including
December 31, 2000 3.50 to 1.00
January 1, 2001 and thereafter 3.00 to 1.00
SECTION 8.19 CAPITAL EXPENDITURES. The Company will not make Capital
Expenditures in an aggregate amount in excess of $1,000,000 in any fiscal year
without thirty (30) days' prior written notification to the Bank.
Notwithstanding the foregoing, the Capital Expenditure limitation set forth
herein shall not include expenditures relating to the Acquisition.
SECTION 8.20 SUBORDINATED DEBT. The Company will not make any payment upon
any outstanding Subordinated Debt, except in such manner and amounts as may be
expressly authorized in any subordination agreement presently or hereafter held
by the Bank.
SECTION 8.21 SENIOR MANAGEMENT. The Company will not replace its
President, Chief Executive Officer or Chief Financial Officer without sixty (60)
days prior written notice to the Bank and will not accept the resignation of its
President, Chief Executive Officer or Chief Financial Officer without providing
written notice to the Bank, which notice will be given to the Bank as soon as
reasonably possible after the Company has knowledge of the same, but in no event
more than three (3) days following the date that the Company obtains such
knowledge.
SECTION 8.22 COMPLIANCE WITH ERISA. With respect to the Company and any
Commonly Controlled Entity, the Company will not permit the occurrence of any of
the following events to the extent that any such events would result in a
material Adverse Effect on the Company, (a) withdraw from or cease to have an
obligation to contribute to, any Multiemployer Plan, (b) engage in any
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"prohibited transaction" (as defined in Section 4975 of the Code) involving any
Plan, (c) except for any deficiency caused by a waiver of the minimum funding
requirement under Section 412 of the Code, as described above, incur or suffer
to exist any material "accumulated funding deficiency" (as defined in Section
302 of ERISA and Section 412 of the Code) of the Company or any Commonly
Controlled Entity, whether or not waived, involving any Single Employer Plan,
(d) incur or suffer to exist any Reportable Event or the appointment of a
trustee or institution of proceedings for appointment of a trustee for any
Single Employer Plan if, in the case of a Reportable Event, such event continues
unremedied for ten (10) days after notice of such Reportable Event pursuant to
Sections 4043(a), (c) or (d) of ERISA is given, if in the reasonable opinion of
the Bank any of the foregoing is likely to result in a Material Adverse Effect,
(e) allow or suffer to exist any event or condition, which presents a material
risk of incurring a material liability of the Company or any Commonly Controlled
Entity to PBGC by reason of termination of any such Plan or (f) cause or permit
any Plan maintained by the Company and/or any Commonly Controlled Entity to be
out of compliance with ERISA.
ARTICLE IX. EVENTS OF DEFAULT
The occurrence of any one or more of the following events shall constitute
an Event of Default under this Agreement:
SECTION 9.1 PRINCIPAL OR INTEREST. If the Company fails to pay any
installment of principal of or interest on any Note, or any other sums of money
when due and payable under this Agreement and such failure continues for
forty-eight (48) hours; or
SECTION 9.2 MISREPRESENTATION. If any representation or warranty made
herein by Company or in any written statement, certificate, report, or financial
statement at any time furnished by, or on behalf of, Company in connection
herewith, is incorrect or misleading in any material respect when made; or
SECTION 9.3 FAILURE OF PERFORMANCE OF THIS AGREEMENT. Except as otherwise
provided herein, if the Company fails to perform or observe any covenant or
agreement contained in this Agreement or any of the other Loan Documents, and
such failure remains unremedied for thirty (30) calendar days after the Bank
shall have given written notice thereof to the Company; or
SECTION 9.4 CROSS-DEFAULT. If the Company (a) fails to pay any
indebtedness or any other sums of money when due and payable under the Letter of
Credit Loan or under any other transaction or document evidencing Indebtedness
of the Company to the Bank, and such failure continues for forty-eight (48)
hours, whether at maturity, by acceleration, or otherwise, or (b) fails to
perform any term, covenant, or agreement on its part to be performed under any
agreement or instrument (other than the Loan Documents) evidencing, securing, or
relating to the Letter of Credit Loan or any other transaction or document
evidencing Indebtedness of the Company to the Bank, and such failure remains
unremedied for thirty (30) calendar days after the Bank shall have given written
notice thereof to the Company, or is otherwise in default thereunder.
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SECTION 9.5 INSOLVENCY. If the Company shall discontinue business or (a)
is adjudicated a bankrupt or insolvent under any law of any existing
jurisdiction, domestic or foreign, or ceases, is unable, or admits in writing
its inability to pay its debts generally as they mature, or makes a general
assignment for the benefit of creditors, (b) applies for, or consents to, the
appointment of any receiver, trustee, or similar officer for it or for any
substantial part of its property, or any such, receiver, trustee, or similar
officer is appointed without the application or consent of the Company, and such
appointment continues thereafter undischarged for a period of thirty (30) days,
(c) institutes, or consents to the institution of any bankruptcy, insolvency,
reorganization, arrangement, readjustment or debt, dissolution, liquidation, or
similar proceeding relating to it under the laws of any jurisdiction, (d) any
such proceeding is instituted against the Company and remains thereafter
undismissed for a period of thirty (30) days, or (e) any judgment, writ, warrant
of attachment or execution, or similar process is issued or levied against a
substantial part of the property of the Company or any Subsidiary and such
judgment, writ, or similar process is not effectively stayed within thirty (30)
days after its issue or levy.
ARTICLE X. REMEDIES UPON DEFAULT
SECTION 10.1 OPTIONAL ACCELERATION. In the event that one or more of the
Events of Default set forth in Sections 9.1 through 9.5 above occurs and
continues and is not waived by the Bank, then, in any such event, and at any
time thereafter, the Bank may, at its option, terminate its commitment to make
any Loan and declare the unpaid principal of, and all accrued interest on any
Note, including any notes executed in connection with the Letter of Credit Loan,
and any other liabilities hereunder, and all other indebtedness of Company to
the Bank forthwith due and payable, whereupon the same will forthwith become due
and payable without presentment, demand, protest, or other notice of any kind,
all of which Company hereby expressly waives, anything contained herein or in
any Note to the contrary notwithstanding.
SECTION 10.2 AUTOMATIC ACCELERATION. Intentionally Deleted.
SECTION 10.3 REMEDIES. The Bank shall have the rights and remedies of a
secured party under the Uniform Commercial Code in addition to the rights and
remedies of a secured party provided elsewhere within the Agreement, the Letter
of Credit Loan or in any other writing executed by the Company. The Bank may
require the Company to assemble the Collateral and make it available to the Bank
at a reasonably convenient place to be designated by the Bank. Unless the
Collateral is perishable, threatens to decline speedily in value, or is of a
type customarily sold on a recognized market, the Bank will give the Company
reasonable notice of the time and place of any public sale of the Collateral or
of the time after which any private sale or other intended disposition thereof
is to be made. The requirement of reasonable notice shall be met if such notice
is mailed (deposited for delivery, postage prepaid, by U.S. mail) to either, at
the Bank's option (i) the principal office of the Company as set forth in this
Agreement (or as modified by any change therein which the Company has supplied
in writing to the Bank), or (ii) the Company's address at which the Bank
customarily communicates with the Company, at least ten (10) days before the
time of the public sale or the time after which any private sale or other
intended disposition thereof is to be made. At any such public or private sale,
the Bank may purchase the Collateral. After deduction for the Bank's Related
Expenses, the residue of any such sale or other disposition shall be applied in
satisfaction
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of the Obligations in such order of preference as the Bank may determine. Any
excess, to the extent permitted by law, shall be paid to the Company, and the
Company shall remain liable for any deficiency.
SECTION 10.4 NO WAIVER. The remedies in this ARTICLE X are in addition to,
not in limitation of. any other right, power, privilege, or remedy, either in
law, in equity, or otherwise, to which the Bank may be entitled. No failure or
delay on the part of the Bank in exercising any right, power, or remedy will
operate as a waiver thereof, nor will any single or partial exercise thereof
preclude any other or further exercise thereof or the exercise of any other
right hereunder.
ARTICLE XI. MISCELLANEOUS
SECTION 11.1 AMENDMENTS. No waiver of any provision of this Agreement, the
Notes, or consent to departure therefrom, is effective unless in writing and
signed by the Bank. No such consent or waiver extends beyond the particular case
and purpose involved. No amendment to this Agreement is effective unless in
writing, and signed by the Company and the Bank.
SECTION 11.2 EXPENSES; DOCUMENTARY TAXES. The Company shall pay (a) all
out-of-pocket expenses of the Bank, including fees and disbursements of special
counsel for the Bank in connection with the preparation of this Agreement, any
waiver or consent hereunder or any amendment hereof or any Event of Default
hereunder, and (b) if an Event of Default occurs, all out-of-pocket expenses
incurred by the Bank, including reasonable fees and disbursements of counsel, in
connection with such Event of Default and collection and other enforcement
proceedings resulting therefrom. The Company shall reimburse the Bank for its
payment of all transfer taxes, documentary taxes, assessments, or charges made
by any governmental authority by reason of the execution and delivery of this
Agreement or the Notes.
SECTION 11.3 INDEMNIFICATION. The Company shall indemnify and hold the
Bank harmless against any and all liabilities, losses, damages, costs, and
expenses of any kind (including, without limitation, the reasonable fees and
disbursements of counsel in connection with any investigative, administrative or
judicial proceeding, whether or not the Bank shall be designated a party
thereto) which may be incurred by the Bank relating to or arising out of this
Agreement or any actual or proposed use of proceeds of any Loan hereunder;
PROVIDED, HOWEVER, that the Bank shall have no right to be indemnified hereunder
for its own negligence, bad faith or willful misconduct as determined by a court
of competent jurisdiction. The Company further agrees to indemnify the Bank
against any loss or expense which the Bank may sustain or incur as a consequence
of any default by the Company in payment when due of any amount due hereunder in
respect of any LIBOR Rate Loan, including, but not limited to, any loss of
profit, premium, or penalty incurred by the Bank in respect of funds borrowed by
it for the purpose of making or maintaining any such Loan, as determined by the
Bank in the exercise of its sole but reasonable discretion. A certificate as to
any such loss or expense shall be promptly submitted by the Bank to the Company
and shall, in the absence of manifest error, be conclusive and binding as to the
amount thereof.
SECTION 11.4 CONSTRUCTION. This Agreement and the Notes will be governed
by and construed in accordance with the laws of the State of Colorado, without
regard to principles of
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conflict of laws. The several captions to different Sections of this Agreement
are inserted for convenience only and shall be ignored in interpreting the
provisions hereof.
SECTION 11.5 EXTENSION OF TIME. Whenever any payment hereunder or under
any Note becomes due on a date which the Bank is not open for the transaction of
business, such payment will be due on the next succeeding Business Day and such
extension of time will be included in computing interest in connection with such
payment.
SECTION 11.6 NOTICES. All written notices, requests, or other
communications herein provided for must be addressed:
to the Company as follows:
Dynamic Materials Corporation
551 Aspen Ridge Dr.
Lafayette, Colorado 80026
Attn: Richard A. Santa, Vice President of Finance and Chief
Financial Officer
to the Bank as follows:
KeyBank National Association
600 S. Cherry Street, Suite 1000
Denver, Colorado 80246
Attn: Scot Wetzel, Corporate Banking
or at such other address as either party may designate to the other in writing.
Such communication will be effective (i) if by telex, when such telex is
transmitted and the appropriate answer back is received, (ii) if given by mail,
72 hours after such communication is deposited in the U.S. mail certified mail
return receipt requested, or (iii) if given by other means, when delivered at
the address specified in this Section 11.6.
SECTION 11.7 SURVIVAL OF AGREEMENTS, RELATIONSHIP. All agreements,
representations, and warranties made in this Agreement will survive the making
of the extension of credit hereunder, and will bind and inure to the benefit of
the Company and the Bank, and their respective successors and assigns; PROVIDED,
HOWEVER, that no subsequent holder of any Note shall by reason of acquiring that
Note, as the case may be, become obligated to make any Loan hereunder and no
successor to or assignee of the Company may borrow hereunder without the Bank's
written consent. The relationship between the Company and the Bank with respect
to this Agreement, the Notes, and any other Loan Document is and shall be solely
that of debtor and creditor, and the Bank has no fiduciary obligation toward the
Company with respect to any such document or the transactions contemplated
thereby.
SECTION 11.8 SEVERABILITY. If any provision of this Agreement or any Note,
or any action taken hereunder or thereunder, or any application thereof, is for
any reason held to be illegal or invalid, such illegality or invalidity shall
not affect any other provision of this Agreement or the
45
<PAGE>
Notes, all of which shall be construed and enforced without reference to such
illegal or invalid portion and shall be deemed to be effective or taken in the
manner and to the full extent permitted by law.
SECTION 11.9 ENTIRE AGREEMENT. This Agreement, the Notes, and any other
Loan Document integrate all the terms and conditions mentioned herein or
incidental hereto and supersede all oral representations and negotiations and
prior writings with respect to the subject matter hereof.
SECTION 11.1 JURY TRIAL WAIVER. THE COMPANY AND THE BANK EACH WAIVE ANY
RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN
CONTRACT, TORT OR OTHERWISE, BETWEEN THE BANK' AND THE COMPANY ARISING OUT OF,
IN CONNECTION WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED
BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT OR ANY NOTE OR OTHER INSTRUMENT,
DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THE
TRANSACTIONS RELATED THERETO.
IN WITNESS WHEREOF, the Company and the Bank have each caused this
Agreement to be executed by their duly authorized officers as of the 30th day of
November, 1998.
REMAINDER OF PAGE INTENTIONALLY DELETED
46
<PAGE>
COMPANY: DYNAMIC MATERIALS CORPORATION
By: _______________________________
Title: ____________________________
BANK: KEYBANK NATIONAL ASSOCIATION
By: _______________________________
Title: ____________________________
47
<PAGE>
EXHIBIT A
ACQUISITION NOTE
$8,000,000.00 November 30, 1998
For value received, DYNAMIC MATERIALS CORPORATION, a Delaware corporation
(the "Company") promises to pay to the order of KEYBANK NATIONAL ASSOCIATION
(the "Bank"), its successor and assigns, at its main office, on the date or
dates and in the manner specified in Article II of the Credit Agreement (as
defined below), the aggregate principal amount of the Loans outstanding under
the Acquisition Line, as shown on any ledger or other record of the Bank, which
shall be rebuttably presumptive evidence of the principal amount owing and
unpaid on this Note.
The Company promises to pay to the order of the Bank interest on the
unpaid principal amount of each Loan evidenced by this Note from the date of
such Loan until such principal amount is paid in full at such interest rate(s)
and at such times as are specified in Article II of the Credit Agreement.
This Note is the Acquisition Note referred to in, and is entitled to the
benefits of, the Amended and Restated Credit Facility and Security Agreement
("Credit Agreement") by and between the Bank and the Company dated November 30,
1998, as the same may be hereafter amended from time to time. This Note may be
declared forthwith due and payable in the manner and with the effect provided in
the Credit Agreement, which contains provisions for acceleration of the maturity
hereof upon the happening of any Event of Default and also for prepayment on
account of principal hereof prior to the maturity hereof upon the terms and
conditions therein specified.
Each defined term used in this Note shall have the meaning ascribed
thereto in Section 1.2 of the Credit Agreement.
The Company expressly waives presentment, demand, protest, and notice of
dishonor.
The Company acknowledges that this Note was signed in the City of Denver,
in the State of Colorado.
COMPANY: DYNAMIC MATERIALS CORPORATION
By: _______________________________
Title: ____________________________
<PAGE>
EXHIBIT B
WORKING CAPITAL NOTE
$6,000,000.00 November 30, 1998
For value received, DYNAMIC MATERIALS CORPORATION, a Delaware corporation
(the "Company") promises to pay to the order of KEYBANK NATIONAL ASSOCIATION,
(the "Bank"), its successor and assigns, at its main office, on the date or
dates and in the manner specified in Article II of the Credit Agreement (as
defined below), the aggregate principal amount of the Loans outstanding under
the Working Capital Line, as shown on any ledger or other record of the Bank,
which shall be rebuttably presumptive evidence of the principal amount owing and
unpaid on this Note.
The Company promises to pay to the order of the Bank interest on the
unpaid principal amount of each Loan evidenced by this Note from the date of
such Loan until such principal amount is paid in full at such interest rate(s)
and at such times as are specified in Article II of the Credit Agreement.
This Note is the Working Capital Note referred to in, and is entitled to
the benefits of, the Amended and Restated Credit Facility and Security Agreement
("Credit Agreement") by and between the Bank and the Company dated November 30,
1998, as the same may be hereafter amended from time to time. This Note may be
declared forthwith due and payable in the manner and with the effect provided in
the Credit Agreement, which contains provisions for acceleration of the maturity
hereof upon the happening of any Event of Default and also for prepayment on
account of principal hereof prior to the maturity hereof upon the terms and
conditions therein specified.
Each defined term used in this Note shall have the meaning ascribed
thereto in Section 1.2 of the Credit Agreement.
The Company expressly waives presentment, demand, protest, and notice of
dishonor.
The Company acknowledges that this Note was signed in the City of Denver,
in the State of Colorado.
COMPANY: DYNAMIC MATERIALS CORPORATION
By: _______________________________
Title: ____________________________
<PAGE>
EXHIBIT C
SCHEDULE OF COMPANY
[See Attached]
<PAGE>
EXHIBIT D
BORROWING BASE CERTIFICATE
DYNAMIC MATERIALS CORPORATION
BORROWING BASE CERTIFICATE
AS OF ____________
The undersigned officer of Dynamic Materials Corporation, hereby certifies
that the following is a true and accurate calculation of the Borrowing Base as
of the date specified above, determined in accordance with the requirements of
the Amended and Restated Credit Facility and Security Agreement dated November
___, 1998 between Dynamic Materials Corporation, a Delaware corporation
("Borrower") and KeyBank National Association ("Lender").
Name:_________________________________________
Title:________________________________________
Date:_________________________________________
Accounts Receivable Aging Schedule:
1-30 Day 31-61 Day 61-90 Day 90+Day Total
------ ------ ------ ------ ------
- - --------------------------------------------------------------------------
BORROWING BASE CALCULATION:
ACCOUNTS RECEIVABLE PORTION:
Accounts Receivable/1/
Less:
(a) Accounts Receivable to which Borrower does
not have valid tit _______
(b) Accounts Receivable which are not the binding
obligation of the account debtor _______
- - --------------------
/1/Reference is made to the definitions of "Eligible Accounts Receivable" in
Section 1.2 of the Credit Agreement. Information must be provided in accordance
with such definitions. Captions set forth below are for reference purposes only
and may not reflect the actual definition in the Credit Agreement.
<PAGE>
(c) Accounts Receivable arising from services provided by
Borrower to an Affiliate of Borrower _______
(d) Accounts Receivable which are unpaid more than the
earlier of ninety (90) days after the original
invoice date or one hundred five (105) days after
the services were provided _______
(e) Accounts Receivable which, when aggregated with all
other Accounts Receivable of the same account debtor
or Affiliate, exceed 50% in face value of all
Accounts Receivable of Borrower _______
(f) Accounts Receivable (i) wherein the account debtor is
also a creditor of the Borrower, (ii) which are
subject to dispute or (iii) which are or are
likely to become subject to any right of setoff or
other claim or defense _______
(g) Accounts Receivable wherein the debtor has commenced
a voluntary case under applicable bankruptcy laws, or
made an assignment for the benefit of creditors, or a
decree has been entered in respect of the debtor in an
involuntary case under federal bankruptcy laws _______
(h) Accounts Receivable in which the Lender does not
have a valid perfected first priority security
interest _______
(i) Accounts Receivable for which the sale to the account
debtor is on a consignment, bill-and hold, sale on
approval, guaranteed sale or sale-and-return basis _______
(j) Accounts Receivable from the same account debtor in
which 50% or more of the other Account Receivables from
such account debtor are unpaid within the applicable
period of time set forth above _______
(k) Accounts Receivable for which 75% or more of other
Accounts Receivable from the same account debtor are
not deemed Eligible Accounts Receivable _______
(l) Accounts Receivable which have not been shipped and
delivered to and accepted or the services giving rise
to such Account Receivable have not been performed or
the Account Receivable otherwise does not represent a
final sale _______
<PAGE>
(m) Accounts Receivable for which the principal place of
business of the debtor is located outside of the
United States _______
(n) Accounts Receivable which do not comply in all
material respects with all applicable legal
requirements _______
(o) Accounts Receivable arising out of unbilled
cooperative advertising activities _______
Eligible Accounts Receivable
=======
BORROWING BASE:
80% of Eligible Accounts Receivable _______
Revolving Credit Availability
=======
INVENTORY PORTION:
Eligible Inventory/2/
=======
BORROWING BASE:
50% of Eligible Inventory consisting of raw
materials _______
50% of Eligible Inventory consisting of
work-in-process purchased by the Company from
Spin Forge LLC or Precision Machined Products _______
30% of Eligible Inventory consisting of
work-in-process other than work-in-process
referred to in the immediately preceding category _______
50% of Eligible Inventory consisting of finished
product _______
- - ------------------
/2/ Reference is made to the definition of "Eligible Inventory" in Section
1.2 of the Credit Agreement. Information must be provided in accordance with
such definition.
<PAGE>
Revolving Credit Availability
=======
EQUIPMENT PORTION:
Eligible Equipment/3/
=======
BORROWING BASE:
the LESSER of:
50% of net book value of Eligible Equipment; or _______
70% of orderly liquidation value of Eligible
Equipment; or _______
80% of forced sale value of Eligible Equipment _______
Revolving Credit Availability
=======
REAL ESTATE PORTION:
Acceptable Real Estate/4/
=======
BORROWING BASE:
75% of Acceptable Real Estate _______
Revolving Credit Availability
=======
AGGREGATE REVOLVING CREDIT
AVAILABILITY
=======
- - -------------------
/3/ Reference is made to the definition of "Eligible Equipment" in Section
1.2 of the Credit Agreement. Information must be provided in accordance with
such definition.
/4/ Reference is made to the definition of "Acceptable Real Estate" in
Section 1.2 of the Credit Agreement. Information must be provided in accordance
with such definition.
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 5,057,658
<ALLOWANCES> 225,000
<INVENTORY> 5,373,829
<CURRENT-ASSETS> 11,145,995
<PP&E> 12,729,209
<DEPRECIATION> 3,931,495
<TOTAL-ASSETS> 33,201,578
<CURRENT-LIABILITIES> 6,069,050
<BONDS> 14,345,117
0
0
<COMMON> 139,920
<OTHER-SE> 12,488,991
<TOTAL-LIABILITY-AND-EQUITY> 33,201,578
<SALES> 38,212,051
<TOTAL-REVENUES> 38,212,051
<CGS> 30,343,637
<TOTAL-COSTS> 30,343,637
<OTHER-EXPENSES> 5,332,458
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 283,706
<INCOME-PRETAX> 2,272,756
<INCOME-TAX> 887,000
<INCOME-CONTINUING> 1,385,756
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,385,756
<EPS-PRIMARY> .50
<EPS-DILUTED> .49
</TABLE>
