UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
( ) 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 or 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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.05 Par Value
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
------- -------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained in this form, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The approximate aggregate market value of the voting stock held by
non-affiliates of the registrant was $3,984,879 as of March 15, 2001.
The number of shares of Common Stock outstanding was 4,990,331 as of March
15, 2001.
PART II
ITEM 8. Financial Statements
DYNAMIC MATERIALS CORPORATION
INDEX TO FINANCIAL STATEMENTS
As of December 31, 2000 and 1999 and for the Three Years Ended
December 2000, 1999 and 1998
Page
Report of Independent Public Accountants.................................... 24
Financial Statements:
Balance Sheets......................................................... 25
Statements of Operations............................................... 27
Statements of Stockholders' Equity..................................... 28
Statements of Cash Flows............................................... 30
Notes to Financial Statements ......................................... 32
The financial statement schedules required by Regulation S-X are filed under
Item 14 "Exhibits, Financial Statement Schedules and Reports on Form 8-K".
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Dynamic Materials Corporation:
We have audited the accompanying balance sheets of DYNAMIC MATERIALS CORPORATION
(a Delaware corporation) as of December 31, 2000 and 1999, and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Dynamic Materials Corporation
as of December 31, 2000 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Denver, Colorado
February 28, 2001
(Except with respect to the matter
discussed in Note 12, as to which the
date is March 15, 2001)
Page 1 of 2
DYNAMIC MATERIALS CORPORATION
BALANCE SHEETS
AS OF DECEMBER 31, 2000 AND 1999
ASSETS 2000 1999
------ -------------------- ----------------
CURRENT ASSETS:
Cash and cash equivalents $186,530
Accounts receivable, net of allowance for doubtful accounts of $130,000 and
$112,000, respectively 4,632,123 3,816,879
Inventories 3,881,155 3,410,828
Prepaid expenses and other 258,493 310,477
Income tax receivable - 1,360,000
-------------- --------------
Total current assets 8,958,301 8,898,184
-------------- --------------
PROPERTY, PLANT AND EQUIPMENT 17,769,509 18,867,796
Less- Accumulated depreciation (4,492,850) (4,538,838)
-------------- ---------------
Property, plant and equipment--net 13,276,659 14,328,958
-------------- ---------------
CONSTRUCTION IN PROCESS - 389,795
RESTRICTED CASH AND INVESTMENTS 179,394 424,312
RECEIVABLE FROM RELATED PARTY - 354,588
INTANGIBLE ASSETS, net of accumulated amortization of $1,094,870 and $786,077,
respectively 4,992,750 5,281,543
OTHER ASSETS, net 260,351 409,938
-------------- ---------------
$27,667,455 $30,087,318
============== ===============
The accompanying notes to financial statements are
an integral part of these balance sheets.
Page 2 of 2
DYNAMIC MATERIALS CORPORATION
BALANCE SHEETS
AS OF DECEMBER 31, 2000 AND 1999
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
------------------------------------ ---------------- ---------------
CURRENT LIABILITIES:
Bank overdraft - $ 193,471
Accounts payable 2,051,301 1,810,577
Accrued expenses 1,275,579 1,096,796
Current maturities on long-term debt 725,000 16,785,000
Current portion of capital lease obligation 3,394 35,230
---------------- ---------------
Total current liabilities 4,055,274 19,921,074
LONG-TERM DEBT 10,230,000 -
CAPITAL LEASE OBLIGATION - 3,069
DEFERRED GAIN ON SWAP TERMINATION 77,887 133,192
---------------- --------------
Total liabilities 14,363,161 20,057,335
---------------- --------------
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY:
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; 4,990,331 and
2,842,429 shares issued and outstanding, respectively 249,517 142,122
Additional paid-in capital 12,262,109 7,122,553
Deferred compensation - (37,970)
Retained earnings 792,668 2,803,278
---------------- ---------------
13,304,294 10,029,983
---------------- ---------------
$27,667,455 $30,087,318
================ ===============
The accompanying notes to financial statements are
an integral part of these balance sheets.
DYNAMIC MATERIALS CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
----------------- ---------------- ---------------
NET SALES $27,862,581 $29,131,289 $38,212,051
COST OF PRODUCTS SOLD 23,822,815 25,419,287 30,372,600
----------------- ---------------- ---------------
Gross profit 4,039,766 3,712,002 7,839,451
----------------- ---------------- ---------------
COSTS AND EXPENSES:
General and administrative expenses 3,622,403 3,536,450 3,262,993
Selling expenses 1,483,476 1,424,774 1,850,973
New facility start up costs - 334,372 189,529
Plant closing costs - 812,197 -
Impairment of long-lived assets - 179,004 -
Costs related to attempted asset disposition - 322,098 -
----------------- ---------------- ---------------
Total costs and expenses 5,105,879 6,608,895 5,303,495
----------------- ---------------- ---------------
(LOSS) INCOME FROM OPERATIONS (1,066,113) (2,896,893) 2,535,956
OTHER INCOME (EXPENSE):
Other income 198,290 14,784 8,921
Interest expense, net of amounts capitalized (1,094,181) (1,009,911) (283,706)
Interest income 31,505 19,912 11,585
----------------- ---------------- ---------------
(Loss) income before income taxes (1,930,499) (3,872,108) 2,272,756
INCOME TAX BENEFIT (EXPENSE) - 1,154,000 (887,000)
----------------- ---------------- ---------------
NET (LOSS) INCOME BEFORE EXTRAORDINARY ITEM (1,930,499) (2,718,108) 1,385,756
EXTRAORDINARY ITEM - LOSS FROM EARLY EXTINGUISHMENT OF DEBT (80,111) - -
----------------- ---------------- ---------------
NET (LOSS) INCOME $(2,010,610) $(2,718,108) $ 1,385,756
================= ================ ===============
NET (LOSS) INCOME PER SHARE - BASIC
Net (loss) income before extraordinary item $ (0.48) $ (0.96) $ 0.50
Extraordinary item (0.02) - -
----------------- ---------------- ---------------
Net (loss) income $ (0.50) $ (0.96) $ 0.50
================= ================ ===============
NET (LOSS) INCOME PER SHARE - DILUTED
Net (loss) income before extraordinary item $ (0.48) $ (0.96) $ 0.49
Extraordinary item (0.02) - -
Net (loss) income $ (0.50) $ $ 0.49
================= ================ ===============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
Basic 4,004,873 2,822,184 2,770,139
========= ========= =========
Diluted 4,004,873 2,822,184 2,852,547
========= ========= =========
The accompanying notes to financial statements
are an integral part of these statements.
Page 1 of 2
DYNAMIC MATERIALS CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Additional
Common Stock Paid-In Deferred Retained
Shares Amount Capital Compensation Earnings
--------------- ----------------- ------------------ ------------------- ------------
BALANCES, December 31, 1997 2,718,708 $ 135,936 $ 6,587,911 $ - $ 4,135,630
Common stock issued for stock
option exercises 57,115 2,856 139,865 - -
Common stock issued in
connection with the
Employee Stock Purchase
Plan 23,068 1,153 111,271 - -
Tax benefit related to non-
statutory options - - 20,021 - -
Shares issued in connection
with the purchase of
Spin Forge 50,000 2,500 447,300 - -
Restricted stock grant related
to the purchase of
Spin Forge 7,500 375 67,125 (67,500) -
Shares issued in connection
with the purchase of
PMP 40,000 2,000 213,680 - -
Amortization of deferred
compensation - - - 12,655 -
Shares repurchased from
related party (73,168) (3,658) (421,627) - -
Shares received from related
party in partial satisfaction of
related party receivable (24,832) (1,242) (143,096) - -
Net income - - - - 1,385,756
------------ ----------- --------------- ------------ ------------
BALANCES, December 31, 1998 2,798,391 139,920 7,022,450 (54,845) 5,521,386
The accompanying notes to financial statements are
an integral part of these statements.
Page 2 of 2
DYNAMIC MATERIALS CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Additional
Common Stock Paid-In Deferred Retained
Shares Amount Capital Compensation Earnings
---------------- ----------------- ----------------- ------------------ -------------
BALANCES, December 31, 1998 2,798,391 $ 139,920 $ 7,022,450 $ (54,845) $ 5,521,386
Common stock issued for stock
option exercises 19,500 975 52,150 - -
Common stock issued in
connection with the
Employee Stock Purchase
Plan 24,538 1,227 47,953 - -
Amortization of deferred
compensation - - - 16,875 -
Net loss - - - - (2,718,108)
---------------- ----------------- ----------------- ------------------ --------------
BALANCES, December 31, 1999 2,842,429 142,122 7,122,553 (37,970) 2,803,278
Common stock issued to SNPE, Inc.,
net $563,748 in of issuance costs 2,109,091 105,455 5,130,797 - -
Common stock issued in
connection with the
Employee Stock Purchase
Plan 42,561 2,128 42,322 - -
Amortization of deferred
compensation - - - 4,219 -
Forfeiture of restricted stock grant (3,750) (188) (33,563) 33,751 -
Net loss - - - - (2,010,610)
---------------- ----------------- ----------------- ------------------ --------------
BALANCES, December 31, 2000 4,990,331 $ 249,517 $12,262,109 $ - $ 792,668
================ ================= ================= ================== ==============
The accompanying notes to financial statements are
an integral part of these statements.
Page 1 of 2
DYNAMIC MATERIALS CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
------------- ------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (2,010,610) $(2,718,108) $ 1,385,756
Adjustments to reconcile net (loss) income
to net cash flows from operating activities-
Depreciation 1,311,417 1,187,785 942,688
Amortization 308,793 326,318 152,308
Amortization of deferred compensation 4,219 16,875 12,655
Amortization of deferred gain on swap termination (55,305) (17,708) -
Provision for deferred income taxes - 66,300 119,900
Impairment of long-lived assets - 179,004 -
Gain on sale of property, plant and equipment (185,570) - -
Change in (excluding acquisitions)-
Accounts receivable, net (815,244) 1,015,779 578,209
Inventories (470,327) 1,963,001 18,090
Prepaid expenses and other (1,582) (95,701) (34,235)
Income tax receivable 1,360,000 (860,068) (204,938)
Accounts payable 240,724 (537,513) (786,769)
Accrued expenses 178,783 (637,486) 602,883
------------- ------------- -------------
Net cash flows from operating activities (134,702) (111,522) 2,786,547
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment and earnings on bond proceeds (10,090) (110,693) (6,550,707)
Release of bond proceeds by trustee 255,008 4,735,362 1,501,726
Cash paid in connection with the construction
of the new facility (336,347) (5,082,680) (1,853,723)
Purchase of AMK assets - - (939,968)
Purchase of Spin Forge assets - - (2,615,691)
Purchase of PMP assets - - (6,869,920)
Acquisition of property, plant and equipment (233,876) (351,425) (961,092)
Loan to related party - (74,588) (280,000)
Proceeds from repayment of loan to related party 354,588 - -
Change in other noncurrent assets 245,971 57,366 34,036
Proceeds on sale of property, plant and equipment 940,036 - -
------------ ------------- -------------
Net cash flows from investing activities 1,215,290 (826,658) (18,535,339)
------------ ------------- -------------
The accompanying notes to financial statements
are an integral part of these statements.
Page 2 of 2
DYNAMIC MATERIALS CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
-------------- -------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Industrial development revenue bond proceeds $ - $ - $ 6,850,000
Bond issue costs paid - - (195,720)
Borrowings/(payments) on bank line of credit, net 155,000 1,500,000 8,600,000
Repayment on bank line of credit (10,255,000) - -
Payment on industrial development revenue bonds (680,000) (165,000) -
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 - -
Payments on long-term debt - (5,742) (84,378)
Payments on capital lease obligation (34,905) (32,450) (29,888)
Payment of deferred financing costs (116,384) - (100,216)
Cash received upon termination of swap agreements - 150,900 -
Repayment of bank overdraft (193,471) (611,833) -
Bank overdraft - - 805,304
Cash paid in connection with the shares repurchased
from related party - - (425,285)
Net proceeds from issuance of common stock 44,450 102,305 255,145
Tax benefit related to non-statutory options - - 20,021
-------------- ------------- ------------
Net cash flows from financing activities (894,058) 938,180 15,694,983
-------------- ------------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 186,530 - (53,809)
CASH AND CASH EQUIVALENTS, beginning of the year - - 53,809
-------------- ------------- ------------
CASH AND CASH EQUIVALENTS, end of the year $ 186,530 $ - $ -
============== ============== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for-
Interest, net of amounts capitalized $ 850,717 $ 951,507 $ 138,677
============== ============= ============
Income taxes $ - $ 145,307 $ 952,017
============== ============= ============
NON-CASH INVESTING ACTIVITIES:
During 1998, $144,338 of the shares acquired from a related party were in
satisfaction of a receivable from that party.
Acquisitions:
2000 1999 1998
-------------- -------------- ---------------
Accounts receivable $ - $ - $ 474,517
Inventories - - 1,362,360
Prepaids and other - - 31,500
Property, plant and equipment - - 5,617,460
Intangible assets - - 4,529,705
Liabilities assumed - - (924,483)
Common stock issued - - (665,480)
-------------- ------------- -------------
Net cash paid $ - $ - $10,425,579
============== ============= =============
The accompanying notes to financial statements
are an integral part of these statements.
DYNAMIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(1) ORGANIZATION AND BUSINESS
Dynamic Materials Corporation (the "Company") was incorporated in the state
of Colorado in 1971, and reincorporated in the state of Delaware during 1997, to
provide products and services requiring explosive metalworking. The Company is
based in the United States and has customers throughout North America, Western
Europe, Australia and the Far East. The Company currently operates under two
business groups - explosion metalworking, in which metals are metallurgically
joined or altered by using explosives; and aerospace, in which parts are
machined, formed or welded primarily for the commercial aircraft and aerospace
industries.
Transaction 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. In addition, the Company borrowed $1,200,000 under a convertible
subordinated note from SNPE and $3,500,000 under a new credit facility with SNPE
(see Note 4). 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.
(2) ACQUISITIONS
AMK Welding, Inc. - South Windsor, Connecticut
On January 5, 1998, the Company acquired certain assets of AMK Welding,
Inc. ("AMK"). AMK supplies commercial aircraft and aerospace-related automatic
and manual, gas tungsten and arc welding services. The total purchase price of
approximately $940,000 included a cash payment made to the seller of $900,000
and transaction costs paid of approximately $40,000. Assets acquired consisted
primarily of machinery and equipment, land and the building that houses AMK's
operations.
Spin Forge, LLC - El Segundo, California
On March 18, 1998, the Company acquired certain assets of Spin Forge, LLC
("Spin Forge") for a purchase price of approximately $3,826,000 that was paid
with a combination of approximately $2,616,000 in cash (which includes
approximately $146,000 in transaction related costs), assumption of
approximately $760,000 in liabilities and 50,000 shares of the Company's stock
valued at $449,800. Spin Forge manufactures tactical missile motor cases and
titanium pressure vessels for the commercial aerospace and defense industries.
Principal assets acquired included machinery and equipment and inventories. The
Company leases the land and buildings from Spin Forge, LLC and holds an option
to purchase such property for approximately $2,900,000, subject to certain
adjustments, exercisable under certain conditions through January 2002. The
option may be extended beyond this date under specified conditions provided that
the option price must be adjusted upwards in the event that the fair market
value of the property at the time of exercise is higher than $2,900,000.
As part of a Personal Services Agreement between the Company and one of the
former owners of Spin Forge, the Company granted 7,500 shares of restricted
stock to that former owner. In connection with this acquisition, the former
owner became an officer of the Company. The restricted stock grant was recorded
as deferred compensation and was being amortized to expense over the four year
vesting period of the grant. During the third quarter of 2000, the officer
resigned from the Company and, consequently, the unvested shares of the
restricted stock grant were forfeited.
Precision Machined Products, Inc. - Fort Collins, Colorado
On December 1, 1998, the Company acquired substantially all of the assets
of Precision Machined Products, Inc. ("PMP") for a purchase price of
approximately $7,073,000 (including approximately $57,000 in transaction related
costs) which was paid with a combination of $6,800,000 in cash payments to the
seller and the delivery of 40,000 shares of the Company's stock valued at
approximately $216,000. PMP is a contract machining shop specializing in high
precision, high quality, complex machined parts used in the aerospace,
satellite, medical equipment and high technology industries. The Company is
leasing the land and building used in the operation of PMP and held an option to
purchase such land and building at fair market value that was exercisable
through December 2000. Subsequent to the expiration of the option term, the
Company has a right of first offer to purchase the land and building at fair
market value. This right of first offer is exercisable through December 2008.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. Cost elements included in inventory are material, labor, subcontract
costs and factory overhead.
Inventories consist of the following at December 31, 2000 and 1999:
2000 1999
Raw materials $ 950,632 $ 1,311,345
Work in process 2,878,802 2,001,784
Supplies 51,721 97,699
------------ ------------
$ 3,881,155 $ 3,410,828
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Additions, improvements
and betterments are capitalized when incurred. Maintenance and repairs are
charged to operations as the costs are incurred. Depreciation is computed using
the straight-line method over the estimated useful life of the related asset as
follows:
Building and improvements 3-20 years
Manufacturing equipment and tooling 3-15 years
Furniture, fixtures and computer equipment 3-10 years
Other 3-5 years
Property, plant and equipment consists of the following at December 31,
2000 and 1999:
2000 1999
Land $ 241,600 $ 387,308
Building and improvements 5,138,626 6,699,198
Manufacturing equipment and tooling 10,220,578 9,736,646
Furniture, fixtures and computer equipment 1,957,948 1,802,751
Other 210,757 241,893
------------- -------------
$17,769,509 $18,867,796
Construction in Process
Building and equipment costs of $726,142 related to the Company's new
manufacturing facility were transferred from construction in process to
property, plant and equipment during the year ended December 31, 2000.
Construction began in September 1998 and was largely completed during the third
quarter of 1999. Residual costs incurred on the project in late 1999 and into
2000 related primarily to bringing a few remaining pieces of manufacturing
equipment online. The project was financed using proceeds from the issuance of
industrial development revenue bonds ("the Bonds") (see Note 4). Total net
interest expense incurred on the bonds during 2000, 1999 and 1998 was $388,357,
$188,648 and $(10,560), respectively (net of interest earned on the related
invested bond proceeds held in trust of $10,089, $110,693 and $89,693 during
2000, 1999 and 1998, respectively). Of the total net bond interest incurred
during 1999, $96,222 was incurred prior to the new facility being ready for
service and was, therefore, capitalized. No interest was capitalized during
2000.
Intangible Assets and Goodwill
The Company holds numerous United States product and process patents
related to the business of explosion metalworking and metallic products produced
by various explosive processes. The Company's current patents expire between
2001 and 2010; however, expiration of any single patent is not expected to have
a material adverse effect on the Company or its operations.
Patent costs are included in intangible assets in the accompanying balance
sheets and include primarily legal and filing fees associated with the patent
registration. These costs are amortized over the expected useful life of the
issued patent, up to 17 years.
As a result of the Detaclad acquisition in 1996, $1,081,375 of excess cost
over assets acquired was recorded. These costs are being amortized over a
25-year period using the straight-line method. The Company also acquired certain
tradenames and entered into a non-compete agreement in connection with the
Detaclad acquisition, which are included in intangible assets in the
accompanying balance sheets. The costs attributed to the tradenames have been
fully amortized while the non-compete agreement is being amortized over five
years from the date of acquisition.
As a result of the AMK acquisition discussed in Note 2, the Company entered
into two non-compete agreements which are valued at $50,000 each and are
included in intangible assets and are being amortized over five years.
As a result of the PMP acquisition discussed in Note 2, $4,334,723 of
excess cost over assets acquired was recorded and is being amortized over a
25-year period using the straight-line method. In addition, the Company entered
into a non-compete agreement related to the acquisition of PMP. The value
attributable to the non-compete agreement of $100,000 is also included in
intangible assets and is being amortized over four years.
Intangible assets and goodwill are summarized as follows as of December 31,
2000 and 1999:
2000 1999
--------------- ---------------
Goodwill $ 5,416,098 $ 5,416,098
Non-compete agreements 400,000 400,000
Other 271,522 251,522
--------------- --------------
6,087,620 6,067,620
Accumulated amortization (1,094,870) (786,077)
--------------- --------------
$ 4,992,750 $ 5,281,543
=============== ==============
The Company evaluates the carrying value of its goodwill in accordance with
the asset impairment accounting policy discussed below. However, if no events
trigger a review under the asset impairment policy, the Company evaluates
goodwill recoverability by reviewing whether ongoing events and circumstances
throughout the year warrant revised estimates of goodwill useful lives. If
estimates are changed and the useful life is shortened, the unamortized goodwill
is allocated to the reduced number of remaining periods in the revised useful
life, and the excess is expensed as a cost of operations. The Company has
recorded no such revision to the carrying value of its goodwill during the years
presented.
Asset Impairments
The Company reviews its long-lived assets and certain identifiable
intangibles to be held and used by the Company for impairment whenever events or
changes in circumstances indicate their carrying amount may not be recoverable.
In so doing, the Company estimates the future net cash flows expected to result
from the use of the asset and its eventual disposition. If the sum of the
expected future net cash flows (undiscounted and without interest charges) is
less than the carrying amount of the asset, and impairment loss is recognized to
reduce the asset to its estimated fair value. Otherwise, an impairment loss is
not recognized. Long-lived assets and certain identifiable intangibles to be
disposed of, if any, are reported at the lower of carrying amount or fair value
less cost to sell.
Plant Closing Costs
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 $812,197 in
non-recurring charges during the year ended December 31, 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 were abandoned and had 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 had no carrying value, have been disposed of.
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 year ended
December 31, 1999.
Other Assets
Included in other assets are deferred financing costs of $100,748 and
$144,842, net of accumulated amortization of $15,636 and $155,767, as of
December 31, 2000 and 1999, respectively. The deferred financing costs
outstanding as of December 31, 2000 were incurred in connection with the SNPE
subordinated note and credit facility (See Notes 1 and 4). These costs are being
amortized over the applicable terms of the debt agreements. The deferred
financing costs outstanding at December 31, 1999 related to the Company's
previous lines of credit (see Note 4). As these lines of credit were
extinguished in connection with the SNPE transaction on June 14, 2000, the
unamortized deferred finance costs, net of the deferred gain on the termination
of the related swap agreement of $80,111, was written off and recorded as
extraordinary item - loss from extinguishment of debt. Also included in other
assets at December 31, 2000 and 1999 are bond issue costs of $127,140 and
$156,194, respectively, associated with the industrial development revenue bonds
used to finance the Company's new manufacturing facility (Note 4). These costs,
which originally totaled $195,720, are being amortized over the life of the
bonds. As of December 31, 1999, other assets included $75,359 of costs related
to the issuance of stock to SNPE, Inc. These costs consisted primarily of
professional fees associated with the SNPE transaction and during 2000, were
offset against additional paid-in capital or included in deferred finance costs
in proportion to the equity and subordinated debt components of the SNPE
transaction (Note 1).
Revenue Recognition
The Company's contracts with its customers generally require the production
and delivery of multiple units or products. The Company records revenue from its
contracts using the completed contract method as products are completed and
shipped to the customer. If, as a contract proceeds toward completion, projected
total cost on an individual contract indicates a potential loss, the Company
provides currently for such anticipated loss.
Net (Loss) Income Per Share
Basic earnings per share ("EPS") is computed by dividing net (loss) income
by the weighted average number of shares of common stock outstanding during the
period. Diluted EPS recognizes the potential dilutive effects of dilutive
securities. The following represents a reconciliation of the numerator and
denominator used in the calculation of basic and diluted EPS:
For the year ended December 31, 1998
Per share
Income Shares Amount
------ ------ ------
Net income $1,385,756
==========
Basic earnings per share:
Income available to common
shareholders $1,385,756 2,770,139 $ 0.50
==========
Dilutive effect of options to purchase common
stock - 82,408
--------- --------
Dilutive earnings per share:
Income available to common
shareholders $1,385,756 2,852,547 $ 0.49
========== ========= ==========
During the years ended December 31, 2000 and 1999, the Company incurred a
net loss, therefore, there is no difference in basic and diluted loss per share
because the effect of options to purchase common stock and the conversion of the
convertible subordinated debt is antidilutive.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, trade accounts receivable
and payable, accrued expenses and notes receivable are considered to approximate
fair value due to the short-term nature of these instruments. The fair value of
the Company's long-term debt is estimated to approximate carrying value based on
the borrowing rates currently available to the Company for bank loans with
similar terms and average maturities.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the expected
future income tax consequences based on enacted tax laws of temporary
differences between the financial reporting and tax bases of assets and
liabilities. The Company recognizes deferred tax assets for the expected future
effects of all deductible temporary differences. Deferred tax assets are then
reduced, if deemed necessary, by a valuation allowance for the amount of any tax
benefits which, more likely than not based on current circumstances, are not
expected to be realized (see Note 6).
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers highly
liquid investments purchased with an original maturity of three months or less
to be cash equivalents.
Start-up Costs
AICPA Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities," ("SOP 98-5") provides for guidance on the financial reporting for
start-up and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. SOP 98-5 was effective for
financial statements for fiscal years beginning after December 15, 1998,
however, the Company elected to adopt SOP 98-5 in 1998.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to a
concentration of credit risk, consist primarily of cash, restricted cash, cash
equivalents and accounts receivable. Generally, the Company does not require
collateral to secure receivables. The Company currently has no significant
financial instruments with off-balance sheet risk of accounting losses, such as
foreign exchange contracts, options contracts, or other foreign currency hedging
arrangements.
Reclassifications
Certain prior period amounts have been reclassified to conform to the
current period presentation.
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 has implemented SFAS 133 effective January 1, 2001 with no
impact.
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 was required to implement SAB 101 during the year ended December 31,
2000. The Company has implemented SAB 101 with no impact.
(4) LONG-TERM DEBT
Long-term debt consists of the following at December 31, 2000 and 1999:
2000 1999
--------------- -------------
Line of Credit - SNPE, Inc. $ 3,750,000 $ -
Convertible Subordinated Note - SNPE, Inc. 1,200,000 -
Bank lines of credit - 10,100,000
Industrial development revenue bonds 6,005,000 6,685,000
-------------- --------------
10,955,000 16,785,000
Less- Current maturities (725,000) (16,785,000)
-------------- --------------
$ 10,230,000 $ -
============== ==============
SNPE, Inc. Line of Credit
In connection with the SNPE transaction (see Note 1), the Company borrowed
$3,500,000 on June 14, 2000 under a new credit facility with SNPE. 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 interest rate at December 31, 2000 was 8.18%. The credit
facility was originally scheduled to mature on June 14, 2001. However, SNPE
subsequently agreed to amend the maturity date to March 31, 2002. During
September 2000, the Company obtained the required approvals from SNPE and
borrowed an additional $250,000 resulting in a $3,750,000 balance outstanding
under the credit facility as of December 31, 2000. The credit facility is
secured by the Company's accounts receivable, inventory and property, plant and
equipment, except such assets that relate to the Company's Explosive
Metalworking Group.
SNPE, Inc. Convertible Subordinated Note
In connection with the SNPE transaction (see Note 1), a cash payment was
made by SNPE to the Company to purchase a five-year, 5% Convertible Subordinated
Note ("Subordinated Note"). SNPE may convert the Subordinated Note into common
stock of the Company at a conversion price of $6 at any time up to, and
including the maturity date (June 14, 2005).
Bank Lines of Credit
The bank lines of credit were paid in their entirety in connection with the
SNPE transaction discussed in Note 1. The weighted average interest rate on all
line of credit borrowings at December 31, 1999 was 8.94%. The Company was in
default on these lines of credit at December 31, 1999 and, as the corresponding
waiver extended only through March 30, 2000, and certain covenant violations
were likely to continue beyond this date, the subject debt was classified as a
current liability in the December 31, 1999 financial statements.
In December 1998, the Company entered into an interest rate swap agreement
with its bank related to the bank lines of credit. The Company terminated this
swap agreement in the third quarter of 1999 resulting in a deferred gain of
$45,600 that was being amortized over the terms of the acquisition line of
credit. Once the bank lines of credit were extinguished as part of the SNPE
transaction, the unamortized deferred gain of $31,388 was offset against the
unamortized deferred finance charges of $111,499 related to the lines of credit
and recorded as a extraordinary loss on extinguishment.
Industrial Development Revenue Bonds
During September 1998, the Company began construction on a new
manufacturing facility in Fayette County, Pennsylvania. This project was being
financed with proceeds from industrial development revenue bonds issued by the
Fayette County Industrial Development Authority. The loan bears interest at a
variable rate which is set weekly based on the current weekly market rate for
tax-exempt bonds. The interest rate at December 31, 2000 and 1999 was 5.1% and
5.7%, respectively. The Company has established a bank letter of credit in the
trustee's favor for the principal amount of outstanding bonds plus 98 days
accrued interest on the bonds. The letter of credit was secured by the Company's
accounts receivable, inventory, property, plant and equipment and the bond
proceeds not yet expended for construction. On June 14, 2000, in conjunction
with the line of credit entered into with SNPE, the collateral securing the
letter of credit was reduced to include only those assets described above that
relate to the Explosive Metalworking Group. The portion of the borrowings not
yet expended for construction was $179,394 as of December 31, 2000 and was
classified as restricted cash and investments in the accompanying balance sheet.
The proceeds are held by a trustee until qualified expenditures are made and
reimbursed to the Company. The Company may redeem the bonds prior to maturity at
an amount equal to the outstanding principal plus any accrued interest. The
bonds mature on September 1, 2013 at which time all amounts become due and
payable. The three-year bank letter of credit that supports the Company's
industrial development revenue bonds expires in September 2001. Company
management believes that the Company will be able to obtain a replacement letter
of credit arrangement on terms similar to those of the existing letter of credit
and underlying reimbursement agreement.
In September 1998, the Company entered into an interest rate swap agreement
with its bank under which the Company converted the variable interest rate on
the bonds to a rate that is largely fixed. The Company terminated this swap
agreement during the third quarter of 1999 resulting in a deferred gain of
$105,300 which is being amortized over the term of the bonds.
Loan Covenants and Restrictions
The Company's existing 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.
Scheduled Debt Maturity
The Company's long-term debt matures based on the following:
Year ended December 31-
2001 $ 725,000
2002 4,545,000
2003 855,000
2004 930,000
2005 1,990,000
Thereafter 1,910,000
------------
$10,955,000
(5) COMMON STOCK OPTIONS AND BENEFIT PLAN
Stock Option Plans
The Company maintains stock option plans that provide for grants of both
incentive stock options and non-statutory stock options. During 1997, the 1992
Incentive Stock Option Plan and the 1994 Nonemployee Director Stock Option Plan
were both amended and restated in the form of the 1997 Equity Incentive Plan,
which was approved by the Company's stockholders in May of 1997. Incentive stock
options are granted at exercise prices that equal the fair market value at date
of grant based upon the closing sales price of the Company's common stock on
that date. Incentive stock options generally vest 25% annually and expire ten
years from the date of grant. Non-statutory stock options are granted at
exercise prices that range from 85% to 100% of the fair market value of the
stock at date of grant. These options vest over periods ranging from one to four
years and have expiration dates that range from five to ten years from the date
of grant. Under the 1997 Equity Incentive Plan, there are 1,075,000 shares of
common stock authorized to be granted, of which 497,999 remain available for
future grants.
Statement of Financial Accounting Standards No. 123 ("SFAS 123")
SFAS 123, "Accounting for Stock-Based Compensation," defines a fair value
based method of accounting for employee stock options or similar equity
instruments. However, SFAS 123 allows the continued measurement of compensation
cost for such plans using the intrinsic value based method prescribed by APB
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), provided
that pro forma disclosures are made of net income and net income per share,
assuming the fair value based method of SFAS 123 had been applied. The Company
has elected to account for its stock-based compensation plans under APB 25;
accordingly, for purposes of the pro forma disclosures presented below, the
Company has computed the fair values of all options granted during 2000, 1999
and 1998, using an acceptable option pricing model and the following weighted
average assumptions:
2000 1999 1998
-------------- --------------- -------------
Risk-free interest rate 6.4% 4.8% 5.4%
Expected lives 4.0 years 4.0 years 4.0 years
Expected volatility 97.2% 82.2% 68.0%
Expected dividend yield 0% 0% 0%
To estimate expected lives of options for this valuation, it was assumed
options will be exercised upon becoming fully vested at the end of four years.
All options are initially assumed to vest. Cumulative compensation cost
recognized in pro forma net income with respect to options that are forfeited
prior to vesting is adjusted as a reduction of pro forma compensation expense in
the period of forfeiture.
The total fair value of options granted was computed to be approximately
$153,705, $260,900 and $2,211,800 for the years ended December 31, 2000, 1999
and 1998, respectively. These amounts are amortized on a straight-line basis
over the vesting periods of the options. Pro forma stock-based compensation
(including the effects of its Employee Stock Purchase Plan), net of the effect
of forfeitures, was $311,459, $597,200 and $520,200 for 2000, 1999 and 1998,
respectively.
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS 123, the Company's net (loss) income and pro forma net
(loss) income per common share would have been reported as follows:
Year Ended December 31,
2000 1999 1998
-------------- -------------- -----------
Net (loss) income:
As reported $(2,010,610) $(2,718,108) $1,385,756
Pro forma $(2,322,069) $(3,315,308) $865,556
Pro forma basic earnings per common share:
As reported $(.50) $(.96) $.50
Pro forma $(.58) $(1.17) $.31
Pro forma diluted earnings per common share:
As reported $(.50) $(.96) $.49
Pro forma $(.58) $(1.17) $.31
Weighted average shares used to calculate pro forma diluted earnings per
share were determined as described in Note 3, except in applying the treasury
stock method to outstanding options, net proceeds assumed received upon exercise
were increased by the amount of compensation cost attributable to future service
periods and not yet recognized as pro forma expense and the amount of any tax
benefits upon assumed exercise that would be credited to additional paid-in
capital.
A summary of stock option activity for the years ended December 31, 2000,
1999 and 1998 is as follows:
2000 1999 1998
---------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
----------- -------- ---------- -------- ---------- --------
Outstanding at beginning of year 540,334 $6.66 540,625 $6.94 349,115 $5.62
Granted 127,500 $1.59 102,500 $4.27 490,000 $7.41
Cancelled (313,583) $5.62 (83,291) $6.49 (241,375) $7.07
Exercised - - (19,500) $2.72 (57,115) $2.50
----------- -------- ---------- -------- ---------- --------
Outstanding at end of year 354,251 $5.75 540,334 $6.66 540,625 $6.94
=========== ======== ========== ======== ========== ========
Exercisable at end of year 212,376 $7.22 262,962 $7.04 178,462 $6.16
=========== ======== ========== ======== ========== ========
The weighted average fair values and weighted average exercise prices of
options granted are as follows:
For the Year Ended For the Year Ended For the Year Ended
December 31, 2000 December 31, 1999 December 31, 1998
---------------------------------------------------------------------------------------------
Fair Exercise Fair Exercise Fair Exercise
Number Value Price Number Value Price Number Value Price
---------------------------------------------------------------------------------------------
Exercise Price
Less than market
Price 47,500 $1.14 $1.33 20,000 $2.90 $3.72 197,500 $4.83 $6.91
Equal to market price 80,000 $1.24 $1.75 82,500 $2.62 $4.19 280,500 $4.36 $7.83
Greater than market
Price - - - - - - 12,000 $0.13 $5.44
--------- ------ ------- -------- ------- ------- -------- ------- ------
Total 127,500 $1.21 $1.59 102,500 $2.67 $4.10 490,000 $4.51 $7.41
========= ====== ======= ======== ======= ======= ======== ======= ======
The following table summarizes information about employee stock options
outstanding and exercisable at December 31, 2000:
Options Outstanding Options Exercisable
---------------------------------------------------------------- ---------------------------------------
Number of Weighted
Options Average Number
Range of Outstanding at Remaining Weighted Exercisable at Weighted
Exercise December 31, Contractual Life Average December 31, Average
Prices 2000 in Years Exercise Price 2000 Exercise Price
- ------------ --------------- ---------------- -------------- --------------- --------------
$1.33 - 2.00 89,750 9.14 $1.54 4,500 $2.00
$3.72 - 4.19 36,000 8.09 $4.01 19,875 $3.91
$5.31 - 7.63 78,501 6.67 $6.83 71,251 $6.90
$7.88 - 7.92 83,000 6.84 $7.88 58,250 $7.88
$8.00 - 9.63 67,000 6.34 $8.42 58,500 $8.46
---------- ------ --------- ---------- ---------
354,251 7.42 $5.75 212,376 $7.22
========== ====== ========= ========== =========
Employee Stock Purchase Plan
During 1998, the Company adopted an Employee Stock Purchase Plan ("ESPP")
which was approved by the Company's stockholders in May of 1998. The Company is
authorized to issue up to 175,000 shares under the ESPP. The initial offering
under the ESPP was January 1, 1998 and ended June 30, 1998. Subsequent offerings
begin on the first day following each previous offering ("Offering Date") and
end six months from the offering date ("Purchase Date"). The ESPP provides that
full time employees may authorize the Company to withhold up to 15% of their
earnings, subject to certain limitations, to be used to purchase common stock of
the Company at the lesser of 85% of the fair market value of the Company's
common stock on the Offering Date or the Purchase Date. In connection with the
ESPP, 42,561, 24,538 and 23,068 shares of the Company's stock were purchased
during the years ended December 31, 2000, 1999 and 1998, respectively.
The pro forma net income calculation above reflects $29,124 and $29,200 and
$46,800 in compensation expense associated with the ESPP for 2000, 1999 and
1998, respectively. The compensation expense represents the fair value of the
employees' purchase rights which was estimated using an acceptable pricing model
with the following weighted average assumptions:
Year Ended December 31,
2000 1999 1998
-------------- --------------- --------------
Risk-free interest rate 6.3% 4.5% 5.24%
Expected lives 0.5 year 0.5 year 0.5 year
Expected volatility 149.3% 131.0% 71.0%
Expected dividend yield 0% 0% 0%
401(k) Plan
The Company offers a contributory 401(k) plan (the "Plan") to its
employees. The Company made matching contributions to the Plan at 50% of the
employees' contribution for the first 8% of the employees' compensation for
2000, 1999 and 1998. Total Company contributions were $169,535, $185,747 and
$158,890 for the years ended December 31, 2000, 1999 and 1998, respectively.
(6) INCOME TAXES
The components of the (benefit) provision for income taxes are as follows:
2000 1999 1998
-------------- ------------ -----------
Current -- Federal $ - $(1,061,660) $ 662,000
Current - State - (158,640) 85,079
Deferred - Federal - 57,680 107,280
Deferred - State - 8,620 12,620
Tax effect of deduction for exercised stock
options credited to paid-in capital - - 20,021
-------------- ----------- ----------
Income tax (benefit) provision $ - $(1,154,000) $ 887,000
============== ============ ==========
The Company's deferred tax assets and liabilities at December 31, 2000 and
1999 consist of the following:
2000 1999
---------- ----------
Deferred tax assets-
Federal net operating loss carry-forward $1,332,000 $ 270,000
Federal AMT tax credit carry-forward 169,000 102,000
State net operating loss carry-forward 414,000 248,000
Inventory 15,500 14,000
Allowance for doubtful accounts 50,500 43,700
Repair reserve 31,500 59,600
Vacation accrual 121,500 43,100
Accrual for unbilled services 4,000 3,900
Other - 29,100
---------- ----------
2,138,000 813,400
Deferred tax liability-
Depreciation (1,085,500) (556,400)
Other (20,500) -
Valuation allowance (1,032,000) (257,000)
---------- ----------
Net deferred tax assets $ - $ -
========== ==========
Net current deferred tax assets $ 261,000 $ 189,000
Net long-term deferred tax assets 771,000 68,000
Valuation allowance (1,032,000) (257,000)
---------- ----------
$ - $ -
========== ==========
A reconciliation of the Company's income tax provision (benefit) computed
by applying the federal statutory income tax rate of 34% to income before taxes
is as follows:
2000 1999 1998
------------ ------------ ----------
Federal income tax at statutory rate $ (683,600) $(1,316,500) $772,700
State tax items, net (99,500) (3,800) 93,400
Nondeductible expenses 8,100 4,300 20,900
Federal tax net operating loss in excess
of book net operating loss - (121,000) -
Federal AMT tax credit carry-forward -
not recognized - 26,000 -
Change in valuation allowance 775,000 257,000 -
------------ ------------ ----------
(Benefit) provision for income taxes $ - $(1,154,000) $887,000
============ =========== ==========
The income tax receivable of $1,360,000 outstanding at December 31, 1999,
related to Federal and State tax refunds due to the Company as a result of its
1999 tax loss carryback. The refunds were received during 2000. The available
tax loss carrybacks were fully utilized in 1999 and, were therefore, not
available for any of the 2000 tax loss. The Company has $4,092,000 in NOL
carryforwards that expire through 2020.
(7) CAPITAL LEASE
In February 1996, the Company entered into an agreement to lease a phone
system. The lease has been capitalized using an implicit interest rate of 8.25%.
Future minimum lease payments under the lease as of December 31, 2000 totaled
$3,394.
(8) RECEIVABLE FROM RELATED PARTY
In connection with the acquisition of Spin Forge, the Company advanced
$280,000 to the seller. Prior to the acquisition, Spin Forge was owned and
controlled by an individual and his spouse. Later in 1998, this individual was
named President and CEO of the Company and served in that capacity until his
resignation in the third quarter of 2000. The advance was made to allow the
seller to retire certain debt that was outstanding on land and buildings that
the Company currently leases from the seller and on which the Company holds a
purchase option as discussed in Note 2. The Company also agreed to make
additional advances to the seller in connection with future principal payments
that the seller was required to make to satisfy debt obligations relating to the
property. The Company made additional advances totaling $74,588 during 1999,
bringing the balance outstanding to $354,588 as of December 31, 1999. No
additional advances were made during 2000. The outstanding balance was paid in
full during the first quarter of 2000. The Company's promissory note from the
seller, which was to mature on January 1, 2002, earned no interest, was secured
by a pledge of 50,000 shares of the Company's common stock held by the seller
and was personally guaranteed by the seller's two owners.
(9) BUSINESS SEGMENTS
The Company is organized in the following two segments: the Explosive
Metalworking Group ("Explosive Manufacturing") and the Aerospace Group
("Aerospace"). Explosive Manufacturing uses explosives to perform metal cladding
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. Aerospace 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.
Aerospace was formed in 1998 as a result of the Company's acquisitions of
AMK, Spin Forge and PMP during the year ended December 31, 1998. Explosive
Manufacturing was the Company's only segment prior to 1998. Segment information
is presented for the years ended December 31, 2000, 1999 and 1998 as follows:
Explosive
Manufacturing Aerospace Total
-------------- ------------ ------------
As of and for the year ended December 31, 2000:
Net sales $16,965,677 $10,896,904 $27,862,581
========== ========== ==========
Depreciation and amortization $ 820,953 $ 799,257 $ 1,620,210
========== ========== ==========
Income (loss) from operations $ 82,149 $(1,148,262) $(1,066,113)
Unallocated amounts:
Other income 198,290
Interest expense (1,094,181)
Interest income 31,505
-----------
Consolidated loss before income taxes and extraordinary item $(1,930,499)
===========
Segment assets $14,488,880 $12,539,505 $27,028,385
========== ==========
Assets not allocated to segments:
Cash 186,530
Prepaid expenses and other 193,966
Other long-term corporate assets 258,574
----------
Consolidated total assets $27,667,455
==========
Capital expenditures $ 483,443 $ 86,780 $ 570,223
========== ========== ==========
Explosive
Manufacturing Aerospace Total
-------------- ------------ -----------
As of and for the year ended December 31, 1999:
Net sales $17,014,639 $ 12,116,650 $29,131,289
========== =========== ==========
Depreciation and amortization $ 785,958 $ 728,145 $ 1,514,103
========== =========== ==========
Segment (loss) income from operations $(3,437,118) $ 862,323 $(2,574,795)
Corporate non-recurring charge (322,098)
----------
Loss from operations $(2,896,893)
Unallocated amounts:
Other income 14,784
Interest expense (1,009,911)
Interest income 19,912
----------
Consolidated loss before income taxes $(3,872,108)
===========
Segment assets $15,250,163 $ 12,561,020 $27,811,183
========== ===========
Assets not allocated to segments:
Prepaid expenses and other 151,609
Income tax receivable 1,360,000
Other long-term corporate assets 764,526
----------
Consolidated total assets $30,087,318
==========
Capital expenditures $ 5,244,292 $ 189,813 $ 5,434,105
========== =========== ==========
Explosive
Manufacturing Aerospace Total
-------------- ------------ ------------
As of and for the year ended December 31, 1998:
Net sales $29,727,273 $ 8,484,778 $ 38,212,051
========== ============ ==========
Depreciation and amortization $ 861,769 $ 233,227 $ 1,094,996
========== ============ ==========
Income from operations $ 1,252,618 $ 1,283,338 $ 2,535,956
Unallocated amounts:
Other income 8,921
Interest expense (283,706)
Interest income 11,585
----------
Consolidated income before income taxes $ 2,272,756
==========
Segment assets $18,086,015 $ 13,428,751 $ 31,514,766
=========== ===========
Assets not allocated to segments:
Prepaid expenses and other 214,776
Income tax receivable 499,932
Current deferred tax asset 224,800
Other long-term corporate assets 747,304
----------
Consolidated total assets $ 33,201,578
==========
Capital expenditures $ 2,442,041 $ 372,774 $ 2,814,815
========== =========== ==========
Capital expenditures for the Explosive Manufacturing segment included
$336,347, $5,082,680 and $1,853,723 of costs incurred related to the
construction of the Company's new manufacturing facility and the acquisition of
related manufacturing equipment during the years ended December 31, 2000, 1999
and 1998, respectively.
All of the Company's sales are shipped from domestic locations and all of
the Company's assets are located within the United States. The following
represents the Company's net sales based on the geographic location of the
customer:
For the years ended December 31,
--------------------------------
2000 1999 1998
--------------- --------------- -------------
United States $25,115,688 $26,563,764 $32,478,791
Canada 986,508 1,516,580 3,818,968
Australia 9,600 149,626 38,428
Mexico 300,537 449,405 305,398
South Korea 1,022,285 11,390 -
Other foreign countries 427,963 440,524 1,570,466
----------- ----------- -----------
Total consolidated net sales $27,862,581 $29,131,289 $38,212,051
=========== =========== ===========
All of the Company's sales are made in U.S. dollars and as a result the
Company is not exposed to foreign exchange risks.
During the years ended December 31, 2000 and December 31, 1998, no one
customer accounted for more than 10% of total net sales. During the year ended
December 31, 1999, sales to one customer represented approximately $2,968,000
(10%) of total net sales.
(10) COMMITMENTS AND CONTINGENCIES
The Company leases certain office space, storage space, vehicles and other
equipment under various operating lease agreements. Future minimum rental
commitments under noncancelable operating leases are as follows:
Year ended December 31-
2001 $ 596,206
2002 369,069
2003 337,863
2004 237,673
2005 139,339
Thereafter 49,880
------------
$1,730,030
Total rental expense included in operations was $885,726, $843,690 and
$713,731 in the years ended December 31, 2000, 1999 and 1998, respectively.
In the normal course of business, the Company is a party to various
contractual disputes and claims. After considering the Company's insurance
coverage and evaluations by legal counsel regarding pending actions, management
is of the opinion that the outcome of such actions will not have a material
adverse effect on the financial position or results of operations of the
Company.
(11) STOCKHOLDERS' EQUITY
The Company's authorized capital consists of 15,000,000 shares of common
stock, $.05 par value, of which 4,990,331 shares are outstanding as of December
31, 2000 and 4,000,000 shares of preferred stock, $.05 par value, of which no
shares are issued and outstanding.
On January 8, 1999, the Board of Directors of the Company declared a
dividend of one preferred share purchase right for each outstanding share of
common stock of the Company to record holders of common stock at the close of
business on January 15, 1999. The rights were exercisable following the
occurrence of certain specified events and each right would have entitled the
holder, within certain limitations, to purchase one one-hundredth of a share of
Series A Junior Participating Preferred Stock for $22.50 subject to certain
anti-dilution adjustments. If a person or group were to have acquired 15 percent
of the Company's common stock, every other holder of a right would have been
entitled to buy at the right's then-exercise price a number of shares of the
Company's common stock having a value of twice such exercise price. After the
threshold was crossed, the rights would have become non-redeemable, except that,
prior to the time a person or group acquired 50% or more of the common stock,
the rights other than those held by such person or group could be exchanged at a
ratio of one share of common stock for each right. In the event of certain
extraordinary transactions, including mergers, the rights entitle holders to buy
at the right's then-exercise price equity in the acquiring company having a
value of twice such exercise price. The rights did not have any voting rights
nor were they entitled to dividends. The rights were redeemed by the Company at
$.001 each on June 20, 2000.
(12) SUBSEQUENT EVENTS
On March 15, 2000, the Company announced that it has reached an agreement
to acquire 100% of the stock of Nobelclad Europe S.A. ( "Nobelclad") and Nitro
Metall Aktiebolag ("Nitro Metall") from Nobel Explosifs France ("NEF").
Nobelclad and Nitro Metall operate cladding businesses located in Rivesaltes,
France and Likenas, Sweden, respectively, which generated combined revenues of
approximately $10.5 million during the year ended December 31, 2000. NEF is
wholly owned by Groupe SNPE and is a sister company to SNPE, which owns 55% of
the Company's common stock.
The acquisition, which is expected to close in the third quarter of 2001,
is subject to the customary due diligence reviews and the finalization of a
definitive stock purchase agreement. The purchase price of approximately $5.4
million will be financed through a $4.0 million intercompany note agreement
between the Company and SNPE and the assumption of approximately $1.4 million in
third party bank debt associated with Nobelclad's planned acquisition of Nitro
Metall from NEF prior to the Company's purchase of Nobelclad stock.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Company has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DYNAMIC MATERIALS CORPORATION
March 30, 2001 By: /s/ Richard A. Santa
----------------------
Richard A. Santa
Vice President and Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Company and in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
/s/ Yvon Pierre Cariou President and Chief Executive Officer March 30, 2001
- -------------------------------- (Principal Executive Officer)
Yvon Pierre Cariou
/s/ Richard A. Santa Vice President and Chief Financial Officer March 30, 2001
- -------------------------------- (Principal Financial and Accounting Officer)
Richard A. Santa
/s/ Bernard Hueber Chairman and Director March 30, 2001
- --------------------------------
Bernard Hueber
/s/ Dean K. Allen Director March 30, 2001
- --------------------------------
Dean K. Allen
/s/ Bernard Fontana Director March 30, 2001
- --------------------------------
Bernard Fontana
/s/ George W. Morgenthaler Director March 30, 2001
- --------------------------------
George W. Morgenthaler
/s/ Gerard Munera Director March 30, 2001
- --------------------------------
Gerard Munera
/s/ Michel Philippe Director March 30, 2001
- --------------------------------
Michel Philippe
/s/ Bernard Riviere Director March 30, 2001
- --------------------------------
Bernard Riviere