U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
--------------------
Commission file number: 0-8328
DYNAMIC MATERIALS CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 84-0608431
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
551 ASPEN RIDGE DRIVE, LAFAYETTE 80026
(Address of principal executive office) (Zip Code)
Issuer's telephone number, including Area Code (303) 665-5700
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.05 PAR VALUE
(TITLE OF CLASS)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
--- ----
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 2,790,008 SHARES OF COMMON
STOCK AS OF APRIL 30,1998.
ITEM 1. FINANCIAL STATEMENTS
DYNAMIC MATERIALS CORPORATION
CONDENSED BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
1998 1997
---------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ - $ 53,809
Accounts recevable, net of allowance for doubtful
accounts of $150,000 as of each date 6,312,350 4,936,350
Inventories 5,757,816 4,029,559
Prepaid expenses and other 217,462 368,511
Deferred tax asset 200,000 200,000
Receivable from related party 221,274 221,274
----------- -----------
Total current assets 12,708,902 9,809,503
----------- -----------
PROPERTY, PLANT AND EQUIPMENT 9,524,966 5,831,687
Less- Accumulated depreciation (3,181,346) (2,988,807)
----------- -----------
Property, plant and equipment-net 6,343,620 2,842,880
----------- -----------
INTANGIBLE ASSETS, net of accumulated amortization
of $342,229 and $307,451, respectively 1,295,686 1,230,464
NOTE RECEIVABLE 280,000 -
OTHER ASSETS 280,221 522,962
---------- -----------
TOTAL ASSETS $20,908,429 $14,405,809
=========== ===========
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS
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DYNAMIC MATERIALS CORPORATION
CONDENSED BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
1998 1997
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft $ 513,768 $ -
Accounts payable 3,435,111 2,328,867
Accrued expenses 1,007,896 1,012,908
Current maturities of long-term debt and
capital lease obligations 98,722 113,925
----------- ------------
Total current liabilities 5,055,497 3,455,700
LINE OF CREDIT 3,938,589 -
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 59,147 76,832
DEFERRED TAX LIABILITY 13,800 13,800
----------- ------------
Total liabilities 9,067,033 3,546,332
----------- ------------
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $.05 par value;
4,000,000 shares authorized: no issued and
outstanding shares - -
Common stock, $.05 par value; 15,000,000 shares
authorized; 2,789,508 and 2,718,708 shares
issued and outstanding, respectively 139,476 135,936
Additional paid-in capital 7,057,315 6,587,911
Retained earnings 4,644,605 4,135,630
----------- ------------
11,841,396 10,859,477
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $20,908,429 $14,405,809
=========== ===========
See Notes to Condensed Financial Statements
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DYNAMIC MATERIALS CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
1998 1997
----------- -----------
NET SALES $ 9,495,154 $ 9,781,910
COST OF PRODUCTS SOLD 7,498,794 7,734,297
----------- -----------
Gross profit 1,996,360 2,047,613
----------- -----------
COSTS AND EXPENSES:
General and administrative expenses 608,337 548,217
Selling expenses 522,501 527,823
Research and development costs 16,486 10,326
----------- -----------
1,147,324 1,086,366
----------- -----------
INCOME FROM OPERATIONS 849,036 961,247
OTHER INCOME (EXPENSE):
Other income -- 21,890
Interest expense (29,350) (65,364)
Interest income 1,289 2,485
----------- -----------
Income before income tax provision 820,975 920,258
INCOME TAX PROVISION (312,000) (295,000)
----------- -----------
NET INCOME $ 508,975 $ 625,258
=========== ===========
NET INCOME PER SHARE
Basic $ .19 $ .24
=========== ===========
Diluted $ .18 $ .22
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING
Basic 2,735,324 2,600,239
=========== ===========
Diluted 2,869,547 2,891,140
=========== ===========
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS
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DYNAMIC MATERIALS CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
Common Stock Additional
------------------------ Paid in Retained
Shares Amount Capital Earnings
----------- ----------- ----------- -----------
BALANCES, December 31, 1997 2,718,708 $ 135,936 $ 6,587,911 $ 4,135,630
Common stock issued for stock
option exercises 13,300 665 22,479 --
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 (375) --
Net income -- -- -- 508,975
----------- ----------- ----------- -----------
BALANCES, March 31, 1998 2,789,508 $ 139,476 $ 7,057,315 $ 4,644,605
=========== =========== =========== ===========
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS
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DYNAMIC MATERIALS CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 508,975 $ 625,258
Adjustments to reconcile net income
to net cash from operating activities-
Depreciation 192,539 143,062
Amortization 34,778 29,529
Decrease (increase) in-
Accounts receivable, net (1,376,000) 360,066
Inventories (386,422) 2,650,354
Prepaid expenses and other 155,179 49,120
Increase (decrease) in-
Bank overdraft 513,768 (743,471)
Accounts payable 344,307 (1,130,336)
Accrued expenses (189,480) 155,717
----------- -----------
Net cash flows from operating activities (202,356) 2,139,299
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Spin Forge assets (2,348,589) --
Purchase of AMK assets (905,873) --
Loan to related party (280,000) --
Acquisition of property, plant and equipment (171,020) (19,765)
Sale of property, plant and equipment -- 10,172
Change in other noncurrent assets (74,816) (71,374)
----------- -----------
Net cash flows used in investing activities (3,780,298) (80,967)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings/(payments) on line of credit, net 3,938,589 (2,430,000)
Payments on long-term debt and capital lease obligations (32,888) (29,482)
Net proceeds from issuance of common stock 23,144 200,398
----------- -----------
Net cash flows from financing activities 3,928,845 (2,259,084)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (53,809) (200,752)
CASH AND CASH EQUIVALENTS, beginning of the period 53,809 209,650
----------- -----------
CASH AND CASH EQUIVALENTS, end of the period $ -- $ 8,898
=========== ===========
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS
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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-KSB for the year ended December 31, 1997.
2. ACQUISITION OF AMK AND SPIN FORGE BUSINESSES
The Company has completed two separate business acquisitions since its December
31, 1997 fiscal year end. On January 5, 1998, the Company acquired certain
assets of AMK Welding, Inc. (AMK) for a cash purchase price of approximately
$900,000. Assets acquired consisted primarily of machinery and equipment, land
and the building that houses AMK's operations. AMK supplies commercial aircraft
and aerospace-related automatic and manual, gas tungsten and arc welding
services. On March 18, 1998, the Company completed the acquisition of certain
assets of Spin Forge, LLC (Spin Forge) for a purchase price of approximately
$3,900,000 that was paid with a combination of approximately $2,350,000 in cash,
assumption of approximately $1,100,000 in liabilities and 50,000 shares of DMC
Common Stock valued at $450,500. The Company's management believes Spin Forge is
one of the country's leading manufacturers of tactical missile motor cases and
titanium pressure vessels for the commercial aerospace and defense industries.
Principal assets acquired included machinery and equipment and inventories. The
Company will lease land and buildings from Spin Forge, LLC and holds an option
to purchase such property for approximately $2.9 million, subject to certain
adjustments, exercisable under certain conditions through January 2002. The
option may be extended beyond this date under specified conditions provided that
the option price must be adjusted upwards in the event that the fair market
value of the property at the time of exercise is higher than $2.9 million.
The following unaudited pro forma results of operations of the Company for the
three months ended March 31, 1998 and March 31, 1997 assumes that the
acquisition of AMK and Spin Forge had occurred on January 1, 1997. These pro
forma results are not necessarily indicative of the actual results of operations
that would have been achieved nor are they necessarily indicative of future
results of operations. In addition, the purchase price allocation of these
acquisitions are tentative and may be affected by final post closing
adjustments.
Three Months Ended
March 31, 1998 March 31, 1997
-------------- --------------
REVENUES $ 10,756,439 $ 11,474,073
NET INCOME $ 564,854 $ 603,457
NET INCOME PER SHARE - BASIC $ 0.20 $ 0.23
NET INCOME PER SHARE - DILUTED $ 0.19 $ 0.21
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3. INVENTORIES
This caption on the Condensed Balance Sheet includes the following:
March 31, December 31,
1998 1997
---------- ----------
RAW MATERIALS $ 931,739 $ 984,788
WORK-IN-PROCESS 4,714,328 2,865,164
SUPPLIES 111,749 179,607
$5,757,816 $4,029,559
========== ==========
4. NET INCOME PER SHARE:
The Company computes earnings per share (EPS) in accordance with Statement of
Financial Accounting Standards No. 128 ("SFAS 128), "Earnings per Share". Basic
EPS is computed by dividing net income by the weighted average number of shares
of common stock outstanding during the period. Diluted EPS recognizes the
potential dilutive effects of dilutive securities. The following represents a
reconciliation of the numerator and denominator used in the calculation of basic
and diluted EPS:
For the quarter ended March 31, 1997
------------------------------------
Per Share
Income Shares Amount
---------- --------- ---------
Net Income $ 625,258
==========
Basic earnings per share:
Income available to common shareholders $ 625,258 2,600,239 $ 0.24
======
Dilutive effect of options to purchase common
stock -- 290,901
---------- ---------
Dilutive earnings per share:
Income available to common shareholders $ 625,258 2,891,140 $ 0.22
=========== ========= ======
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For the quarter ended March 31, 1997
------------------------------------
Per Share
Income Shares Amount
----------- -------- ---------
Net Income $ 508,975
===========
Basic earnings per share:
Income available to common shareholders $ 508,975 2,735,324 $ 0.19
======
Dilutive effect of options to purchase common
stock -- 134,223
----------- ---------
Dilutive earnings per share:
Income available to common shareholders $ 508,975 2,869,547 $ 0.18
=========== ========= ======
In December, 1997 the Company adopted SFAS 128 and, as a result, the Company's
reported earnings per share for the quarter ended March 31, 1997 were restated.
The effect of this change on previously reported EPS data was as follows:
Quarter Ended
March 31, 1997
-------------------
Per share amounts
Primary EPS as reported $0.22
Effect of FAS 128 0.02
-----
Basic EPS as restated $0.24
Fully diluted EPS as reported $0.22
Effect of FAS 128 -
-----
Diluted EPS as restated $0.22
=====
5. SIGNIFICANT CUSTOMER
During the quarter ended March 31, 1998 one customer accounted for approximately
11% of net sales. One customer accounted for approximately 26% of net sales
during the quarter ended March 31, 1997. International sales as a percent of net
sales were 19% and 42% for the quarters ended March 31, 1998 and March 31, 1997,
respectively. Due to the fact that a significant portion of the Company's sales
is derived from a relatively small number of customers, the failure to perform
existing contracts on a timely basis, 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.
-8-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion should be read in conjunction with the condensed
financial statements included elsewhere within this quarterly report.
Fluctuations in annual and quarterly operating results may occur as a result of
certain factors such as the size and timing of customer orders and competition.
Due to such fluctuations, historical results and percentage relationships are
not necessarily indicative of the results for any future period. Statements
contained in this report that are not historical facts 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 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; 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. The Company further directs readers to the
factors discussed in the Company's Form 10-KSB for the year ended December 31,
1997.
GENERAL
Dynamic Materials Corporation ("DMC" or the "Company") is a worldwide
leader in the high energy metal working business. The high energy metal working
business includes the use of explosives to perform both metallurgical bonding,
or metal "cladding," and metal forming. The Company performs metal cladding
using its proprietary Dynaclad(TM) and Detaclad(R) technologies and performs
metal forming using its proprietary Dynaform(TM) technology. Historically, the
Company has generated approximately 85% to 90% of its revenues from its metal
cladding business and approximately 10% to 15% of its revenues from its metal
forming and shock synthesis businesses. The Company expects revenues from its
cladding business, as a proportion of total Company revenues, to decline as a
result of the recent AMK and Spin Forge acquisitions.
Metal Cladding. 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.
Metal Forming, Welding and Assembly. 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 both the use of explosives and 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
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beam and gas tungsten arc welding processes. The Company's forming and welding
operations are often performed to support the manufacture of completed
assemblies and sub-assemblies required by its customers. Assembly and
fabrication services are performed utilizing the Company's close-tolerance
machining, forming, welding, inspection and other special service capabilities.
The Company's forming, welding and assembly operations serve a variety of
product applications in the commercial aircraft, aerospace, defense and power
generation industries. Product applications include torque box webs for jet
engine nacelles, tactical and ballistic missile motor cases and titanium
pressure tanks.
The Company is continually working to generate solutions to the materials
needs of customers in its target markets. Key elements of the Company's strategy
include continual improvement of its basic processes and product offerings, the
internal development of new cladding and forming products and the acquisition of
businesses that broaden or complement the Company's existing product lines. In
July 1996, the Company completed its first strategic acquisition when it
acquired the assets of the Detaclad(R) Division ("Detaclad") of E.I. du Pont de
Nemours and Company ("DuPont"), a complementary explosion cladding business with
expertise in cladding thin metals and heat exchanger components primarily for
the chemical processing, power generation and petrochemical industries.
The Company has completed two separate business acquisitions since its
December 31, 1997 fiscal year end. On January 5, 1998, the Company acquired
certain assets of AMK Welding, Inc. (AMK) for a cash purchase price of
approximately $900,000. Assets acquired consisted primarily of machinery and
equipment, land and the building that houses AMK's operations. AMK supplies
commercial aircraft and aerospace-related automatic and manual, gas tungsten and
arc welding services and generated sales of approximately $1.2 million in its
most recent fiscal year that ended on July 31, 1997. On March 18, 1998, the
Company completed the acquisition of certain assets of Spin Forge, LLC (Spin
Forge) for a purchase price of approximately $3,900,000 that was paid with a
combination of approximately $2,350,000 in cash, assumption of approximately
$1,100,000 in liabilities and 50,000 shares of DMC Common Stock valued at
$450,500. The Company's management believes Spin Forge is one of the country's
leading manufacturers of tactical missile motor cases and titanium pressure
vessels for the commercial aerospace and defense industries. Principal assets
acquired included machinery and equipment and inventories. The Company will
lease land and buildings from Spin Forge, LLC and holds an option to purchase
such property for approximately $2.9 million, subject to certain adjustments,
exercisable under certain conditions through January 2002. The option may be
extended beyond this date under specified conditions provided that the option
price must be adjusted upwards in the event that the fair market value of the
property at the time of exercise is higher than $2.9 million. Spin Forge
generated sales revenues of approximately $6.5 million for the year ended
December 31, 1997.
The Company has experienced and expects to continue to experience,
quarterly fluctuations in operating results caused by various factors, including
the timing and size of orders by major customers, customer inventory levels,
shifts in product mix, the occurrence of acquisition-related costs and general
economic conditions. In addition, the Company typically does not obtain
long-term volume purchase contracts from its customers. Quarterly sales and
operating results therefore depend on the volume and timing of backlog as
well as bookings received during the quarter. A significant
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portion of the Company's operating expenses are fixed, and planned expenditures
are based primarily on sales forecasts and product development programs. If
sales do not meet the Company's expectations in any given period, the adverse
impact on operating results may be magnified by the Company's inability to
adjust operating expenses sufficiently or quickly enough to compensate for such
a shortfall. In addition, the Company uses numerous suppliers of alloys, steels
and other materials for its operations. The Company typically bears a short-term
risk of alloy, steel and other component price increases, which could adversely
affect the Company's gross profit margins. Although the Company will work with
customers and suppliers to minimize the impact of any component shortages,
component shortages have had, and are expected from time to time to have,
short-term adverse effects on the Company's business. Results of operations in
any period should not be considered indicative of the results to be expected for
any future period. Fluctuations in operating results may also result in
fluctuations in the price of the Company's Common Stock.
QUARTER ENDED MARCH 31, 1998 COMPARED TO MARCH 31, 1997
The following table sets forth for the periods indicated the percentage
relationship to net sales of certain income statement data:
PERCENTAGE OF NET SALES
THREE MONTHS ENDED MARCH 31,
1998 1997
Net Sales 100.0% 100.0%
Cost of Products Sold 79.0% 79.1%
----- -----
Gross Profit 21.0% 20.9%
General & Administrative 6.4% 5.6%
Selling Expenses 5.5% 5.4%
R & D 0.2% 0.1%
Other Income 0.0% 0.2%
Interest Expense 0.3% 0.7%
Interest Income 0.0% 0.0%
Income Tax Provision 3.3% 3.0%
----- -----
Net Income 5.4% 6.4.%
===== =====
NET SALES. Net sales for the quarter ended March 31, 1998 decreased by 2.9% to
$9,495,154 from $9,781,910 in the first quarter of 1997. Sales for the first
quarter of 1997 included approximately $3.2 million in sales from shipments
under two large, non-recurring orders from an Australian customer. Sales for the
first quarter of 1998 included approximately $800,000 in sales from the newly
acquired Spin Forge and AMK businesses.
GROSS PROFIT. As a result of the Company's decrease in net sales, gross profit
for the quarter ended March 31, 1998 decreased by 2.5% to $1,996,360 from
$2,047,613 in first quarter of 1997. The gross
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profit margin of 21.0% for the quarter ended March 31, 1998 was virtually
unchanged from the gross profit margin of 20.9% for the first quarter of 1997.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for quarter
ended March 31, 1998 increased 11.0% to $608,337 from $548,217 in the first
quarter of 1997. This increase reflects higher spending levels in a number of
categories, including compensation, travel and entertainment, business
development and insurance. General and administrative expenses are expected to
increase during the remainder of the year as a result of the recently completed
Spin Forge acquisition and the Company's ongoing business development
activities. As a percentage of sales, general and administrative expenses
increased from 5.6% in the first quarter of 1997 to 6.4% in the first quarter of
1998.
SELLING EXPENSE. Selling expenses decreased by 1.0% to $522,501 for the quarter
ended March 31, 1998 from $527,823 in the first quarter of 1997. This decrease
is attributable to timing differences and does not reflect a downward trend in
the Company's selling expenses. As a percentage of sales, selling expenses
increased from 5.4% in the first quarter of 1997 to 5.5% in the first quarter of
1998.
RESEARCH AND DEVELOPMENT. Research and development expenses increased to $16,486
for the quarter ended March 31, 1998 from $10,326 in the first quarter of 1997.
INCOME FROM OPERATIONS. Income from operations decreased by 11.7% to $849,036
for the quarter ended March 31, 1998 from $961,247 in the first quarter of 1997.
This decrease is a direct result of the decrease in net sales combined with the
increase in general and administrative expenses discussed above. Income from
operations as a percentage of net sales decreased to 8.9% for the quarter ended
March 31, 1998 from 9.8% in the first quarter of 1997.
INTEREST EXPENSE. Interest expense decreased to $29,350 for the quarter ended
March 31, 1998 from $65,364 in the first quarter of 1997. This decrease is due
to borrowings during the first quarter of 1997 under the Company's revolving
line of credit facility with KeyBank National Association that were required to
finance a portion of the Detaclad acquisition and working capital requirements
associated with two large orders that accounted for a significant portion of
December 31, 1996 accounts receivable and inventory balances. Interest expense
is expected to increase in the second quarter of 1998 as the line of credit
borrowings increased from zero at December 31, 1997 to $3,938,589 at March 31,
1998. The increase is principally a result of the utilization of line of credit
borrowings to finance the AMK and Spin Forge acquisitions.
INCOME TAX PROVISION. The Company's income tax provision increased by 5.8% to
$312,000 for the quarter ended March 31, 1998 from $295,000 in the first quarter
of 1997. This increase reflects an increase in the Company's effective tax rate
to 38.0% for the quarter ended March 31, 1998 from 32.1% for the first quarter
of 1997. The 38.0% effective tax rate used in the first quarter of 1998 compares
to an effective tax rate of 37.8% for the year ended December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has secured the major portion of its operational
financing from operating activities and an asset-backed revolving credit
facility. In connection with the Detaclad acquisition, the Company entered into
a $7,500,000 asset-backed revolving credit facility with
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KeyBank National Association (KeyBank) in July of 1996. The credit facility has
a seven-year term and is secured by substantially all of the Company's assets,
including its accounts receivable, inventory and equipment The maximum amount
available under the line of credit is subject to borrowing base restrictions
which are a function of defined balances in accounts receivable, inventory, real
property and equipment.
In connection with the Company's acquisition of Spin Forge on March 18,
1998 and resultant increase in the Company's asset base, the Company amended its
revolving credit facility with KeyBank. Amendments included an increase in the
total facility from $7.5 million to $10 million and separating $5 million of the
total facility into a reducing revolving credit facility to be used principally
for acquisition financing. The reducing revolving credit facility is secured by
certain of the Company's assets, including those of the acquired AMK and Spin
Forge businesses, and is not subject to borrowing base restrictions.
Availability under this facility will be reduced at the rate of $1 million per
year over its five-year term. The remaining $5 million of the revolving credit
facility will continue under the same terms and conditions as described above
for the original $7.5 million facility. The interest rate applicable to
borrowings under both the revolving credit facility and reducing revolving
credit facility is, at the Company's option, either the LIBOR Rate plus 1% to
1-1/2%, depending on certain conditions, or the Federal Funds Rate plus 2%. The
Company's total borrowings under the KeyBank facility were $3,938,589 as of
March 31, 1998.
During the quarter ended March 31, 1998, the Company used $202,356 in cash
flows from operating activities as compared to generating $2,139,299 in the
first quarter of 1997. The principal sources of cash flow from operations in the
quarter ended March 31, 1998 were net income of $508,975, an increase in bank
overdraft of $513,768 and an increase in accounts payable of $344,307. These
sources of operating cash flow were more than offset by a $1,376,000 increase in
accounts receivable and $386,422 increase in inventories. The increase in
receivables and inventory relates to higher than normal March sales and
production activity associated with the Company's relatively strong beginning of
the year order backlog. The Company's current ratio was 2.5 March 31, 1998 as
compared to 2.8 at December 31, 1997. Investing activities in the quarter ended
March 31, 1998 used $3,780,298 of cash, principally to fund the purchase of the
Spin Forge and AMK assets. Financing activities for the quarter ended March 31,
1998 provided $3,928,845 of net cash, including line of credit borrowings in the
amount of $3,938,589 that were used primarily for the purchase of the assets of
Spin Forge and AMK.
In March 1998, the Company's Board of Directors approved the Company's
proposal to build a new manufacturing facility in Pennsylvania at a cost of
approximately $6 million. The Company plans to finance the construction of the
manufacturing facility and purchase of related equipment with proceeds from the
issuance of tax-exempt, industrial development revenue bonds. KeyBank has
provided the Company with a letter of credit commitment in the amount of $6
million as credit enhancement for the bond financing. The Company anticipates
closing the bond financing by early third quarter of 1998. Construction of the
new facility is expected to begin in the summer of 1998 and should be completed
in early 1999.
The Company believes that its cash flow from operations, funds expected to
be available under its amended credit facility, and proceeds from the
anticipated tax-exempt bond financing for the new Pennsylvania manufacturing
facility will be sufficient to fund working capital and capital expenditure
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requirements of its current business operations, including those of the recently
acquired AMK and Spin Forge businesses, for the foreseeable future. However, a
significant portion of the Company's sales is derived from a relatively small
number of customers; therefore, the failure to perform existing contracts on a
timely basis, and to receive payment for such services in a timely manner, or to
enter into future contracts at projected volumes and profitability levels could
adversely affect the Company's ability to meet its cash requirements exclusively
through operating activities. Consequently, any restriction on the availability
of borrowing under the line of credit could negatively affect the Company's
ability to meet its future cash requirements. The Company's expenditures for the
Pennsylvania manufacturing facility could exceed its estimates due to
construction delays, the delay in the receipt of any required government
approvals and permits, labor shortages or other factors. In addition, the
Company plans to grow both internally and through the acquisition of
complementary businesses. Increased expenditures for the Pennsylvania
manufacturing facility and/or a significant acquisition may require th Company
to secure additional debt or equity financing. While the Company believes it
would be able to secure such additional financing at reasonable terms, there is
no assurance that this would be the case.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has been named as a defendant in a Lawsuit filed in France by a
French company with which the Company had preliminary acquisition discussions
during 1997. The Company plans to vigorously defend itself against such claim
and the management of the Company believes that the ultimate outcome of such
litigation will not have a material adverse effect on the Company's financial
condition or results of operations. The Company is not party to any other legal
proceedings, the adverse outcome of which would, in management's opinion, have a
material adverse effect on the Company's business, operation results and
financial condition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Between January 1, 1998 and March 31, 1998 the Registrant has issued and/or sold
unregistered securities as set forth below:
(1) In March 1998, the Registrant issued 50,000 shares of unregistered Common
Stock to Joseph Allwein, an officer of the Registrant, as part of the
consideration for the purchase of the assets of Spin Forge, LLC.
(2) In March 1998 the Registrant issued 7,500 shares of unregistered Common
Stock to Joseph Allwein, an officer of the Registrant, in exchange for
services rendered which stock will vest in four equal annual installments.
The sales and issuance of securities in the transactions described in paragraphs
(1) and (2) above were deemed to be exempt from registration under the
Securities Act by virtue of Section 4(2) promulgated under the Securities Act.
The purchasers in each case represented their intention to acquire the
securities for investment only and not with a view to the distribution thereof.
Appropriate legends are affixed to the stock certificates issued in such
transactions. All recipients either received adequate information about the
Registrant or had access , through employment or other relationships, to such
information.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a)
3.1 Certificates of Incorporation of the Registrant**
3.2 Bylaws of the Registrant**
10.1 Asset Purchase Agreement, dated January 1998, between the Registrant and
AMK Inc.
10.2 Asset Purchase Agreement, dated as of March 18, 1998 between the
Registrant, Spin Forge, LLC, Joseph Allwein and Darlene Bauer Allwin*
10.3 Option Agreement, dated as of March 18, 1998 between the Registrant and
Spin Forge, LLC*
10.4 Operating Lease, dated as of March 18, 1998 between the Registrant and
Spin Forge, LLC*
10.5 Loan Agreement, dated March 18, 1998 between the Registrant and Spin
Forge, LLC*
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10.6 Personal Services Agreement, dated March 18, 1998 between the Registrant
and Joseph Allwein*
10.7 Stock Agreement, dated as of March 18, 1998 between the Registrant and
Spin Forge, LLC*
10.8 Stock Agreement, dated as of March 18, 1998 between the Registrant and
Joseph Allwein*
10.9 Non-Competition Agreement, dated as of March 18, 1998 between the
Registrant and Joseph Allwein*
10.10 Master Promissory Note, dated as of March 18, 1998, by Spin Forge, LLC*
10.11 Personal Guaranty, dated as of March 18, 1998 between the Registrant, Spin
Forge, LLC, Joseph Allwein and Darlene Bauer Allwin*
10.12 Credit Facility and Security Agreement, dated as of March 18, 1998 between
the Registrant and Key Bank National Association
10.13 First Amendment to Loan Documents, dated as of March 18, 1998 between the
Registrant and Key Bank National Association
27 Financial Data Schedule
(b) None
* Incorporated by reference from the Registrant's Report on Form 8-K filed
April 2, 1998
**Incorporated by reference form the Company's Proxy Statement for the 1998
Annual Shareholders' Meeting filed July 14, 1997
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
DYNAMIC MATERIALS CORPORATION
(Registrant)
Date: May 15, 1998 /s/Richard A. Santa
-------------------------------
Richard A. Santa, Vice President
of Finance and Chief Financial
Officer (Duly Authorized Officer
and Principal Financial and
Accounting Officer)
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
10.1 Asset Purchase Agreement, dated January 1998, between the
Registrant and AMK Inc.
10.12 Credit Facility and Security Agreement, dated as of March 18, 1998
between the Registrant and Key Bank National Association
10.13 First Amendment to Loan Documents, dated as of March 18, 1998
between the Registrant and Key Bank National Association
27 Financial Data Schedule