SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended June 30, 1997
or
( ) Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from to
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Commission File Number: 001-07252
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DYNAMICS CORPORATION OF AMERICA
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(Exact name of registrant as specified in its charter)
NEW YORK 13-0579260
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
475 Steamboat Road, Greenwich, Connecticut 06830-7197
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(Address of principal executive offices) (Zip Code)
(203) 869-3211
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(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past
90 days.
Yes X No
--------- ------------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of July 30, 1997:
Voting 3,834,031
Non-Voting 3,569
DYNAMICS CORPORATION OF AMERICA
AND SUBSIDIARIES
INDEX
Page No.
--------
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
As of June 30, 1997 and December 31, 1996 2
Condensed Consolidated Statements of
Income - For the Three and Six Months
Ended June 30, 1997 and 1996 3
Condensed Consolidated Statement of
Stockholders' Equity - For the Six
Months Ended June 30, 1997 4
Condensed Consolidated Statements of
Cash Flows - For the Six Months
Ended June 30, 1997 and 1996 5
Notes to Condensed Consolidated
Financial Statements 6-9
Item 2. Management's Discussion and
Analysis of Results of Operations
and Financial Condition 10-14
Part II - Other Information:
Item 6. Exhibits and Reports on Form 8-K 15
Signature Page 16
Part 1 - Financial Information
Item 1 - Financial Statements
DYNAMICS CORPORATION OF AMERICA
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AT JUNE 30, 1997 (Unaudited) and DECEMBER 31, 1996
(DOLLAR AMOUNTS IN THOUSANDS)
June 30, December 31,
1997 1996
ASSETS -------- ------------
Current Assets:
Cash and cash equivalents $ 2,507 $ 1,146
Accounts Receivable, less allowance
of $584 and $536 22,288 19,583
Inventories - Note 1 24,091 22,624
Other current assets 1,311 1,196
Deferred income taxes 5,051 4,801
-------- --------
TOTAL CURRENT ASSETS 55,248 49,350
Property, Plant and Equipment - at
cost, less accumulated depreciation
and amortization of $37,956 and
$37,113 6,532 5,121
Equity Investment in CTS Corporation -
Notes 2 and 5 89,570 84,046
Other Assets 2,309 2,219
-------- --------
TOTAL ASSETS $153,659 $140,736
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current installments of long-term
debt $ 2,054 $ 50
Accounts payable 6,584 6,898
Accrued expenses and sundry
liabilities 17,747 15,291
Federal income taxes payable 1,297 1,578
-------- --------
TOTAL CURRENT LIABILITIES 27,682 23,817
Long-term Debt - Note 3 5,364 374
Other Liabilities 1,197 1,269
Deferred Income Taxes 644 238
-------- --------
TOTAL LIABILITIES 34,887 25,698
Contingencies - Note 7
Stockholders' Equity:
Preferred stock, par value $1 per
share -- authorized 894,000
shares - none issued
Series A Participating Preferred
Stock, par value $1 per share -
authorized 106,000 shares -
none issued
Stockholder's equity - see
accompanying statement 118,772 115,038
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $153,659 $140,736
======== ========
See accompanying notes to condensed consolidated financial statements.
DYNAMICS CORPORATION OF AMERICA
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED June 30, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
Unaudited
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
-------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $35,826 $33,326 $66,228 $61,190
Cost of sales 27,197 26,798 49,408 49,587
------- ------- ------- -------
Gross profit 8,629 6,528 16,820 11,603
Selling, general and
administrative expenses 6,296 6,027 12,488 12,583
------- ------- ------- -------
2,333 501 4,332 (980)
Other expense, net - Note 4 (509) (219) (649) (102)
Takeover defense and merger
costs - Note 5 (5,594) (5,594)
------- ------- ------- -------
Income (loss) from continuing
operations before items
shown below (3,770) 282 (1,911) (1,082)
Income tax charge (benefit)
- Note 6 (743) 117 (55) (413)
------- ------- ------- -------
Income (loss) from continuing
operations before equity
in CTS Corporation (3,027) 165 (1,856) (669)
Income from equity investment
in CTS Corporation - Notes
2 and 6 3,253 1,974 5,890 6,034
------- ------- ------- -------
Income from continuing
operations 226 2,139 4,034 5,365
Reclassification of provision
for Fermont disposition,
net of taxes 251
------- ------- ------- -------
Net income $ 226 $ 2,139 $ 4,034 $ 5,616
======= ======= ======= =======
Weighted average number of
common and common equivalent
shares utstanding 3,839,592 3,819,080 3,829,954 3,823,427
========= ========= ========= =========
Income per common share:
Continuing operations $ .05 $ .56 $ 1.05 $ 1.40
Reclassification of
provision for Fermont
disposition .07
------- ------- ------- -------
Net income $ .05 $ .56 $ 1.05 $ 1.47
======= ======= ======= =======
Dividends per common share - - $ .10 $ .10
======= ======= ======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
DYNAMICS CORPORATION OF AMERICA
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(DOLLAR AMOUNTS IN THOUSANDS)
Unaudited
<TABLE>
<CAPTION>
Common Stock
(Authorized 10,000,000
voting shares and 600,000
non-voting shares)
---------------------------
Paid-in Total
Shares Additional Retained Deferred Stockholders'
Outstanding* Par Value Capital Earnings Compensation Equity
------------ --------- ---------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1996 3,810,810 $381 $11,518 $103,365 $(226) $115,038
Shares issued and
issuable from treasury
pursuant to benefit plans 33,000 3 1,352 (1,297) 58
Shares acquired for
treasury and pursuant
to benefit plans (5,418) (107) (55) (162)
Amortization of deferred
compensation and related
tax benefit 88 98 186
Net income 4,034 4,034
Cash dividends (382) (382)
--------- ---- ------- -------- ------- --------
Balance at June 30, 1997 3,838,392 $384 $12,851 $106,962 $(1,425) $118,772
========= ==== ======= ======== ======= ========
</TABLE>
* Net of shares held in treasury at $.10 par value per share (3,336,769
voting shares at June 30, 1997 and 3,364,351 voting shares at December
31, 1996). The cumulative cost of treasury shares held at June 30, 1997
amounted to approximately $35,500. Includes non-voting shares
outstanding of 3,569 at June 30, 1997.
See accompanying notes to condensed consolidated financial statements.
DYNAMICS CORPORATION OF AMERICA
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
Unaudited
June 30, June 30,
1997 1996
------- --------
Operating activities:
Net income $ 4,034 $ 5,616
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 989 637
Deferred income taxes 156 (2,412)
Income before income taxes from equity
investment in CTS (6,353) (3,861)
Dividends from CTS 829 760
Decrease (increase) in other assets (90) 74
Decrease in other liabilities (72) (50)
Issuance of Company common stock 58 10
Other--net 186 99
Changes in operating assets and
liabilities:
Accounts receivable (2,705) (946)
Inventory (1,467) 433
Other current assets (115) (1,331)
Accounts payable, accrued expenses
and sundry liabilities 2,142 (169)
Federal income taxes payable (281) 426
------- ------
Net cash used in operating activities (2,689) (714)
------- ------
Investing activities:
Purchases of property, plant and equipment (2,378) (1,317)
------- ------
Net cash used in investing activities (2,378) (1,317)
------- ------
Financing activities:
Principal payments under capital lease
obligations (28) (34)
Borrowings under lines of credit 7,000 1,750
Purchases of treasury stock (162) (365)
Dividends paid (382) (383)
------- ------
Net cash provided by financing activities 6,428 968
------- ------
Increase (decrease) in cash and cash
equivalents 1,361 (1,063)
Cash and cash equivalents at beginning
of period 1,146 1,767
------- ------
Cash and cash equivalents at end of
period $ 2,507 $ 704
======= ======
See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not
include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion
of Management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the six months ended June 30, 1997 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1997. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31,
1996.
Note 1 - Inventories:
Quarterly inventories are estimated based on perpetual inventory records
of the Company and the gross profit method under the first-in, first-out
and the last-in, first-out methods.
Inventories are summarized as follows:
June 30, December 31,
1997 1996
(in thousands)
Raw materials and supplies $ 6,465 $ 6,276
Work in process 7,882 7,024
Finished goods 3,492 5,466
------- -------
17,839 18,766
------- -------
Inventories subject to progress
billings 12,473 5,184
Progress billings (6,221) (1,326)
------- -------
6,252 3,858
------- -------
$24,091 $22,624
======= =======
Note 2 - Equity Investment in CTS Corporation:
At June 30, 1997, the Company's holdings aggregated 2,303,100 shares of
CTS Corporation ("CTS") common stock, unchanged from year-end, and the
Company's percentage of equity ownership in CTS declined to 44.0% from
44.1% due to stock issuances by CTS.
The market value of the Company's investment in CTS amounted to
$158,770,000 at June 30, 1997 and $98,458,000 at December 31, 1996. The
market value at August 11, 1997 was $189,430,000. Under the Control Share
Acquisitions Chapter of the Indiana Business Corporation Law, 1,020,000
of the Company's shares of CTS common stock presently have no voting
rights.
Summarized unaudited financial information derived from CTS' Quarterly
Report on Form 10-Q for the three and six months ended June 29, 1997
follows:
Three Months Ended Six Months Ended
--------------------- ----------------------
June 29, June 30, June 29, June 30,
1997 1996 1997 1996
-------- -------- -------- ---------
(in thousands)
Net sales $107,482 $ 83,820 $198,751 $164,006
======== ======== ======== ========
Gross profit $ 28,837 $ 21,874 $ 54,128 $ 41,673
======== ======== ======== ========
Net earnings $ 8,458 $ 5,340 $ 15,412 $ 9,754
======== ======== ======== ========
The Company's reported share of CTS' net earnings in the first quarter
of 1996 increased by $2,466,000, or $.64 per share, for the favorable
adjustment to taxes previously provided on the Company's cumulative
share of CTS' undistributed earnings through January 1, 1996.
Note 3 - Long-Term Debt:
The Company had $7,000,000 outstanding under its Revolving Credit
Agreement with banks at June 30, 1997.
Note 4 - Other Expense, Net:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1997 1996 1997 1996
------- ------- ------ ------
(in thousands)
Income (Expense):
Interest:
Income $ 2 $ 4 $ 4 $ 13
Expense (69) (69) (84) (127)
------ ------ ------ ------
(67) (65) (80) (114)
Environmental costs (76) (200) (138) (200)
Other, net (366) 46 (431) 212
------ ------ ------ ------
($509) ($219) ($649) ($102)
====== ====== ====== ======
Note 5 - Unsolicited Tender Offer and CTS Merger Agreement:
On March 31, 1997, WHX Corporation ("WHX") announced an unsolicited
tender offer to acquire up to 649,000 shares of the Company's common
stock at $40 per share. WHX subsequently offered to purchase any and all
outstanding shares at $45 per share. The Company's Board of Directors
unanimously determined that the WHX offer was inadequate and not in the
best interests of the Company and its stockholders. WHX also announced
its intention to solicit proxies to, among other things, replace members
of the Company's Board of Directors at the Company's Annual Meeting of
Stockholders. WHX's offer was later increased to $56 per share.
On May 9, 1997, the Company and CTS executed an Agreement and Plan of
Merger providing that CTS would commence a tender offer for up to 49.9%
of the Company's outstanding common shares at $55 cash per share,
subsequently amended to $56.25 cash per share, to be followed by a
merger in which each remaining common share will be converted into the
right to receive 0.88 shares of CTS common stock.
Both tender offers expired on June 13, 1997. Based on available
information, WHX currently owns 516,440 DCA shares (13.5%) and CTS owns
1,215,264 DCA shares (31.7%).
On July 17, 1997, WHX agreed to vote for the merger of CTS and DCA and
to oppose any competing transaction on the condition that DCA's
shareholders have the option of receiving in the merger either 0.88 CTS
shares or $58.00 in cash for each DCA share; and CTS and the Company
amended the merger agreement to provide for the $58 cash election
option. The cash consideration will be prorated to the extent that the
total number of DCA shares for which cash elections are made exceeds
49.9% of DCA shares less the DCA shares owned by CTS prior to the
merger. The merger remains subject to approval by shareholders of both
CTS and DCA and other customary conditions. The approval by DCA
shareholders requires a two-thirds shareholder vote. It is expected that
DCA and CTS shareholders will be asked to approve the merger in
September.
In the course of responding to and defending against the unsolicited
tender offer and the proxy solicitation and negotiating a merger
agreement with CTS, the Company incurred certain costs, including legal
fees, investment banking fees and the payment of a nonrefundable $2
million inducement fee to CTS upon signing the Agreement and Plan of
Merger on May 9, 1997. These costs totaled $5,594,000 ($4,168,000, or
$1.09 loss per share, net of tax benefits).
Note 6 - Income Tax Charge (Benefit):
The effective rates for tax benefits for the three and six months ended
June 30, 1997 were substantially lower than the Federal statutory rate
due to the effect of certain non-deductible takeover defense and merger
costs. The effective rates for tax charges (benefits) for the three and
six months ended June 30, 1996 exceeded the Federal statutory rate due
to the effect of state income taxes.
Note 7 - Contingencies:
The Company is a supplier to the United States Government under
contracts and subcontracts on which there are cost allocation, cost
allowability and compliance issues under examination by various agencies
or departments of the Federal government. In the course of the
resolution of these issues, the Company may be required to adjust
certain prices or refund certain payments on its government contracts
and subcontracts. The Company believes that any such price adjustments
or refunds will not have a materially adverse effect on the financial
position or results of operations of the Company.
The Company has been notified by the U.S. Environmental Protection
Agency ("EPA") that it is a Potentially Responsible Party ("PRP")
regarding hazardous waste cleanup in the vicinity of a Company site in
California, and has elected to participate in the allocation of
responsibility proceedings conducted by the PRP group formed in
connection therewith. In February 1996, the Company settled the past
costs portion of a 1995 lawsuit by a state environmental agency to
recover past and future response costs related to the cleanup of a
non-Company site in Pennsylvania as to which the Company was earlier
designated a PRP; and the Company has also been sued by certain of the
PRPs who have agreed with the state agency to fund other past response
costs at that site to recover a portion of those costs from the Company
and other PRPs who have not agreed to participate in such funding. The
Company is also a defendant in two lawsuits seeking contribution for
Superfund cleanup costs relating to two other non-Company sites in
Pennsylvania. Based upon its knowledge of the extent of the Company's
exposure and current statutes, rules and regulations, and emerging
alternative remedial approaches, management believes that the
anticipated costs resulting from claims and proceedings with respect to
the above mentioned sites, including remediation, the extent and cost of
which are presently unknown, will not materially affect the financial
position or results of operations of the Company.
With respect to other claims and actions against the Company, it is the
opinion of Management that they will not have a material effect on the
financial position of the Company.
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Results of Operations - Three Months Ended June 30, 1997 Compared to
Three Months Ended June 30, 1996
- --------------------------------------------------------------------
Sales increased $2,500,000 or 7.5%. Sales in the Electrical Appliances
and Electronic Devices segment increased $2,096,000. Increases in sales
of heat dissipating devices for computers and oscillators were offset in
part by a decline in sales of electrical appliances, primarily due to a
decision by Waring's management late in 1996 to de-emphasize low margin
consumer products and their marketing through mass merchants and to
focus instead on higher quality and higher margin consumer and
commercial products. Sales in the Fabricated Metal Products and
Equipment segment increased $687,000, as security, air and systems
product sales improved. Sales in the Power and Controlled Environmental
Systems segment decreased $283,000, as sales declines for power plant
and thermal products were partially offset by sales increases for engine
generator sets under the Tactical Quiet ("TQ") contract and for
transportable medical units.
Gross profit increased $2,101,000 and increased as a percentage of sales
to 24.1% from 19.6%. Gross profit in the Electrical Appliances and
Electronic Devices segment increased due to sales increases for heat
dissipating devices for computers and oscillators, and favorable sales
mix on quartz crystal products and electrical appliances. Gross profit
increased in the Fabricated Metal Products and Equipment segment due to
sales increases and improvement in manufacturing efficiency at the
Scranton, Pennsylvania plant compared to the prior year. Gross profit
increased slightly in the Power and Controlled Environmental Systems
segment, as improved margins on engine generator sets due to increased
sales, and gross profit of $223,000 ($138,000 net of income taxes)
related to a supplemental delay claim settlement, under the TQ contract,
and on transportable medical suites were offset by decreased margins on
lower sales of power plant products.
Selling, general and administrative expenses increased $269,000 but
declined as a percentage of sales to 17.6% from 18.1%. Increased
performance-related incentive costs were offset in part by salary and
benefit savings resulting from last year's staff reductions at the
Waring and Anemostat Scranton operations.
Other expense, net increased $290,000, as environmental costs declined
$124,000 and other net costs increased $412,000, primarily related to an
unfavorable judgement in a customer contract dispute and the costs of
litigation against a former supplier of an electrical appliance.
In the course of responding to and defending against the unsolicited
tender offer and proxy solicitation of WHX and negotiating a merger
agreement with CTS, the Company incurred certain costs during the
quarter totaling $5,594,000, which included legal fees, investment
banking fees and the payment of a nonrefundable $2,000,000 inducement
fee to CTS upon signing the Agreement and Plan of Merger on May 9, 1997.
The Company recorded an income tax benefit of $743,000, a 19.7% tax
rate, for the current year's period, and an income tax charge of
$117,000, a 41.5% tax rate, for the prior year's period. The effective
benefit rate is substantially lower than the Federal statutory rate due
to the effect of certain non-deductible takeover defense and merger
costs. Without these costs, the effective tax rate would have been
37.4%. The effective rate for the prior year's period exceeds the
Federal statutory rate due to the effect of state income taxes.
Income from the Company's equity investment in CTS Corporation increased
$1,279,000 as CTS' quarterly net earnings increased by $3,118,000
compared to the prior year period. The Company's percentage of equity
ownership decreased to 44.0% for the current period, compared to 44.1%
at June 30, 1996, due to stock issuances by CTS.
Results of Operations - Six Months Ended June 30, 1997 Compared to Six
Months Ended June 30, 1996
- ----------------------------------------------------------------------
Sales increased $5,038,000 or 8.2%. Sales in the Electrical Appliances
and Electronic Devices segment increased $3,733,000. Increases in sales
of heat dissipating devices for computers and oscillators were partially
offset by sales declines for electrical appliances, primarily due to a
decision by Waring's management late in 1996 to de-emphasize low margin
consumer products and their marketing through mass merchants and to
focus instead on higher quality and higher margin consumer and
commercial products. Sales in the Fabricated Metal Products and
Equipment segment increased $734,000, as air, security, door and systems
product sales improved. Sales in the Power and Controlled Environmental
Systems segment increased $571,000, as sales increases of engine
generator sets, and revenues related to a delay claim settlement, under
the TQ contract and of transportable medical units were partially offset
by sales declines for power plant products.
Gross profit increased $5,217,000 and increased as a percentage of sales
to 25.4% from 19.0%. Gross profit in the Electrical Appliances and
Electronic Devices segment increased due to sales increases for
heat dissipating devices for computers and oscillators, and favorable
sales mix on quartz crystal products and electrical appliances. Gross
profit increased in the Fabricated Metal Products and Equipment segment
due to sales increases and improvement in manufacturing efficiency at
the Scranton, Pennsylvania plant compared to the prior year's period.
Gross profit increased in the Power and Controlled Environmental Systems
segment, as increased shipments of engine generator sets and gross
profit of $951,000 ($597,000 net of income taxes) related to a delay
claim settlement under the TQ contract and gross profit increases for
transportable medical units were partially offset by decreases for power
plant products.
Selling, general and administrative expenses decreased $95,000 and
declined as a percentage of sales to 18.9% from 20.6%. Salary and
benefit savings resulting from last year's staff reductions at the
Waring and Anemostat Scranton operations were offset in part by
increased performance-related incentive costs.
Other expense, net increased $547,000, as environment costs declined
$62,000 and other net costs increased $643,000, primarily related to an
unfavorable judgement in a customer contract dispute and the costs of
litigation against a former supplier of an electrical appliance.
In the course of responding to and defending against the unsolicited
tender offer and proxy solicitation of WHX and negotiating a merger
agreement with CTS, the Company incurred certain costs during the six
months totaling $5,594,000, which included legal fees, investment
banking fees and the payment of a nonrefundable $2,000,000 inducement
fee to CTS upon signing the Agreement and Plan of Merger on May 9, 1997.
The Company recorded income tax benefits of $55,000, a 2.9% tax rate,
for the current year's period and $413,000, a 38.2% tax rate, for the
prior year's period. The effective benefit rate for the current year's
period is substantially lower than the Federal statutory rate due to the
effect of certain non- deductible takeover defense and merger costs.
Without these costs, the effective tax rate would have been 37.2%. The
effective rate for the prior year's period exceeds the Federal statutory
rate due to the effect of state income taxes.
Income from the Company's equity investment in CTS decreased $144,000
due to last year's first quarter $2,466,000 favorable adjustment to
taxes previously provided on the Company's cumulative share of CTS'
undistributed earnings through January 1, 1996. (See Note 2 - Equity
Investment in CTS Corporation in the Notes to the Condensed Consolidated
Financial Statements). CTS' six month net earnings increased by
$5,658,000 compared to the prior year. The Company's percentage of
equity ownership decreased to 44.0% for the current period, compared to
44.1% at June 30, 1996, due to stock issuances by CTS.
Beginning on April 1, 1996, the Fermont Division's results of operations
are included in the Company's Consolidated Statements of Income.
Reported results for prior periods have been reclassified, including a
$251,000 reversal for the six months ended June 30, 1996 of the
operating loss provision for Fermont recorded in a prior period.
Financial Condition
Cash and cash equivalents increased $1,361,000 during the six months
ended June 30, 1997. Cash of $2,689,000 was used in operating
activities, principally to pay takeover defense and merger costs and to
fund increases in accounts receivable and inventories, which were offset
in part by increases in accounts payable and accrued expenses. Cash of
$2,378,000 was used in investing activities to acquire machinery and
equipment. Cash of $6,428,000 was provided by financing activities, as
borrowings increased by $7,000,000. The Company also paid dividends and
purchased treasury stock.
Cash at June 30, 1997 amounted to $2,507,000. During the six month
period, the Company borrowed $7,000,000 under its $37,000,000 Revolving
Credit Agreement with its banks. The Company presently has $31,500,000
available under the Agreement, in addition to a $9,000,000 uncommitted
line with a bank.
Liquidity and financial resources are considered adequate to fund
planned Company operations, including capital expenditures, payment of
dividends and additional stock purchases, if any, and the payment of
takeover defense and merger costs, presently estimated at $10.5 million.
The Company intends to continue its stated policy of reviewing potential
acquisitions of companies and product lines which it believes would
enhance its growth and profitability.
Management anticipates that the Company's deferred tax assets will be
realized based upon its expectation of future taxable income. The
Company will require taxable income of $15,639,000 to realize its net
deferred tax assets, which are $5,956,000, excluding deferred tax
liabilities of $1,549,000 at June 30, 1997 for the undistributed
earnings of the Company's equity investment in CTS Corporation. Also,
under applicable carryback provisions of the Internal Revenue Code,
prior years' taxable income could be utilized to realize a substantial
portion of the deferred tax assets.
With respect to environmental matters (see Note 7 - Contingencies in the
Notes to the Condensed Consolidated Financial Statements), the Company
incurred costs of $110,000 and $235,000 for managing hazardous
substances or pollutants during the current three and six month periods,
compared to $325,000 and $426,000 for the comparable prior year periods.
In complying with federal, state and local environmental protection
statutes and regulations, the Company has altered or modified certain
manufacturing processes and expects to continue to do so in the future.
Such modifications to date have not significantly increased capital
expenditures or materially affected earnings or the competitiveness of
the Company.
In connection with the WHX tender offer and proxy solicitation and the
CTS Merger Agreement, the Company has incurred and expects to continue
to incur costs, including fees for investment bankers and legal counsel,
which are significant and will negatively impact future operating
results and cash flows. The Board of Directors has authorized the
Company to enter into various severance arrangements with key employees
which will require lump sum payments in the event of a change in control
(as defined in the agreements) followed by certain terminations of
employment. Certain lump sum payments would also be required in the
event of a change in control followed by certain terminations of
employment under the employment contracts dated February 1, 1996, as
amended, with Andrew Lozyniak, Patrick J. Dorme and Henry V. Kensing.
(See Note 5 - Unsolicited Tender Offer and CTS Merger Agreement in the
Notes to the Condensed Consolidated Financial Statements.)
The Financial Accounting Standards Board ("FASB") recently issued FASB
Statement No. 128, "Earnings per Share," which the Company is required
to adopt for the quarter and year ended December 31, 1997. The statement
simplifies the standards for computing earnings per share previously
found in APB Opinion No. 15, "Earnings per Share." It replaces the
presentation of primary earnings per share ("EPS") with a presentation
of basic EPS. Earlier adoption is not permitted under the Statement, but
restatement of prior periods is required once adopted. Restatement of
prior period EPS data is not expected to have a material effect on prior
period EPS numbers.
The FASB recently issued Statement No. 130, "Reporting Comprehensive
Income," which the Company is required to adopt for the quarter ended
March 31, 1998. The Company anticipates no substantial impact on its
financial position or results of operations upon adoption of Statement
No. 130.
The FASB recently issued Statement No. 131, "Disclosures about Segments
of an Enterprise and Related information," which the Company is required
to adopt for the year ended December 31, 1998. The statement changes the
way public companies report information about segments of their business
in their annual financial statements and requires them to report
selected segment information in their quarterly reports issued to
shareholders. The Company has not yet decided whether it will elect to
adopt Statement No. 131 earlier than required by the Statement.
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 Amended and Restated Agreement and Plan of
Merger, dated as of July 17, 1997, among
Dynamics Corporation of America, CTS
Corporation and CTS First Acquisition Corp.
(incorporated by reference to Exhibit (c)(6)
to Amendment No. 3 to the Schedule 13D of CTS
Corporation, filed July 18, 1997, with
respect to its investment in Dynamics
Corporation of America). DCA agrees to
furnish supplementally a copy of any omitted
schedule to the Securities and Exchange
Commission upon request.
27.1 Financial Data Schedule, for the period ended
June 30, 1997.
(b) On May 9, 1997, the Company reported on Form 8-K
under Item 5, Other Events, that it had amended
its Rights Agreement, dated as of January 30,
1986, as amended on December 27, 1995, pursuant to
which Series A Cumulative Participating Preferred
Stock Purchase Rights (the "Rights") were issued
to holders of the common stock of the Company.
The Rights Agreement now provides that the Board
of Directors of the Company shall determine the
day that a Distribution Date occurs following the
first public announcement of the commencement of,
or the intent of any Person (other than the
Company) to commence, a tender or exchange offer
for 25% or more of the outstanding shares of
Common Stock. Without such an amendment, the
Rights would have separated from the common
stock on May 10, 1997, as a result of WHX
Corporation's offer to purchase any and all shares
of the Company's Common Stock.
On May 12, 1997, the Company reported on Form 8-K
under Item 5, Other Events, that the Company, CTS
Corporation and CTS First Acquisition Corp. has
entered into an Agreement and Plan of Merger. The
Company also reported that it had amended its
Rights Agreement, as referenced above, so that the
Expiration Date shall mean the earliest to occur
of (a) February 14, 2006, or such date to which
the Rights may be extended pursuant to the Rights
Agreement, (b) the date on which the Rights are
redeemed as provided in the Rights Agreement or
(c) immediately prior to the Effective Time of the
Merger. The Rights Agreement also now provides
that none of CTS, any of its affiliates or
associates or any of its permitted assignees or
transferees shall be deemed an Acquiring Person
and neither a Distribution Date nor a Stock
Acquisition Date shall be deemed to occur by
reason of the Merger Agreement.
For both filings, the Company reported on Form 8-K
under Item 7, Financial Statements, Pro Forma
Financial Information and Exhibits, the applicable
exhibits for the filing.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
DYNAMICS CORPORATION OF AMERICA
(Registrant)
/s/ Patrick J. Dorme
--------------------------------
(Signature)
Patrick J. Dorme
Vice President - Finance and
Chief Financial Officer
Date: August 13, 1997
EXHIBIT INDEX
Exhibit
No. Description
------- -----------
2.1 Amended and Restated Agreement and Plan of Merger,
dated as of July 17, 1997, among Dynamics Corporation
of America, CTS Corporation and CTS First Acquisition
Corp. (incorporated by reference to Exhibit (c)(6) to
Amendment No. 3 to the Schedule 13D of CTS Corporation,
filed July 18, 1997, with respect to its investment in
Dynamics Corporation of America). DCA agrees to
furnish supplementally a copy of any omitted schedule
to the Securities and Exchange Commission upon request.
27.1 Financial Data Schedule, for the period ended June 30,
1997.
<TABLE> <S> <C>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
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