U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
--------------------
Commission file number: 0-8328
DYNAMIC MATERIALS CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 84-0608431
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
551 ASPEN RIDGE DRIVE, LAFAYETTE 80026
(Address of principal executive office) (Zip Code)
Issuer's telephone number, including Area Code (303) 665-5700
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.05 PAR VALUE
(TITLE OF CLASS)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities 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
- ----- ------
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 2,828,577 SHARES OF COMMON
STOCK AS OF OCTOBER 31,1999.
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
DYNAMIC MATERIALS CORPORATION
CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
ASSETS ------------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 338,900 $ -
Accounts receivable, net of allowance for doubtful
accounts of $157,000 and $225,000, respectively 4,144,401 4,832,658
Inventories 3,516,139 5,373,829
Prepaid expenses and other 195,679 214,776
Income tax receivable 1,505,897 499,932
Deferred tax asset 224,800 224,800
------------- ----------
Total current assets 9,925,816 11,145,995
------------- ----------
PROPERTY, PLANT AND EQUIPMENT 18,188,158 12,729,209
Less- Accumulated depreciation (4,252,240) (3,931,495)
------------- ----------
Property, plant and equipment-net 13,935,918 8,797,714
------------- ----------
CONSTRUCTION IN PROCESS 658,087 1,853,723
RESTRICTED CASH AND INVESTMENTS 1,048,954 5,048,981
RECEIVABLE FROM RELATED PARTY 335,320 280,000
INTANGIBLE ASSETS, net of accumulated amortization
of $710,154 and $459,759, respectively 5,357,466 5,607,861
OTHER ASSETS 367,991 467,304
------------- ----------
TOTAL ASSETS $ 31,629,552 $33,201,578
============= ==========
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS
<PAGE>
DYNAMIC MATERIALS CORPORATION
CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
LIABILITIES AND STOCKHOLDERS' EQUITY ------------- ------------
<S> <C> <C>
CURRENT LIABILITIES:
Bank overdraft $ - $ 805,304
Accounts payable 2,043,884 2,348,090
Accrued expenses 1,108,464 1,734,282
Current maturities on long-term debt (see note 5) 17,250,000 1,148,924
Current portion of capital lease obligation 33,122 32,450
------------ ----------
Total current liabilities 20,435,470 6,069,050
LONG-TERM DEBT - 14,306,818
CAPITAL LEASE OBLIGATION 10,789 38,299
DEFERRED TAX LIABILITY 22,500 158,500
DEFERRED GAIN 141,889 -
------------ ----------
Total liabilities 20,610,648 20,572,667
------------ ----------
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $.05 par value;
4,000,000 shares authorized: no issued and
outstanding shares - -
Common stock, $.05 par value; 15,000,000 shares
authorized; 2,828,577 and 2,798,391 shares
issued and outstanding, respectively 141,429 139,920
Additional paid-in capital 7,109,263 7,022,450
Deferred compensation (42,188) (54,845)
Retained earnings 3,810,400 5,521,386
------------ ----------
11,018,904 12,628,911
------------ ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 31,629,552 $33,201,578
============ ===========
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS
2
<PAGE>
DYNAMIC MATERIALS CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $ 6,267,617 $ 9,675,750 $23,711,802 $30,543,872
COST OF PRODUCTS SOLD 5,757,880 7,556,682 20,526,592 24,071,416
----------- ---------- ---------- ----------
Gross profit 509,737 2,119,068 3,185,210 6,472,456
----------- ---------- ---------- ----------
COSTS AND EXPENSES:
General and administrative expenses 766,318 1,070,726 2,648,425 2,401,618
Selling expenses 357,579 387,550 1,140,764 1,387,822
New facility start up costs 125,538 86,036 334,496 114,437
Plant closing costs 87,319 - 636,618 -
Impairment of long-lived assets (9,074) - 179,004 -
Costs related to sale of bonding
business 79,462 - 278,470 -
----------- ---------- ---------- -----------
1,407,142 1,544,312 5,217,777 3,903,877
----------- ---------- ---------- -----------
INCOME (LOSS) FROM OPERATIONS (897,405) 574,756 (2,032,567) 2,568,579
OTHER INCOME (EXPENSE):
Other income 3,340 141 10,815 5,625
Interest expense (271,057) (75,166) (697,807) (198,811)
Interest income 931 9,006 3,573 11,089
----------- ---------- ---------- -----------
Income (loss) before income
taxes (1,164,191) 508,737 (2,715,986) 2,386,482
INCOME TAX BENEFIT (EXPENSE) 399,000 (199,000) 1,005,000 (931,000)
----------- ---------- ---------- -----------
NET INCOME (LOSS) $ (765,191) $ 309,737 $(1,710,986) $ 1,455,482
=========== ========== ========== ===========
NET INCOME (LOSS) PER SHARE
Basic $ (0.27) $ 0.11 $ (0.61) $ 0.52
=========== ========== ========== ===========
Diluted $ (0.27) $ 0.11 $ (0.61) $ 0.50
=========== ========== ========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING
Basic 2,828,577 2,807,957 2,820,030 2,780,238
========== ========== ========== ===========
Diluted 2,828,577 2,881,317 2,820,030 2,889,732
========== ========== ========== ===========
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS
3
<PAGE>
DYNAMIC MATERIALS CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Additional
------------- Paid-In Deferred Retained
Shares Amount Capital Compensation Earnings
------ ------ ---------- ------------ --------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1998 2,798,391 $ 139,920 $ 7,022,450 $ (54,845) $ 5,521,386
Common stock issued for
stock option exercises 19,500 974 52,150 - -
Amortization of deferred
compensation - - - 12,657 -
Common stock issued in
connection with the
employee stock purchase
plan 10,686 535 34,663 - -
Net loss - - - - (1,710,986)
---------- --------- ----------- ---------- ------------
Balances, September 30, 1999 2,828,577 $ 141,429 $ 7,109,263 $ (42,188) $ 3,810,400
========== ========= =========== =========== ============
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS
4
<PAGE>
DYNAMIC MATERIALS CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ (1,710,986) $ 1,455,482
Adjustments to reconcile net income
to net cash from operating activities-
Depreciation 841,396 666,885
Amortization 250,395 102,083
Amortization of deferred compensation 12,657 8,438
Deferred income tax (136,000) --
Amortization of deferred gain on the termination
of the swap agreements (9,011) --
Impairment of long-lived assets 179,004 --
Change in (excluding acquisitions)-
Accounts receivable, net 688,257 (1,136,911)
Inventories 1,857,690 1,603,903
Prepaid expenses and other 19,097 1,455
Income tax receivable 1,005,965) 111,654
Bank overdraft (805,304) 82,536
Accounts payable 304,206) (1,252,642)
Accrued expenses 625,818) 373,838
------------ ------------
Net cash flows from operating activities (748,794) 2,016,721
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment of bond proceeds -- (6,461,015)
Release of restricted cash and investments 4,000,027 --
Cash paid in connection with the construction
of the new facility (4,630,059) --
Purchase of AMK assets -- (905,873)
Purchase of Spin Forge assets -- (2,615,691)
Acquisition of property, plant and equipment (332,909) (901,071)
Loan to related party (55,320) (280,000)
Cash paid in connection with the shares
issued to related party -- (425,285)
Change in other noncurrent assets 99,313 26,628
------------ ------------
Net cash flows from investing activities (918,948) (11,562,307)
------------ ------------
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS
5
<PAGE>
DYNAMIC MATERIALS CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Industrial development revenue bond proceeds - 6,850,000
Bond issue costs paid - (171,151)
Borrowings on line of credit, net 1,800,000 2,785,000
Cash received upon termination of the swap
agreements 150,900 -
Finance charges paid in connection with the reducing
revolver credit facility - (33,977)
Payments on long-term debt (5,742) (69,319)
Payments on capital lease obligation (26,838) (20,378)
Net proceeds from issuance of common stock 88,322 151,602
-------------- -------------
Net cash flows from financing activities 2,006,642 9,491,777
-------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS 338,900 (53,809)
CASH AND CASH EQUIVALENTS, beginning of the period - 53,809
-------------- -------------
CASH AND CASH EQUIVALENTS, end of the period $ 338,900 $ -
============== =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for-
Interest, net of amounts capitalized $ 856,279 $ 192,893
============== =============
Income taxes $ 72,483 $ 819,346
============== =============
</TABLE>
NONCASH INVESTING ACTIVITIES:
Costs of $5,825,695, representing the building and equipment placed in
service prior to September 30, 1999 related to the Company's new manufacturing
facility, were transferred from construction in process to fixed assets during
the quarter ended September 30, 1999.
$139,440 of the shares repurchased from a related party were in satisfaction
of a receivable due from that party.
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS
6
<PAGE>
DYNAMIC MATERIALS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The information included in the Condensed Financial Statements is unaudited but
includes all normal and recurring adjustments which, in the opinion of
management, are necessary for a fair presentation of the interim periods
presented. These Condensed Financial Statements should be read in conjunction
with the financial statements that are included in the Company's Annual Report
filed on Form 10-K for the year ended December 31, 1998.
Certain prior period amounts have been reclassified to conform to the current
period presentation.
2. NEW ACCOUNTING PRINCIPLE
The Financial Accounting Standards Board 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, as amended, is effective for fiscal
years beginning after June 15, 2000. The Company is currently assessing the
effect of this new standard.
3. INVENTORIES
This caption on the Condensed Balance Sheet includes the following:
September 30, December 31,
1999 1998
---- ----
Raw Materials $ 1,572,667 $ 1,534,800
Work-in-Process 1,804,803 3,614,485
Supplies 138,669 224,544
----------- -----------
$ 3,516,139 $ 5,373,829
=========== ===========
7
<PAGE>
4. CONSTRUCTION IN PROCESS
The construction in process balance of $658,087 at September 30, 1999 represents
costs incurred on the remaining manufacturing equipment not yet in service at
the Company's new manufacturing facility. Costs of $5,825,695, representing the
building and equipment placed in service prior to September 30, 1999 related to
the Company's new manufacturing facility, were transferred from construction in
process to fixed assets during the quarter ended September 30, 1999.
Construction began in September 1998 and was largely completed during the third
quarter of 1999. The project is being financed using proceeds from the issuance
of industrial development revenue bonds (the "Bonds"). The Company is
capitalizing the interest expense related to the Bonds net of the interest
earned on the investments purchased with the excess proceeds. The portion of the
borrowings on the bonds not yet expended for construction was $1,048,954 (which
includes accrued interest) as of September 30, 1999 and is 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.
5. LONG-TERM DEBT
Long-term debt consists of the following at September 30, 1999 and December 31,
1998:
September 30, December 31,
1999 1998
---- ----
Lines of credit $ 10,400,000 $ 8,600,000
Industrial development
revenue bonds 6,850,000 6,850,000
Notes payable to financial
institution - 5,742
------------ -------------
Total debt 17,250,000 15,455,742
Less current maturities (17,250,000) (1,148,924)
------------ -------------
Total long-term debt $ - $ 14,306,818
============ =============
Due largely to the operating loss the Company incurred for the quarter and nine
months ended September 30, 1999, the Company violated certain financial
covenants under both its amended and restated credit facility with its bank and
its reimbursement agreement relating to the letter of credit with its bank that
supports payment of the principal and interest under the Bonds. The Company had
planned to apply a portion of the proceeds from the sale of certain assets of
the Explosive Metalworking Group to retire the majority of the Company's
borrowings under its credit facility and to redeem in full the outstanding
Bonds. However, as more fully discussed in note 8 below, AMETEK, Inc. ("AMETEK")
has terminated the Asset Purchase Agreement between the two companies.
As a result of such termination, the operating losses incurred by the Company
during 1999 and the expected continued operating losses through the first
quarter of 2000, the Company anticipates continued violations of certain
financial covenants and also anticipates difficulty in meeting scheduled
principal payments under its credit facility during the remainder of 1999 and
the year 2000. Accordingly, the Company is working with its bank to restructure
both its credit facility and the financial covenant conditions under the
reimbursement agreement relating to the
8
<PAGE>
bond. As an initial step in this restructuring, the Company entered into a
Deferral and Wavier Agreement with its bank that (i) defers certain principal
payments that were due on September 30, 1999 ($259,091 under the Company's
acquisition line and $230,000 under its accommodation line) and (ii) waives
covenant defaults until December 30, 1999. As the waiver extends only through
December 30, 1999 and certain covenant violations are likely to continue beyond
this date, the subject debt is classified as a current liability. Under the
Deferral and Waiver Agreement, the interest rate on the acquisition line and
working capital line was increased by 100 basis points and the interest rate on
the accommodation line was increased by 200 basis points.
In addition to its ongoing efforts to enhance operating efficiencies, reduce
costs and optimize cash flows, the Company is evaluating various business
strategies and financing alternatives in connection with its efforts to
restructure its bank financing and/or re-capitalize the Company's balance sheet.
Management believes that the Company will ultimately be successful in these
efforts and will be able to negotiate, as required, necessary extensions to the
Deferral and Waiver Agreement. However there is no assurance that the Company
will be successful in any of these efforts. If the Company is unsuccessful in
restructuring the aforementioned credit facility or obtaining new debt and/or
equity financing, the Company may be required to liquidate certain assets
outside of the normal course of business which could result in a loss on the
disposition of those assets.
Also during the quarter ended September 30, 1999, the Company terminated its
swap agreements with its bank resulting in a deferred gain of $150,900 that is
being amortized over the terms of the related debt agreements.
6. BUSINESS SEGMENTS
The Company is organized in the following two segments: the Explosive
Metalworking Group and the Aerospace Group. The Explosive Metalworking Group
uses explosives to perform metal cladding and shock synthesis.
The most significant product of this group is clad metal which is used in the
fabrication of pressure vessels, heat exchangers and transition joints used in
the hydrocarbon processing, chemical processing, power generation,
petrochemical, pulp and paper, mining, shipbuilding and heat, ventilation and
air conditioning industries. The Aerospace Group machines, forms and welds parts
for the commercial aircraft, aerospace and defense industries.
The accounting policies of both segments are the same as those described in the
summary of significant accounting policies.
The Company's reportable segments are strategic business units that offer
different products and services and are separately managed. Each segment is
marketed to different customer types and requires different manufacturing
processes and technologies. Segment information is presented for the three and
nine months ended September 30, 1999 and 1998 as follows:
9
<PAGE>
<TABLE>
<CAPTION>
Explosive
Metalworking Aerospace Total
------------ ------------ ------------
<S> <C> <C> <C>
For the three months ended September 30, 1999:
Net sales $ 3,110,064 $ 3,157,553 $ 6,267,617
============ ============ ============
Depreciation and amortization $ 197,069 $ 180,169 $ 377,238
============ ============ ============
Income (loss) from operations $ (1,081,693) $ 184,288 $ (897,405)
Unallocated amounts:
Other income 3,340
Interest expense (271,057)
Interest income 931
------------
Consolidated loss before income tax provision $ (1,164,191)
============
</TABLE>
<TABLE>
<CAPTION>
Explosive
Metalworking Aerospace Total
------------ ------------ ------------
<S> <C> <C> <C>
For the three months ended September 30, 1998:
Net sales $ 7,059,195 $ 2,616,555 $ 9,675,750
============ ============ ============
Depreciation and amortization $ 205,899 $ 46,639 $ 252,538
============ ============ ============
Income from operations $ 167,139 $ 407,617 $ 574,756
Unallocated amounts:
Other income 141
Interest expense (75,166)
Interest income 9,006
------------
Consolidated income before income tax provision $ 508,737
============
</TABLE>
<TABLE>
<CAPTION>
Explosive
Metalworking Aerospace Total
------------ ------------ ------------
<S> <C> <C> <C>
For the nine months ended September 30, 1999:
Net sales $ 14,005,406 $ 9,706,396 $ 23,711,802
============ ============ ============
Depreciation and amortization $ 561,493 $ 530,303 $ 1,091,796
============ ============ ============
Income (loss) from operations $ (2,900,518) $ 867,951 $ (2,032,567)
Unallocated amounts:
Other income 10,815
Interest expense (697,807)
Interest income 3,573
------------
Consolidated loss before income tax provision $ (2,715,986)
============
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Explosive
Metalworking Aerospace Total
------------ ------------ ------------
<S> <C> <C> <C>
For the nine months ended September 30, 1998:
Net sales $ 24,765,711 $ 5,778,161 $ 30,543,872
============ ============ ============
Depreciation and amortization $ 613,259 $ 155,709 $ 768,968
============ ============ ============
Income from operations $ 1,682,769 $ 885,810 $ 2,568,579
Unallocated amounts:
Other income 5,625
Interest expense (198,811)
Interest income 11,089
------------
Consolidated income before income tax provision $ 2,386,482
============
</TABLE>
All of the Company's sales are shipped from domestic locations and all of the
Company's assets are located within the United States. The following represents
the Company's net sales based on the geographic location of the customer:
For the three months ended September 30,
1999 1998
---- ----
United States $5,464,846 $8,974,183
Canada 281,653 509,288
Australia - 31,777
Other foreign countries 521,118 160,502
--------- ---------
Total consolidated net sales $6,267,617 $9,675,750
========= =========
For the nine months ended September 30,
1999 1998
---- ----
United States $21,533,124 $25,576,026
Canada 1,312,844 3,229,857
Australia 149,626 31,777
Other foreign countries 716,208 1,706,212
---------- ----------
Total consolidated net sales $23,711,802 $30,543,872
========== ==========
During the three months and nine months ended September 30, 1999, one customer
accounted for 25% and 17% of net sales, respectively. During the three months
ended September 30, 1998, two customers accounted for approximately 25% of net
sales. No one customer accounted for more than 10% of net sales during the nine
months ended September 30, 1998.
11
<PAGE>
7. PLANT CLOSING/IMPAIRMENT OF LONG-LIVED ASSETS
On April 22, 1999, the Company announced that it would be closing its
Louisville, Colorado-based explosion bonded clad metal plate manufacturing
facility in the third quarter of 1999 and consolidating all of its Explosive
Metalworking Group operations into the new Pennsylvania-based clad plate
manufacturing facility. The Company recorded a total of $636,618 in
non-recurring charges during the nine months ended September 30, 1999 to cover
costs associated with this plant closing. Plant closing costs include severance
pay to terminated employees, outplacement service fees and certain expenses
incurred in connection with final plant shutdown, clean-up and site reclamation
work subsequent to the discontinuation of manufacturing activities at this
facility.
In connection with the plant closing discussed above, the Company identified
certain long-lived assets associated with its Colorado manufacturing operations
that will be abandoned and have negligible fair market values. Accordingly, the
Company recorded asset impairment write-downs of $179,004 during the second and
third quarters of 1999. The impaired assets, which after the write-down have no
carrying value are in the process of being disposed of. These assets should
largely be disposed of by the end of the fourth quarter of 1999.
The Company also identified certain inventory that was determined to have little
value as a result of the plant closing. This inventory, which totaled
approximately $108,000, was consequently written off in the second quarter of
1999. This charge is included in cost of products sold.
8. DIVESTITURE OF EXPLOSIVE METALWORKING BUSINESS SEGMENT
On June 23, 1999, the Company announced that it had entered into an asset
purchase agreement to sell certain assets relating to its Explosive Metalworking
Group to AMETEK for an approximate purchase price of $17 million. The closing of
the transaction was expected to occur during the latter part of 1999, pending
the satisfaction of certain conditions. However, in a letter dated October 20,
1999, AMETEK notified the Company that it was terminating the Asset Purchase
Agreement. The Company does not believe that AMETEK has a legal basis for
terminating the agreement and is currently evaluating its course of action
relating to the termination.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion should be read in conjunction with the Condensed
Financial Statements included elsewhere within this quarterly report.
Fluctuations in annual and quarterly operating results may occur as a result of
certain factors such as the size and timing of customer orders and competition.
Due to such fluctuations, historical results and percentage relationships are
not necessarily indicative of the results for any future period. 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. The Company further directs readers to the
factors discussed in the Company's Form 10-K for the year ended December 31,
1998.
GENERAL
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. The Explosive
Metalworking Group comprised a substantial portion of the Company's business
until 1998 when the Company formed its Aerospace Group as a result of the
acquisition of AMK Welding, Inc. ("AMK"), Spin Forge, LLC ("Spin Forge") and
Precision Machined Products, Inc. ("PMP"). The revenues from the Aerospace Group
accounted for 22% of the Company's revenues and 51% of the Company's operating
income for the year ended December 31, 1998. The proportion of revenues
accounted for by the Aerospace Group for the quarter and nine months ended
September 30, 1999 was 50% and 41%, respectively, compared to 27% and 19% for
the comparable periods of 1998.
On June 23, 1999, the Company announced that it had entered into an asset
purchase agreement to sell certain assets relating to its Explosive Metalworking
Group to AMETEK for an approximate purchase price of $17 million. The closing of
the transaction was expected to occur during the latter part of 1999, pending
the satisfaction of certain conditions. However, in a letter dated October 20,
1999, AMETEK notified the Company that it was terminating the Asset Purchase
Agreement. The Company does not believe that AMETEK has a legal basis for
terminating the agreement and is currently evaluating its course of action
relating to such termination.
EXPLOSIVE METALWORKING GROUP. 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
13
<PAGE>
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
shock synthesis of synthetic diamonds and, through the first half of 1999,
included explosive forming of metal parts. Concurrent with the closing of its
Colorado manufacturing facility in July, the Company discontinued its explosive
forming manufacturing activities.
AEROSPACE GROUP. 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.
The Company formed its Aerospace Group through three separate acquisitions
during 1998. In January 1998, the Company completed its acquisition of 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, 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 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.
RISKS. 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, as has been the case for
the nine months ended September 30, 1999, 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
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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 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 and a half, 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 patch from the vendor in January 1999. The
Company's desktop applications became Year 2000 compliant during the third
quarter of 1999 with the installation of patches received 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 will complete before the end of the
year, 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 expects future incremental Year 2000 project 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,
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future Year 2000 project costs will not have a material adverse effect on its
financial condition and results of operations.
While management does not believe there to be significant Year 2000 risks for
the Company, the Company's contingency plan is to rely on manual workarounds
that have been developed as part of the Company's Year 2000 compliance program.
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO QUARTER AND NINE
MONTHS ENDED SEPTEMBER 30, 1998
The following table sets forth for the periods indicated the percentage
relationship to net sales of certain income statement data:
PERCENTAGE OF NET SALES
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
1999 1998 1999 1998
---- ---- ---- ----
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Products Sold 91.9% 78.1% 86.6% 78.8%
----- ----- ----- -----
%
Gross Margin 8.1% 21.9% 13.4% 21.2%
General & Administrative 12.2% 11.1% 11.2% 7.9%
Selling Expenses 5.7% 4.0% 4.8% 4.5%
New Facility Start-up 2.0% 0.9% 1.4% 0.4%
Costs
Plant Closing Costs 1.2% - 2.7% -
Asset Impairments 0.0% - 0.7% -
Costs related to sale of
Bonding business 1.3% - 1.2% -
Income (Loss) from
Operations -14.3% 5.9% -8.6% 8.4%
Interest Expense 4.3% 0.8% 2.9% 0.7%
Income Tax (Expense)
Benefit 6.4% -2.1% 4.2% -3.0%
Net Income (Loss) -12.2% 3.2% -7.2% 4.8%
NET SALES. Net sales for the quarter ended September 30, 1999 decreased 35.2% to
$6,267,617 from $9,675,750 in the third quarter of 1998. The Company's Aerospace
Group, which was formed in 1998 as a result of the acquisitions of AMK, Spin
Forge and PMP, contributed $3,157,553 (50.4% of total sales) to third quarter
1999 sales versus sales of $2,616,555 (27.0% of total sales) in the third
quarter of 1998. Sales by the Explosive Metalworking Group, which includes
explosion bonding of clad metal, explosively formed metal products and shock
synthesis of synthetic diamonds, decreased 55.9% from $7,059,195 in the third
quarter of 1998 to $3,110,064 in the third quarter of 1999. For the nine months
ended September 30, 1999, net sales decreased 22.4% to $23,711,802 from
$30,543,872 for the comparable period of 1998. Aerospace Group sales for the
nine months ended September 30, 1999 totaled $9,706,396 (40.9% of total sales),
an increase of 68% from sales of $5,778,161 (18.9% of total sales) reported for
the comparable period of 1998. These increases were largely due to the December
1, 1998 acquisition of PMP whose results are included in the Aerospace Group's
sales and operating income calculation for 1999 but not 1998. Sales by the
Explosive Metalworking Group for the comparable nine-month period decreased by
43.4% from $24,765,711 in 1998 to $14,005,406 in 1999. The decreases in
Explosive Metalworking Group sales for both the three-month and nine-month
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periods reflect what management believes is a significant slowdown in global
market demand for explosion bonded clad metal plate that is expected to continue
for the remainder of 1999 and at least the first half of the year 2000.
GROSS PROFIT. As a result of the sharp decline in the Company's net sales, gross
profit for the quarter ended September 30, 1999 decreased by 75.9% to $509,737
from $2,119,068 in the third quarter of 1998. The gross profit margin for the
quarter ended September 30, 1999 was 8.1%, representing a 63% decline from the
gross profit margin of 21.9% for the third quarter of 1998. For the nine months
ended September 30, 1999, gross profit decreased 50.8% to $3,185,210 from
$6,472,456 in the comparable period of 1998. The gross profit margin for the
nine months ended September 30, 1999 was 13.4%, representing a 36.8% decline
from the gross profit margin of 21.2% for the first nine months of 1998. The
gross profit margin for the Explosive Metalworking Group decreased from 18.5% in
the third quarter of 1998 to a negative gross margin of 3.9% in the third
quarter of 1999. For the comparable nine-month periods, Explosive Metalworking
gross margins decreased from 19.5% in 1998 to 5.2% in 1999. The significant
decrease in gross profit margins for the Explosive Metalworking Group are due to
unfavorable fixed manufacturing overhead cost variances associated with the
sharp declines in production and sales of clad plate and proportionately lower
sales of higher margin explosively formed products. The gross profit margin for
the Aerospace Group was 20.0% for the quarter ended September 30, 1999 as
compared to 31.0% in the third quarter of 1998. For the comparable nine-month
periods, Aerospace Group gross margins decreased from 28.5% in 1998 to 25.3% in
1999. The decline in gross margin rates for the Aerospace Group reflects a
decrease in year-to-year sales at the Spin Forge operating unit and unfavorable
product mix changes at each of the three Aerospace Group operating units.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the quarter
ended September 30, 1999 decreased 28.4% to $766,318 from $1,070,726 in the
third quarter of 1998. This decrease of $304,408 is largely attributable to
non-recurring charges of $262,524 in the third quarter of 1998 relating to the
departure of the Compamy's former president and chief executive officer. For the
nine months ended September 30, 1999, general and administrative expenses
increased 10.3% to $2,648,425 from $2,401,618 in the comparable period of 1998.
The increase of $246,807 for the nine-month period includes a $494,097 increase
in direct Aerospace Group general and administrative expenses. The increases in
direct general and administrative expenses of the Aerospace Group relate to the
timing of the 1998 acquisitions of AMK, Spin Forge and PMP which were completed
on January 5, March 18 and December 1, 1998, respectively. As a percentage of
net sales, general and administrative expenses increased from 11.1% in the third
quarter of 1998 to 12.2% for the quarter ended September 30, 1999 and from 7.9%
to 11.2% for the comparable nine-month periods. These increased percentages are
largely attributable to the significant decrease in sales by the Explosive
Metalworking Group.
SELLING EXPENSE. Selling expenses decreased by 7.7% to $357,579 for the quarter
ended September 30, 1999 from $387,550 in the third quarter of 1998. For the
nine months ended September 30, 1999, selling expenses decreased 17.8% to
$1,140,764 from $1,387,822 in the comparable period of 1998. These decreases
reflect lower expense levels in a number of categories, including compensation
and benefits, advertising and promotion, reserves for bad debts and travel and
entertainment expenses. Selling expenses as a percentage of net sales increased
from 4.0% in the third quarter of 1998 to 5.7% for the quarter ended September
30, 1999 and from 4.5% for the nine months ended September 30,
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1998 to 4.8% for the comparable period of 1999. These increased percentages are
largely attributable to the significant decrease in sales by the Explosive
Metalworking Group.
START-UP COSTS. For the quarter and nine months ended September 30, 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 the quarter and nine months ended September 30, 1999
totaled $125,538 and $334,496, respectively, as compared to $86,036 and $114,437
for the respective comparable periods of 1998. Start-up costs 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 new facility commenced operations in August 1999 at which time
all operating costs associated with this new facility began to be recorded as
manufacturing overhead that is included in the computation of cost of products
sold.
PLANT CLOSING COSTS. On April 23, 1999, the Company announced that it would be
closing its Louisville, Colorado-based explosion bonded clad metal plate
manufacturing facility in the third quarter of 1999 and consolidating all of its
Explosive Metalworking Group operations into the new Pennsylvania-based clad
metal plate manufacturing facility. For the quarter and nine months ended
September 30, 1999, the Company recorded non-recurring charges of $87,319 and
$636,618, respectively, related to costs associated with this plant closing.
Plant closing costs include severance pay to terminated employees, outplacement
service fees and certain expenses to be incurred in connection with final plant
shutdown, clean-up and site reclamation work subsequent to the discontinuation
of manufacturing activities at this facility in July.
IMPAIRMENT OF LONG-LIVED ASSETS. In connection with the plant closing discussed
above, the Company identified certain long-lived assets associated with its
Colorado manufacturing operations that will be abandoned and have negligible
fair market values. Accordingly, the Company recorded asset impairment
write-down charges in the aggregate amount of $188,079 during the second quarter
of 1999 that are included in the results for the nine months ended September 30,
1999.
The Company also identified certain inventory that was determined to have little
value as a result of the plant closing. This inventory, which totaled
approximately $108,000, was consequently written off in the second quarter of
1999. This charge is included in cost of products sold for the nine months ended
September 30, 1999.
COSTS RELATED TO SALE OF EXPLOSIVE METALWORKING GROUP. On June 23, 1999, the
Company announced that it had entered into an agreement to sell certain assets
relating to its Explosive Metalworking Group to AMETEK for approximately $17
million. However, on October 20, 1999, AMETEK notified the Company that it was
terminating the Asset Purchase Agreement. In connection with the Company's
efforts to sell its Explosive Metalworking Group, the Company recorded expenses
of $79,462 and $278,470 for the three and nine months ended September 30, 1999.
These expenses relate principally to investment banking, legal and other third
party fees associated with the terminated sales transaction. Certain of these
expenses will continue to be incurred by the Company during the fourth quarter
of 1999.
INCOME (LOSS ) FROM OPERATIONS. For the third quarter ended September 30, 1999,
the Company reported a $897,405 loss from operations compared to income from
operations of $574,756 for the third quarter of 1998. This decrease is a result
of the 35.2% decrease in net sales discussed above and
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<PAGE>
non-recurring charges in the aggregate amount of $283,245 associated with plant
closing costs, new facility start-up costs, asset impairment write-downs and
expenses incurred in connection with efforts to sell the Explosive Metalworking
Group. For the nine months ended September 30, 1999, the Company reported an
operating loss of $2,032,567 compared to income from operations of $2,568,579 in
the comparable period of 1998. This decrease is a result of the 22.4% decrease
in sales for the nine month period and non-recurring charges in the aggregate
amount of $1,428,588 associated with plant closing costs, new facility start-up
costs, asset impairment write-downs and expenses incurred in connection with
efforts to sell the Explosive Metalworking Group. For the quarter and nine
months ended September 30, 1999, the Company's Aerospace Group reported income
from operations of $184,188 and $867,851, respectively, as compared to $407,617
and $885,811 for the respective comparable periods of 1998. For the quarter and
nine months ended September 30, 1999, the Explosive Metalworking Group reported
a loss from operations of $1,081,693 and $2,900,518, respectively, as compared
to income from operations of $167,139 and $1,682,769 for the respective
comparable periods of 1998.
INTEREST EXPENSE. Interest expense increased to $271,057 for the quarter ended
September 30, 1999 from $75,166 in the third quarter of 1998. For the nine
months ended September 30, 1999, interest expense increased to $697,807 from
$198,811 in the comparable period of 1998. These increases are principally due
to borrowings under the Company's revolving line of credit with the Company's
bank that were required to finance the AMK, Spin Forge and PMP acquisitions and
to borrowings under the Company's Bonds that were used to finance the new clad
metal plate manufacturing facility in Pennsylvania.
INCOME TAX BENEFIT (EXPENSE). Due to losses before income taxes and the ability
to carry-back losses to prior years in which the Company generated taxable
income, the Company recorded tax benefits of $399,000 and $1,005,000 for the
quarter and nine months ended September 30, 1999. For the comparable periods of
1998, the Company recorded income tax expense of $199,000 and $931,000,
respectively. For the quarter and nine months ended September 30, 1999, the
effective tax rate was 34.3% and 37.0%, respectively, as compared to 39.1% and
39.0% for the comparable 1998 periods. The lower effective rates for 1999
reflect an adjustment recorded in the third quarter of 1999 to refine the
estimated effective tax benefit rate associated with the carryback of the
Company's 1999 estimated tax loss to the 1998 and 1997 tax years.
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 its
bank 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
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<PAGE>
capital line" of $6,000,000 (subject to borrowing base restrictions). Beginning
on September 30, 1999 and on the last day of each calendar quarter thereafter,
the maximum borrowings available under the acquisition line 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
at .25% above the bank's Prime rate. Under a Deferral and Waiver Agreement
between the Company and its bank that was signed on October 15, 1999, the
interest rate on the acquisition line and working capital line was increased by
100 basis points and the interest rate on the accommodation line was increased
by 200 basis points. The lines of credit are secured by the Company's accounts
receivable, inventory and property, plant and equipment. Outstanding borrowings
at September 30, 1999 on the acquisition line, accommodation line and working
capital line totaled $5,700,000, $2,300,000 and $2,400,000, 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 (the "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 (classified as "Restricted Cash and Investments" on the
Condensed Balance Sheets). 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 the nine months ended September 30, 1999, the Company used $748,794 in
cash to fund operating activities as compared to generating $2,016,721 during
the first nine months of 1998. The principal sources of cash flow from
operations for the nine months ended September 30, 1999 were depreciation and
amortization charges of $1,104,450, a decrease in inventories of $1,857,690 and
a decrease in accounts receivable of $688,257. These sources of operating cash
flow were more than offset by the net loss of $1,710,986, a $1,141,965 increase
in income tax receivable, and a $1,735,330 decrease in accounts payable, accrued
expenses and bank overdraft. Investing activities for the nine months ended
September 30, 1999 used $918,948 of cash, including expenditures of $4,630,059
on the new Pennsylvania manufacturing facility and $332,909 for other capital
expenditures, and are stated net of $4,000,027 in reimbursement of bond proceeds
from the trustee. Financing activities provided $2,006,642 of net cash for the
nine months ended September 30, 1999, including new line of credit borrowings of
$1,800,000.
Due largely to the operating loss the Company incurred for the quarter and nine
months ended September 30, 1999, the Company violated certain financial
covenants under both its amended and restated credit facility with its bank and
its reimbursement agreement relating to the letter of credit with its bank that
supports payment of the principal and interest under the
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Bonds. The Company had planned to apply a portion of the proceeds from the sale
of certain assets of the Explosive Metalworking Group to retire the majority of
the Company's borrowings under its credit facility and to redeem in full the
outstanding Bonds. However, as more fully discussed in note 8 above, AMETEK,
Inc. has terminated the Asset Purchase Agreement between the two companies.
As a result of such termination, the operating losses incurred by the Company
during 1999 and the expected continued operating losses through the first
quarter of 2000, the Company anticipates continued violations of certain
financial covenants and also anticipates difficulty in meeting scheduled
principal payments under its credit facility during the remainder of 1999 and
the year 2000. Accordingly, the Company is working with its bank to restructure
both its credit facility and the financial covenant conditions under the
reimbursement agreement relating to the bonds. As an initial step in this
restructuring, the Company entered into a Deferral and Wavier Agreement with its
bank that (i) defers certain principal payments that were due on September 30,
1999 ($259,091 under the Company's acquisition line and $230,000 under its
accommodation line) and (ii) waives covenant defaults until December 30, 1999.
As the waiver extends only through December 30, 1999 and certain covenant
violations are likely to continue beyond this date, the subject debt is
classified as a current liability.
In addition to its ongoing efforts to enhance operating efficiencies, reduce
costs and optimize cash flows, the Company is evaluating various business
strategies and financing alternatives in connection with its efforts to
restructure its bank financing and/or re-capitalize the Company's balance sheet.
Management believes that the Company will ultimately be successful in these
efforts and will be able to negotiate, as required, necessary extensions to the
Deferral and Waiver Agreement. However, there is no assurance that the Company
will be successful in any of these efforts. If the Company is unsuccessful in
restructuring the aforementioned credit facility or obtaining new debt and/or
equity financing, the Company may be required to liquidate certain assets
outside of the normal course of business which could result in a loss on the
disposition of those assets.
SHAREHOLDER INFORMATION
The Company's common stock is traded on the Nasdaq National Market. On October
27, 1999, Nasdaq notified the Company that it was not in compliance with the
Nasdaq public float requirement which requires a minimum value of $5,000,000 for
shares not held directly or indirectly by any officer or director, and any other
person who is the beneficial owner of more than 10 percent of the total shares
outstanding. Nasdaq advised the Company that it would be provided ninety
calendar days in which to regain compliance with the public float requirement.
If the Company is unable to demonstrate compliance with the minimum $5,000,000
market value of public float requirement on or before the end of the ninety day
period ending January 25, 2000, for at least ten consecutive days, the Company's
securities may be delisted by Nasdaq at the opening of business on January 27,
2000.
The Company is currently evaluating all available options, including commencing
appeal procedures allowed by Nasdaq, which management believes could result in
the Company being allowed to remain on the Nasdaq National Market. Other viable
options include the Company moving onto the Nasdaq Small Cap Market or some
other public stock market system.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company had been named as a third party defendant in a lawsuit filed in the
United States District Court for the District of Wyoming alleging various types
of damages for the alleged breach of a supply contract to which the Company is a
party. The probable outcome of such litigation is unclear at this time.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit Number Description of Exhibit
- -------------- ----------------------
2.1 Deferral and Waiver Agreement, dated October 15, 1999, by and
between KeyBank National Association and the Company.
27 Financial Data Schedule.
(b) A report on Form 8-K was filed on September 15, 1999 reporting that a
dispute between the Company and AMETEK had developed regarding the terms of the
Asset Purchase Agreement, dated as of June 23, 1999, by and between the Company
and AMETEK.
A report on Form 8-K was filed on October 20, 1999 reporting that AMETEK
had terminated the Asset Purchase Agreement, dated as of June 22, 1999, by and
between the Company and AMETEK.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DYNAMIC MATERIALS CORPORATION
(Registrant)
Date: November 15, 1999
-------------------------------------------
Richard A. Santa, Vice President of Finance
and Chief Financial Officer (Duly
Authorized Officer and Principal
Financial and Accounting Officer)
23
DEFERRAL AND WAIVER AGREEMENT
THIS DEFERRAL AND WAIVER AGREEMENT is made and entered into this 15th day
of October, 1999, by and between KEYBANK NATIONAL ASSOCIATION, a national
banking association ("LENDER") and DYNAMIC MATERIALS CORPORATION, a Delaware
corporation (the "COMPANY").
RECITALS
A. On December 31, 1998, the Company and Lender entered into a First
Amendment to Amended and Restated Credit Facility and Security Agreement ("FIRST
AMENDMENT"), which amended the terms of a November 30, 1998 Amended and Restated
Credit Facility and Security Agreement (the First Amendment and the Amended and
Restated Credit Facility and Security Agreement shall be hereinafter
collectively referred to as the "CREDIT AGREEMENT"). Pursuant to the terms of
the First Amendment, Lender agreed to provide credit facilities to the Company
in an aggregate principal amount of up to $14,000,000, consisting of an
Acquisition Line with a maximum credit limit of $5,700,000, an Accommodation
Line with a maximum credit limit of $2,300,000, and a Working Capital Credit
Line with a maximum credit limit of $6,000,000.
B. By letter dated July 21, 1999, Lender has waived for the period ended
September 30, 1999 certain of the Company's covenant defaults under the Credit
Agreement and under that certain Reimbursement Agreement between the parties
dated as of September 1, 1998, executed in connection with Lender's issuance of
a letter of credit to support principal and interest payments under certain
industrial development revenue bonds (the Credit Agreement and the Reimbursement
Agreement are sometimes hereinafter collectively referred to as the "LOAN
DOCUMENTS"). In addition, by letter dated September 30, 1999, Lender deferred
until October 15, 1999 certain principal payments that were required to be made
by the Company on September 30, 1999.
C. Company hereby acknowledges that as of the date hereof, it continues to
be in default under the Loan Documents and is unable to cure such defaults.
D. Company has requested that Lender enter into this Deferral and Waiver
Agreement in order to give the Company time to undertake diligent efforts to
develop and implement a business plan that will bring it into compliance with
its obligations under the Loan Documents or to otherwise provide for a
refinancing or infusion of equity that will permit the obligations under the
Loan Documents to be satisfied.
E. Lender is willing to enter into this Deferral and Waiver Agreement, but
only upon the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the above Recitals and for other good
and valuable consideration, the receipt and adequacy of which are hereby
mutually acknowledged, the parties do hereby agree as follows:
<PAGE>
1. AFFIRMATION OF RECITALS. The Recitals set forth above are true and
correct and are incorporated herein by this reference.
2. ACKNOWLEDGMENT OF INDEBTEDNESS AND DEFAULT. Company acknowledges that as
of the date hereof, a material default under the Loan Documents has occurred in
the principal amounts due to Lender pursuant to the terms and conditions of the
Loan Documents and that, with respect thereto, as of the date hereof, the
following sums are owed by the Company to Lender:
Principal amount due under Acquisition Line $259,090.91
Principal amount due under Accommodation Line $230,000.00
In addition to the foregoing payment defaults, Company acknowledges that it is
in default of certain loan covenant requirements under the Loan Documents (the
"Covenant Defaults"), including, but not limited to the following: Minimum Debt
Service Coverage Ratio of 1.25:1.00 (Section 8.16 of Credit Agreement); Funded
Debt to EBITDA Ratio of not more than 3.50:1.00 (Section 8.18 of Credit
Agreement); Minimum Current Ratio of not less than 2.00:1.00 (Section 8.15 of
Credit Agreement and Section 6.15 of Reimbursement Agreement); Ratio of Total
Indebtedness to Tangible Net Worth of not more than 1.99 to 1.00 (Section 6.18
of the Reimbursement Agreement).
3. LENDER'S FORBEARANCE. Provided that Company is not in default under the
terms of this Deferral and Waiver Agreement, Lender agrees not to declare any
further defaults under the Loan Documents, to accelerate the amounts due under
the Loan Documents, or to otherwise exercise its other rights and remedies under
the Loan Documents for the period from October 16, 1999 through December 30,
1999 (the "DEFERRAL PERIOD"). The principal payments referred to in paragraph 2
above, together with accrued interest (as calculated pursuant to paragraphs 4
and 5 below), shall be due and payable on December 30, 1999.
4. INTEREST RATE ON ACCOMMODATION LINE. From and after the date hereof,
interest on the unpaid principal due with respect to the Accommodation Line
shall accrue and be payable at the rate of the Prime Rate (as defined in the
First Amendment) PLUS two hundred twenty five (225) basis points.
5. INTEREST RATE ON ACQUISITION LINE AND WORKING CAPITAL CREDIT LINE. From
and after the date hereof, interest on the unpaid principal due with respect to
the Acquisition Line and the Working Capital Credit Line shall accrue and be
payable as set forth in the First Amendment, PLUS one hundred (100) basis
points.
6. RETENTION OF CONSULTANT BY LENDER. During the Deferral Period, Lender
shall be entitled to retain a consultant for the purpose of reviewing the
Company's business plan and financial records. If so requested by Company, the
consultant shall execute a non-disclosure agreement pursuant to which
information provided to the consultant by the Company shall not be disclosed to
2
<PAGE>
third parties without the consent of Company. Notwithstanding the foregoing
sentence, the consultant shall be entitled to provide such information to Lender
and Lender's other professionals, including its counsel. The Company shall
cooperate with the consultant in responding to requests for information, and
shall provide the consultant with reasonable access to the Company's books and
records and the Company's personnel. All fees and expenses incurred by Lender
for the services of consultant shall be reimbursed to Lender by the Company
within ten (10) days of written request therefor.
7. WAIVER OF COVENANT VIOLATIONS. Provided that the Company is not in
default hereunder, Lender agrees, during the Deferral Period, to waive the
Company's Covenant Defaults under the Loan Documents.
8. NO DEFENSES, WAIVERS. As of the date of this Deferral and Waiver
Agreement, the amounts set forth in paragraph 2 above are due and payable by the
Company to Lender, and the Company acknowledges that it has no defense, offset,
or counterclaims to any of Company's obligations under the Loan Documents. To
the extent that any such defenses, claims or offsets exist as of the date
hereof, they are hereby waived and released in consideration of Lender's
execution of this Deferral and Waiver Agreement. Company has duly authorized,
executed and delivered this Deferral and Waiver Agreement to Lender, and the
Company acknowledges that the Loan Documents are valid and enforceable in
accordance with their terms against the Company.
9. DEFAULTS. The occurrence of any one or more of the following shall
constitute a default under this Deferral and Waiver Agreement:
(i) the untruth of any representation or warranty contained in
this Deferral and Waiver Agreement, or the existence of a misrepresentation of
fact or fraud contained in any document or information heretofore or hereafter
submitted or communicated to Lender in support of this Deferral and Waiver
Agreement;
(ii) breach or violation of any terms, covenant or condition
contained in this Deferral and Waiver Agreement;
(iii) any other default (other than non-payment of principal
and the Covenant Defaults acknowledged in paragraph 2 above) under any of the
Loan Documents;
(iv) any variation by Two Hundred and Fifty Thousand Dollars
($250,000) or more (on a cumulative basis) between (i) the proforma cash flow
summary (September 21, 1999 update) and monthly income statement summary
(September 21, 1999 update) which have been submitted by the Company to Lender
in accordance with the Loan Documents and (ii) the actual cash flow and
operating income of the Company calculated and submitted to Lender within twenty
(20) days following the end of each calendar month during the Deferral Period.
10.
3
<PAGE>
TERMINATION; REMEDIES. Immediately following the occurrence of any default under
this Deferral and Waiver Agreement, Lender may, at its option, (i) terminate its
obligations to waive Covenant Defaults and defer payments as contained herein
without notice or demand to the Company and (ii) pursue any other remedies
available to it under the Loan Documents or otherwise. If not sooner terminated,
Lender's obligation to waive Covenant Defaults and defer payments as set forth
herein shall terminate automatically and without notice to or action by Company
on December 30, 1999.
11. NO WAIVER OF REMEDIES. Lender expressly reserves any and all rights and
remedies available to it under this Deferral and Waiver Agreement and the Loan
Documents, at law or in equity in the event the Company defaults under this
Deferral and Waiver Agreement. No failure to exercise, or delay by Lender in
exercising, any right, power or privilege hereunder shall preclude any other or
further exercise thereof, or the exercise of any other right, power or
privilege. The rights and remedies provided in this Deferral and Waiver
Agreement and the Loan Documents are cumulative and not exclusive of each other
or of any right or remedy provided by law or in equity. Except as expressly
provided in the Loan Documents, no notice to or demand upon the Company in any
instance shall, in itself, entitle the Company to any other or further notice or
demand in similar or other circumstances or constitute a waiver of the right of
Lender to any other or further action in any circumstances without notice or
demand.
12. EXPENSES; ATTORNEYS' FEES. In addition to all other amounts that are
now due or may hereafter become due to Lender under the Loan Documents or this
Deferral and Waiver Agreement, the Company shall reimburse Lender for all
amounts reasonably incurred by or on behalf of Lender for attorneys' fees,
recording expenses, title insurance fees, UCC searches, and all other reasonable
expenses incurred by or on behalf of Lender by reason of the matters specified
herein and for the preparation of this Deferral and Waiver Agreement and all
other documents necessary and required to effectuate the provisions hereof
including, without limitation, all reasonable costs and expenses with respect to
the Company's compliance with the terms and conditions hereof and Lender's
enforcement thereof. In the event any dispute shall arise concerning the subject
matter of this Deferral and Waiver Agreement, Lender shall be entitled to
recover from the Company its reasonable attorneys' fees and costs incurred in
the enforcement of any of the provisions set forth herein. The rights and
remedies of Lender contained in this paragraph shall be in addition to, and not
in lieu of, the rights and remedies contained in the Loan Documents and as
provided by law.
13. GOVERNING LAW. This Deferral and Waiver Agreement shall be construed in
accordance with the laws of the State of Colorado, without regard to its
conflict of laws principles.
14. CONSTRUCTION. This Deferral and Waiver Agreement shall not be construed
more strictly against Lender merely by virtue of the fact that the same has been
prepared by Lender or its counsel, it being recognized that the Company and
Lender have contributed substantially and materially to the preparation of this
Deferral and Waiver Agreement, and the Company and Lender each acknowledge and
waive any claim contesting the existence and the adequacy of the consideration
given by any of the other parties hereto in entering into this Deferral and
Waiver Agreement.
4
<PAGE>
15. ENTIRE AGREEMENT. Company and Lender each acknowledge that there are no
other agreements or representations, either oral or written, express or implied,
not embodied in this Deferral and Waiver Agreement and the Loan Documents,
which, together, represent a complete integration of all prior and
contemporaneous agreements and understandings of the Company and Lender, and the
provisions of the Loan Documents are hereby ratified and confirmed.
16. BENEFIT. Except as provided herein, this Deferral and Waiver Agreement
shall be binding upon and shall inure to the benefit of the Company and Lender,
and their respective successors and assigns.
17. RATIFICATION. The Loan Documents shall remain in full force and effect,
and all of the terms and provisions of the Loan Documents, as herein modified,
are hereby ratified and reaffirmed.
18. CONSENT TO AGREEMENT. Company acknowledges that it has thoroughly read
and reviewed the terms and provisions of this Deferral and Waiver Agreement and
is familiar with the same, that the terms and provisions contained herein are
clearly understood by it and have been fully and unconditionally consented to by
it and that the Company has had the full benefit and advice of counsel of its
own selection, or the opportunity to obtain the benefit and advice of counsel of
its own selection, in regard to understanding the terms, meaning and effect of
this Deferral and Waiver Agreement and that this Deferral and Waiver Agreement
has been entered into by the Company freely, voluntarily, with full knowledge,
and without duress, and that in executing this Deferral and Waiver Agreement,
the Company is relying on no other representations either written or oral,
express or implied, made to the Company by any other party hereto, and that the
consideration received by the Company hereunder has been actual and adequate.
19. RELEASE. As additional consideration for Lender entering into this
Deferral and Waiver Agreement, the Company hereby fully and unconditionally
releases and forever discharges Lender, its agents, servants, employees,
directors, officers, attorneys, branches, affiliates, subsidiaries, successors
and assigns and all persons, firms, corporations, and organizations acting in
its behalf of and from all damage, loss, claims, demands, liabilities,
obligations, actions and causes of action whatsoever which the Company may now
have or claim to have against Lender as of the date of this Deferral and Waiver
Agreement, whether presently known or unknown, and of every nature and extent
whatsoever on account of or in any way affecting, concerning, arising out of or
founded upon the Loan Documents including, but not limited to, all such loss or
damage of any kind heretofore sustained, or that may arise as a consequence of
the dealings between the parties up to and including the date of this Deferral
and Waiver Agreement.
20. COUNTERPARTS. It is understood and agreed that this Deferral and Waiver
Agreement may be executed in several counterparts, each of which shall, for all
purposes, be deemed an original and all of such counterparts, taken together,
shall constitute one and the same Deferral and Waiver Agreement, even though all
of the parties hereto may not have executed the same counterpart of this
Deferral and Waiver Agreement.
5
<PAGE>
21. LENDER NOT LIABLE FOR EXPENSES. Nothing in this Deferral and Waiver
Agreement shall be intended or construed to hold Lender liable or responsible
for any expenses, disbursement, liability or obligation of any kind or nature
whatsoever including, but not limited to, wages, salaries, payroll taxes,
deposits, withholding, benefits or other amounts payable to or on behalf of the
Company.
22. COMPANY REMAINS IN CONTROL. Company and Lender agree that the Company
remains in control of the Company, that it determines the business plan for, and
employment, management and operating directions and decisions for Company.
23. MISCELLANEOUS. This Deferral and Waiver Agreement is made for the sole
protection of Lender and the Company and their respective successors and
assigns. No other person shall have any right whatsoever hereunder. Notices to
parties hereunder may be given to them at the addresses and in the manner
provided in the Loan Documents. Time shall be of the strictest essence in the
performance of each and every one of the Company's obligations hereunder. If any
provision of this Deferral and Waiver Agreement is held to be invalid or
unenforceable, the remaining provisions shall remain in effect without
impairment.
IN WITNESS WHEREOF, this Deferral and Waiver Agreement has been executed by
the parties hereto in manner and form sufficient to bind them, as of the day and
year first above written.
KEYBANK NATIONAL ASSOCIATION
a national banking association
By:
Name:
-----------------------------------
Its:
DYNAMIC MATERIALS CORPORATION,
a Delaware corporation
By:
Name:
-----------------------------------
Its:
6
<PAGE>
STATE OF COLORADO )
) ss.
COUNTY OF )
-------------------
The foregoing was acknowledged before me this day of
----
, 1999, by , as of
- ------------- ----------------- -------------------------
KEYBANK NATIONAL ASSOCIATION, a national banking association.
WITNESS my hand and official seal.
My commission expires:
-------------------------
Notary Public
STATE OF COLORADO )
) ss.
COUNTY OF )
-----------------
The foregoing was acknowledged before me this day of
----
, 1999, by , as of
- ------------- ----------------- -------------------------
DYNAMIC MATERIALS CORPORATION, a Delaware corporation.
WITNESS my hand and official seal.
My commission expires:
-------------------------
Notary Public
7
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