10-Q 1 0001.txt QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-Q (Mark One) ( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 OR ( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO . Commission file number 0-8328 DYNAMIC MATERIALS CORPORATION (Exact name of Registrant as Specified in its Charter) Delaware 84-0608431 (State of Incorporation or Organization) (I.R.S. Employer Identification No.) 551 Aspen Ridge Drive, Lafayette, Colorado 80026 (Address of principal executive offices, including zip code) (303) 665-5700 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes X No The number of shares of Common Stock outstanding was 4,973,768 as of July 31, 2000. ITEM 1. Financial Statements DYNAMIC MATERIALS CORPORATION CONDENSED BALANCE SHEETS (unaudited)
June 30, December 31, ASSETS 2000 1999 ----------------- ---------------- CURRENT ASSETS: Cash $ 56,376 $ - Accounts receivable, net of allowance for doubtful accounts of $136,000 and $112,000, respectively 4,668,687 3,816,879 Inventories 3,612,217 3,410,828 Prepaid expenses and other 139,674 310,477 Income tax receivable - 1,360,000 ------------- ------------- Total current assets 8,476,954 8,898,184 ------------- ------------- PROPERTY, PLANT AND EQUIPMENT 17,640,025 18,867,796 Less- Accumulated depreciation (3,815,652) (4,538,838) ------------- ------------- Property, plant and equipment-net 13,824,373 14,328,958 ------------- ------------- CONSTRUCTION IN PROCESS - 389,795 RESTRICTED CASH AND INVESTMENTS 169,304 424,312 RECEIVABLE FROM RELATED PARTY - 354,588 INTANGIBLE ASSETS, net of accumulated amortization of $942,051 and $786,077, respectively 5,145,569 5,281,543 OTHER ASSETS 291,393 409,938 ------------- ------------- TOTAL ASSETS $ 27,907,593 $ 30,087,318 ========== ===========
See Notes to Condensed Financial Statements DYNAMIC MATERIALS CORPORATION CONDENSED BALANCE SHEETS (unaudited)
June 30, December 31, LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999 ----------------- ---------------- CURRENT LIABILITIES: Bank overdraft $ - $ 193,471 Accounts payable 1,761,465 1,810,577 Accrued expenses 952,598 1,096,796 Line of credit with related party 3,500,000 - Current maturities on long-term debt 700,000 16,785,000 Current portion of capital lease obligation 21,008 35,230 ------------- ------------- Total current liabilities 6,935,071 19,921,074 LONG-TERM DEBT 5,650,000 - CONVERTIBLE SUBORDINATED NOTE WITH RELATED PARTY 1,200,000 - CAPITAL LEASE OBLIGATION - 3,069 DEFERRED GAIN ON SWAP TERMINATION 86,542 133,192 ------------- ------------- Total liabilities 13,871,613 20,057,335 ------------- ------------- STOCKHOLDERS' EQUITY: Convertible preferred stock, $.05 par value; 4,000,000 shares authorized: no issued and outstanding shares - - Common stock, $.05 par value; 15,000,000 shares authorized; 4,973,768 and 2,842,429 shares issued and outstanding, respectively 248,689 142,122 Additional paid-in capital 12,276,853 7,122,553 Deferred compensation (29,531) (37,970) Retained earnings 1,539,969 2,803,278 ------------- ------------- 14,035,980 10,029,983 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 27,907,593 $ 30,087,318 =========== ===========
See Notes to Condensed Financial Statements DYNAMIC MATERIALS CORPORATION CONDENSED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (unaudited)
Three months ended Six months ended June 30, June 30, 2000 1999 2000 1999 ---- ----- ---- ---- NET SALES $ 8,320,483 $ 7,737,924 $14,707,107 $17,444,185 COST OF PRODUCTS SOLD 7,256,318 6,924,649 12,808,108 14,768,711 ------------- -------------- -------------- -------------- Gross profit 1,064,165 813,275 1,898,999 2,675,474 ------------- -------------- -------------- -------------- COSTS AND EXPENSES: General and administrative expenses 909,210 927,743 1,776,741 1,882,107 Selling expenses 422,401 388,733 789,430 783,185 New facility start up costs - 143,735 - 208,958 Plant closing costs - 549,298 - 549,298 Impairment of long-lived assets - 188,079 - 188,079 Costs related to sale of bonding business - 199,007 - 199,007 ------------ -------------- -------------- ------------- 1,331,611 2,396,595 2,566,171 3,810,634 ------------ -------------- -------------- ------------- LOSS FROM OPERATIONS (267,446) (1,583,320) (667,172) (1,135,160) OTHER INCOME (EXPENSE): Other income 1,857 1,583 187,417 8,315 Interest expense (342,436) (217,172) (705,132) (426,749) Interest income 1,639 274 1,689 1,802 ------------ -------------- -------------- ------------ Loss before income taxes (606,386) (1,798,635) (1,183,198) (1,551,792) INCOME TAX PROVISION - 708,000 - 606,000 ------------ ------------- -------------- ------------ NET LOSS BEFORE EXTRAORDINARY ITEM $(606,386) (1,090,635) $ (1,183,798) $ (945,792) EXTRAORDINARY ITEM - LOSS FROM EXTINGUISHMENT OF DEBT (80,111) - (80,111) - ------------ ------------- -------------- ------------ NET LOSS $(686,497) $(1,090,635) $ (1,263,309) $ (945,792) ============ ============= ============== ============ NET LOSS PER SHARE - BASIC AND DILUTED Loss before extraordinary item $(0.19) $(0.39) $(0.39) $(0.34) Extraordinary item (0.02) - (0.03) - ------------ ------------- -------------- ------------ NET LOSS PER SHARE $(0.21) $(0.39) $(0.42) $(0.34) ============ ============= ============== ============ WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC AND DILUTED Basic 3,213,258 2,817,891 3,027,844 2,815,685 ============ ============= ============== ============
See Notes to Condensed Financial Statements DYNAMIC MATERIALS CORPORATION STATEMENT OF STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 2000 (unaudited)
Additional Common Stock Paid-In Deferred Retained Shares Amount Capital Compensation Earnings Balances, December 31, 1999 2,842,429 $ 142,122 $ 7,122,553 $ (37,970) $ 2,803,278 Common stock issued to SNPE, Inc., net of 2,109,091 105,455 5,128,228 - - issuance costs Amortization of deferred compensation - - - 8,439 - Common stock issued in connection with the employee stock purchase plan 22,248 1,112 26,072 - - Net loss - - - - (1,263,309) ------------ ------------ -------------- -------------- -------------- Balances, June 30, 2000 4,973,768 $ 248,689 $ 12,276,853 $ (29,531) $ 1,539,969 ========= ========= ============ ============= ===========
See Notes to Condensed Financial Statements DYNAMIC MATERIALS CORPORATION STATEMENTS OF CASH FLOWS (unaudited)
For the six months ended June 30, ------------------------------- 2000 1999 -------------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (1,263,309) $ (945,792) Adjustments to reconcile net income to net cash from operating activities- Depreciation 634,219 532,013 Amortization 155,974 167,110 Amortization of deferred gain on swap termination (46,650) - Amortization of deferred compensation 8,438 8,438 Impairment of long-lived assets - 188,079 Gain on sale of property, plant and equipment (185,570) - Change in (excluding acquisitions)- Accounts receivable, net (851,808) 78,679 Inventories (201,389) 1,371,408 Prepaid expenses and other 117,237 (15,238) Income tax receivable 1,360,000 (695,477) Accounts payable (49,112) (935,212) Accrued expenses (144,198) (156,064) ------------- ------------- Net cash flows from operating activities (466,168) (402,056) ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Release of restricted cash and investments 255,008 2,788,607 Cash paid in connection with the construction of the new facility (297,073) (3,580,997) Acquisition of property, plant and equipment (143,666) (278,328) Loan to related party - (38,882) Proceeds from repayment of loan to related party 354,588 - Change in other non-current assets 214,929 51,318 Proceeds from sale of property, plant and equipment 940,036 - ------------ ------------- Net cash flows from investing activities 1,323,822 (1,058,282) ------------- -------------
See Notes to Condensed Financial Statements DYNAMIC MATERIALS CORPORATION STATEMENTS OF CASH FLOWS (unaudited)
For the six months ended June 30, ------------------------------ 2000 1999 -------------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings on bank line of credit, net 155,000 1,400,000 Repayment on bank line of credit (10,255,000) - Payment on industrial development revenue bonds (335,000) - Proceeds from issuance of common stock to SNPE, Inc., net of issuance costs 5,233,682 - Borrowings on SNPE, Inc. line of credit 3,500,000 - Borrowings on SNPE, Inc. convertible subordinated note 1,200,000 - Payment of deferred financing costs (116,384) - Payments on long-term debt - (5,742) Payments on capital lease obligation (17,291) (18,644) Net proceeds from issuance of common stock to employees 27,186 88,322 Repayment of bank overdraft (193,471) (3,598) -------------- ------------- Net cash flows from financing activities (801,278) 1,460,338 -------------- ------------- NET DECREASE IN CASH AND CASH EQUIVALENTS 56,376 - CASH AND CASH EQUIVALENTS, beginning of the period - - -------------- ------------- CASH AND CASH EQUIVALENTS, end of the period $ 56,376 $ - ============= ============= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for- Interest, net of amounts capitalized $ 603,277 $ 439,729 ============= ============= Income taxes $ - $ 72,483 ============== =============
See Notes to Condensed Financial Statements DYNAMIC MATERIALS CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The information included in the Condensed Financial Statements is unaudited but includes all normal and recurring adjustments which, in the opinion of management, are necessary for a fair presentation of the interim periods presented. These Condensed Financial Statements should be read in conjunction with the financial statements that are included in the Company's Annual Report filed on Form 10-K for the year ended December 31, 1999. Certain prior period amounts have been reclassified to conform to the current period presentation. 2. TRANSACTIONS WITH SNPE, INC. On June 14, 2000 the Company's stockholders approved a Stock Purchase Agreement ("the Agreement") between the Company and SNPE, Inc ("SNPE"). The closing of the transaction, which was held immediately following stockholder approval, resulted in a payment from SNPE of $5,800,000 to the Company in exchange for 2,109,091 shares of the Company's common stock at a price of $2.75 per share causing SNPE to become a 50.8% stockholder of the Company on the closing date. An additional $1,200,000 cash payment was made by SNPE to the Company to purchase a five-year, 5% Convertible Subordinated Note that is convertible in whole or in part into common stock by SNPE at a conversion price of $6 per share. The Company also borrowed $3,500,000 on June 14, 2000 under a new credit facility with SNPE, which provides up to $3,500,000 in borrowings for working capital requirements through June 30, 2001. The SNPE credit facility, which bears interest at the Federal Funds Rate plus 1.5%, may be increased to a maximum of $4,500,000 in total borrowings subject to certain approvals by SNPE. Proceeds from the SNPE equity investment, convertible subordinated note issuance and credit facility borrowings enabled the Company to repay all borrowings from its bank under a revolving credit facility on which the Company had been in default since September 30, 1999. 3. NEW ACCOUNTING PRINCIPLE The FASB recently issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which requires that companies recognize all derivatives as either assets or liabilities in the balance sheet at fair value. Under SFAS 133, accounting for changes in fair value of a derivative depends on its intended use and designation. SFAS 133 is effective for fiscal years beginning after June 15, 2000. The Company is currently assessing the effect of this new standard. In December 1999, the staff of the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101") "Views on Selected Revenue Recognition Issues" which provides the staff's views in applying generally accepted accounting principles to selected revenue recognition issues. The Company is required to implement SAB 101 during the second quarter of 2000. The Company is currently assessing the effect of implementing SAB 101. 4. INVENTORIES This caption on the Condensed Balance Sheet includes the following: June 30, December 31, 2000 1999 ----------------- ----------------- Raw Materials $ 1,082,698 $ 1,311,345 Work-in-Process 2,454,510 2,001,784 Supplies 75,009 97,699 ---------------- --------------- $ 3,612,217 $ 3,410,828 ============= ============= 5. CONSTRUCTION IN PROCESS Building and equipment costs of $686,868 related to the Company's new manufacturing facility were transferred from construction in process to property, plant and equipment during the six months ended June 30, 2000. Construction began in September 1998 and was largely completed during the third quarter of 1999 with final completion during the second quarter of 2000. The project was financed using proceeds from the issuance of industrial development revenue bonds ("the Bonds"). The portion of the borrowings on the bonds not yet expended for construction was $169,304 (which includes accrued interest) as of June 30, 2000 and is classified as restricted cash and investments (non-current) in the accompanying balance sheet. The proceeds are being held by a trustee until qualified expenditures are made and reimbursed to the Company. 6. LONG-TERM DEBT Long-term debt consists of the following at June 30, 2000 and December 31, 1999: June 30, December 31, 2000 1999 ------------------ ----------------- Lines of credit $ - . $ 10,100,000 Industrial development revenue bonds 6,350,000 6,685,000 ---------- --------- Total long-term debt 6,350,000 16,785,000 Less portion classified as current (700,000) (16,785,000) --------- ------------ $ 5,650,000 $ - . =========== ============= Loan Covenants and Restrictions The Company's loan agreements include various covenants and restrictions, certain of which relate to the payment of dividends or other distributions to stockholders, redemption of capital stock, incurrence of additional indebtedness, mortgaging, pledging or disposition of major assets and maintenance of specified financial ratios. Due largely to the operating losses the Company incurred during 1999 and the first quarter of 2000, the Company violated certain financial covenants under both its amended and restated credit facility with its bank and its reimbursement agreement relating to the letter of credit with its bank that supports payment of the principal and interest under the bonds. As a result of the debt and equity infusion from SNPE (see note 2), the Company was able to completely repay all outstanding borrowings under its bank credit facility and terminated this facility on June 14, 2000. Additionally the Company was able to restructure financial covenants under the reimbursement agreement. In connection with the early termination of the credit facility, the Company recorded an $80,111 loss on the early extinguishment of this debt. As of June 30, 2000, the Company is in compliance with all financial covenants and other provisions of its debt agreements. 7. BUSINESS SEGMENTS The Company is organized in the following two segments: the Explosive Metalworking Group and the Aerospace Group. The Explosive Metalworking Group uses explosives to perform metal cladding, metal forming and shock synthesis. The most significant product of this group is clad metal which is used in the fabrication of pressure vessels, heat exchangers and transition joints used in the hydrocarbon processing, chemical processing, power generation, petrochemical, pulp and paper, mining, shipbuilding and heat, ventilation and air conditioning industries. The Aerospace Group machines, forms and welds parts for the commercial aircraft, aerospace and defense industries. The 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's products are marketed to different customer types and requires different manufacturing processes and technologies. Segment information is presented for the three and six months ended June 30, 2000 and 1999 as follows:
Explosive Aerospace Total Manufacturing -------------- -------------- For the three months ended June 30, 2000: Net sales $5,377,273 $ 2,943,210 $8,320,483 ========= =========== ========= Depreciation and amortization $ 204,861 $ 208,762 $ 413,623 ========= =========== ========= Loss from operations $ (67,063) $ (200,383) $ (267,446) Unallocated amounts: Other income 1,857 Interest expense, net (340,797) ------------ Consolidated loss before income taxes and extraordinary items $ (606,386) ============ Explosive Aerospace Total Manufacturing -------------- -------------- For the three months ended June 30, 1999: Net sales $ 4,529,853 $ 3,208,071 $ 7,737,924 ========== =========== =========== Depreciation and amortization $ 198,897 $ 176,237 $ 375,134 =========== ============ ============ (Loss) income from operations $(1,853,809) $ 270,489 $ (1,583,320) Unallocated amounts: Other income 1,583 Interest expense, net (216,898) ------------- Consolidated loss before income taxes and extraordinary items $(1,798,635) Explosive Manufacturing Aerospace Total -------------- -------------- For the six months ended June 30, 2000: Net sales $8,682,619 $ 6,024,488 $ 14,707,107 ========= =========== ========== Depreciation and amortization $ 369,400 $ 420,793 $ 790,193 ========== ============ ============ Loss from operations $ (455,501) $ (211,671) $ (667,172) Unallocated amounts: Other income 187,417 Interest expense, net (703,443) ------------ Consolidated loss before income taxes and extraordinary items $(1,183,198) Explosive Manufacturing Aerospace Total -------------- -------------- For the six months ended June 30, 1999: Net sales $10,895,341 $ 6,548,844 $17,444,185 ========== =========== ========== Depreciation and amortization $ 364,424 $ 350,134 $ 714,558 ========== ============ ============ (Loss) income from operations $ (1,818,824) $ 683,664 $(1,135,160) Unallocated amounts: Other income 8,315 Interest expense, net (424,947) -------------- Consolidated loss before income taxes and extraordinary items $(1,551,792) =============
All of the Company's sales are shipped from domestic locations and all of the Company's assets are located within the United States. The following represents the Company's net sales based on the geographic location of the customer: For the three months ended June 30, ------------------------------- 2000 1999 United States $7,177,855 $7,303,003 Canada 298,225 351,441 Australia - 36,800 Korea 572,041 - Other foreign countries 272,362 46,680 ------------ ------------ Total consolidated net sales $8,320,483 $7,737,924 ========= ========= For the six months ended June 30, ------------------------------- 2000 1999 United States $12,802,090 $16,068,278 Canada 512,886 1,031,191 Australia - 149,626 Korea 952,285 1,000 Other foreign countries 439,846 194,090 ------------ ------------ Total consolidated net sales $14,707,107 $17,444,185 ========== ========== During the three months ended June 30, 2000, sales to one customer represented approximately $1,101,000 (13%) of total net sales and during the six months ended June 30, 2000, no one customer accounted for more than 10% of total net sales. During the three months and six months ended June 30, 1999, sales to one customer represented approximately $1,036,000 (13%) and $2,356,000 (14%) of total net sales, respectively. ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General Dynamic Materials Corporation ("DMC" or the "Company") is a worldwide leader in explosive metalworking and, through its new Aerospace Group, is involved in a variety of metal forming, machining, welding, and assembly activities. The explosive metalworking business includes the use of explosives to perform metallurgical bonding, or "metal cladding" and shock synthesis of synthetic diamonds. The Company performs metal cladding using its proprietary Dynaclad(TM) and Detaclad(R) technologies. The Company's revenues from its explosive metalworking businesses, as a proportion of total Company revenues, have declined as a result a significant slowdown in global market demand for explosion bonded clad metal plate and the 1998 acquisitions of AMK Welding, Spin Forge and Precision Machined Products. The Company's Aerospace Group was formed from these three acquisitions and accounted for 22% and 42% of the Company's 1998 revenues and 1999 revenues, respectively. The proportion of revenues accounted for by the Aerospace Group for the quarter and six months ended June 30, 2000 was 35% and 41%, compared to 41% and 38% for the comparable periods of 1999. Explosive Metalworking. Clad metal products are used in manufacturing processes or environments that involve highly corrosive chemicals, high temperatures and/or high pressure conditions. For example, the Company fabricates clad metal tube sheets for heat exchangers. Heat exchangers are used in a variety of high temperature, high pressure, highly corrosive chemical processes, such as processing crude oil in the petrochemical industry and processing chemicals used in the manufacture of synthetic fibers. In addition, the Company has produced titanium clad plates used in the fabrication of metal autoclaves to replace autoclaves made of brick and lead for two customers in the mining industry. The Company believes that its clad metal products are an economical, high-performance alternative to the use of solid corrosion-resistant alloys. In addition to clad metal products, the explosive metalworking business includes shock synthesis of synthetic diamonds. Aerospace Manufacturing. Formed metal products are made from sheet metal and forgings that are subsequently formed into precise, three-dimensional shapes that are held to tight tolerances. Metal forming is accomplished through the use of traditional forming technologies, including spinning, machining, rolling and hydraulic expansion. DMC also performs welding services utilizing a variety of manual and automatic welding techniques that include electron beam and gas tungsten arc welding processes. The Company's forming and welding operations are often performed to support the manufacture of completed assemblies and sub-assemblies required by its customers. Fabrication and assembly services are performed utilizing the Company's close-tolerance machining, forming, welding, inspection and other special service capabilities. The Company's forming, machining, welding and assembly operations serve a variety of product applications in the commercial aircraft, aerospace, defense and power generation industries. Product applications include tactical missile motor cases, titanium pressure tanks for launch vehicles, and complex, high precision component parts for satellites. On June 14, 2000 the Company's stockholders approved a Stock Purchase Agreement ("the Agreement") between the Company and SNPE, Inc ("SNPE"). The closing of the transaction, which was held immediately following stockholder approval, resulted in a payment from SNPE of $5,800,000 to the Company in exchange for 2,109,091 shares of the Company's common stock at a price of $2.75 per share causing SNPE to become a 50.8% stockholder of the Company on the closing date. An additional $1,200,000 cash payment was made by SNPE to the Company to purchase a five-year, 5% Convertible Subordinated Note that is convertible in whole or in part into common stock by SNPE at a conversion price of $6 per share. The Company also borrowed $3,500,000 on June 14, 2000 under a new credit facility with SNPE, which provides up to $3,500,000 in borrowings for working capital requirements through June 30, 2001. The SNPE credit facility, which bears interest at the Federal Funds Rate plus 1.5%, may be increased to a maximum of $4,500,000 in total borrowings subject to certain approvals by SNPE. Proceeds from the SNPE equity investment, convertible subordinated note issuance and credit facility borrowings enabled the Company to repay all borrowings from its bank under a revolving credit facility on which the Company had been in default since September 30, 1999. In 1999, the Company experienced significant operating losses as a result of a significant slowdown in global market demand for explosion bonded clad metal plate and non-recurring charges associated with plant closing costs, new facility start-up costs, asset impairment write-downs and expenses incurred in connection with efforts to sell the Explosive Metalworking Group. During the first half of 2000, the Company again experienced operating losses due to the continued slowdown in global market demand for explosion bonded clad metal plate and lower sales and gross margins in its Aerospace Group. The Company expects the reduced demand for its clad metal products to continue at least through the end of 2000. The Company also experienced, and expects to continue to experience, quarterly fluctuations in operating results caused by various factors, including the timing and size of orders from major customers, customer inventory levels, shifts in product mix, the occurrence of acquisition and divestiture-related costs, and general economic conditions. The Company typically does not obtain long-term volume purchase contracts from its customers. Quarterly sales and operating results therefore depend on the volume and timing of backlog as well as bookings received during the quarter. A significant portion of the Company's operating expenses is fixed, and planned expenditures are based primarily on sales forecasts and product development programs. If sales do not meet the Company's expectations in any given period, the adverse impact on operating results may be magnified by the Company's inability to adjust operating expenses sufficiently or quickly enough to compensate for such a shortfall. In addition, the Company uses numerous suppliers of alloys, steels and other materials for its operations. The Company typically bears a short-term risk of alloy, steel and other component price increases, which could adversely affect the Company's gross profit margins. Although the Company will work with customers and suppliers to minimize the impact of any component shortages, component shortages have had, and are expected from time to time to have, short-term adverse effects on the Company's business. Results of operations in any period should not be considered indicative of the results to be expected for any future period. Fluctuations in operating results may also result in fluctuations in the price of the Company's common stock. Quarter and Six Months Ended June 30, 2000 Compared to Quarter and Six Months June 30, 1999 The following table sets forth for the periods indicated the percentage relationship to net sales of certain income statement data: Percentage of Net Sales Three Months Ended June 30, Six Months Ended June 30, 2000 1999 2000 1999 Net Sales 100.0% 100.0% 100.0% 100.0% Cost of Products Sold 87.2% 89.5% 87.1% 84.7% ----- ----- ----- ----- Gross Margin 12.8% 10.5% 12.9% 15.3% General & Administrative 10.9% 12.0% 12.1% 10.8% Selling Expenses 5.1% 5.0% 5.4% 4.5% New Facility Start-up Costs - 1.9% - 1.2% Plant Closing Costs - 7.1% - 3.1% Asset Impairments - 2.4% - 1.1% Costs related to sale of Bonding business - 2.6% - 1.1% Loss from Operations -3.2% -20.59% -4.5% -6.5% Interest Expense 5.1% 2.8% 5.3% 2.4% Income Tax Benefit - 9.2% - 3.5% Net Loss -8.3% -14.1% -8.6% -5.4% Net Sales. Net sales for the quarter ended June 30, 2000 increased by 7.5% to $8,320,483 from $7,737,924 in the second quarter of 1999. The Company's Aerospace Group contributed $2,943,210 (35.4% of total sales) to second quarter 2000 sales versus sales of $3,208,071 (41.4% of total sales) in the second quarter of 1999. Sales by the Explosive Metalworking Group, which includes explosion bonding of clad metal and shock synthesis of synthetic diamonds, increased by 18.7% from $4,529,853 in the second quarter of 1999 to $5,377,273 in the second quarter of 2000. For the six months ended June 30, 2000, net sales decreased by 15.7% to $14,707,107 from $17,444,185 for the comparable period of 1999. Aerospace Group sales for the six months ended June 30, 2000 totaled $6,024,488 (41.0% of total sales), a decrease of 8% from sales of $6,548,844 (37.5% of total sales) reported for the comparable period of 1999. Sales by the Explosive Metalworking Group for the comparable six-month period decreased by 20.3% from $10,895,341 in 1999 to $8,682,619 in 2000. The decrease in Explosive Metalworking Group sales for the six-month period reflects a significant slowdown in global market demand for explosion bonded clad metal plate that is expected to continue for at least the remainder of the year 2000. Gross Profit. As a result of the increase in the Company's net sales and lower fixed manufacturing costs for the Explosive Metalworking Group, gross profit for the quarter ended June 30, 2000 increased by 30.8% to $1,064,165 from $813,275 in the second quarter of 1999. The gross profit margin for the quarter ended June 30, 2000 was 12.8%, representing a 22% increase from the gross profit margin of 10.5% for the second quarter of 1999. For the six months ended June 30, 2000, gross profit decreased 29.0% to $1,898,999 from $2,675,474 in the comparable period of 1999. The gross profit margin for the six months ended June 30, 2000 was 12.9%, representing a 15.7% decline from the gross profit margin of 15.3% for the first six months of 1999. The gross profit margin for the Explosive Metalworking Group increased from a negative gross margin of 0.3% in the second quarter of 1999 to a gross margin of 12.0% in the second quarter of 2000. For the comparable six-month periods, Explosive Metalworking gross margins increased from 7.8% in 1999 to 10.4% in 2000. The increase in gross profit margins for the Explosive Metalworking Group are due to favorable fixed manufacturing overhead cost variances associated with the operation of the new manufacturing facility in Pennsylvania. The gross profit margin for the Aerospace Group was 14.2% for the quarter ended June 30, 2000 as compared to 25.8% in the second quarter of 1999. For the comparable six-month periods, Aerospace Group gross margins decreased from 27.9% in 1999 to 16.6% in 2000. The decline in operating unit gross margin rates for the Aerospace Group reflects a decrease in year-to-year sales at Spin Forge and AMK and unfavorable product mix changes at each of the three Aerospace Group operating units. General and Administrative. General and administrative expenses for the quarter ended June 30, 2000 decreased by 2.0% to $909,210 from $927,743 in the second quarter of 1999. For the six months ended June 30, 2000, general and administrative expenses decreased by 5.6% to $1,776,741 from $1,882,107 in the comparable period of 1999. The decreases in general and administrative expenses are largely due to reductions in salaries, payroll taxes and benefits. As a percentage of net sales, general and administrative expenses decreased from 12.0% in the second quarter of 1999 to 10.9% for the quarter ended June 30, 2000 and increased from 10.8% to 12.1% for the comparable six-month periods. Selling Expense. Selling expenses increased by 8.7% to $422,401 for the quarter ended June 30, 2000 from $388,733 in the second quarter of 1999. For the six months ended June 30, 2000, selling expenses increased by 0.8% to $789,430 from $783,185 in the comparable period of 1999. Selling expenses for the three and six months ended June 30, 2000 included $80,284 of non-recurring expenses associated with severance pay and other employee separation costs. Excluding the non-recurring employee separation costs, selling expenses decreased by 12.0% to $342,117 for the quarter ended June 30, 2000 from $388,733 in the second quarter of 1999 and by 9.5% to $709,146 for the six months ended June 30, 2000 from $783,185 in the comparable period of 1999. These decreases are principally due to reductions in salaries, payroll taxes and benefits associated with Explosive Metalworking Group sales staff reductions. Excluding the impact of the non-recurring expenses discussed above, selling expenses as a percentage of net sales decreased from 5.0% in the second quarter of 1999 to 4.1% for the quarter ended June 30, 2000 and increased from 4.5% for the six months ended June 30, 1999 to 4.8% for the comparable period of 2000. The increased percentage for the six-month period is attributable to the 15.7% decline in sales for the six months ended June 30, 2000 versus the comparable period of 1999. Start-up Costs. Beginning in 1998, the Company began to separately report the start-up costs associated with the construction of a new facility in Pennsylvania for the manufacture of clad metal plates. Start-up costs for the quarter and six months ended June 30, 1999 totaled $143,735 and $208,958, respectively. Start-up costs include salaries, benefits and travel expenses for Company employees assigned to this project, field office expenses and other operating expenses directly associated with this project. The new facility commenced operations in August 1999 at which time all operating costs associated with this new facility began to be recorded as manufacturing overhead that is included in the computation of cost of products sold. Plant Closing Costs. On April 23, 1999, the Company announced that it would be closing its Louisville, Colorado-based explosion bonded clad metal plate manufacturing facility in the third quarter of 1999 and consolidating all of its Explosive Metalworking Group operations into the new Pennsylvania-based clad metal plate manufacturing facility. For the quarter and six months ended June 30, 1999, the Company recorded non-recurring charges of $549,298 related to costs associated with this plant closing. Plant closing costs include severance pay to terminated employees, outplacement service fees and certain expenses to be incurred in connection with final plant shutdown, clean-up and site reclamation work subsequent to the discontinuation of manufacturing activities at this facility in July 1999. Impairment of Long-lived Assets. In connection with the plant closing discussed above, the Company identified certain long-lived assets associated with its Colorado manufacturing operations that were abandoned and had negligible fair market values. Accordingly, the Company recorded asset impairment write-down charges in the aggregate amount of $188,079 during the second quarter of 1999 that are included in the results for the six months ended June 30, 1999. The Company 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 six months ended June 30, 1999. Costs related to Sale of Explosive Metalworking Group. On June 23, 1999, the Company announced that it had entered into an agreement to sell certain assets relating to its Explosive Metalworking Group to AMETEK for approximately $17 million. However, on October 20, 1999, AMETEK notified the Company that it was terminating the Asset Purchase Agreement. In connection with the Company's efforts to sell its Explosive Metalworking Group, the Company recorded expenses of $199,007 for the three and six months ended June 30, 1999. These expenses related principally to investment banking, legal and other third party fees associated with the terminated sales transaction. Certain of these expenses continued to be incurred by the Company during the third and fourth quarters of 1999. Income (Loss ) from Operations. For the second quarter ended June 30, 2000, the Company reported a $267,446 loss from operations compared to a $1,583,320 loss from operations for the second quarter of 1999. This decreased loss from operations is a result of the 30.8% increase in gross profit discussed above and a reduction in non-recurring charges in the aggregate amount of $1,080,119 associated with plant closing costs, new facility start-up costs, asset impairment write-downs and expenses incurred in connection with efforts to sell the Explosive Metalworking Group that was recorded in the second quarter of 1999. For the six months ended June 30, 2000, the Company reported an operating loss of $667,172 compared to $1,135,160 in the comparable period of 1999. This decreased loss from operations is a result of a decrease in non-recurring charges in the aggregate amount of $1,145,342 associated with plant closing costs, new facility start-up costs, asset impairment write-downs and expenses incurred in connection with efforts to sell the Explosive Metalworking Group that was recorded for the six months ended June 30, 1999. The effect of the decrease in non-recurring costs was partly offset by the 29.0% decrease in gross profit for the six months ended June 30, 2000 versus the comparable period in 1999 that is attributable to lower sales by the Company's Explosive Metalworking Group and lower sales and gross margins by the Aerospace Group. For the quarter and six months ended June 30, 2000, the Company's Aerospace Group reported a loss from operations of $200,383 and $211,671, respectively, as compared to income from operations of $270,489 and $683,664 for the respective comparable periods of 1999. For the quarter and six months ended June 30, 2000, the Explosive Metalworking Group reported a loss from operations of $67,063 and $455,501, respectively, as compared to operating losses of $1,853,809 and $1,818,824 for the respective comparable periods of 1999. Interest Expense. Interest expense increased to $342,436 for the quarter ended June 30, 2000 from $217,172 in the second quarter of 1999. For the six months ended June 30, 2000, interest expense increased to $705,132 from $426,749 in the comparable period of 1999. These increases are due to increases in both interest rates and average borrowings outstanding under the Company's revolving credit facility. In addition, the increase reflects the interest on the industrial development revenue bonds being recorded in interest expense for the quarter and six months ended June 30, 2000 versus being capitalized during the quarter and six months ended June 30, 1999. The Company began to record interest on the industrial development revenue bonds as expense once the new facility commenced operations in August 1999. Prior to the commencement of operations, interest on the industrial development revenue bonds was being capitalized. Income Tax Benefit (Expense). No tax benefit has been recorded for the quarter and six months ended June 30, 2000 since the Company utilized all of its tax loss carry-backs in 1999 and the Company's current financial position and near-term operations outlook make the future realization of tax benefits associated with tax loss carry-forwards uncertain. The income tax benefit for the quarter and six months ended June 30, 1999 was 708,000 and 606,000, respectively, representing respective effective tax rates of 39.4% and 39.1%. Liquidity and Capital Resources Historically, the Company has obtained most of its operational financing from a combination of operating activities and an asset-backed revolving credit facility. Due primarily to the operating losses the Company incurred during 1999 and the first quarter of 2000, the Company violated certain financial covenants under both its revolving credit facility and the reimbursement agreement related to the letter of credit supporting payment of principal and interest under the Company's industrial revenue development bonds (the "Bonds") used to finance the construction of its manufacturing facilities in Pennsylvania. On June 14, 2000 the Company's stockholders approved a Stock Purchase Agreement ("the Agreement") between the Company and SNPE, Inc ("SNPE"). The closing of the transaction, which was held immediately following stockholder approval, resulted in a payment from SNPE of $5,800,000 to the Company in exchange for 2,109,091 shares of the Company's common stock at a price of $2.75 per share causing SNPE to become a 50.8% stockholder of the Company on the closing date. An additional $1,200,000 cash payment was made by SNPE to the Company to purchase a five-year, 5% Convertible Subordinated Note that is convertible in whole or in part into common stock by SNPE at a conversion price of $6 per share. The Company also borrowed $3,500,000 on June 14, 2000 under a new credit facility with SNPE, which provides up to $3,500,000 in borrowings for working capital requirements through June 30, 2001. The SNPE credit facility, which bears interest at the Federal Funds Rate plus 1.5%, may be increased to a maximum of $4,500,000 in total borrowings subject to certain approvals by SNPE. Proceeds from the SNPE equity investment, convertible subordinated note issuance and credit facility borrowings aggregated $10,500,000 and enabled the Company to repay all outstanding borrowings under its bank revolving credit facility on which the Company had been in default since September 30, 1999. The bank revolving credit facility was terminated on June 14, 2000. As a result of the SNPE debt and equity infusion, the Company was also able to restructure financial covenants under the reimbursement agreement with its bank relating to the industrial development revenue bonds and is currently in full compliance with all provisions of its debt agreements. The Company believes that its cash flow from operations and funds available under its credit facility with SNPE, Inc., or a replacement credit facility with a third party financial institution, will be sufficient to fund working capital and capital expenditure requirements of its current business operations for the foreseeable future. Management of the Company intends to replace the SNPE credit facility, which matures on June 30, 2001 and is callable upon 90 days notice after October 1, 2000, with a new third party credit facility during the latter part of 2000 or early part of 2001 and believes that the Company's strengthened balance sheet and improving operating results will enable the Company to secure such third party financing on reasonable terms. However, a significant portion of the Company's sales is derived from a relatively small number of customers; therefore, the failure to perform existing contracts on a timely basis, and to receive payment for such services in a timely manner, or to enter into future contracts at projected volumes and profitability levels could adversely affect the Company's ability to meet its cash requirements exclusively through operating activities. Consequently, any restriction on the availability of borrowing under the SNPE credit facility or a replacement facility could negatively affect the Company's ability to meet its future cash requirements. Forward-Looking Statements Statements which are not historical facts contained in this report are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from projected results. Factors that could cause actual results to differ materially include, but are not limited to, the following: the ability to obtain new contracts at attractive prices; the size and timing of customer orders; fluctuations in customer demand; competitive factors; the timely completion of contracts; any actions which may be taken by SNPE as the controlling shareholder of the Company with respect to the Company and its businesses; the ability of the Company to successfully restructure or refinance its existing debt obligations; the timing and size of expenditures; the timely receipt of government approvals and permits; the adequacy of local labor supplies at the Company's facilities; the availability and cost of funds; and general economic conditions, both domestically and abroad. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Company undertakes no obligation to publicly release the results of any revision to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Part II - OTHER INFORMATION Item 1. Legal Proceedings None. Item 2. Changes in Securities and Use of Proceeds Redemption of Rights On June 14, 2000 the Board of Directors of the Company approved a redemption under the Rights Agreement dated as of January 8, 1999, as amended by the First Amendment to Rights Agreement, dated June 13, 2000. Subsequently, the Company redeemed all outstanding Preferred Stock Purchase Rights issued in respect of the DMC Common Stock. The redemption was effective as of June 14, 2000, for $0.001 per share. Issuance of Unregistered Common Stock and Unregistered Convertible Debt On January 20, 2000, SNPE, Inc. and the Company entered into a Stock Purchase Agreement, pursuant to which the Company sold and SNPE, Inc. acquired on June 14, 2000 2,109,091 newly issued shares of the Company's common stock, par value $.05 per share, for approximately $5,800,000. In connection with the purchase of the Common Stock, the Company also issued to SNPE, Inc. a convertible subordinated note with an aggregate principal amount of $1,200,000, that is convertible into 200,000 shares of the Company's Common Stock at a conversion price of $6 per share for a period of five years from issuance. The terms of the transaction are set forth in more detail in the Stock Purchase Agreement, the Note and a related registration rights agreement, copies of which were attached to the Company's proxy statement dated May 5, 2000 for the special meeting of stockholders on June 14, 2000. The Company relied on the exemption from registration under Section 4(2) of the Securities Act of 1933 for the transactions described above, as the Company believes they did not involve a public offering based on the nature of the persons involved and the private character of the transactions. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders On June 14, 2000, at the Company's Special Meeting of Stockholders a Stock Purchase Agreement with SNPE, Inc. was approved by the following vote: Shares Voted Shares Voted Shares Shares not voted "FOR" "AGAINST" "ABSTAINING" 1,845,616 28,336 12,675 955,802 Pursuant to the Stock Purchase Agreement, SNPE, Inc. became a 50.8% stockholder of the Company. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27 Financial Data Schedule (b) Reports on Form 8-K A Current Report on Form 8-K dated June 14, 2000 was filed during the quarter ended June 30, 2000, pursuant to Item 5 of that form. No financial statements were filed as part of that report. 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 14, 2000 ----------------------------------------------- Richard A. Santa, Vice President of Finance and Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer)