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: JUNE 30, 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
of incorporation or organization) Identification No.)
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: 2,821,666 SHARES OF COMMON
--------------------------
STOCK AS OF JULY 31,1998.
- ------------------------
ITEM 1. FINANCIAL STATEMENTS
DYNAMIC MATERIALS CORPORATION
CONDENSED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
ASSETS 1998 1997
------ ---------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ - $ 53,809
Accounts receivable, net of allowance for doubtful
accounts of $173,000 and $150,000, respectively 6,530,979 4,936,350
Inventories 4,630,184 4,029,559
Prepaid expenses and other 299,388 368,511
Deferred tax asset 200,000 200,000
Receivable from related party 221,274 221,274
---------- ----------
Total current assets 11,881,825 9,809,503
---------- ----------
PROPERTY, PLANT AND EQUIPMENT 10,029,280 5,831,687
Less-Accumulated depreciation (3,435,956) (2,988,807)
---------- ----------
Property, plant and equipment-net 6,593,324 2,842,880
---------- ----------
INTANGIBLE ASSETS, net of accumulated amortization
of $377,840 and $307,451, respectively 1,261,183 1,230,464
NOTE RECEIVABLE 280,000 -
OTHER ASSETS 301,867 522,962
---------- ----------
TOTAL ASSETS $ 20,318,199 $ 14,405,809
========== ==========
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS
1
DYNAMIC MATERIALS CORPORATION
CONDENSED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
------------------------------------ ------------ -------------
CURRENT LIABILITIES:
Bank overdraft $ 269,541 $ -
Accounts payable 2,281,452 2,328,867
Accrued expenses 1,080,298 1,012,908
Current maturities of long-term debt and capital lease obligations 62,411 113,925
---------- ----------
Total current liabilities 3,693,702 3,455,700
LINE OF CREDIT 3,955,000 -
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 62,729 76,832
DEFERRED TAX LIABILITY 13,800 13,800
---------- ----------
Total liabilities 7,725,231 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; 2,818,916 and 2,718,708 shares
issued and outstanding, respectively 140,947 135,936
Additional paid-in capital 7,238,145 6,587,911
Deferred compensation (67,500) -
Retained earnings 5,281,376 4,135,630
---------- ----------
12,592,968 10,859,477
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 20,318,199 $ 14,405,809
========== ==========
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS
2
DYNAMIC MATERIALS CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
NET SALES $11,372,968 $7,877,630 $20,868,122 $17,659,541
COST OF PRODUCTS SOLD 8,990,249 6,016,044 16,489,041 13,750,341
----------- ---------- ----------- -----------
Gross profit 2,382,719 1,861,586 4,379,081 3,909,200
----------- ---------- ----------- -----------
COSTS AND EXPENSES:
General and administrative expenses 749,701 547,087 1,358,038 1,095,306
Selling expenses 478,123 528,828 1,000,623 1,056,651
Research and development costs 10,107 6,803 26,594 17,129
----------- ---------- ----------- -----------
1,237,931 1,082,718 2,385,255 2,169,086
----------- ---------- ----------- -----------
INCOME FROM OPERATIONS 1,144,788 778,868 1,993,826 1,740,114
OTHER INCOME (EXPENSE):
Other income 5,482 1,612 5,482 23,506
Interest expense (94,297) (24,921) (123,647) (90,285)
Interest income 796 4,607 2,085 7,087
----------- ---------- ----------- -----------
Income before income tax provision 1,056,769 760,166 1,877,746 1,680,422
INCOME TAX PROVISION (420,000) (242,857) (732,000) (537,857)
----------- ---------- ----------- -----------
NET INCOME $ 636,769 $ 517,309 $ 1,145,746 $ 1,142,565
=========== ========== =========== ===========
NET INCOME PER SHARE
Basic $ 0.23 $ 0.19 $ 0.41 $ 0.43
=========== ========== =========== ===========
Diluted $ 0.22 $ 0.18 $ 0.39 $ 0.40
=========== ========== =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING
Basic 2,796,636 2,692,436 2,766,149 2,646,592
========== ========== ========== ==========
Diluted 2,932,188 2,855,949 2,901,232 2,878,143
========== ========== ========== ==========
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS
3
DYNAMIC MATERIALS CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
Common Stock Additonal
--------------------- 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 31,615 1,581 62,109 - -
Common stock issued in
connection with the
employee stock purchase
plan 11,093 555 73,700 - -
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) -
Net income - - - - 1,145,746
--------- --------- ----------- --------- -----------
Balances, June 30, 1998 2,818,916 $ 140,947 $ 7,238,145 $ (67,500) $ 5,281,376
========= ========= =========== ========== ===========
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS
4
DYNAMIC MATERIALS CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,145,746 $ 1,142,565
Adjustments to reconcile net income
to net cash from operating activities-
Depreciation 447,149 276,058
Amortization 69,281 50,412
Decrease (increase) in-
Accounts receivable, net (1,594,629) 1,669,203
Inventories 417,603 3,158,852
Prepaid expenses and other 73,253 (133,076)
Increase (decrease) in-
Bank overdraft 269,541 (743,471)
Accounts payable (809,351) (584,895)
Accrued expenses (117,078) (131,418)
---------- ----------
Net cash flows from operating activities (98,485) 4,704,230
---------- ----------
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 (351,727) (170,614)
Change in other noncurrent assets (96,462) 13,689
---------- ----------
Net cash flows used in investing activities (3,982,651) (156,925)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings/(payments) on line of credit, net 3,955,000 (3,930,000)
Payments on long-term debt and capital lease obligations (65,616) (59,589)
Net proceeds from issuance of common stock 137,943 304,036
---------- ----------
Net cash flows from financing activities 4,027,327 (3,685,553)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (53,809) 861,752
CASH AND CASH EQUIVALENTS, beginning of the period 53,809 209,650
---------- ----------
CASH AND CASH EQUIVALENTS, end of the period $ - $ 1,071,402
========== ==========
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS
5
DYNAMIC MATERIALS CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
1998 1997
--------- ---------
Cash paid during the period for-
Interest $ 66,820 $ 137,298
======== =========
Income taxes $344,587 $ 907,242
========= =========
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS
6
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. Certain prior period
amounts have been reclassified to conform to the current period presentation.
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 June 30, 1997 and the six months ended June 30, 1997 and 1998
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 is tentative and may be affected by final
post-closing adjustments.
7
Three Months Ended Six Months Ended
June 30, 1997 June 30, 1998 June 30, 1997
------------- ------------- -------------
Revenues $ 9,770,738 $ 22,129,407 $ 21,244,813
Net Income $ 488,974 $ 1,185,168 $ 1,081,701
Net Income Per Share - Basic $ 0.18 $ 0.42 $ 0.40
Net Income Per Share - Diluted $ 0.17 $ 0.40 $ 0.37
3. INVENTORIES
This caption on the Condensed Balance Sheet includes the following:
June 30, December 31,
1998 1997
---- ----
Raw Materials $ 898,079 $ 984,788
Work-in-Process 3,603,752 2,865,164
Supplies 128,353 179,607
----------- -----------
$ 4,630,184 $ 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 June 30, 1997
-----------------------------------
Per share
Income Shares Amount
------ ------ ------
Net Income $ 517,309
=========
Basic earnings per share:
Income available to common shareholders $ 517,309 2,692,436 $ 0.19
======
Dilutive effect of options to purchase common
stock - 163,513
--------- ---------
Dilutive earnings per share:
Income available to common shareholders $ 517,309 2,855,949 $ 0.18
========= ========= ======
8
For The Quarter Ended June 30, 1998
-----------------------------------
Per share
Income Shares Amount
------ ------ ------
Net Income $ 636,769
=========
Basic earnings per share:
Income available to common shareholders $ 636,769 2,796,636 $ 0.23
=======
Dilutive effect of options to purchase common
stock - 135,552
--------- --------
Dilutive earnings per share:
Income available to common shareholders $ 636,769 2,932,188 $ 0.22
========= ========= ======
For The Six Months Ended June 30, 1997
--------------------------------------
Per Share
Income Shares Amount
------ ------ ------
Net Income $1,142,565
Basic earnings per share:
Income available to common shareholders $1,142,565 2,646,592 $ 0.43
======
Dilutive effect of options to purchase common
stock - 231,551
----------- --------
Dilutive earnings per share:
Income available to common shareholders $ 1,142,565 2,878,143 $ 0.40
=========== ========= ======
9
For The Six Months Ended June 30, 1998
--------------------------------------
Per Share
Income Shares Amount
------ ------ ------
Net Income $1,145,746
==========
Basic earnings per share:
Income available to common shareholders $1,145,746 2,766,149 $ 0.41
======
Dilutive effect of options to purchase common
stock - 135,083
---------- ---------
Dilutive earnings per share:
Income available to common shareholders $1,145,746 2,901,232 $ 0.39
========== ========= ======
In December 1997, the Company adopted SFAS 128 and, as a result, the Company's
reported earnings per share for the quarter and six months ended June 30, 1997
were restated. The effect of this change on previously reported EPS data was as
follows:
Quarter Ended Six Months Ended
June 30, 1997 June 30,1997
------------- ----------------
Per share amounts
Primary EPS as reported $0.18 $0.40
Effect of FAS 128 0.01 0.03
----- -----
Basic EPS as restated $0.19 $0.43
===== =====
Fully diluted EPS as reported $0.18 $0.40
Effect of FAS 128 - -
----- -----
Diluted EPS as restated $0.18 $0.40
===== =====
5. SIGNIFICANT CUSTOMER
During the quarter and six months ended June 30, 1998, no one customer accounted
for more than 10% of net sales. Two customers accounted for approximately 30% of
net sales during the quarter ended June 30, 1997 and one customer accounted for
approximately 23% of net sales during the six months ended June 30, 1997.
International sales as a percent of net sales were 21% and 27% for the quarters
ended June 30, 1998 and June 30, 1997, respectively. International sales as a
percent of net sales were 20% and 35% for the six months ended June 30, 1998 and
June 30, 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 loss
of a customer, 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
10
projected volumes and profitability levels could adversely affect the Company's
ability to meet its cash requirements exclusively through operating activities.
6. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company has been named as a defendant in a lawsuit filed by a French company
who the Company had been in merger/acquisition discussions with during 1997,
seeking damages of approximately $1.3 million. The Company plans to vigorously
defend itself against such claim and management of the Company believes the
ultimate outcome of such litigation will not have a material adverse effect on
its financial condition or results of operations. No provision for liability
with respect to this claim has been made in the accompanying statements of
financial condition.
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
11
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 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.
12
The Company has experienced and expects to continue to experience,
quarterly fluctuations in operating results caused by various factors, including
the timing and size of orders from major customers, customer inventory levels,
shifts in product mix, the occurrence of acquisition-related costs and general
economic conditions. In addition, the Company typically does not obtain
long-term volume purchase contracts from its customers. Quarterly sales and
operating results therefore depend on the volume and timing of backlog as well
as bookings received during the quarter. A significant portion of the Company's
operating expenses is fixed, and planned expenditures are based primarily on
sales forecasts and product development programs. If sales do not meet the
Company's expectations in any given period, the adverse impact on operating
results may be magnified by the Company's inability to adjust operating expenses
sufficiently or quickly enough to compensate for such a shortfall. In addition,
the Company uses numerous suppliers of alloys, steels and other materials for
its operations. The Company typically bears a short-term risk of alloy, steel
and other component price increases, which could adversely affect the Company's
gross profit margins. Although the Company will work with customers and
suppliers to minimize the impact of any component shortages, component shortages
have had, and are expected from time to time to have, short-term adverse effects
on the Company's business. Results of operations in any period should not be
considered indicative of the results to be expected for any future period.
Fluctuations in operating results may also result in fluctuations in the price
of the Company's Common Stock.
The Year 2000 will impact computer programs written using two digits
rather than four to define the applicable year. Any programs with time-sensitive
software may recognize a date using A00@ as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operation, including a temporary inability to process
transactions, send invoices or engage in other ordinary activities. This problem
largely affects software programs written years ago, before the issue came to
prominence. The Company recently reviewed all of its software for exposure to
Year 2000 issues, including network and workstation software, and does not
believe that it has significant risk associated with the problem. The Company
primarily uses third party software programs written and updated by outside
firms, each of whom has stated that its software is Year 2000 compliant. To
assure that all software programs can successfully work in conjunction with each
other in regards to the year 2000 issue, the Company tested all of its software
during the second quarter of 1998 using a combination of past and future dates.
Only minor problems were identified during this test, which should be corrected
before the end of the 1998 calendar year. The cost of modifying or replacing
software to bring the Company into compliance is not expected to be significant.
The Company is in the process of reviewing its suppliers exposure to Year 2000
issues and the potential impact on the Company's operations.
QUARTER ENDED JUNE 30, 1998 COMPARED TO JUNE 30, 1997
The following table sets forth for the periods indicated the percentage
relationship to net sales of certain income statement data:
13
Percentage of Net Sales
-----------------------
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Products 79.0% 76.4% 79.0% 77.9%
----- ----- ----- -----
Gross Margin 21.0% 23.6% 21.0% 22.1%
General & Administrative 6.6% 6.9% 6.5% 6.2%
Selling Expenses 4.2% 6.7% 4.8% 6.0%
R & D 0.1% 0.1% 0.1% 0.1%
Income from Operations 10.1% 9.9% 9.6% 9.9%
Interest Expense 0.8% 0.3% 0.6% 0.5%
Income Tax Provision 3.7% 3.1% 3.5% 3.0%
Net Income 5.6% 6.6% 5.5% 6.5%
NET SALES. Net sales for the quarter ended June 30, 1998 increased 44.4% to
$11,372,968 from $7,877,630 in the second quarter of 1997. Sales for the second
quarter of 1998 included approximately $2,350,000 from the newly acquired Spin
Forge and AMK businesses, with these sales accounting for the majority of the
1998 sales increase. For the six months ended June 30, 1998, net sales increased
18.2% to $20,868,122 from $17,659,541 in the comparable period of 1997. Spin
Forge and AMK sales of approximately $3,150,000 for the six months ended June
30, 1998 accounted for the entire sales increase.
GROSS PROFIT. As a result of the Company's increase in net sales, gross profit
for the quarter ended June 30, 1998 increased by 28.0% to $ 2,382,719 from
$1,861,586 in the second quarter of 1997. The gross profit margin for the
quarter ended June 30, 1998 was 21.0%, representing an 11% decline from the
gross profit margin of 23.6% for the second quarter of 1997. For the six months
ended June 30, 1998, gross profit increased 12.0% to $4,379,081 from $3,909,200
in the comparable period of 1997. The gross profit margin for the six months
ended June 30, 1998 was 21.0%, representing a 5% decline from the gross profit
margin of 22.1% for the first six months of 1997. The decreases for both the
three and six month periods are principally due to proportionately lower sales
of explosively formed products that have historically carried significantly
higher margins than sales of clad metal plates. A customer that accounts for a
major portion of the Company's sales of explosively formed products has
significantly reduced its 1998 order levels for explosively formed parts and has
informed the Company that it likely will no longer order such parts from the
Company. The Company expects that the resulting reduced sales and gross profits
from its explosion forming business will be replaced by sales and gross profits
generated by the recently acquired AMK Welding and Spin Forge operations.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the quarter
ended June 30, 1998 increased 37.0% to $749,701 from $547,087 in the second
quarter of 1997. For the six months ended June 30, 1998, general and
administrative expenses increased 24.0% to $1,358,038 from $1,095,306 in the
comparable period of 1997. These increases are primarily attributable to general
and administrative expenses associated with the operations of AMK Welding and
Spin Forge which were acquired on January 5, 1998 and March 18, 1998,
respectively. General and administrative expenses are expected to remain at
these higher 1998 levels to support the acquired AMK and Spin Forge operations
and other strategic business initiatives. As a percentage of sales, general and
administrative expenses decreased from 6.9% in the second quarter of 1997 to
6.6% for the quarter ended June 30, 1998 and increased from 6.2% to 6.5% for the
comparable six month periods.
14
SELLING EXPENSE. Selling expenses decreased by 9.6% to $478,123 for the quarter
ended June 30, 1998 from $528,828 in the second quarter of 1997. For the six
months ended June 30, 1998, selling expenses decreased 5.3% to $1,000,623 from
$1,056,651 in the comparable period of 1997. These decreases reflect lower
expense levels in a number of categories, including compensation and benefits,
advertising and promotion, reserves for bad debts and travel and entertainment
expenses. Selling expenses as a percentage of net sales decreased from 6.7% in
the second quarter of 1997 to 4.2% for the quarter ended June 30, 1998, and from
6.0% for the six months ended June 30, 1997 to 4.8% for the comparable period of
1998. These decreases reflect decreased spending levels combined with the higher
sales volume achieved in 1998.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 48.6% to
$10,107 for the quarter ended June 30, 1998 from $6,803 in the second quarter of
1997. For the six months ended June 30, 1998, research and development expenses
increased 55.3% to $26,594 from $17,129 in the comparable period of 1997. The
Company is currently utilizing its engineering resources to support current
manufacturing activities, including the plant design and sourcing of equipment
for a new manufacturing facility to be constructed in Pennsylvania, and does not
expect to significantly increase spending on research and development projects
in the near future.
INCOME FROM OPERATIONS. Income from operations increased by 47.0% to $1,144,788
for the quarter ended June 30, 1998 from $778,868 in the second quarter of 1997.
This increase is a direct result of the 44.4% increase in net sales discussed
above. For the six months ended June 30, 1998, income from operations increased
14.6% to $1,993,826 from $1,740,114 in the comparable period of 1997. This
increase is a direct result of the 18.2% increase in net sales. Income from
operations as a percentage of net sales increased to 10.1% for the three months
ended June 30, 1998 from 9.9% in the comparable 1997 period and decreased to
9.6% for the six months ended June 30, 1998 from 9.9% for the six months ended
June 30, 1997.
INTEREST EXPENSE. Interest expense increased to $94,297 for the quarter ended
June 30, 1998 from $24,921 in the second quarter of 1996. For the six months
ended June 30, 1998, interest expense increased to $123,647 from $90,285 in the
comparable period of 1997. These increases are due to borrowings under the
Company's revolving line of credit with KeyBank of Colorado that were required
to finance the AMK Welding and Spin Forge acquisitions.
INCOME TAX PROVISION. The Company's income tax provision increased by 72.9% to
$420,000 for the quarter ended June 30, 1998 from $242,857 in the second quarter
of 1997. The income tax provision for the six months ended June 30, 1998
increased 36.1% to $732,000 from $537,857 for the comparable period of 1997. For
the quarter and six months ended June 30, 1998, the effective tax rate was 39.7%
and 39.0%, respectively, as compared to 32.0% for the comparable 1997 periods.
The full year 1997 effective tax rate was 37.8% and the Company expects its
effective tax rate to increase slightly in 1998 to 39.0% due to anticipated
increases in state income taxes as a result of the AMK Welding and Spin Forge
acquisitions.
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
15
acquisition, the Company entered into a $7,500,000 asset-backed revolving credit
facility with KeyBank National Association (KeyBank) in July of 1996. The credit
facility had a seven-year term and was 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 was subject to borrowing
base restrictions that were 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
1.5%, depending on certain conditions, or the Federal Funds Rate plus 2%. The
Company's total borrowings under the KeyBank facility were $3,955,000 as of
June 30, 1998.
During the six months ended June 30, 1998, the Company used $98,485
in cash flows from operating activities as compared to generating $4,704,230
during the first six months of 1997. The principal sources of cash flow from
operations in the quarter ended June 30, 1998 were net income of $1,145,746,
depreciation and amortization charges of $516,430, a decrease in inventories of
$417,603, and an increase in bank overdraft of $269,541. These sources of
operating cash flow were more than offset by a $1,594,629 increase in accounts
receivable and a $926,429 decrease in accounts payable and accrued expenses. The
large increase in accounts receivable relates to the build-up of Spin Forge
accounts receivable subsequent to the March 18, 1998 acquisition of Spin Forge
(outstanding accounts receivable on this date were not included among the assets
purchased) and strong June sales in the Company's bonding business. The current
ratio was 3.2 as of June 30, 1998 as compared to 2.8 at December 31, 1997.
Investing activities in the six months ended June 30, 1998 used $3,982,651 of
cash, principally to fund the purchase of the Spin Forge and AMK assets.
Financing activities for the six months ended June 30, 1998 provided $4,027,327
of net cash, including line of credit borrowings in the amount of $3,955,000
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 $6.8 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 $7
million as credit enhancement for the bond financing. The Company anticipates
closing the bond financing before the end of the third quarter. Construction of
the new facility is also expected to begin during the third quarter of 1998 and
should be completed during the first half of 1999.
16
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 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 the Company
to secure additional debt or equity financing. While the Company believes it
would be able to secure such additional financing at reasonable terms, there is
no assurance that this would be the case.
17
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders (the "Annual Meeting") was held on
May 22, 1998. At the Annual Meeting, the stockholders of the Company (i) elected
each of the persons listed below to serve as a director of the Company until the
2001 Annual Meeting of Shareholders or until his successor is elected, (ii)
approved the amendment and restatement of the Company's 1997 Equity Incentive
Plan and increased the aggregate number of shares of Common Stock authorized for
issuance under such plan by 150,000 shares, (iii) approved the Company's
Employee Stock Purchase Plan, (iv) ratified the indemnification agreements
entered into between the Company and its directors and officers and to approve
the Company entering into similar agreements with future directors and officers,
and (v) ratified the selection of Arthur Andersen LLP as independent accountants
of the Company for its fiscal year ending December 31, 1998.
The Company had 2,789,508 shares of Common Stock outstanding as of
April 9, 1998, the record date for the Annual Meeting. At the Annual Meeting,
holders of a total of 2,609,055 shares of Common Stock were present in person or
represented by proxy. The following sets forth information regarding the results
of the voting at the Annual Meeting:
PROPOSAL 1: ELECTION OF DIRECTORS
VOTING SHARES VOTING SHARES VOTING SHARES
IN FAVOR AGAINST WITHHELD
DIRECTOR
Michael C. Franson 2,566,630 -- 42,425
George W. Morgenthaler 2,569,880 -- 39,175
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PROPOSAL 2: APPROVAL OF THE AMENDMENT AND RESTATEMENT OF THE 1997 EQUITY
INCENTIVE PLAN
VOTING SHARES VOTING SHARES VOTING SHARES BROKER
IN FAVOR AGAINST ABSTAIN NON-VOTES
2,408,536 176,640 5,785 18,094
PROPOSAL 3: APPROVAL OF THE EMPLOYEE STOCK PURCHASE PLAN
VOTING SHARES VOTING SHARES VOTING SHARES BROKER
IN FAVOR AGAINST ABSTAIN NON-VOTES
1,815,739 24,500 2,335 766,481
PROPOSAL 4: RATIFICATION OF INDEMNIFICATION AGREEMENTS AND TO APPROVE
ENTERING INTO SIMILAR AGREEMENTS WITH FUTURE DIRECTORS AND OFFICERS
VOTING SHARES VOTING SHARES VOTING SHARES
IN FAVOR AGAINST ABSTAIN
2,561,645 42,056 5,354
PROPOSAL 5: RATIFICATION OF SELECTION OF INDEPENDENT ACCOUNTANTS
VOTING SHARES VOTING SHARES VOTING SHARES
IN FAVOR AGAINST ABSTAIN
2,596,866 7,615 4,574
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27 Financial Data Schedule
(b) A report on Form 8-K was filed on April 2, 1998 reporting the completion of
the acquisition of certain assets of Spin Forge, LLC, which occurred on March
18, 1998. A report on Form 8-K/A was filed on June 1, 1998. This report amended
the Form 8-K filed on April 2, 1998, to include audited financial information as
of December 31, 1997 for the Spin Forge business, which the Company acquired on
March 18, 1998. The report also included unaudited pro forma financial
information as of March 31, 1998, and for the year ended December 31, 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: August 14, 1998
---------------
---------------------------------
Richard A. Santa, Vice President of
Finance and Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
20