Form 10-K

(Mark One)

(Exact name of Registrant as specified in its charter)

5405 Spine Road, Boulder, Colorado 80301

(Address of principal executive offices, including zip code)

(303) 665-5700

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:  Common Stock, $.05 Par Value

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  ý    No  o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained in this form, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 under the Act).    Yes  o    No  ý

The approximate aggregate market value of the voting stock held by non-affiliates of the registrant was $8,193,605 as of June 30, 2004.

The number of shares of Common Stock outstanding was 5,391,438 as of March 11, 2005.

Certain information required by Items 10, 11, 12, 13 and 14 of Form 10-K is incorporated by reference into Part III hereof from the registrant’s proxy statement for its 2005 Annual Meeting of Shareholders, which is expected to be filed with the Securities and Exchange Commission (“SEC”) within 120 days of the close of the registrant’s fiscal year ended December 31, 2004.

PART I

ITEM 1.                                                      Business

Dynamic Materials Corporation (“DMC” or the “Company”) is a worldwide leader in the explosive metalworking business, which uses explosives to perform metal cladding and shock synthesis.  The Company performs metal cladding using its proprietary technologies. Historically, our Aerospace Group was comprised of three companies that we acquired in 1998, AMK Welding, Spin Forge and Precision Machined Products (“PMP”).  Since PMP and Spin Forge were sold in October of 2003 and September of 2004, respectively, and are reported as discontinued operations, AMK Welding has become a stand-alone business segment.

Explosive Metalworking. The primary product of the Explosive Metalworking Group is explosion welded clad metal plate. Clad metal plates are used in the construction of heavy, corrosion resistant pressure vessels and heat exchangers for petrochemical, refining, hydrometallurgy and similar industries. Clad plates consist of a thin layer of an expensive, corrosion resistant metal, such as titanium or stainless steel, which is metallurgically clad to a less expensive, less corrosion resistant, thick base metal, typically carbon steel. Explosion clad occupies a well-defined technical and commercial niche in the broader clad metal marketplace. Explosion clad is a high performance, low cost alternative for many applications requiring corrosion resistant alloys. Explosive metalworking also uses explosives to perform shock synthesis of industrial diamonds and has been used for precision metal forming and powder metal compaction.  The company has a long-term ongoing contract for shock synthesis of industrial diamonds.

On July 3, 2001, the Company completed its acquisition of substantially all of the outstanding stock of Nobelclad Europe S.A. (“Nobelclad”) from Nobel Explosifs France (“NEF”). Nobelclad and its wholly-owned subsidiary, Nitro Metall AB (“Nitro Metall”) are the primary manufacturers of explosion clad products in Europe and operate cladding businesses located in Rivesaltes, France and Likenas, Sweden, respectively, along with sales offices in each country. Products manufactured by Nobelclad and Nitro Metall are similar to those produced by DMC’s domestic factory in Mount Braddock, Pennsylvania.  NEF is wholly owned by Groupe SNPE and is a sister company to SNPE, Inc. (“SNPE”), which owns 52% of the Company’s common stock. The purchase price of approximately $5.3 million was financed through a $4.0 million intercompany note agreement between the Company and SNPE, Inc. and the assumption of approximately $1.23 million in third party bank debt associated with Nobelclad’s acquisition of Nitro Metall from NEF prior to the Company’s purchase of Nobelclad stock.

AMK Welding. In January 1998, the Company acquired the assets of AMK Welding, a supplier of welding services that include the use of automatic and manual gas tungsten, electron beam and arc welding techniques to manufacturers of commercial and military aircraft engines and power industry-related ground-based turbines.

Stock Purchase Agreement with SNPE. On June 14, 2000, the Company’s stockholders approved a Stock Purchase Agreement (the “Agreement”) between the Company and SNPE. The closing of the transaction, which was held immediately following stockholder approval, resulted in a payment from SNPE of $5,800,000 to the Company in exchange for 2,109,091 of the Company’s common stock at a price of $2.75 per share causing SNPE to become a 50.8% stockholder of the Company on the closing date. In addition, at that time, the Company borrowed $1,200,000 under a convertible subordinated note from SNPE and $3,500,000 under a credit facility with SNPE.

Dynamic Materials Corporation, formerly Explosive Fabricators, Inc., was incorporated in Colorado in 1971 and was reincorporated in Delaware in 1997.

Our principal Internet address is www.dynamicmaterials.com. We make available free of charge on www.dynamicmaterials.com our annual, quarterly and current reports, and amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.  Information contained on our website does not constitute part of this Annual Report on Form 10-K.

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See Note 6 to the Company’s financial statements included under Item 8 of this Form 10-K for certain financial information about the Company’s industry segments.

Except for the historical information contained herein, this report on Form 10-K contains forward-looking statements that involve risks and uncertainties. The Company wishes to caution readers that the risks detailed below, among others, in some cases have affected the Company’s results, and in others could cause the Company’s results to differ materially from those expressed in any forward-looking statements made by the Company and could otherwise affect the Company’s business, results of operations and financial condition. Certain of these factors are further discussed below and should be considered in evaluating the Company’s forward-looking statements and any investment in the Company’s Common Stock.

Fluctuations in Operating Results. The Company has experienced, and expects to continue to experience, fluctuations in annual and quarterly operating results caused by various factors, including the timing and size of orders by major customers, customer inventory levels, shifts in product mix, acquisitions and divestitures, and general economic conditions.  In addition, the threat of terrorism and other geopolitical uncertainty could have a negative impact on the global economy, the industries served by the Company and the Company’s operating results. 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. Significant portions of the Company’s operating expenses are fixed, and planned expenditures are based primarily on sales forecasts and product development programs. If sales do not meet the Company’s expectations in any given period, the adverse impact on operating results may be magnified by the Company’s inability to adjust operating expenses sufficiently or quickly enough to compensate for such a shortfall. 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. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Dependence on Clad Metal Business; Limitation on Growth in Existing Markets for Clad Metal Products. For the year ended December 31, 2004, the Company’s cladding business accounted for approximately 95% of its consolidated net sales. The explosion clad metal products industry in which the Company currently operates is mature and offers limited potential for substantial growth in existing markets. The Company estimates that it currently serves a major percentage of the world market for its explosion clad metal products. Historically, the worldwide demand for clad metal products has been cyclical. Lower future demand for clad metal products could have a material adverse effect on the Company’s business, financial condition and results of operations.

Availability of Suitable Cladding Sites. The cladding process involves the detonation of large amounts of explosives. As a result, the sites where the Company performs cladding must meet certain criteria, including lack of proximity to a densely populated area, the specific geological characteristics of the site, and the Company’s ability to comply with local noise and vibration abatement regulations in conducting the process. The process of identifying suitable sites and obtaining permits for using the sites from local government agencies can be time-consuming and costly. In addition, the Company could experience difficulty in obtaining permits because of resistance from residents in the vicinity of proposed sites. The Company currently leases its only domestic cladding site in Dunbar, Pennsylvania. The lease term for the Pennsylvania site expires in 2010 but the underlying agreement has renewal options extending through 2029. The Company also leases its two European shooting sites that are located in Tautavel, France and in Likenas, Sweden, respectively.  The shooting site in Tautavel is operated under a permit issued by the Préfecture des Pyrénées Orientales and the shooting site in Likenas is operated under a permit issued by the County of Varmland.  The failure to obtain required governmental approvals or permits would have a material adverse effect on the Company’s business, financial condition and results of operations.

Competition. The Company’s explosion clad products compete with explosion clad products made by other like-kind manufacturers located throughout the world and with clad products manufactured using other technologies. The

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Company’s combined North American and European operations typically supply explosive clad for a major percentage of the worldwide market needs. There is one other well-known major explosion clad supplier worldwide, a small division of Asahi-Kasei Corporation of Japan. There are a number of other companies worldwide with explosion clad manufacturing capability, with most of these being smaller companies. There are no other significant North American based explosion clad suppliers. The company focuses strongly on reliability, product quality, on-time delivery performance, and low cost manufacturing to minimize the potential of future competitive threats.

Explosion clad products also compete with clad manufactured by rollbond and overlay cladding processes. In rollbond technology, the clad and base metal are bonded together during a hot rolling process in which slab is converted to plate. In weld overlay, which is typically performed by the Company’s fabricator customers, the cladding layer is deposited on the base metal through a fusion welding process. The technical and commercial niches of each cladding process are well understood within the industry and vary from one world market location to another.  The Company has established exclusive sales arrangements with other manufacturers where explosion clad is not the low cost solution, and consequently participates as a sales agent in a significant share of the North American rollbond market. The Company has a minimal share of the world rollbond market, which is dominated by very large Japanese and European steel producers. The U.S. clad market is currently protected from Japanese and European competition by anti-dumping orders. The Company’s products compete with weld overlay clad products manufactured by a significant number of its fabricator customers. Competitive niche positions in the world market are strongly driven by currency exchange rates and regulatory factors. Unfavorable currency exchange and regulatory conditions in various parts of world could put the Company at a competitive disadvantage and thus could have a material adverse effect on the Company’s business, financial condition and results of operations.

AMK Welding competes principally with other domestic companies that provide welding services to the aircraft engine and power generation industries.  Certain of these competitors have financial, technical, marketing, sales, manufacturing, distribution and other resources significantly greater than those of the Company. In addition, some of these competitors have name recognition, established positions in the market, and long standing relationships with customers. To remain competitive, the Company will be required to continue to develop and provide technologically advanced welding, heat-treat and inspection services, maintain quality levels, offer flexible delivery schedules, and compete favorably on the basis of price. The Company competes against other welding companies on the basis of quality, performance and cost. There can be no assurance that the Company will continue to compete successfully against these companies.

Availability and Pricing of Raw Materials. Although the Company generally uses standard metals and other materials in manufacturing its products, certain materials such as specific grades of carbon steel, titanium, zirconium and nickel are subject to supply shortages due to general economic conditions. While the Company seeks to maintain sufficient alternative supply sources for these materials, there can be no assurance that the Company will always be able to obtain sufficient supplies or obtain supplies at acceptable prices without production delays, additional costs or a loss of product quality. If the Company were to fail to obtain sufficient supplies on a timely basis or to obtain supplies at acceptable prices, such loss or failure could have a material adverse effect on the Company’s business, financial condition and results of operations. See “Suppliers.”

Customer Concentration. A significant portion of the Company’s net sales is derived from a relatively small number of customers. The Company expects to continue to depend upon its principal customers for a significant portion of its sales, although there can be no assurance that the Company’s principal customers will continue to purchase products and services from the Company at current levels, if at all. The loss of one or more major customers or a change in their buying patterns could have a material adverse effect on the Company’s business, financial condition and results of operations. Historically, the majority of the Company’s Explosive Metalworking revenues have been derived from customers in the chemical and petrochemical processing, petroleum refining, aluminum smelting, shipbuilding and air conditioning industries and the majority of AMK Welding’s revenues have been derived from customers in the aircraft engine and power generation industries. Economic downturns in these industries could have a material adverse effect on the Company’s business, financial condition and results of operations.  The Company believes that its risks in this area for its Explosive Metalworking business are partially mitigated by its strengthened world market position in explosive clad following the 2001 acquisition of Nobelclad and the breadth and depth of its customer base in the various industries that purchase clad metal.  AMK Welding’s risk in this area is partially mitigated by its diversification into the power

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generation industry where it provides a number of welding and heat-treat services in support of the manufacturing of ground-based turbines.

Dependence on Key Personnel; Need to Attract and Retain Employees. The Company’s continued success depends to a large extent upon the efforts and abilities of key managerial and technical employees. The loss of services of certain of these key personnel could have a material adverse effect on the Company’s business, results of operations and financial condition. There can be no assurance that the Company will be able to attract and retain such individuals on acceptable terms, if at all, and the failure to do so could have a material adverse effect on the Company’s business, financial condition and results of operations.

Government Regulation; Safety. The Company’s explosion metal working business is subject to extensive government regulation in the United States, France and Sweden, including guidelines and regulations for the safe handling and transport of explosives provided by the U.S. Bureau of Alcohol, Tobacco and Firearms, the U.S. Department of Transportation set forth in the Federal Motor Carrier Safety Regulations and the Institute of Makers of Explosive Safety Library Publications and their European counterparts.  In Sweden, the purchase, transport, storage and use of explosives is governed by a permit issued by the Police Authority of the County of Varmland.  In France, the manufacture and transportation of explosives is subcontracted to Nobel Explosifs France, an affiliate of the Company, who is responsible for compliance with regulations established by various State and local governmental agencies concerning the handling and transportation of explosives.  The Company must comply with licensing and regulations for the purchase, transport, manufacture and use of explosives. In addition, depending upon the types of explosives used, the detonation by-products may be subject to environmental regulation. The Company’s activities in the United States are subject to federal, state and local environmental and safety laws and regulations, including but not limited to, local noise abatement and air emissions regulations, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, including the regulations issued and laws enforced by the labor and employment departments of states in which the Company conducts business, the U.S. Department of Commerce, the U.S. Environmental Protection Agency and by state and county health and safety agencies. In France, the Company’s activities are subject to state environmental and safety regulations established by various departments of the French Government, including the Ministry of Labor, the Ministry of Ecology and the Ministry of Industry, and to local environmental and safety regulations and administrative procedures established by DRIRE (Direction Régionale de l’Industrie, de la Recherche et de l’Environnement) and the Préfecture des Pyrénées Orientales.  In Sweden, the Company’s activities are subject to safety and environmental regulations established by the Work Environment Authority of Sweden in its Work Environment Act.  Any failure to comply with current and future regulations in the U.S. and Europe could subject the Company to future liabilities. In addition, such regulations could restrict the Company’s ability to expand its facilities, construct new facilities or could require the Company to incur other significant expenses in order to comply with government regulations. In particular, any failure by the Company to adequately control the discharge of its hazardous materials and wastes could subject it to future liabilities, which could be significant.

The Company’s explosive metalworking operation involves the detonation of large amounts of explosives. As a result, the Company is required to use specific safety precautions under the Occupational Safety and Health Administration guideline and guidelines of similar entities in France and Sweden.  These include precautions which must be taken to protect employees from facility deterioration as well as exposure to sound and ground vibration.

The explosive metalworking business includes the use of explosives to perform metal cladding and shock synthesis of industrial diamonds. While metal cladding is a mature industry, DMC believes that the characteristics of its explosive metalworking processes may enable the development of new products in a variety of industries and continues to explore such development opportunities.

Metal Cladding. The principal product of metal cladding is a metal plate composed of two or more dissimilar metals, usually a corrosion resistant alloy and carbon steel, welded or clad together at the atomic level. High-energy metal cladding is performed by detonating an explosion on the surface of an assembly of two parallel metal plates, the cladding metal and the backing metal, separated by a “standoff space”. The explosive force creates a metallurgical bond between the two metal components. The technology is unique in that it can be used to weld non-compatible metals, which cannot be welded by conventional processes, such as titanium-steel, aluminum-steel, and aluminum-copper. It can also be

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used to weld compatible metals, such as stainless steels and nickel alloys to steel.  DMC Detacladâ is used in the fabrication of pressure vessels and heat exchangers for chemical and petrochemical processing, refining, mining, power generations, air conditioning (HVAC) and other industries where corrosion, temperature, and pressure combine to produce demanding environments. DMC Detacoupleâ bimetal welding transition joints are used in ship construction, and in a variety of electrochemical industries including aluminum smelting.

The Company’s clad metal products are primarily produced on a project-by-project basis conforming to requirements set forth in customer purchase orders. Upon receipt of an order, the Company obtains the component materials from a variety of sources based on quality, availability and cost. The company explosively bonds the metals in one of its three manufacturing plants (Mount Braddock, PA, USA; Rivesaltes, France and Likenas, Sweden). Final products are processed to meet contract specific requirements for product configuration and quality/inspection level. Maintaining DMC’s corporate culture and reputation for product quality and on-time delivery is a critical factor for management.

Shock Synthesis. DMC operates under an agreement to provide explosive shock synthesis services associated with the manufacture of industrial diamonds. Shock synthesis is one step in a series of operations required for production of industrial grade diamond abrasives.

AMK Welding provides welding services principally to the commercial and military aircraft engine markets and to the power generation industry.  Welding services are provided on a project-by-project basis based on specifications set forth in customer’s purchase orders. Upon receipt of an order for welded assemblies, the Company performs welding services using customer specific welding procedures.

The welding services are performed utilizing a variety of manual and automatic welding techniques, including electron beam and gas tungsten arc welding processes. The Company has considerable expertise in vacuum controlled atmospheric purged chamber welding which is a critical capability when welding titanium, zirconium, high temperature nickel alloys and other specialty alloys. In addition to its welding capabilities, the Company also utilizes various special stress relieving and non-destructive examination processes such as radiographic inspection in support of its welding operations.

The Company’s strategy for growth is to expand and refine its basic processes and product offerings to generate solutions to the materials needs of customers in its target markets. Key elements of the Company’s strategy include:

Technological and Manufacturing Leadership. The Company seeks to take advantage of its technology leadership in the explosion metalworking business. In 1998 and 1999, the Company invested nearly $7 million in new manufacturing equipment and technologies at Mount Braddock, Pennsylvania, that has substantially increased manufacturing efficiencies and plant capacity. Management believes that this state-of-art clad plate manufacturing facility provides a significant advantage to the Company in the global marketplace for explosion clad metal plates. In 2001, the Company invested approximately $5.3 million in the acquisition of Nobelclad, strengthening its competitive position in Europe, and in much of the rest of the world.  The Company will continue to invest in new manufacturing equipment at each of its facilities to further enhance its manufacturing leadership.  Additionally, the Company will work to strengthen its technological leadership through a strong focus on process improvement programs, supplemented by targeted spending on research and development activities.

Establish Global Presence. The Company seeks to establish a global sales and marketing presence in the major international markets for explosion cladding, including Europe, Australia, the Far East and the Americas. The Company is working to establish relationships with end users, engineering contractors, metal fabricators and independent sales representatives in these markets and has developed the capacity in its sales and marketing department to address these markets.  The Company’s plan to continue its international expansion depends on a number of factors. See “Risk Factors” for a discussion of certain of the risks associated with the Company’s ability to establish a global presence.

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Add New Product Lines or Customers. The Company seeks to grow its sales base by adding new product lines and new customers to both of its business segments. The Company’s future sales growth plans depend on a number of factors. See “Risk Factors” for a discussion of certain of the risks associated with the Company’s ability to achieve its planned sales growth.

The Company uses numerous suppliers of alloys, steels and other materials for its operations. The Company sometimes 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 to have, from time to time, short-term adverse effects on the Company’s business. The Company generally uses standard metals and other materials in manufacturing its products; however, certain materials such as specific grades of carbon steel, titanium, zirconium and nickel are subject to supply shortages due to general economic conditions. If the Company were to fail to obtain sufficient supplies on a timely basis or obtain supplies at acceptable prices, such loss or failure could have a material adverse effect on the Company’s business, financial condition and results of operations.

Competition in the explosion metal working business and the AMK Welding business is, and is expected to remain, intense.  The Company’s strong market position in the clad metal industry makes it a target for competitors attempting to gain market share.  Competitors include major domestic and international companies. Competitors in the explosion metal working business use alternative technologies; additionally certain of DMC’s customers and suppliers have in-house metalworking capabilities. Many of these companies have financial, technical, marketing, sales, manufacturing, distribution and other resources significantly greater than those of the Company. In addition, many of these companies have name recognition, established positions in the market, and long standing relationships with customers. To remain competitive, the Company will be required to continue to develop and provide technologically advanced manufacturing services, maintain quality levels, offer flexible delivery schedules, deliver finished products on a reliable basis and compete favorably on the basis of price.

The primary industries served by the Company are the chemical processing, power generation, petrochemical, defense, aircraft engine and marine engineering industries. The Company’s metal cladding customers in these industries require metal products that can withstand exposure to corrosive materials, high temperatures and high pressures.  AMK Welding’s customers operate in industries that require metal products that meet rigorous criteria for tolerances, weight, strength and reliability.

At any given time, certain customers may account for significant portions of the Company’s business. A significant portion of the Company’s net sales is derived from a relatively small number of customers. Large customers also accounted for a significant portion of the Company’s backlog as of March 2005. The Company expects to continue to depend upon its principal customers for a significant portion of its sales, although there can be no assurance that the Company’s principal customers will continue to purchase products and services from the Company at current levels, if at all. The loss of one or more major customers or a change in their buying pattern could have a material adverse effect on the Company’s business, financial condition and results of operations.

The Company extends its internal selling efforts by marketing its services to potential customers through senior management, direct sales personnel, program managers and independent sales representatives. Prospective accounts in specific industries are identified through networking in the industry, cooperative relationships with suppliers, public relations, customer references, inquiries from technical articles and seminars and trade shows. The Company markets its clad metal products to three tiers of customers; the product end-users (e.g., operators of chemical processing plants), the engineering contractors in charge of specifying the metal parts to be used by the end-users, and the metal fabricators who manufacture the products or equipment that utilize the Company’s metal products. By maintaining relationships with

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these parties and educating them as to the technical benefits of DMC’s high-energy metal worked products, the Company endeavors to have its products specified as early as possible in the design process.

The DMC clad metal businesses have several exclusive or non-exclusive agreements with agents for sales and business promotion in specific territories defined by each agreement. These agency contracts cover sales in specific European, Middle East and Far East countries. Agency agreements are usually of one to two years in duration and, subject to agents meeting the Company’s performance expectations, are automatically renewed.

The Company’s backlog with respect to its three Explosive Metalworking businesses was approximately $27.5 million at December 31, 2004 compared with approximately $11.7 million and $8.6 at December 31, 2003 and 2002, respectively.  Backlog consists of firm purchase orders and commitments that the Company expects to fill within the next 12 months. The Company expects most of the backlog at December 31, 2004 to be filled during 2005. However, since orders may be rescheduled or canceled and a significant portion of the Company’s net sales is derived from a small number of customers, backlog is not necessarily indicative of future sales levels.

The Company employs approximately 163 full-time employees as of December 31, 2004, the majority of which are engaged in manufacturing operations. The Company believes that its relations with its employees are good.  Of the 163 employees, there are 52 full-time employees working in France at the Nobelclad facility and 12 full-time employees working in Sweden for Nitro Metall.  Approximately twenty-five Nobelclad employees and all Nitro Metall employees are members of trade unions.

The Company holds numerous patents related to the business of explosion metal working and metallic processes and also owns certain registered trademarks, including Detaclad®, Detacouple®, Dynalock®, EFTEK® and NOBELCLAD®. The Company’s current patents expire on various dates through 2012. Since individual patents relate to specific product applications and not to core technology, the Company does not believe that such patents are material to its business and the expiration of any single patent is not expected to have a material adverse effect on the Company or its operations.

See Note 6 to the Company’s Consolidated Financial Statements included under Item 8 for certain financial information about geographic areas and the Company’s export sales.

The Company’s principal manufacturing site, which is owned by the Company, is located in Mount Braddock, Pennsylvania. The Company also leases property in Dunbar, Pennsylvania that serves as an explosion site. The lease for the Dunbar, Pennsylvania property will expire in December 2010, but has renewal options that extend through 2029. The Company leases office space in Boulder, Colorado to house its corporate headquarters under a lease with the building owner that expires in February 2006. The Company owns the land and buildings housing the operations of AMK Welding in South Windsor, Connecticut.  The Company, through its French subsidiary, Nobelclad, owns the land and the buildings housing its operations in Rivesaltes, France and leases the land that serves as the shooting site in Tautavel, France. This lease expires in December 31, 2007 and may be extended. The Company, through its Swedish subsidiary, Nitro Metall, owns the buildings housing its manufacturing operations in Likenas, Sweden and leases the land. Both the buildings and the land housing the Nitro Metall sales office in Nora, Sweden are leased. These leases are automatically

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renewed every year. The Company believes that its current facilities are adequate for its existing operations and are in good condition. See “Item 1 – Risk Factors” for a discussion of certain of the risks associated with the Company’s ability to renew the leases for its current manufacturing sites and to identify and establish new manufacturing sites.

The Company continues to lease the land and building in El Segundo, California that house the operations of its former Spin Forge division under a lease agreement that expires in January 2012.  The Company is subleasing the Spin Forge real estate to the Aerojet-General Corporation, the acquirer of the Spin Forge business, under a sublease agreement that expires on January 1, 2007.  The Company holds an option to purchase the Spin Forge real estate at a fixed price of $2,880,000 between November 1, 2006 and January 31, 2007 and at fair market value thereafter.

ITEM 3.                                                     Legal Proceedings

There are no significant pending legal proceedings against the Company or its subsidiary.

ITEM 4.                                                     Submission of Matters to a Vote of Security Holders

No matters were submitted to security holders for vote during the fourth quarter of the fiscal year ended December 31, 2004.

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PART II

The Common Stock of the Company is publicly traded on The Nasdaq SmallCap Market (“Nasdaq”) under the symbol “BOOM.”  The following table sets forth quarterly high and low bid quotations for the Common Stock during the Company’s last two fiscal years, as reported by Nasdaq. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.

As of March 11, 2005, there were approximately 402 holders of record of the Company’s Common Stock.

The Company has never declared or paid cash dividends on its Common Stock. While the Company will likely retain the majority of its 2004 and any future earnings to finance the growth and development of its business, the Company is currently evaluating its dividend policy to determine the conditions under which the Company should consider the future payment of cash dividends.

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ITEM 6.                                                     Selected Financial Data

The following selected financial data should be read in conjunction with the Consolidated Financial Statements, including the related Notes, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

(1)  Restated, see Note 8 to the Consolidated Financial Statements.

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Selected unaudited quarterly financial data for the years ended December 31, 2004 and 2003 is presented below:

The total net income (loss) per share for the 2004 and 2003 quarters do not equal net income (loss) per share for the respective years as the per share amounts for each quarter and for each year are computed based on their respective discrete periods.

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For all of the quarters reported for the year ended December 31, 2003 and for the quarters ended March 31 and June 30, 2004, certain amounts have been reclassified to discontinued operations.  In connection with the divestiture of its Spin Forge division in September 2004, the Company began to report Spin Forge as discontinued operations beginning in its September 30, 2004 Form 10-Q.  The amounts that were reclassified include net sales, gross profit and income from continuing operations.

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ITEM 7.                                                      Management’s Discussion and Analysis of Financial Condition and Results of Operations

DMC’s consolidated sales for the year ended December 31, 2004 increased by 51% from those in 2003 due to a general strengthening in demand for clad metal plate manufactured by our Explosion Welding Group.  Explosive Metalworking Group sales increased by 56% from 2003 to 2004 and include sales increases of 69% and 33% by the Group’s U.S. Clad Metal Division and Nobelclad, respectively.  Consolidated income from operations increased by 108% to $6,887,595 in 2004 from $3,315,862 in 2003 due to a significant year-to-year improvement in the operating results of the Explosive Metalworking Group that was partially offset by a decline in operating income at AMK Welding.  We reported consolidated net income of $2,832,761 in 2004 as compared to a net loss of $709,158 in 2003.  Our 2004 reported net income was reduced by a loss from discontinued operations of $1,569,537 relating to the divestiture of our Spin Forge Division that was completed on September 17, 2004.  In 2003, we reported a loss from discontinued operations of $1,993,602 that reflected the combined after tax operating losses of Spin Forge and the former PMP Division, which was sold on October 7, 2003.  After tax income from continuing operations increased to $4,402,298 in 2004 from $1,284,444 in 2003.

Our Explosive Metalworking Group reported sales of $51,374,956 in 2004 versus 2003 sales of $33,043,448 and an increase in operating income to $6,608,592 in 2004 from $2,854,818 in 2003. The outlook for continued improvement in the Group’s sales performance and operating income for the full year 2005 is promising.  The Explosive Metalworking Group’s backlog, which had increased from $8.6 million at December 31, 2002 to $11.7 million at December 31, 2003 and $25.6 million as of September 30, 2004, increased further to $27.5 million as of December 31, 2004.  This record backlog is the direct result of the strong flow of new orders during 2004 that exceeded our expectations and that included an order in excess of $5.4 million for the Ravensthorpe nickel project in Australia, the majority of which shipped during 2004.  With the exception of the large nickel hydrometallurgy project orders that we receive periodically, U.S. demand for our clad metal products is largely driven by plant maintenance and retrofit projects at existing chemical processing, petrochemical processing and oil refining facilities.  Postponed capital spending within these industries over the past few years, improved economic conditions and the “Clean Fuels Act” appear to be working together to increase demand for our products in the U.S.  In contrast to the U.S. market, demand for our clad products in Europe is more dependent on large projects, such as the building of new purified terephthalic acid (“PTA”) plants in different parts of the world, including China, and on sales of electrical transition joints that are used in the aluminum smelting industry.  European sales were strong in 2004 as Nobelclad shipped product relating to orders in support of new PTA plant construction and other large projects, including those being constructed in China, and continued to gain market share in the electrical transition joint business.  With a record backlog at the end of 2004 and what appear to be generally strong market conditions in most of the industries that we serve, the prospects for continued sales and operating income growth in our core Explosive Metalworking business during 2005 are encouraging.

Historically, our Aerospace Group has been comprised of the AMK Welding, Spin Forge and PMP divisions.  Since PMP and Spin Forge are now reported as discontinued operations due to the 2003 sale of PMP and the divestiture of Spin Forge in September 2004, the Aerospace Group no longer exists and AMK Welding has been reported as a stand-alone business segment in the accompanying consolidated financial statements. For the year ended December 31, 2004, AMK Welding reported sales of $2,789,674 compared to sales of $2,735,881 in 2003.  As a result of changes in product mix and increased operating expenses, AMK Welding reported operating income of $279,003 in 2004 compared to operating income of $461,044 in 2003.  Development work performed in 2003 on a new ground-based turbine did not recur during 2004 and the absence of such work in 2004 is largely responsible for the decline in AMK Welding’s operating income levels. After an expected slow first quarter, prospects at AMK Welding for 2005 and beyond appear to be quite good as the new ground-based turbine goes into production and the demand for commercial aircraft engines, which has been depressed since 2001, continues to improve. AMK Welding sales in 2005 are expected to exceed those of 2002 when AMK Welding reported sales of approximately $3.3 million and operating income in excess of $1 million.

For the years ended December 31, 2004, 2003, 2002, DMC generated cash flow from operations of approximately $4.5 million, $2.8 million and $5.7 million, respectively.  With respect to the operating cash flow generated in 2004, approximately $1.1 million was used for capital expenditures and approximately $2.8 million was

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used for scheduled principal payments under various long-term debt obligations. Increases in our net working capital and the funding of 2004 operating losses incurred by our Spin Forge division required us to increase our bank line of credit borrowings by approximately $1.9 million in 2004.  With the expected improvement in 2005 sales and operating income and an anticipated stabilization of working capital levels, operating cash flow for 2005 should be strong.  A significant portion of the operating cash flow that we expect to generate in 2005 will be used to satisfy approximately $3.0 million in principal payments that are due in 2005 under various long-term debt agreements and to fund approximately $2.4 million in planned capital expenditures at our U.S. Clad Metal, Nobleclad and AMK Welding operations, which will allow DMC to more effectively pursue new growth opportunities.  With the reductions to existing term debt that are scheduled to occur in 2005, outstanding obligations under existing long-term debt agreements will be reduced to approximately $2.9 million by the end of 2005 from approximately $8.6 million at the end of 2003.  Minimum annual principal payments on existing term debt will be less than $600,000 in 2006.

Net Sales. Net sales for 2004 increased 51.4% to $54,164,630 from $35,779,329 in 2003. Sales by our Explosive Metalworking Group, which include explosion bonding of clad metal and shock synthesis of synthetic diamonds, increased 55.5% to $51,374,956 in 2004 (95% of total sales) from $33,043,448 in 2003 (92% of total sales).  The Explosive Metalworking sales increase reflects a 68.7% increase in U.S. clad sales and a smaller 32.5% U.S. dollar sales increase at Nobleclad Europe.  The Noblelclad Europe sales increase of approximately $3.9 million includes a sales volume increase of approximately $2.7 million and a favorable foreign exchange translation adjustment of approximately $1.2 million relating to the decline in the value of the U.S. dollar against the Euro.  The large year-to-year increase in worldwide Explosive Metalworking Welding Group sales is principally attributable to the improved economic condition of the industries that the Group serves as evidenced by an increase in backlog from $11.7 million at December 31, 2003 to $27.5 million as of December 31, 2004.  AMK Welding contributed $2,789,674 to 2004 sales (5% of total sales) versus sales of $2,735,881 in 2003 (8% of total sales).  The relatively flat sales at AMK Welding were expected as AMK waits for a customer to transition a new ground-based turbine system from development into production.

Gross Profit. Gross profit for 2004 increased by 51.6% to $13,605,452 from $8,977,026 in 2003. Our 2004 consolidated gross profit margin rate of 25.1% was the same as that for 2003.  The gross profit margin for our Explosive Metalworking Group increased from 25.0% in 2003 to 25.4% in 2004, while the gross profit margin for AMK Welding decreased to 20.5% in 2004 from 26.1% in 2003.  The gross margin increase for our Explosive Metalworking Group reflects a small decrease in the U.S. gross margin rate from 29.1% in 2003 to 28.4% in 2004 that was more than offset by an increase in the Nobelclad’s rate to 18.8% in 2004 from 17.9% in 2003.  The gross margin decline at AMK Welding is principally attributable to unfavorable changes in product mix as higher development work performed in 2003 on a customer’s new ground turbine did not recur at the same volume levels in 2004 and was replaced by lower margin aircraft engine work.

General and Administrative.  General and administrative expenses increased by $689,986, or 26.1%, to $3,334,996 in 2004 from $2,645,010 in 2003.  The increase in general and administrative expense includes an approximate $260,000 increase in incentive compensation expense resulting from the large increase in 2004 pre-tax earnings, increased tax consulting expenses of approximately $125,000 relating to special tax studies that were performed during 2004 to maximize our use of available U.S. federal income tax credits and deductions, and an increase of approximately $150,000 in aggregate audit, legal and board of director fees that relates principally to the direct and indirect costs of complying with various aspects of the Sarbanes-Oxley Act.  As a percentage of net sales, general and administrative expenses decreased to 6.2% in 2004 from 7.4% in 2003.  This decreased percentage is attributable to the significant increase in 2004 net sales.

Selling Expense. Selling expenses increased by 12.2% to $3,382,861 in 2004 from $3,016,154 in 2003.  Selling expenses for our U.S. operations increased from $1,533,606 in 2003 to $2,044,866 in 2004, with this increase being partially offset by a reduction in Nobelclad’s selling expense from $1,482,548 in 2003 to $1,337,995 in 2004. The increase in selling expenses for our U.S. operations reflects an approximate $310,000 increase in accrued bonus expense associated with the higher profitability of the U.S. Clad Metal Division in 2004 and increased spending in 2004 on business travel and outside consultants relating to the higher level of business activity and the pursuit of new business development opportunities.  The decline in selling expenses for our European operations relates principally to a decrease

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in commissions paid to third party agents that represent us in certain countries.  As a result of the significant increase in 2004 net sales, selling expenses as a percentage of net sales decreased to 6.2% in 2004 from 8.4% in 2003.

Income from Operations. DMC reported income from operations of $6,887,595 in 2004, an increase of $3,571,733 from the $3,315,862 of operating income reported in 2003. Our Explosive Metalworking Group reported income from operations of $6,608,592 in 2004 as compared to $2,854,818 in 2003.  This $3,753,774 or 131% increase in our 2004 Explosive Metalworking Group operating income is largely attributable to the 55.5% sales increase discussed above.

AMK Welding reported income from operations of $279,003 in 2004 compared to $461,044 in 2003.  Development work performed in 2003 on a new ground-based turbine did not recur at the same levels during 2004 and the absence of such higher margin work in 2004 is largely responsible for the decline in AMK Welding’s operating income levels.

Interest Expense, net.  Interest expense increased by 4.4% to $531,038 in 2004 from $508,505 in 2003.  This increase in interest expense reflects an increase in average borrowings under our U.S. bank line of credit to support the higher level of working capital required by the significant growth in production and sales levels in 2004 that offset the reduction in our outstanding term debt from $8,648,589 at December 31, 2003 to $5,957,481 at the end of 2004.  The increase in interest expense also reflects higher average interest rates in the U.S. on our variable rate line of credit and term debt borrowings.  Related party interest expense totaled $146,298 and $181,741 in 2004 and 2003, respectively.

Income Tax Provision.  DMC recorded a consolidated income tax provision of $1,961,289 in 2004 on income from continuing operations as compared to a consolidated income tax provision of $1,504,006 in 2003.  The effective tax rate decreased to 30.8% in 2004 from 53.9% in 2003.  The 2004 and 2003 income tax provisions include $1,662,904 and $1,480,299, respectively, related to U.S. taxes, with the remainder relating to foreign taxes associated with the operations of Nobelclad and its Swedish subsidiary Nitro Metall.  Income tax provisions on the 2004 and 2003 earnings of Nobelclad and Nitro Metall have been provided based upon the respective French and Swedish statutory tax rates.  The 2004 tax effective rate is much lower than an expected rate of approximately 39% as a result of the recognition of U.S. tax benefits aggregating more than $500,000 relating to research and development tax credits, extraterritorial income exclusions and foreign tax credits.  These tax credits and income exclusions were generated from business activities and transactions that occurred in tax years prior to 2004 but were not probable and estimable until the fourth quarter of 2004 when special tax studies were completed.

The effective tax rate for 2003 was high because U.S. taxes were provided at a 39% rate on $732,256 of intercompany dividends received in 2003 from Nobleclad. The dividend income was eliminated in DMC’s consolidated statement of operations, but U.S. taxes were provided on such dividend income in the consolidated income tax provision without any offsetting tax credit as the recoverability of that tax credit did not meet the more likely than not test required by Statement of Financial Accounting Standard No. 109, Accounting for Income Taxes.  This increased the consolidated effective tax rate increased from an expected rate of approximately 39% to an actual rate of 53.9%

Income from Continuing Operations.  Income from continuing operations increased from $1,284,444 in 2003 to $4,402,298 in 2004.  The increases reflects the significant improvement in sales and operating income reported by our Explosive Metalworking Group in 2004, as discussed above.

Discontinued Operations. On October 7, 2003, DMC completed the sale of its PMP division.  In our consolidated financial statements for the year ended December 31, 2003, we reported the loss on the sale of PMP as well as the operating losses reported by PMP in prior years as discontinued operations, net of related tax benefits.  On September 17, 2004, DMC completed the divestiture of its Spin Forge division.  Under the principal divestiture agreement, DMC sold the assets of the Spin Forge division to a third party, excluding certain equipment and real estate which are being leased or subleased to the buyer, for a sales price of approximately $1,665,000 to be paid in cash according to the arrangement set forth in the divestiture agreement.  With respect to the Spin Forge manufacturing equipment and tooling, DMC recorded an after tax impairment loss of $619,000 based upon the difference between the current carrying value of the equipment and the present value of the future minimum equipment lease payments from the lessee plus estimated liquidation proceeds at the end of the minimum lease term.  The Company holds a purchase option on the Spin Forge real estate that allows it to purchase the real estate for $2,880,000, a price that is below the real estate’s

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recently appraised value.  The value inherent in the real estate purchase option is believed to be significant but was not considered in the calculation of the reported impairment loss on the Spin Forge equipment and tooling due to uncertainties surrounding its ultimate realization.  In the accompanying consolidated financial statements, we have reported the 2004, 2003 and 2002 operating losses of Spin Forge and a loss on the divestiture, which includes the asset impairment loss discussed above and divestiture transaction costs, as discontinued operations, net of related tax benefits.

The net loss from the discontinued operations of PMP and Spin Forge decreased from $1,993,602 in 2003 to $1,569,537, with the 2004 net loss including a net of tax loss of $787,000 from the Spin Forge divestiture and the 2003 net loss including a net of tax loss of $710,309 from the sale of PMP.  Discontinued operations included net of tax operating losses of $782,537 in 2004 and $1,283,293 in 2003, with the entire 2004 amount relating to Spin Forge and the 2003 amount including net of tax operating losses from both Spin Forge and PMP in the amounts of $696,195 and $587,098, respectively.

Net Income. The Company reported a net income of $2,832,761 in 2004 compared to a net loss of $709,158 in 2003.  Net income for 2004 includes income from continuing operations of $4,402,298 that was partially offset by a loss from discontinued operations of $1,569,537.  The 2003 net loss includes income from continuing operations of $1,284,444 that was exceeded by a loss from discontinued operations of  $1,993,602

Net Sales. Net sales for 2003 decreased 8.0% to $35,779,329 from $38,879,912 in 2002. Sales by our Explosive Metalworking Group, which include explosion bonding of clad metal and shock synthesis of synthetic diamonds, decreased 7.2% to $33,043,448 in 2003 (92% of total sales) from $35,603,415 in 2002 (92% of total sales).  The Explosive Metalworking sales decrease reflects a 14.7% decrease in U.S. clad sales that was partially offset by a 9.5% U.S. dollar sales increase at Nobleclad Europe.  The Noblelclad Europe sales increase of approximately $1.05 million includes a sales volume decrease of approximately $1.2 million that was entirely offset by a favorable foreign exchange translation adjustment of approximately $2.25 million due to the significant decline in the value of the U.S. dollar against the Euro.  The decrease in worldwide Explosive Metalworking Group sales is principally attributable to more than $5 million of 2002 shipments in support of Inco’s Goro Nickel Project in New Caledonia.  There were no similar large project orders and shipments in 2003.  AMK Welding contributed $2,735,881 to 2003 sales (8% of total sales) versus sales of $3,276,497 in 2002 (8% of total sales), a decrease of 16.5%.  AMK Welding reported record sales in 2002 as a result of significant revenues from welding development work on a new ground-based turbine that has not yet reached the production phase.  The absence of similar development work in 2003 resulted in the year-to-year sales decrease at AMK Welding.

Gross Profit. Gross profit for 2003 decreased by 26.5% to $8,977,026 from $12,206,963 in 2002. Our consolidated gross profit margin decreased to 25.1% in 2003 from 31.4% in 2002.  The gross profit margin for our Explosive Metalworking Group decreased from 30.7% in 2002 to 25.0% in 2003.  The decrease in the gross profit margin for the Explosive Metalworking Group is principally due to the 2003 sales decrease discussed above and the resultant less favorable absorption of fixed manufacturing overhead expenses.  AMK Welding’s gross margin declined from a record level of 38.5% in 2002 to 26.1% in 2003 due to the 16.5% sales decrease that AMK Welding experienced in 2003.

General and Administrative.  General and administrative expenses increased by $107,139, or 4.2%, to $2,645,010 in 2003 from $2,537,871 in 2002.  This increase in general and administrative expenses reflects increased legal, audit and Board of Directors expenses of aggregating approximately $175,000 associated with Sarbanes-Oxley compliance, activities surrounding the divestiture of PMP, and amendments to the Company’s articles of incorporation that were offset by decreased spending in other areas.  As a percentage of net sales, general and administrative expenses increased to 7.4% in 2003 from 6.5% in 2002.  This increased percentage is attributable to decreased 2003 net sales and higher year-to-year spending levels for our U.S. operations.

Selling Expense. Selling expenses increased by 21.9% to $3,016,154 in 2003 from $2,473,357 in 2002. This increase in selling expenses is largely attributable to an increase in outside selling commissions associated with a large export order that Nobelclad shipped during 2003.  As a result of the increase in outside sales commissions and an unfavorable foreign exchange translation adjustment of approximately $150,000, Nobleclad Europe’s selling expenses

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increased from $794,305 in 2002 to $1,482,548 in 2003.  Selling expenses for our U.S. operations decreased from $1,679,052 in 2002 to $1,533,606 in 2003 due principally to a decrease in bonuses earned by the U.S. Explosive Metalworking Group sales team.  As a result of the decrease in 2003 net sales and higher year-to-year selling expenses at Nobelclad, consolidated selling expenses as a percentage of net sales increased to 8.4% in 2003 from 6.4% in 2002.

Income from Operations. DMC reported income from operations of $3,315,862 in 2003, a decrease of $3,879,873 from the $7,195,735 of operating income reported in 2002. This year-to-year decrease reflects a significant decline in operating income reported by both our Explosive Metalworking Group and AMK Welding. Our Explosive Metalworking Group reported income from operations of $2,854,818 in 2003 as compared to $6,149,962 in 2002.  This significant decrease in 2003 Explosive Metalworking operating income is largely attributable to the sales decrease discussed above, which resulted in a $2,680,200 decline in reported gross profit, and higher 2003 selling expenses.  As we stated at the beginning of 2003, with no large projects like the Goro Nickel Project on the horizon, the Explosive Metalworking Group would likely have difficulty matching its 2002 sales and operating income performance in 2003.  This proved to be the case.

AMK Welding reported income from operations of $461,044 in 2003 compared to $1,045,773 in 2002.  AMK Welding’s operating income in 2003 was less than half of that reported in 2002 as a result of the 16.5% decrease in its 2003 sales.

Interest Expense, net. Interest expense decreased by 26.2% to $508,505 in 2003 from $689,129 in 2002.  This decrease relates principally to a decline in interest rates during the year but also reflects lower average borrowings.  Outstanding borrowings were reduced to $10,708,213 at December 31, 2003 from $11,702,329 at the end of 2002.  Related party interest expense totaled $181,741 and $272,727 in 2003 and 2002, respectively.

Income Tax Provision.  DMC recorded a consolidated income tax provision of $1,504,006 in 2003 on income from continuing operations as compared to a consolidated income tax provision of $2,528,453 in 2002.  The effective tax rate increased to 53.9% in 2003 from 39.2% in 2002.  The 2003 and 2002 income tax provisions include $1,480,299 and $2,211,800, respectively, related to U.S. taxes, with the remainder relating to foreign taxes associated with the operations of Nobelclad and its Swedish subsidiary Nitro Metall.  The effective tax rate for 2003 is high because U.S. taxes were provided at a 39% rate on $732,256 of intercompany dividends received in 2003 from Nobleclad. The dividend income was eliminated in DMC’s consolidated statement of operations, but U.S. taxes are provided on such dividend income in the consolidated income tax provision without any offsetting tax credit as the recoverability of that tax credit does not meet the more likely than not test required by Statement of Financial Accounting Standard No. 109, Accounting for Income Taxes.  This increased the consolidated effective tax rate increased from an expected rate of approximately 39% to an actual rate of 53.9%.  Income tax provisions on the 2003 and 2002 earnings of Nobelclad and Nitro Metall have been provided based upon the respective French and Swedish statutory tax rates.

Income from Continuing Operations.  Income from continuing operations before cumulative effect of a change in accounting principle decreased from $3,925,728 in 2002 to $1,284,444 in 2003.  This decrease is principally attributable to the large decrease in 2003 income from operations as discussed above and an increase in the effective tax rate from 39.2% in 2002 to 53.9% in 2003.

Discontinued Operations.  On October 7, 2003, DMC completed the sale of its PMP division.  The sales price was $580,000 and was financed through the issuance of a promissory note payable over a 2 ½ year period.  The sale included the inventory and property, plant and equipment of PMP.  The loss recorded on the sale of PMP, as well as the operating losses reported by PMP in 2003 and 2002, has been reported as discontinued operations, net of related tax benefits.  On September 17, 2004, DMC completed the divestiture of its Spin Forge division.  Previously reported discontinued operations for 2003 and 2002 have been restated to include the net of tax operating losses of Spin Forge for these periods.  The net loss from discontinued operations increased to $1,993,602 in 2003 from $1,473,491 in 2002, with the 2003 net loss including a $710,309 net of tax loss from the sale of PMP assets.  The 2003 net loss included net of tax operating losses of  $587,098 and $696,195 from PMP and Spin Forge, respectively, as compared to net of tax operating losses of $714,029 and $723,462 that these divisions reported, respectively, in 2002.

Cumulative Effect of a Change in Accounting Principle.  On January 1, 2002, DMC adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, and in early 2002 disclosed that up to

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the full amount of the remaining goodwill associated with the Company’s 1998 acquisition of PMP could be impaired.  In the fourth quarter of 2002, we completed our evaluation of goodwill impairment at PMP and determined that the remaining goodwill in the amount of $3,800,108 was impaired.  Accordingly, we wrote off all of the remaining PMP goodwill, less associated tax benefits of $1,482,000, and reported the resultant after tax loss of $2,318,108 as a cumulative effect of a change in accounting principle.

Net Income. The Company recorded a net loss of $709,158 in 2003 compared to net income of $170,129 in 2002.  The 2003 net loss includes income from continuing operations of $1,284,444 and a loss from discontinued operations of  $1,993,602.  Net income for 2002 includes income from continuing operations of $3,925,728 that was almost entirely offset by a loss from discontinued operations of $1,437,491 and a loss of $2,318,108 related to the cumulative effect of a change in accounting principle as further described above.

Historically, DMC has obtained its operational financing from a combination of internally generated cash flow, revolving credit borrowings, various long-term debt arrangements and the issuance of common stock.  On June 14, 2000, our stockholders approved a Stock Purchase Agreement between DMC and SNPE. The closing of the transaction resulted in a payment from SNPE of $5,800,000 to DMC in exchange for 2,109,091 shares of DMC common stock at a price of $2.75 per share causing SNPE to become the majority stockholder of DMC on the closing date. An additional $1,200,000 cash payment was made by SNPE to DMC 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 at any time up to and including the June 14, 2005 maturity date.  We also borrowed $3,500,000 on June 14, 2000 under a credit facility with SNPE that carried interest at the Federal Funds Rate plus 1.5% and provided for maximum borrowings of $4,500,000.

In connection with its July 3, 2001 acquisition of Nobelclad, DMC entered into a $4,000,000 term loan agreement with SNPE. The term loan bears interest at the Federal Funds Rate plus 3.0%.  Commencing September 30, 2002 and on the last day of each calendar quarter thereafter, principal payments of $333,333 are due, with a final principal payment of $333,337 being due on June 30, 2005.  In anticipation of its acquisition by DMC, Nobelclad acquired the stock of Nitro Metall and financed this acquisition with proceeds obtained from a term loan with a French bank in the amount of 1,448,266 Euros ($1,976,013 based upon the December 31, 2004 exchange rate).  This term loan carries interest at the Euro Interbank Offered Rate (“EURIBOR”) plus 0.4%.  Annual principal payments of 289,653 Euros begin on June 21, 2004 and are due on each anniversary date thereafter until final maturity on June 21, 2008.  The bank has the option of demanding early repayment of any outstanding loans if Groupe SNPE’s indirect ownership of Nobelclad falls below 50%.  Nobelclad also maintains a 2 million Euro ($2,728,800 based upon the December 31, 2004 exchange rate) intercompany working capital line with Groupe SNPE under which borrowings of $133,928 were outstanding as of December 31, 2004. This intercompany line bears interest at EURIBOR plus 1.5%.  Additionally, DMC maintains a 4,000,000 Swedish Krona line of credit with a Swedish bank for its Nitro Metall operations.  As of December 31, 2004, there were no outstanding borrowings under this line of credit and the line has a variable interest rate, which was 2.0% at December 31, 2004.

In December 2001, we obtained a $6,000,000 revolving line of credit with a U.S. bank that replaced the $4,500,000 credit facility between DMC and SNPE.  This bank line of credit is being used to finance ongoing working capital requirements of our U.S. operations.  Initial proceeds from the bank line of credit were used to repay $3,650,000 of borrowings that were outstanding under the credit facility with SNPE.  The bank line expires on December 4, 2005 and carries an interest rate equal to the bank’s prime rate plus 0.5%.  Borrowings under the line of credit are limited to a calculated borrowing base that is a function of inventory and accounts receivable balances and are secured by accounts receivable and inventories of our U.S. operations and by new investments in property, plant and equipment with respect to U.S. operations that are made during the term of the Agreement.  As of December 31, 2004, borrowing availability under the line of credit was approximately $2.8 million greater than the $3,215,712 in outstanding borrowings as of that date.

We believe that cash flow from operations and funds available under our current credit facilities and any future replacement thereof will be sufficient to fund working capital, debt service obligations and capital expenditure

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requirements of our current business operations for the foreseeable future.  However, a significant portion of our sales is derived from a relatively small number of customers; therefore, the failure to complete 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 our ability to meet cash requirements exclusively through operating activities. Consequently, any restriction on the availability of borrowing under our credit facilities could negatively affect our ability to meet future cash requirements. DMC attempts to minimize its risk of losing customers or specific contracts by continually improving product quality, delivering product on time and competing favorably on the basis of price. Risks associated with the availability of funds are minimized by borrowing from multiple lenders. The nature of DMC’s business is largely insulated from the negative effects of inflation on sales and operating income because the pricing on custom orders reflects current raw material and other manufacturing costs.

The Company’s existing loan agreements include various covenants and restrictions, certain of which relate to the payment of dividends or other distributions to stockholders, redemption of capital stock, incurrence of additional indebtedness, mortgaging, pledging or disposition of major assets and maintenance of specified financial ratios.  As of December 31, 2004, the Company is in compliance with all financial covenants and other provisions of its debt agreements.

The table below presents principal cash flows and related weighted-average interest rates by expected maturity dates for the Company’s debt obligations.

*   Reflected in accompanying consolidated balance sheets.

** Not reflected in accompany consolidated balance sheets.

Debt obligations.  For more information about our debt obligations, refer to Note 3 to the Company’s Consolidated Financial Statements.

Operating lease obligations.  Our operating lease obligations are primarily real estate and equipment leases used in the normal operation of the business

Purchase obligations.  Purchase obligations represent open purchase commitments.  These commitments are all short term in nature and in the normal course of the Company’s business.

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Net cash flows provided by operating activities for the year ended December 31, 2004 totaled $4,467,387.  Significant sources of operating cash flow included income from continuing operations of $4,402,298, non-cash depreciation and amortization expense of $1,387,560, a provision for deferred income taxes of $1,180,584, and $311,000 from the tax benefit related to stock options exercised during the year.  These sources of operating cash flow were partially offset by negative net changes in various components of working capital in the amount of $2,814,055.  Net negative changes in working capital included an increase in accounts receivable and inventories of $6,962,913 and $1,992,705, respectively.  These negative changes in working capital were partially offset by an increase in accounts payable and accrued expenses and other liabilities of  $3,129,109 and $2,374,854 respectively, and a decrease in prepaid expenses and other of $637,600.  The large increases in accounts receivable and inventories reflect the higher production and sales volume associated with the strong performance of our Explosive Metalworking business during the last half of 2004. Fortunately, we were able to finance a significant portion of the build-up in accounts receivable and inventories by increasing our accounts payable and accrued expenses.

Net cash flow used in investing activities for the year ended December 31, 2004 was $295,053 and consisted primarily of $1,138,063 in capital expenditures that was partially offset a  $580,000 reduction in the promissory note receivable relating to the sale of PMP and the collection of the note, the release of $190,000 in restricted cash from bond proceeds and a $73,900 decrease in other non-current assets.

Net cash flow used in financing activities for the year ended December 31, 2004 was $898,614.  Significant uses of cash for financing activities included related party debt repayments of $1,333,332 to SNPE, industrial development revenue bond principal payments of $1,120,000, related party lines of credit repayment of $624,220 to Groupe SNPE, and principal payment on our term loan with a French bank of $360,289.  These payments were partially offset by a net increase of $1,914,764 in bank lines of credit borrowings.

Cash flows used in discontinued operations totaled $1,479,466 and were primarily the result of the operating losses incurred by Spin Forge.

Net cash flows provided by operating activities for the year ended December 31, 2003 was $2,762,422.  Sources of operating cash flow consisted primarily of income from continuing operations of $1,284,444, non-cash depreciation and amortization expense of $1,247,956, and a provision for deferred income taxes of 1,328,439.  Net negative changes in various components of working capital totaling $1,098,417 partially offset the foregoing sources of operating cash flow.  Negative changes in working capital included an increase in inventories of $1,019,918, an increase in prepaid and other of $382,232, and a decrease in accrued expenses and other liabilities of $1,174,993.  These negative changes in working capital were partially offset by a $1,257,047 decrease in accounts receivable and a $221,679 increase in accounts payable.

Net cash flow used in investing activities for the year ended December 31, 2003 was $827,187 and consisted primarily of $918,707 in capital expenditures that was partially offset by a $92,317 decrease in other non-current assets.

Net cash flow used in financing activities for the year ended December 31, 2003 was $1,171,047.  Significant uses of cash for financing activities included related party debt repayments of $1,333,332 and industrial development revenue bond principal payments of $855,000.  These payments were partially offset by related party and bank lines of credit borrowings of $425,167 and 335,289 respectively.

Cash flows used in discontinued operations totaled $1,534,544 and were the result of the operating losses of Spin Forge and PMP as well as negative changes in working capital for these divisions.

Net cash flows provided by operating activities for the year ended December 31, 2002 totaled $5,695,795. Significant sources of operating cash flow included income from continuing operations of $3,925,728, non-cash

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depreciation and amortization expense of $1,252,257, and a provision for deferred income taxes of $2,223,053.  Net negative changes in various components of working capital totaling $1,696,356 partially offset these sources of cash flow.  Negative changes in working capital included an increase in accounts receivable and a decrease in accounts payable of $1,982,469 and $1,081,115, respectively.  A decrease in inventories of $1,086,180 helped to partially offset these negative changes in working capital.

Net cash flow used in investing activities for the year ended December 31, 2002 was $1,393,392 and consisted primarily of $1,421,746 in capital expenditures.

Financing activities for the year ended December 31, 2002 used $3,746,352 of cash.  Significant uses of cash for financing activities included a $2,451,266 reduction in borrowings under bank lines of credit, related party debt repayments of $815,107 and industrial development revenue bond principal payments of $795,000.

Cash flows used in discontinued operations totaled $1,432,380 and were the result of the operating losses of Spin Forge and PMP as well as negative changes in working capital for those divisions.

We anticipate that, for the foreseeable future, significant amounts of available cash flows will be utilized for:

•                  operating expenses to support our domestic and foreign manufacturing operations;

•                  capital expenditures;

•                  debt service requirements; and

•                  other general corporate expenditures, including dividend payments when and if adopted by the Company.

We expect cash inflows from operating activities to exceed outflows for the full year 2005. However, our success depends on the execution of our strategies, including our ability to:

•                  secure an adequate level of new customer orders at all operating divisions; and

•     continue to implement the most cost-effective internal processes.

Based on available cash resources, anticipated capital expenditures and projected operating cash flow, we believe that we will be able to fully fund our operations during 2005.  In making this assessment, we have considered:

•                  presently scheduled debt service requirements during 2005, as well as the availability of funding related to our line of credit with SNPE and our bank lines of credit;

•                  the anticipated level of capital expenditures in 2005; and

•                  our expectation of realizing positive cash flow from operations in 2005.

In response to the SEC’s Release No. 33-8040, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, we identified the most critical accounting principles upon which our financial status depends. We determined the critical principles by considering accounting policies that involve the most complex or subjective decisions or assessments. We identified our most critical accounting policies to be those related to revenue recognition, asset impairments, inventory valuation and impact of foreign currency exchange rate risks.

Revenue Recognition.  The Company’s contracts with its customers generally require the production and delivery of multiple units or products. The Company records revenue from its contracts using the completed contract method as products are completed and shipped to the customer. For contracts that require multiple shipments, revenue is recorded only for the units included in each individual shipment.  If, as a contract proceeds toward completion, projected total cost on an individual contract indicates a potential loss, the Company provides currently for such anticipated loss.

Asset Impairments.  The Company reviews its long-lived assets and certain identifiable intangibles to be held and used by the Company for impairment whenever events or changes in circumstances indicate their carrying amount may

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not be recoverable. In so doing, the Company estimates the future net cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future net cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized to reduce the asset to its estimated fair value. Otherwise, an impairment loss is not recognized.  Long-lived assets and certain identifiable intangibles to be disposed of, if any, are reported at the lower of carrying amount or fair value less cost to sell.

Goodwill.  Goodwill is tested for impairment at least annually on reporting units one level below the segment level and any impairment is based on the reporting unit’s estimated fair value.  Fair value can be determined based on discounted cash flows, comparable sales or valuations of similar businesses.  Impairment occurs when the carrying amount of goodwill exceeds its estimated fair value.  The Company’s policy is to test goodwill for impairment in the fourth quarter of each year unless an indicator of impairment arises earlier.

The entire amount of goodwill, which had a carrying value of $847,076 on the Consolidated Balance Sheet as of December 31, 2004, relates to the Company’s U.S. Clad Metal Products division.  Based on the analysis performed in the fourth quarter of 2004, no impairment was recorded to the carrying value of goodwill.

Impact of Foreign Currency Exchange Rate Risks.  The functional currency for the Company’s foreign operations is the applicable local currency for each affiliate company. Assets and liabilities of foreign subsidiaries for which the functional currency is the local currency are translated at exchange rates in effect at period-end, and the statements of operations are translated at the average exchange rates during the period.  Exchange rate fluctuations on translating foreign currency financial statements into U.S. dollars that result in unrealized gains or losses are referred to as translation adjustments. Cumulative translation adjustments are recorded as a separate component of stockholders’ equity and are included in other cumulative comprehensive income (loss). Transactions denominated in currencies other than the local currency are recorded based on exchange rates at the time such transactions arise. Subsequent changes in exchange rates result in transaction gains and losses which are reflected in income as unrealized (based on period-end translations) or realized upon settlement of the transactions. Cash flows from the Company’s operations in foreign countries are translated at actual exchange rates when known, or at the average rate for the period. As a result, amounts related to assets and liabilities reported in the consolidated statements of cash flows will not agree to changes in the corresponding balances in the consolidated balance sheets. The effects of exchange rate changes on cash balances held in foreign currencies are reported as a separate line item below cash flows from financing activities.

Income Taxes.  The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No.  109, Accounting for Income Taxes (SFAS 109) which requires the recognition of deferred tax assets and deferred tax liabilities for the expected future income tax consequences of transactions that have been included in the Consolidated Financial Statements or tax returns.  Deferred tax assets and liabilities are determined based on the temporary differences between the Consolidated Financial Statement base and the tax base of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.  The Company believes that deferred tax assets will more likely than not be recovered from future projected taxable income and as such no allowance has been recorded on the deferred tax assets in the Consolidated Balance Sheet as of December 31, 2004.

During the fourth quarter of 2004, the Company completed special tax studies related to research and development tax credits, foreign tax credits and extraterritorial income exclusions.  As a result of these tax studies, the Company recognized approximately $500,000 in tax benefits in its 2004 tax provision calculation that increased its reported 2004 net income by the same amount.  The Company will closely monitor the availability of similar tax benefits in the future but cannot currently estimate the amount of such tax benefits, if any, which may be realized in the future.

We have no obligations, assets or liabilities other than those disclosed in the Consolidated Financial Statements forming part of this Form 10-K; no trading activities involving non-exchange traded contracts accounted for at fair value; and no relationships and transactions with persons or entities that derive benefits from their non-independent relationship with us or our related parties.

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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 the majority stockholder, Groupe SNPE, as the controlling stockholder of the Company with respect to the Company and its businesses; 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 which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

In December 2004, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”), which is a revision of SFAS 123.  SFAS 123R supersedes APB 25 and amends SFAS 95, Statement of Cash Flows.  Generally the approach in SFAS 123R is similar to the approach described in SFAS 123.  However, SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values.  Pro forma disclosure is no longer an option.  SFAS 123R must be adopted no later than July 1, 2005.

The Company may adopt the requirements of SFAS 123R using either a modified prospective method or a modified retrospective method.  The Company will adopt SFAS 123R in the third quarter of 2005 and is currently evaluating the effect that the adoption will have on its financial position and results of operations.

In November 2004, the FASB issued SFAS 151, Inventory Costs, which amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing.  This statement requires abnormal amounts of idle facility expense, freight, handling costs and wasted material to be excluded from inventory costing and instead included as period expenses.  In addition, this standard requires the allocation of fixed production overhead to be based on normal capacity of the production facilities.  The Company does not believe the adoption of this standard in 2005 will have a significant impact on its results of operations.

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ITEM 7A.                                            Quantitative and Qualitative Disclosure about Market Risk

The table below provides information about the Company’s financial instruments that are sensitive to changes in interest rates, primarily debt obligations. Since most of the Company’s obligations carry variable interest rates, there is no material difference between the book value and the fair value of those obligations.

The functional currencies for the foreign operations of Nobelclad and Nitro Metall are the Euro and the Swedish Krona, respectively. Thus, the major foreign exchange risks relates to the Euro / Swedish Krona and Euro / U.S. Dollar conversion rates. Additionally, the Company occasionally enters into transactions denominated in currencies other than the local currency, which exposes us to other foreign exchange risks.  Sales made in currencies other than U.S. Dollars accounted for 30%, 35% and 28% of total sales for the years ended 2004, 2003 and 2002, respectively.

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ITEM 8.     Financial Statements and Supplementary Data

DYNAMIC MATERIALS CORPORATION AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2004 and 2003 and for the Three Years Ended
December 2004, 2003 and 2002

The consolidated financial statement schedules required by Regulation S-X are filed under Item 15 “Exhibits and Financial Statement Schedules”.

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Report of Independent Registered Public Accounting Firm

To the Stockholders and the

Board of Directors of Dynamic Materials Corporation:

We have audited the accompanying consolidated balance sheets of Dynamic Materials Corporation and subsidiary as of December 31, 2004 and 2003 (restated – see Note 8), and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004. These consolidated financial statements are the responsibility of Dynamic Materials Corporation’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  We were not engaged to perform an audit of the Company’s internal control over financial reporting.  An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made my management, and evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Dynamic Materials Corporation and subsidiary as of December 31, 2004 and 2003 (restated – see Note 8), and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with U.S. generally accepted accounting principles.

As discussed in Note 2 to the consolidated financial statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2004 AND 2003

The accompanying notes are an integral part of these Consolidated Financial Statements.

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2004 AND 2003

The accompanying notes are an integral part of these Consolidated Financial Statements.

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002