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, 1994 or ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File Number: 0-7304 DYNAMICS CORPORATION OF AMERICA (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 (Address of principal executive offices) (Zip Code) (203) 869-3211 (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, 1994: Voting 3,869,756 Non-Voting 4,765 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, 1994 and December 31, 1993 2 Condensed Consolidated Statements of Operations - For the Three and Six Months Ended June 30, 1994 and 1993 3 Condensed Consolidated Statement of Stockholders' Equity - For the Six Months Ended June 30, 1994 4 Condensed Consolidated Statements of Cash Flows - For the Six Months Ended June 30, 1994 and 1993 5 Notes to Condensed Consolidated Financial Statements 6 - 8 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 9 - 10 Part II - Other Information: Item 4. Submission of Matters to a Vote of Security Holders 11 Item 6. Exhibits and Reports on Form 8-K 11 Signature Page 12 Part 1 - Financial Information Item 1 - Financial Statements DYNAMICS CORPORATION OF AMERICA AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 1994 (Unaudited) and DECEMBER 31, 1993 (DOLLAR AMOUNTS IN THOUSANDS) June 30, December 31, ASSETS 1994 1993 Current Assets: Cash and cash equivalents $ 10,791 $ 8,969 Accounts receivable, less allowances of $604 and $531 16,713 16,287 Inventories - Note 1 20,423 18,092 Other current assets 1,807 1,897 Current assets of discontinued operation - Note 2 1,745 1,408 Deferred income taxes 4,564 4,542 TOTAL CURRENT ASSETS 56,043 51,195 Property, Plant and Equipment - at cost, less accumulated depreciation and amortization of $31,755 and $31,252 3,695 3,906 Equity Investment in CTS Corporation - Note 3 59,669 57,037 Other Assets 1,813 1,769 Deferred Income Taxes 1,311 1,457 TOTAL ASSETS $122,531 $115,364 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current installments of long-term debt $ 221 $ 400 Accounts payable 4,638 3,617 Accrued expenses and sundry liabilities 12,726 12,602 Federal income taxes payable 4,095 2,354 TOTAL CURRENT LIABILITIES 21,680 18,973 Long-term Debt 462 623 Other Liabilities 2,626 2,954 TOTAL LIABILITIES 24,768 22,550 Contingencies - Note 6 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 Stockholders' equity - see accompanying statement 97,763 92,814 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $122,531 $115,364 See accompanying notes to condensed consolidated financial statements. -2- DYNAMICS CORPORATION OF AMERICA AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED June 30, 1994 AND 1993 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) Unaudited For the three months For the six months ended June 30, ended June 30, 1994 1993 1994 1993 Net sales $23,998 $25,719 $46,714 $51,310 Cost of sales 17,309 19,203 33,998 38,063 Gross profit 6,689 6,516 12,716 13,247 Selling, general and administrative expenses 5,883 6,196 11,634 12,731 806 320 1,082 516 Other income, net - Note 4 201 123 251 182 Income from continuing operations before items shown below 1,007 443 1,333 698 Provision for income taxes - Note 5 375 183 488 271 Income from continuing operations before equity in CTS Corporation 632 260 845 427 Income from equity investment in CTS Corporation 1,101 467 1,821 918 Income from continuing operations 1,733 727 2,666 1,345 Income from discontinued operation, net of income tax charge of $2,022 - Note 2 3,334 3,334 Income before changes in accounting methods 5,067 727 6,000 1,345 Equity in CTS' cumulative effect to January 1, 1993 of changes in accounting methods - Note 3 (1,716) Net income (loss) $ 5,067 $ 727 $ 6,000 $ (371) Weighted average number of common and common equivalent shares outstanding 3,880,117 3,902,805 3,882,964 3,903,644 Income (loss) per common share: Continuing operations $ .45 $ .18 $ .69 $ .34 Discontinued operation .86 .86 Equity in CTS' cumulative effect to January 1, 1993 of changes in accounting methods (.44) Net income (loss) $ 1.31 $ .18 $ 1.55 $ (.10) Dividends per common share - - $ .10 $ .10 <FN> See accompanying notes to condensed consolidated financial statements. -3- DYNAMICS CORPORATION OF AMERICA AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 1994 (DOLLAR AMOUNTS IN THOUSANDS) Unaudited 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 EarningsCompensation Equity Balance at December 31, 1993 3,889,751 $389 $11,451 $81,125 $(151) $92,814 Shares issued and issuable from treasury pursuant to benefit plans 34,816 4 517 (507) 14 Shares acquired for treasury and pursuant to benefit plans (49,263) (5) (157) (561) (723) Amortization of deferred compensation and related tax charges (3) 50 47 Net income 6,000 6,000 Cash dividends (389) (389) Balance at June 30, 1994 3,875,304 $388 $11,808 $86,175 $(608) $97,763 <FN> * Net of shares held in treasury at $.10 par value per share (3,299,857 voting shares at June 30, 1994 and 3,285,410 voting shares at December 31, 1993). The cumulative cost of treasury shares held at June 30, 1994 amounted to approximately $34,800. Includes non-voting shares outstanding of 4,765 at June 30, 1994. See accompanying notes to condensed consolidated financial statements. -4- DYNAMICS CORPORATION OF AMERICA AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1994 AND 1993 (DOLLAR AMOUNTS IN THOUSANDS) Unaudited June 30, June 30, 1994 1993 Operating activities: Net income (loss) $ 6,000 $ (371) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 553 543 Deferred income taxes 124 29 Loss (income) from equity investment in CTS before income taxes (1,994) 772 Dividends from CTS 386 384 Increase in other assets (68) (52) Decrease in other liabilities (328) (150) Issuance of Company common stock 14 10 Other--net 47 53 Changes in operating assets and liabilities: Decrease (increase) in accounts receivable (426) 4,473 Increase in inventory (2,331) (233) Decrease (increase) in other current assets 90 (70) Increase (decrease) in accounts payable, accrued expenses and sundry liabilities 664 (1,826) Increase in Federal income taxes payable 1,741 158 Decrease (increase) in current assets of discontinued operation (337) 887 Net cash provided by operating activities 4,135 4,607 Investing activities: Purchases of CTS common stock (543) Purchases of property, plant and equipment (342) (362) Other 24 12 Net cash used in investing activities (861) (350) Financing activities: Principal payments under capital lease obligations and mortgages (340) (202) Purchases of treasury stock (723) (66) Dividends paid (389) (391) Net cash used in financing activities (1,452) (659) Increase in cash and cash equivalents 1,822 3,598 Cash and cash equivalents at beginning of period 8,969 6,095 Cash and cash equivalents at end of period $10,791 $ 9,693 See accompanying notes to condensed consolidated financial statements. -5- 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, 1994 are not necessarily indicative of the results that may be expected for the year ending December 31, 1994. 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, 1993. 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, 1994 1993 (in thousands) Raw materials and supplies $ 8,436 $ 7,251 Work in process 6,931 6,426 Finished goods 4,767 4,076 20,134 17,753 Inventories subject to progress billings 1,169 1,189 Progress billings (880) (850) 289 339 $20,423 $18,092 Note 2 - Discontinued Operations - Fermont Division: A proposed change order was submitted in April 1992 to the Government seeking equitable compensation for constructive changes and associated delays by the Government in a contract for the supply of 3KW generator sets to be manufactured by the Company's discontinued Fermont division. In May 1994 the Company agreed to accept $6,450,000 from the Government in settlement of the preproduction portion of its proposed change order. The settlement, net of related expenses and income taxes, amounted to $3,334,000, or $.86 per share, and has been reported as income from discontinued operations in the second quarter. Negotiations to settle the production portion of the proposed change order have not yet commenced. In July 1994, management bid on a major new government generator set contract and decided to pursue other contracts in order to enhance the value of Fermont. Accordingly, commencing on July 1, 1994, the division will no longer be classified as a discontinued operation but as a business held for sale and operating results will be reported as part of continuing operations. A reserve for projected losses for the ensuing twelve month period, including the estimated costs to consummate the division's sale and adjustments for the net realizable value of the division's assets, has been provided from the remainder of the reserve established in 1991 to discontinue the operation. -6- Note 3 - Equity Investment in CTS Corporation: At June 30, 1994, the Company's holdings aggregated 1,962,300 shares of CTS common stock, increased from 1,920,900 shares at December 31, 1993, and the Company's percentage of equity ownership in CTS increased to 38.0% from 37.3%. At August 9, 1994, the Company's holdings aggregated 2,014,200 shares of CTS common stock, or 39.0%. Included in Accounts Payable at June 30, 1994 was $536,000 for purchases of CTS common stock. The market value of the Company's investment in CTS amounted to $48,567,000 at June 30, 1994 and $37,938,000 at December 31, 1993. The market value at August 9, 1994 was $55,642,000. Under the Control Share Acquisitions Chapter of the Indiana Business Corporation Law, 1,020,000 of the Company's shares of CTS stock presently have no voting rights. Summarized unaudited financial information derived from CTS' Quarterly Report on Form 10-Q for the quarter ended July 3, 1994 follows: Three Months Ended Six Months Ended July 3, July 4, July 3, July 4, 1994 1993 1994 1993 (in thousands) Net sales $70,618 $62,613 $134,975 $123,052 Gross earnings $15,633 $12,711 $ 29,760 $25,331 Earnings before cumulative effect of changes in accounting principles $3,889 $1,810 $6,379 $3,577 Cumulative effect of accounting change - postretirement benefits (5,096) Cumulative effect of accounting change - income taxes 482 Net earnings (loss) $ 3,889 $ 1,810 $ 6,379 $(1,037) The Company recognized its proportionate share under equity accounting of CTS' adoption of Financial Accounting Standards Board ("FASB") Statement No. 106, "Employers' Accounting for Post-Retirement Benefits Other Than Pensions," a charge of $1,896,000, or $.49 per share, and FASB Statement No. 109, "Accounting for Income Taxes," a credit of $180,000, or $.05 per share. These onetime, non-cash accounting changes were adopted by CTS as cumulative effects to January 1, 1993. Note 4 - Other Income, Net: Three Months Ended Six Months Ended June 30, June 30, 1994 1993 1994 1993 (in thousands) Interest: Income $46 $42 $98 $64 Expense (18) (31) (45) (64) 28 11 53 0 Other, net 173 112 198 182 $201 $123 $251 $182 -7- Note 5 - Provision for Income Taxes: The effective tax rate for the three and six months ended June 30, 1994 and 1993 exceeds the Federal statutory rate primarily due to the effect of state income and franchise taxes. Note 6 - 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 material adverse effect on the financial position of the Company. In May 1994 the Company settled the preproduction portion of its proposed change order submitted to the Government in April 1992 seeking equitable compensation for constructive changes and associated delays by the Government in a contract for the supply of 3KW generator sets to be manufactured by the Company's Fermont division. (See Note 2 for further information.) Negotiations to settle the production portion of the proposed change order have not yet commenced. 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 at a non-Company site in Connecticut and at a Company site in California. Certain of the PRPs at the Connecticut site have agreed with the EPA to fund a feasibility study at the site and have sued the Company and other PRPs who have not agreed to share the costs. A property owner neighboring the Company site in California has sued the Company and others for allegedly causing contamination at the neighbor's property. In addition, the Company has received notice from a state environmental agency that it is a PRP with respect to a non-Company site in Pennsylvania, and is also a defendant in two lawsuits seeking contribution towards the Superfund cleanup costs relating to two other non-Company sites in that state. Based upon its knowledge of the extent of the Company's exposure and current statutes, rules and regulations, 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 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. -8- Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Results of Operations Sales for the three and six months ended June 30, 1994 decreased $1,721,000 and $4,596,000, respectively, from the same periods a year ago. Sales in the Electrical Appliances and Electronic Devices segment increased $1,930,000 and $896,000. Sales of electrical appliances for the most recent three and six month periods ended June 30, 1994 compared to a year ago were up slightly and declined $2,463,000, respectively, due to a decline for the six month period in sales of blenders and specialty products. Sales of heat dissipating devices, including those for computer microprocessors, increased $1,968,000 and $3,253,000 while sales of frequency control products remained relatively unchanged from the same periods a year ago. Sales in the Fabricated Metal Products and Equipment segment increased $185,000 and $528,000, respectively, as commercial air products and door products sales improved. Sales in the Power and Controlled Environmental Systems segment decreased $3,836,000 and $6,020,000, respectively, due to the significant decline in custom mobile shipments following completion of a large order from a Government prime contractor in the prior year. Gross profit increased $173,000 and decreased $531,000 for the three and six months ended June 30, 1994, respectively, when compared to the same periods a year ago and increased as a percentage of sales to 27.9% from 25.3% for the quarter and to 27.2% from 25.8% for the six month period. Gross profit in the Electrical Appliances and Electronic Devices segment increased in the most recent three and six month period on sharply higher sales and volume efficiencies in production of heat dissipating devices which were offset in part by lower sales of electrical appliances for the most recent six month period compared to the same period a year ago. Gross profit in the Fabricated Metal Products and Equipment segment decreased due to product sales mix and competitive pricing for the quarter ended June 30, 1994 and increased principally due to higher sales in the six month period ended June 30, 1994 compared to the same periods a year ago. In the Power and Controlled Environmental Systems segment gross profit declined sharply primarily as a result of decreased sales in the current periods but increased as a percentage of sales due to margins earned on services related to a technology transfer. Selling, general and administrative expenses decreased $313,000 and $1,097,000 for the three and six months ended June 30, 1994, respectively, when compared to the same periods a year ago, mainly due to lower advertising expenditures and reduced salary and related benefit costs following staff reductions in the fourth quarter of 1993. The provision for income taxes increased $192,000 and $217,000 for the three and six month periods ended June 30, 1994, respectively, compared to the same periods a year ago which resulted from increased income from continuing operations before equity in the income of CTS Corporation. The income tax rate decreased to 37.2% from 41.3% and to 36.6% from 38.8% for the three and six month periods ended June 30, 1994, respectively, compared to the same periods a year ago due to the effect of state income taxes. Income from the Company's equity investment in CTS Corporation increased $634,000 and $903,000 for the three and six months ended June 30, 1994, respectively, when compared to the same periods a year ago, reflecting CTS' increase in earnings, before the prior year's accounting changes, of $2,079,000 and $2,802,000, respectively. During the quarter ended June 30, 1994 the Company agreed to accept $6,450,000 from the Government in settlement of the preproduction portion of its proposed change order on a contract for 3KW generator sets to be manufactured by the Company's discontinued Fermont division. The settlement, net of related expenses and income taxes, amounting to $3,334,000, or $.86 per share, was reported as income from discontinued operations. -9- During the quarter ended March 31, 1993, the Company recognized its proportionate share of CTS' adoption of Financial Accounting Standards Board ("FASB") Statement No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," a charge of $1,896,000, or $.49 per share, and FASB Statement No. 109, "Accounting for Income Taxes," a credit of $180,000, or $.05 per share. These onetime, non-cash accounting changes were adopted by CTS as cumulative effects to January 1, 1993. Financial Condition Cash and cash equivalents increased $1,822,000 during the six months ended June 30, 1994. Cash of $4,135,000 was provided by operating activities, including the cash received from the Government, net of unliquidated progress payments, in settlement of the preproduction portion of the Company's proposed change order concerning the contract for 3KW generator sets, offset in part by an increase in inventories. Cash of $861,000 was used in investing activities, primarily to purchase CTS common stock and machinery and equipment, and cash of $1,452,000 was used in financing activities to purchase treasury stock, fund the Company's dividend payment and to make principal payments under mortgage and capital lease obligations. Cash at June 30, 1994 amounted to $10,791,000. During the six month period, the Company did not borrow under its $27,000,000 Revolving Credit Agreement or its $10,000,000 uncommitted line with its banks. The entire amount of these credit facilities is available for use by the Company. Liquidity and financial resources are considered adequate to fund planned Company operations, including capital expenditures and payment of dividends. 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. Subsequent to June 30, 1994 and through August 9, 1994, the Company has purchased an additional 51,900 shares of CTS common stock at a cost of $1,438,000, which raises the Company's percentage of equity ownership in CTS to 39.0%. The shares were paid for with available funds. 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 $15,744,000 ($15,090,000 of ordinary income and $654,000 of capital gain income) to realize its net deferred tax assets of $5,875,000 at June 30, 1994. With respect to environmental matters (see Note 6 - Contingencies in the Notes to the Condensed Consolidated Financial Statements), the Company has accrued $89,000 and $161,000 for mandated expenditures at a Company site in California during the current three and six month periods, respectively, compared to $108,000 and $131,000 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 do so in the future. Such modifications to date have not significantly increased capital expenditures or affected earnings or the competitiveness of the Company. It is possible, but unanticipated at this time, that future results of operations or cash flows could be materially affected by an unfavorable resolution of environmental-related matters. -10- Part II - Other Information Item 4 - Submission of Matters to a Vote of Security Holders (a) On May 6, 1994, the Annual Meeting of Shareholders was held at Cole Auditorium, Greenwich Library, West Putnam Avenue and Dearfield Drive, Greenwich, Connecticut. (b) Three Class B directors were elected to serve until the Annual Meeting of Shareholders in 1996. The voting results were as follows: Votes Votes Director For Against Patrick J. Dorme 3,494,193 7,621 Russell H. Knisel 3,491,256 10,558 Saul Sperber 3,488,283 13,531 There were no abstentions in the directors' election. (c) The proposal relating to the selection of Ernst & Young as independent auditors of the Company for the year 1994 was approved and ratified. Of the total number of votes cast, 3,310,819 were cast in favor of the proposal, 14,538 were cast against the proposal and 176,457 shares abstained. Information included in the definitive proxy statement for the May 6, 1994 Annual Meeting of Shareholders is incorporated herein by reference. Item 6 - Exhibits and Reports on Form 8-K (b) On May 9, 1994, the Company reported on Form 8-K under Item 5, Other Events, an agreement reached on May 3, 1994 between the Company and the U.S. Government. The Company agreed to settle for $6,450,000 the preproduction portion of its proposed change order to the Government seeking equitable compensation for constructive changes and associated delays by the Government in a contract for the supply of 3KW generator sets to be manufactured by the Company's Fermont division. See Note 2 to the Condensed Consolidated Financial Statements for further information. -11- 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 10, 1994 -12-