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 AND
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934 FOR THE TRANSITION PERIOD FROM TO .
Commission file number 0-8328
---------------------
DYNAMIC MATERIALS CORPORATION
(Exact name of Registrant as Specified in its Charter)
Delaware 84-0608431
(State of Incorporation or Organization) (I.R.S. Employer Identification No.)
551 Aspen Ridge Drive, Lafayette, Colorado 80026
(Address of principal executive offices, including zip code)
(303) 665-5700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes X No
------ ------
The number of shares of Common Stock outstanding was 4,970,018 as of
October 31, 2000.
<PAGE>
Page 1 of 2
ITEM 1. Financial Statements
DYNAMIC MATERIALS CORPORATION
CONDENSED BALANCE SHEETS
(unaudited)
September 30, December 31,
ASSETS 2000 1999
------ ------------- ------------
CURRENT ASSETS:
Cash $ 174,839 $ -
Accounts receivable, net of
allowance for doubtful accounts of
$148,000 and $112,000, respectively 4,083,773 3,816,879
Inventories 4,014,796 3,410,828
Prepaid expenses and other 110,698 310,477
Income tax receivable - 1,360,000
----------- -----------
Total current assets 8,384,106 8,898,184
----------- -----------
PROPERTY, PLANT AND EQUIPMENT 17,757,615 18,867,796
Less- Accumulated depreciation (4,157,324) (4,538,838)
----------- -----------
Property, plant and equipment-net 13,600,291 14,328,958
----------- -----------
CONSTRUCTION IN PROCESS - 389,795
RESTRICTED CASH AND INVESTMENTS 169,304 424,312
RECEIVABLE FROM RELATED PARTY - 354,588
INTANGIBLE ASSETS, net of accumulated
amortization of $1,018,461 and $786,077,
respectively 5,070,130 5,281,543
OTHER ASSETS 274,948 409,938
----------- -----------
TOTAL ASSETS $ 27,498,779 $ 30,087,318
=========== ===========
See Notes to Condensed Financial Statements.
<PAGE>
Page 2 of 2
DYNAMIC MATERIALS CORPORATION
CONDENSED BALANCE SHEETS
(unaudited)
September 30, December 31,
2000 1999
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------ ------------- ------------
CURRENT LIABILITIES:
Bank overdraft $ - $ 193,471
Accounts payable 1,626,421 1,810,577
Accrued expenses 976,985 1,096,796
Line of credit with related party 3,750,000 -
Current maturities on long-term debt 715,000 16,785,000
Current portion of capital lease obligation 12,271 35,230
----------- -----------
Total current liabilities 7,080,677 19,921,074
LONG-TERM DEBT 5,465,000 -
CONVERTIBLE SUBORDINATED
NOTE WITH RELATED PARTY 1,200,000 -
CAPITAL LEASE OBLIGATION - 3,069
DEFERRED GAIN 82,153 133,192
----------- -----------
Total liabilities 13,827,830 20,057,335
----------- -----------
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $.05 par value;
4,000,000 shares authorized: no issued and
outstanding shares - -
Common stock, $.05 par value; 15,000,000 shares
authorized; 4,970,018 and 2,842,429 shares
issued and outstanding, respectively 248,501 142,122
Additional paid-in capital 12,245,859 7,122,553
Deferred compensation - (37,970)
Retained earnings 1,176,589 2,803,278
----------- -----------
13,670,949 10,029,983
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 27,498,779 $ 30,087,318
=========== ===========
See Notes to Condensed Financial Statements.
<PAGE>
DYNAMIC MATERIALS CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
----------------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $ 6,259,297 $ 6,267,617 $ 20,966,405 $ 23,711,802
COST OF PRODUCTS SOLD 5,210,667 5,757,880 18,018,773 20,526,592
------------ ------------- ------------ ------------
Gross profit 1,048,630 509,737 2,947,632 3,185,210
------------ ------------- ------------ ------------
COSTS AND EXPENSES:
General and administrative expenses 909,367 766,318 2,686,108 2,648,425
Selling expenses 330,319 357,579 1,119,749 1,140,764
New facility start up costs - 125,538 - 334,496
Plant closing costs - 87,319 - 636,618
Impairment of long-lived assets - (9,074) - 179,004
Costs related to sale of bonding - 79,462 - 278,470
business ------------ ------------- ------------ ------------
1,239,686 1,407,142 3,805,857 5,217,777
------------ ------------- ------------ ------------
LOSS FROM OPERATIONS (191,056) (897,405) (858,225) (2,032,567)
OTHER INCOME (EXPENSE):
Other income 10,469 3,340 197,886 10,815
Interest expense (194,455) (271,057) (899,589) (697,807)
Interest income 11,661 931 13,350 3,573
------------ ------------- ------------ ------------
Loss before income
taxes (363,381) (1,164,191) (1,546,578) (2,715,986)
INCOME TAX BENEFIT - 399,000 - 1,005,000
------------ ------------- ------------ ------------
NET LOSS BEFORE EXTRAORDINARY ITEM (363,381) (765,191) (1,546,578) (1,710,986)
EXTRAORDINARY ITEM - LOSS FROM
EXTINGUISHMENT OF DEBT - - (80,111) -
------------ ------------- ------------ ------------
NET LOSS $ (363,381) $ (765,191) $ (1,626,689) $ (1,710,986)
============ ============= ============ ============
NET LOSS PER SHARE - BASIC AND DILUTED
Loss before extraordinary item $ (0.07) $ (0.27) $ (0.42) $ (0.61)
Extraordinary item - - (0.02) -
------------ ------------- ------------ ------------
Net loss per share $ (0.07) $ (0.27) $ (0.44) $ (0.61)
============ ============= ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING - BASIC AND DILUTED 4,972,545 2,828,577 3,673,750 2,820,030
============ ============= ============ ============
</TABLE>
See Notes to Condensed Financial Statements.
<PAGE>
DYNAMIC MATERIALS CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(unaudited)
<TABLE>
<CAPTION>
Additional
Common Stock Paid-In Deferred Retained
Shares Amount Capital Compensation Earnings
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1999 2,842,429 $ 142,122 $ 7,122,553 $ (37,970) $ 2,803,278
Common stock issued to
SNPE, Inc., net of
issuance costs 2,109,091 105,455 5,130,797 - -
Amortization of deferred
compensation - - - 4,219 -
Common stock issued in
connection with the
employee stock purchase
plan 22,248 1,112 26,072 - -
Forfeiture of restricted stock
grant (3,750) (188) (33,563) 33,751 -
Net loss - - - - (1,626,689)
--------- --------- ----------- ----------- -----------
Balances, September 30, 2000 4,970,018 $ 248,501 $12,245,859 $ - $ 1,176,589
========= ========= =========== =========== ===========
</TABLE>
See Notes to Condensed Financial Statements.
<PAGE>
Page 1 of 2
DYNAMIC MATERIALS CORPORATION
STATEMENTS OF CASH FLOWS
(unaudited)
------------
<TABLE>
<CAPTION>
For the nine months
-------------------------------
ended September 30,
-------------------------------
2000 1999
-------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,626,689) $ (1,710,986)
Adjustments to reconcile net income
to net cash from operating activities-
Depreciation 974,920 841,396
Amortization 232,384 250,395
Amortization of deferred gain (51,039) (9,011)
Amortization of deferred compensation 4,219 12,657
Impairment of long-lived assets - 179,004
Deferred income tax - (136,000)
Gain on sale of property, plant and equipment (185,570) -
Change in-
Accounts receivable, net (266,894) 688,257
Inventories (603,968) 1,857,690
Prepaid expenses and other 146,213 19,097
Income tax receivable 1,360,000 (1,005,965)
Accounts payable (184,156) (304,206)
Accrued expenses (119,811) (625,818)
------------ ------------
Net cash flows from operating activities (320,391) 56,510
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Release of restricted cash and investments 255,008 4,000,027
Cash paid in connection with the construction
of the new facility (319,302) (4,630,059)
Acquisition of property, plant and equipment (239,027) (332,909)
Loan to related party - (55,320)
Proceeds from repayment of loan to related party 354,588 -
Change in other non-current assets 231,374 99,313
Proceeds from sale of property, plant and equipment 940,036 -
------------ ------------
Net cash flows from investing activities 1,222,677 (918,948)
------------ ------------
</TABLE>
See Notes to Condensed Financial Statements.
<PAGE>
Page 2 of 2
DYNAMIC MATERIALS CORPORATION
STATEMENTS OF CASH FLOWS
(unaudited)
------------
<TABLE>
<CAPTION>
For the nine months
ended September 30,
-------------------------------
2000 1999
-------------- ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on bank line of credit, net 155,000 1,800,000
Repayment on bank line of credit (10,255,000) -
Payment on industrial development revenue bonds (505,000) -
Cash received upon termination of the swap agreements - 150,900
Proceeds from issuance of common stock to SNPE, Inc.,
net of issuance costs 5,236,252 -
Borrowings on SNPE, Inc. line of credit 3,750,000 -
Borrowings on SNPE, Inc. convertible subordinated note 1,200,000 -
Payment of deferred financing costs (116,384) -
Payments on long-term debt - (5,742)
Payments on capital lease obligation (26,028) (26,838)
Net proceeds from issuance of common stock to employees 27,184 88,322
Repayment of bank overdraft (193,471) (805,304)
----------- ----------
Net cash flows from financing activities (727,447) 1,201,338
----------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS 174,839 338,900
CASH AND CASH EQUIVALENTS, beginning of the period - -
----------- ----------
CASH AND CASH EQUIVALENTS, end of the period $ 174,839 $ 338,900
=========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for-
Interest, net of amounts capitalized $ 672,260 $ 856,279
=========== ==========
Income taxes $ - $ 72,483
=========== ==========
</TABLE>
See Notes to Condensed Financial Statements.
<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, 1999.
Certain prior period amounts have been reclassified to conform to the
current period presentation.
2. TRANSACTIONS WITH SNPE, INC.
On June 14, 2000 the Company's stockholders approved a Stock Purchase
Agreement ("the Agreement") between the Company and SNPE, Inc ("SNPE"). The
closing of the transaction, which was held immediately following stockholder
approval, resulted in a payment from SNPE of $5,800,000 to the Company in
exchange for 2,109,091 of the Company's common stock at a price of $2.75 per
share causing SNPE to become a 50.8% stockholder of the Company on the closing
date. An additional $1,200,000 cash payment was made by SNPE to the Company to
purchase a five-year, 5% Convertible Subordinated Note that is convertible in
whole or in part into common stock by SNPE at a conversion price of $6 per
share. The Company also borrowed $3,500,000 on June 14, 2000 under a new credit
facility with SNPE, which provides up to $3,500,000 in borrowings for working
capital requirements through June 30, 2001. The SNPE credit facility, which
bears interest at the Federal Funds Rate plus 1.5%, may be increased to a
maximum of $4,500,000 in total borrowings subject to certain approvals by SNPE.
The Company borrowed an additional $250,000 under the credit facility in
September resulting in $3,750,000 outstanding under the credit facility as of
September 30, 2000. Proceeds from the SNPE equity investment, convertible
subordinated note issuance and credit facility borrowings enabled the Company to
repay all borrowings from its bank under a revolving credit facility on which
the Company had been in default since September 30, 1999.
3. NEW ACCOUNTING PRINCIPLES
The FASB recently issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), which requires that companies recognize all derivatives as either assets
or liabilities in the balance sheet at fair value. Under SFAS 133, accounting
for changes in fair value of a derivative depends on its intended use and
designation. SFAS 133 is effective for fiscal years beginning after June 15,
2000. The Company is currently assessing the effect of this new standard.
In December 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101 ("SAB 101") "Views on Selected Revenue
Recognition Issues" which provides the staff's views in applying generally
accepted accounting principles to selected revenue recognition issues. The
Company is required to implement SAB 101 no later than the end of the fourth
quarter of 2000. Once implemented, the effect of SAB 101 is to be retroactively
applied to January 1, 2000. The Company is currently assessing the effect of
implementing SAB 101.
4. INVENTORIES
This caption on the Condensed Balance Sheet includes the following:
September 30, December 31,
2000 1999
------------- -------------
Raw Materials $ 960,868 $ 1,311,345
Work-in-Process 2,993,005 2,001,784
Supplies 60,923 97,699
------------- -------------
$ 4,014,796 $ 3,410,828
============= =============
5. CONSTRUCTION IN PROCESS
Building and equipment costs of $709,097 related to the Company's new
manufacturing facility were transferred from construction in process to
property, plant and equipment during the nine months ended September 30, 2000.
Construction began in September 1998 and was largely completed during the third
quarter of 1999 with substantial completion during the second quarter of 2000.
The project was financed using proceeds from the issuance of industrial
development revenue bonds ("the Bonds"). The portion of the borrowings on the
bonds not yet expended for construction was $169,304 (which includes accrued
interest) as of September 30, 2000 and is classified as restricted cash and
investments (non-current) in the accompanying balance sheet. The proceeds are
being held by a trustee until qualified expenditures are made and reimbursed to
the Company.
6. LONG-TERM DEBT
Long-term debt consists of the following at September 30, 2000 and December
31, 1999:
September 30, December 31,
2000 1999
------------- ------------
Lines of credit $ - $ 10,100,000
Industrial development revenue bonds 6,180,000 6,685,000
----------- ------------
Total long-term debt 6,180,000 16,785,000
Less portion classified as current (715,000) (16,785,000)
----------- ------------
$ 5,465,000 $ -
=========== ============
Loan Covenants and Restrictions
The Company's loan agreements include various covenants and restrictions,
certain of which relate to the payment of dividends or other distributions to
stockholders, redemption of capital stock, incurrence of additional
indebtedness, mortgaging, pledging or disposition of major assets and
maintenance of specified financial ratios.
Due largely to the operating losses the Company incurred during 1999 and
the first quarter of 2000, the Company violated certain financial covenants
under both its amended and restated credit facility with its bank and its
reimbursement agreement relating to the letter of credit with its bank that
supports payment of the principal and interest under the bonds. As a result of
the debt and equity infusion from SNPE (see note 2), the Company was able to
completely repay all outstanding borrowings under its bank credit facility and
terminated this facility on June 14, 2000. Additionally, the Company was able to
restructure financial covenants under the reimbursement agreement. In connection
with the early termination of the credit facility, the Company recorded an
$80,111 loss on the early extinguishment of this debt. As of September 30, 2000,
the Company is in compliance with all financial covenants and other provisions
of its debt agreements.
7. BUSINESS SEGMENTS
The Company is organized in the following two segments: the Explosive
Metalworking Group and the Aerospace Group. The Explosive Metalworking Group
uses explosives to perform metal cladding, metal forming and shock synthesis.
The most significant product of this group is clad metal, which is used in the
fabrication of pressure vessels, heat exchangers and transition joints used in
the hydrocarbon processing, chemical processing, power generation,
petrochemical, pulp and paper, mining, shipbuilding and heat, ventilation and
air conditioning industries. The Aerospace Group machines, forms and welds parts
for the commercial aircraft, aerospace and defense industries.
The Company's reportable segments are strategic business units that offer
different products and services and are separately managed. Each segment's
products are marketed to different customer types and require different
manufacturing processes and technologies. Segment information is presented for
the three and nine months ended September 30, 2000 and 1999 as follows:
<PAGE>
<TABLE>
<CAPTION>
Explosive
Manufacturing Aerospace Total
<S> <C> <C> <C>
For the three months ended September 30, 2000:
Net sales $ 3,767,601 $ 2,491,696 $6,259,297
========== ========== =========
Depreciation and amortization $ 205,752 $ 211,359 $ 417,111
========== ========== =========
Income (loss) from operations $ 170,538 $ (361,594) $ (191,056)
Unallocated amounts:
Other income 10,469
Interest expense, net (182,794)
----------
Consolidated loss before income taxes
and extraordinary items $ (363,381)
==========
Explosive
Manufacturing Aerospace Total
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
========= ========== =========
(Loss) income from operations $(1,081,693) $ 184,288 $ (897,405)
Unallocated amounts:
Other income 3,340
Interest expense, net (270,126)
----------
Consolidated loss before income taxes
and extraordinary items $(1,164,191)
==========
Explosive
Manufacturing Aerospace Total
For the nine months ended September 30, 2000:
Net sales $12,450,219 $ 8,516,186 $20,966,405
========== =========== ==========
Depreciation and amortization $ 574,152 $ 633,152 $ 1,207,304
========== =========== ==========
Loss from operations $ (284,961) $ (573,264) $ (858,225)
Unallocated amounts:
Other income 197,886
Interest expense, net (886,239)
----------
Consolidated loss before income taxes
and extraordinary items $(1,546,578)
==========
<PAGE>
Explosive
Manufacturing Aerospace Total
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
========== =========== ==========
(Loss) income from operations $(2,900,518) $ 867,951 $(2,032,567)
Unallocated amounts:
Other income 10,815
Interest expense, net (694,234)
----------
Consolidated loss before income taxes
and extraordinary items $(2,715,986)
==========
</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,
-------------------------------
2000 1999
------------- -------------
United States $5,926,407 $5,464,846
Canada 167,860 281,653
Australia 9,600 -
South Korea - -
Other foreign countries 155,430 521,118
------------- ------------
Total consolidated net sales $6,259,297 $6,267,617
============= ============
For the nine months
-------------------------------
ended September 30,
-------------------------------
2000 1999
------------- ------------
United States $18,728,498 $21,533,124
Canada 680,746 1,312,844
Australia 9,600 149,626
South Korea 952,285 -
Other foreign countries 595,276 716,208
------------- ------------
Total consolidated net sales $20,966,405 $23,711,802
============= ============
During the three months ended September 30, 2000, sales to two different
customers represented approximately $926,000 (15%) and 778,000 (12%),
respectively, of total net sales and, during the nine months ended September 30,
2000, sales to these two customers amounted to approximately $2,305,000 (11%)
and $2,272,000 (11%), respectively. During the three months and nine months
ended September 30, 1999, sales to one customer represented approximately
$1,571,000 (25%) and $3,927,000 (17%), respectively, of total net sales.
<PAGE>
ITEM 2. 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" and shock synthesis of
synthetic diamonds. The Company performs metal cladding using its proprietary
Dynaclad(TM) and Detaclad(R) technologies. The Company's revenues from its
explosive metalworking businesses, as a proportion of total Company revenues,
have declined as a result of a significant slowdown in global market demand for
explosion bonded clad metal plate and the 1998 acquisitions of AMK Welding, Spin
Forge and Precision Machined Products. The Company's Aerospace Group was formed
from these three acquisitions and accounted for 22% and 42% of the Company's
1998 revenues and 1999 revenues, respectively. The proportion of revenues
accounted for by the Aerospace Group for the quarter and nine months ended
September 30, 2000 was 40% and 41%, respectively, compared to 50% and 40% for
the comparable periods of 1999.
Explosive Metalworking. Clad metal products are used in manufacturing
processes or environments that involve highly corrosive chemicals, high
temperatures and/or high pressure conditions. For example, the Company
fabricates clad metal tube sheets for heat exchangers. Heat exchangers are used
in a variety of high temperature, high pressure, highly corrosive chemical
processes, such as processing crude oil in the petrochemical industry and
processing chemicals used in the manufacture of synthetic fibers. In addition,
the Company has produced titanium clad plates used in the fabrication of metal
autoclaves to replace autoclaves made of brick and lead for two customers in the
mining industry. The Company believes that its clad metal products are an
economical, high-performance alternative to the use of solid corrosion-resistant
alloys. In addition to clad metal products, the explosive metalworking business
includes shock synthesis of synthetic diamonds.
Aerospace Manufacturing. Formed metal products are made from sheet metal
and forgings that are subsequently formed into precise, three-dimensional shapes
that are held to tight tolerances. Metal forming is accomplished through the use
of traditional forming technologies, including spinning, machining, rolling and
hydraulic expansion. DMC also performs welding services utilizing a variety of
manual and automatic welding techniques that include electron beam and gas
tungsten arc welding processes. The Company's forming and welding operations are
often performed to support the manufacture of completed assemblies and
sub-assemblies required by its customers. Fabrication and assembly services are
performed utilizing the Company's close-tolerance machining, forming, welding,
inspection and other special service capabilities. The Company's forming,
machining, welding and assembly operations serve a variety of product
applications in the commercial aircraft, aerospace, defense and power generation
industries. Product applications include tactical missile motor cases, titanium
pressure tanks for launch vehicles, and complex, high precision component parts
for satellites.
On June 14, 2000 the Company's stockholders approved a Stock Purchase
Agreement ("the Agreement") between the Company and SNPE, Inc ("SNPE"). The
closing of the transaction, which was held immediately following stockholder
approval, resulted in a payment from SNPE of $5,800,000 to the Company in
exchange for 2,109,091 of the Company's common stock at a price of $2.75 per
share causing SNPE to become a 50.8% stockholder of the Company on the closing
date. An additional $1,200,000 cash payment was made by SNPE to the Company to
purchase a five-year, 5% Convertible Subordinated Note that is convertible in
whole or in part into common stock by SNPE at a conversion price of $6 per
share. The Company also borrowed $3,500,000 on June 14, 2000 under a new credit
facility with SNPE, which provides up to $3,500,000 in borrowings for working
capital requirements through June 30, 2001. The SNPE credit facility, which
bears interest at the Federal Funds Rate plus 1.5%, may be increased to a
maximum of $4,500,000 in total borrowings subject to certain approvals by SNPE.
Proceeds from the SNPE equity investment, convertible subordinated note issuance
and credit facility borrowings enabled the Company to repay all borrowings from
its bank under a revolving credit facility on which the Company had been in
default since September 30, 1999.
In 1999, the Company experienced significant operating losses as a result
of a significant slowdown in global market demand for explosion bonded clad
metal plate and non-recurring charges associated with plant closing costs, new
facility start-up costs, asset impairment write-downs and expenses incurred in
connection with efforts to sell the Explosive Metalworking Group. During the
first three quarters of 2000, the Company again experienced operating losses due
to the continued slowdown in global market demand for explosion bonded clad
metal plate and lower sales and gross margins in its Aerospace Group. The
Company expects the reduced demand for its clad metal products to continue at
least through the end of 2000. The Company also experienced, and expects to
continue to experience, quarterly fluctuations in operating results caused by
various factors, including the timing and size of orders from major customers,
customer inventory levels, shifts in product mix, and general economic
conditions. The Company typically does not obtain long-term volume purchase
contracts from its customers. Quarterly sales and operating results therefore
depend on the volume and timing of backlog as well as bookings received during
the quarter. A significant portion of the Company's operating expenses is fixed,
and planned expenditures are based primarily on sales forecasts and product
development programs. If sales do not meet the Company's expectations in any
given period, the adverse impact on operating results may be magnified by the
Company's inability to adjust operating expenses sufficiently or quickly enough
to compensate for such a shortfall. In addition, the Company uses numerous
suppliers of alloys, steels and other materials for its operations. The Company
typically bears a short-term risk of alloy, steel and other component price
increases, which could adversely affect the Company's gross profit margins.
Although the Company will work with customers and suppliers to minimize the
impact of any component shortages, component shortages have had, and are
expected from time to time to have, short-term adverse effects on the Company's
business. Results of operations in any period should not be considered
indicative of the results to be expected for any future period. Fluctuations in
operating results may also result in fluctuations in the price of the Company's
common stock.
<PAGE>
Quarter and Nine Months Ended September 30, 2000 Compared to Quarter and Nine
Months September 30, 1999
The following table sets forth, for the periods indicated, the percentage
relationship to net sales of certain income statement data:
Percentage of Net Sales
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -----------------------
2000 1999 2000 1999
---- ---- ---- ----
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Products Sold 83.2% 91.9% 85.9% 86.6%
----- ----- ----- -----
Gross Margin 16.8% 8.1% 14.1% 13.4%
General & Administrative 14.5% 12.2% 12.8% 11.2%
Selling Expenses 5.3% 5.7% 5.3% 4.8%
New Facility Start-up Costs - 2.0% - 1.4%
Plant Closing Costs - 1.4% - 2.7%
Asset Impairments - -0.1% - 0.8%
Costs related to sale of
Bonding business - 1.3% - 1.2%
Loss from Operations -3.1% -14.3% -4.1% -8.6%
Interest Expense 3.1% 4.3% 4.3% 2.9%
Income Tax Benefit - 6.4% - 4.2%
Net Loss -5.8% -12.2% -7.8% -7.2%
Net Sales. Net sales for the quarter ended September 30, 2000 decreased by 0.1%
to $6,259,297 from $6,267,617 in the third quarter of 1999. The Company's
Aerospace Group contributed $2,491,696 (39.8% of total sales) to third quarter
2000 sales versus sales of $3,157,553 (50.4% of total sales) in the third
quarter of 1999. Sales by the Explosive Metalworking Group, which includes
explosion bonding of clad metal and shock synthesis of synthetic diamonds,
increased by 21.1% from $3,110,064 in the third quarter of 1999 to $3,767,601 in
the third quarter of 2000. For the nine months ended September 30, 2000, net
sales decreased by 11.6% to $20,966,405 from $23,711,802 for the comparable
period of 1999. Aerospace Group sales for the nine months ended September 30,
2000 totaled $8,516,186 (40.6% of total sales), a decrease of 12.3% from sales
9,706,396 (40.9% of total sales) reported for the comparable period of 1999.
Sales by the Explosive Metalworking Group for the comparable nine-month period
decreased by 11.1% from $14,005,406 in 1999 to $12,450,219 in 2000. The decrease
in Explosive Metalworking Group sales for the nine-month period reflects a
significant slowdown in global market demand for explosion bonded clad metal
plate that is expected to continue for at least the remainder of the year 2000.
Gross Profit. As a result of improvements in Explosive Metalworking Group
product pricing and lower fixed manufacturing costs for that segment, gross
profit for the quarter ended September 30, 2000 increased by 105.7% to
$1,048,630 from $509,737 in the third quarter of 1999. The gross profit margin
for the quarter ended September 30, 2000 was 16.8%, representing a 107% increase
from the gross profit margin of 8.1% for the third quarter of 1999. For the nine
months ended September 30, 2000, gross profit decreased 7.5% to $2,947,632 from
$3,185,2210 in the comparable period of 1999. The gross profit margin for the
nine months ended September 30, 2000 was 14.1%, representing a 5.2% increase
from the gross profit margin of 13.4% for the first nine months of 1999. The
gross profit margin for the Explosive Metalworking Group increased from a
negative gross margin of 3.9% in the third quarter of 1999 to a gross margin of
21.3% in the third quarter of 2000. For the comparable nine-month periods,
Explosive Metalworking gross margins increased from 5.2% in 1999 to 13.7% in
2000. The increase in gross profit margins for the Explosive Metalworking Group
is due to improvements in product pricing and favorable fixed manufacturing
overhead cost variances associated with the operation of the new manufacturing
facility in Pennsylvania. The gross profit margin for the Aerospace Group was
9.9% for the quarter ended September 30, 2000 as compared to 20.0% in the third
quarter of 1999. For the comparable nine-month periods, Aerospace Group gross
profit margins decreased from 25.3% in 1999 to 14.6% in 2000. The decline in
operating unit gross profit margin rates for the Aerospace Group reflects a
decrease in year-to-year sales at Spin Forge and AMK 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, 2000 increased by 18.7% to $909,367 from $766,318 in the
third quarter of 1999. This large increase in general and administrative
expenses reflects higher than normal legal fees in the third quarter of 2000
associated with certain transactional activity and lower than normal general and
administrative expenses in the third quarter of 1999 due to certain
reclassification entries that were recorded in that quarter (general and
administrative expenses averaged $884,000 per quarter in 1999). For the nine
months ended September 30, 2000, general and administrative expenses increased
by 1.4% to $2,686,108 from $2,648,425 in the comparable period of 1999. As a
percentage of net sales, general and administrative expenses increased from
12.2% in the third quarter of 1999 to 14.5% for the quarter ended September 30,
2000 and increased from 4.8% to 5.3% for the comparable nine-month periods.
Selling Expense. Selling expenses decreased by 7.6% to $330,319 for the quarter
ended September 30, 2000 from $357,579 in the third quarter of 1999. For the
nine months ended September 30, 2000, selling expenses decreased by 1.8% to
$1,119,749 from $1,140,764 in the comparable period of 1999. Selling expenses
for the nine months ended September 30, 2000 included $80,284 of non-recurring
expenses associated with severance pay and other employee separation costs.
Excluding the non-recurring employee separation costs, selling expenses
decreased by 8.9% to $1,039,465 for the nine months ended September 30, 2000
from $1,140,764 for the comparable period of 1999. This decrease is principally
due to reductions in salaries, payroll taxes and benefits associated with
Explosive Metalworking Group sales staff reductions. Excluding the impact of the
non-recurring expense discussed above, selling expenses as a percentage of net
sales decreased from 5.7% in the third quarter of 1999 to 5.3% for the quarter
ended September 30, 2000 and increased from 4.8% for the nine months ended
September 30, 1999 to 5.0% for the comparable period of 2000. The increased
percentage for the nine-month period is attributable to the 11.6% decline in
sales for the nine months ended September 30, 2000 versus the comparable period
of 1999.
Start-up Costs. Beginning in 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. 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. Plant closing costs for the quarter and nine
months ended September 30, 1999, totaled $87,319 and $636,618, respectively.
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 1999.
Impairment of Long-lived Assets. In connection with the plant closing discussed
above, the Company identified certain long-lived assets associated with its
Colorado manufacturing operations that were abandoned and had 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 six months ended June 30, 1999. The
Company adjusted the impairment estimate downward by $9,074 during the third
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 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,
respectively. These expenses related principally to investment banking, legal
and other third party fees associated with the terminated sales transaction.
Certain of these expenses continued to be incurred by the Company during the
fourth quarter of 1999.
Income (Loss ) from Operations. For the quarter ended September 30, 2000, the
Company reported a $191,056 loss from operations compared to a $897,405 loss
from operations for the third quarter of 1999. This decreased loss from
operations is a result of the 105.7% increase in gross profit discussed above
and a reduction in 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 that was recorded in the third quarter of 1999.
For the nine months ended September 30, 2000, the Company reported an operating
loss of $858,225 compared to $2,032,567 in the comparable period of 1999. This
decreased loss from operations is a result of a decrease in 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
that was recorded for the nine months ended September 30, 1999. The effect of
the decrease in non-recurring costs was partly offset by the 7.5% decrease in
gross profit for the nine months ended September 30, 2000 versus the comparable
period in 1999 that is attributable to lower sales by the Company's Explosive
Metalworking Group and lower sales and gross margins by the Aerospace Group.
For the quarter and nine months ended September 30, 2000, the Company's
Aerospace Group reported a loss from operations of $361,594 and $573,264,
respectively, as compared to income from operations of $187,288 and $867,951 for
the respective comparable periods of 1999. For the quarter and nine months ended
September 30, 2000, the Explosive Metalworking Group reported income from
operations of $170,538 and a loss from operations of $284,961, respectively, as
compared to operating losses of $1,081,693 and $2,900,518 for the respective
comparable periods of 1999.
Interest Expense. Interest expense decreased to $194,455 for the quarter ended
September 30, 2000 from $271,057 in the third quarter of 1999. This decrease in
interest expense is a result of the reduction in the Company's debt resulting
from the equity investment by SNPE, Inc. which occurred on June 14, 2000. For
the nine months ended September 30, 2000, interest expense increased to $899,589
from $697,807 in the comparable period of 1999. This increase is due to
increases in both interest rates and average borrowings outstanding under the
Company's revolving credit facility. In addition, the increase reflects the
interest on the industrial development revenue bonds being recorded in interest
expense for the quarter and nine months ended September 30, 2000 versus being
capitalized through July of 1999. The Company began to record interest on the
industrial development revenue bonds as expense once the new facility commenced
operations in August 1999. Prior to the commencement of operations, interest on
the industrial development revenue bonds was being capitalized. These increases
in interest were partly offset by a decrease in interest occurring as a result
of the reduction in debt which was made possible by the equity investment in the
Company by SNPE, Inc. on June 14, 2000.
Income Tax Benefit (Expense). No tax benefit has been recorded for the quarter
and nine months ended September 30, 2000 since the Company utilized all of its
tax loss carry-backs in 1999 and the Company's current financial position and
near-term operations outlook make the future realization of tax benefits
associated with tax loss carry-forwards uncertain. The income tax benefit for
the quarter and nine months ended September 30, 1999 was 399,000 and 1,005,000,
respectively, representing respective effective tax rates of 34.3% and 37.0%.
Liquidity and Capital Resources
Historically, the Company has obtained most of its operational financing
from a combination of operating activities and an asset-backed revolving credit
facility. Due primarily to the operating losses the Company incurred during 1999
and the first quarter of 2000, the Company violated certain financial covenants
under both its revolving credit facility and the reimbursement agreement related
to the letter of credit supporting payment of principal and interest under the
Company's industrial revenue development bonds (the "Bonds") used to finance the
construction of its manufacturing facilities in Pennsylvania. On June 14, 2000
the Company's stockholders approved a Stock Purchase Agreement ("the Agreement")
between the Company and SNPE, Inc ("SNPE"). The closing of the transaction,
which was held immediately following stockholder approval, resulted in a payment
from SNPE of $5,800,000 to the Company in exchange for 2,109,091 shares of the
Company's common stock at a price of $2.75 per share causing SNPE to become a
50.8% stockholder of the Company on the closing date. An additional $1,200,000
cash payment was made by SNPE to the Company to purchase a five-year, 5%
Convertible Subordinated Note that is convertible in whole or in part into
common stock by SNPE at a conversion price of $6 per share. The Company also
borrowed $3,500,000 on June 14, 2000 under a new credit facility with SNPE,
which provides up to $3,500,000 in borrowings for working capital requirements
through June 30, 2001. The SNPE credit facility, which bears interest at the
Federal Funds Rate plus 1.5%, may be increased to a maximum of $4,500,000 in
total borrowings subject to certain approvals by SNPE. Proceeds from the SNPE
equity investment, convertible subordinated note issuance and credit facility
borrowings aggregated $10,500,000 and enabled the Company to repay all
outstanding borrowings under its bank revolving credit facility on which the
Company had been in default since September 30, 1999. The bank revolving credit
facility was terminated on June 14, 2000. As a result of the SNPE debt and
equity infusion, the Company was also able to restructure financial covenants
under the reimbursement agreement with its bank relating to the industrial
development revenue bonds and is currently in full compliance with all
provisions of its debt agreements.
The Company believes that its cash flow from operations and funds available
under its credit facility with SNPE, Inc., or a replacement credit facility with
a third party financial institution, will be sufficient to fund working capital,
debt service obligations and capital expenditure requirements of its current
business operations for the foreseeable future. Management of the Company
intends to replace the SNPE credit facility, which matures on June 30, 2001 and
is callable upon 90 days' notice after October 1, 2000, with a new third party
credit facility during the early part of 2001 and believes that the Company's
strengthened balance sheet and improving operating results will enable the
Company to secure such third party financing on reasonable terms. 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 SNPE credit facility or a replacement facility could
negatively affect the Company's ability to meet its future cash requirements.
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; any actions which may be taken by
SNPE as the controlling shareholder of the Company with respect to the Company
and its businesses; the ability of the Company to continue to obtain payment
deferrals and covenant waivers from its lenders; the timing and size of
expenditures; the timely receipt of government approvals and permits; the
adequacy of local labor supplies at the Company's facilities; the availability
and cost of funds; and general economic conditions, both domestically and
abroad. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof. The Company undertakes no obligation to publicly release the
results of any revision to these forward-looking statements that may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
<PAGE>
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on September 12,
2000. At the Annual Meeting, the stockholders of the Company (i) elected the
persons listed below to serve as directors of the Company until the 2003 Annual
Meeting of Shareholders or until their respective successors are elected, (ii)
approved amendments to the Company's Employee Share Purchase Plan to increase
the number of common shares authorized for issuance by 50,000 shares and (iii)
ratified the selection of Arthur Andersen LLP as independent accountants of the
Company for its fiscal year ending December 31, 2000.
The Company had 4,973,768 shares of Common Stock outstanding as of July 21,
2000, the record date for the Annual Meeting. At the Annual Meeting, holders of
a total of 4,777,270 shares of Common Stock were present in person or
represented by proxy. The following sets forth information regarding the results
of the voting at the Annual Meeting:
Proposal 1: Election of Directors
DIRECTOR Shares Voted "FOR" Shares Withheld
Bernard Hueber 4,723,993 53,277
Gerard Munera 4,701,993 75,277
Proposal 2: Approval of Amendments to the Company's Employee Stock Purchase Plan
Shares Voted Shares Voted Shares Shares
"FOR" "AGAINST" "ABSTAINING" not voted
4,746,427 22,448 8,395 0
Proposal 3: Ratification of Selection of Independent Accountants
Shares Voted Shares Voted Shares Shares
"FOR" "AGAINST" "ABSTAINING" not voted
4,696,331 56,159 24,780 0
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
A Current Report on Form 8-K dated August 23, 2000 was filed during the
quarter ended September 30, 2000, pursuant to Item 5 of that form. No
financial statements were filed as part of that report.
<PAGE>
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)
/s/ Richard A. Santa
Date: November 14 , 2000 ----------------------------------------------------
Richard A. Santa, Vice President of Finance and
Chief Financial Officer (Duly Authorized Officer and
Principal Financial and Accounting Officer)
