<PAGE> 1
FORM 10 - K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended JUNE 30, 1997
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-14044
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DEFIANCE, INC.
--------------
(Exact name of registrant as specified in its charter)
Delaware 34-1526359
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1111 Chester Ave., Suite 750, Cleveland, Ohio 44114-3516
--------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (216) 861-6300
--------------
Securities registered pursuant to Section 12(b) of the Securities Exchange Act
of 1934:
None
----
(Title of class and name of exchange on which registered)
Securities registered pursuant to Section 12(g) of the Securities Exchange Act
of 1934:
Common Stock, par value $.05 per share
--------------------------------------
(Title of class)
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 and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
------------- -------------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of 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. [ X ]
As of July 31, 1997, 6,416,896 shares of Common Stock of Defiance, Inc. were
outstanding and the aggregate market value of such Common Stock held by
non-affiliates (based upon the closing sale price on such date as reported on
the Nasdaq National Market) was approximately $43,676,000.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Proxy Statement for Defiance, Inc.'s 1997 Annual Meeting of
Shareholders are incorporated by reference into Part III of this Form 10-K
Report.
<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL
Defiance, Inc. (the "Company"), incorporated in Delaware as a holding company in
1985, is recognized as a world-class supplier of tooling systems, testing
services, specialty anti-friction bearings and precision-machined products to
the U.S. transportation industry, with headquarters in Cleveland, Ohio. The
Company offers its customers quality products and services, ranging from
engineering and design of a part or assembly, through analysis, prototype and
physical testing, to tooling and production.
The Company's subsidiaries operate through the following three business units:
Tooling Systems
- ---------------
Defiance Tooling Systems, consisting of Hy-Form Products, Inc., Binderline
Development, Inc. and Draftline Engineering Company, provides full prototype and
production tooling systems primarily to the domestic automotive industry. A full
turn-key project management service is offered to customers, taking a conceptual
design from soft tooling and prototype dies through to the tryout of the
production hard tooling dies. Work is performed either in house or through
strategic alliances with other firms. Together, these companies design and
produce models, patterns, fixtures, soft prototype tooling and aids to hard
tooling and supply computerized machine tool cutter paths, laser processing, CNC
(computer numerical control) machining and CMM (coordinate measuring machine)
certification. Typical parts for which prototypes and production tooling are
made include structural, suspension, inner panels, frame components and
powertrain sheet metal parts.
Testing Services
- ----------------
Defiance Testing & Engineering Services, Inc. (formerly SMTC Corporation)
provides a full range of product design, engineering analysis, and experimental
testing and simulation services for structural and mechanical systems. These
systems range from single components to complete vehicle development projects,
primarily for the U.S. transportation industry. Physical testing services
include product durability testing, experimental stress analysis, product
validation testing, environmental testing, noise and vibration testing and road
simulation. Testing is performed on a wide range of components and systems from
chassis and suspensions, seats and seating assemblies, to entire vehicle
environmental and road simulation. Engineering consulting services include new
product design, finite element modeling and analysis, kinematics analysis,
experimental dynamics, variation simulation analysis and vehicle development
programs for parts such as vehicle bodies, suspensions and engine components.
Computer aided engineering techniques such as computerized simulated testing of
prototypes are used to help in the design process of new products at an early
stage in the product development cycle.
Precision Products
- ------------------
Defiance Precision Products, Inc. ("Precision Products") manufactures specialty
anti-friction bearings and precision-machined products, including cam follower
rollers, cam follower roller axles and other hardened and machined metal fuel
system and valve-train components, primarily for the domestic automobile, light
truck and heavy-duty truck markets. Precision Products' principal product, the
cam follower roller ("CFR"), is a roller bearing used in the valve lifter
assemblies of gasoline and diesel engines that replaces the sliding surface
between the valve lifter and the camshaft with a rolling element, reducing valve
train friction and increasing engine efficiency and durability. Because of their
application, these products must be manufactured to extremely precise
specifications drawing upon core competencies in precision machining, grinding
and heat treating processes.
CURRENT YEAR DEVELOPMENTS
Tooling Systems
- ---------------
Defiance Tooling Systems continued to approach the automotive marketplace as a
full service problem solving tooling and prototype services supplier and
continued to pursue strategic alliances with companies that have complementary
products and processes. Several process and productivity improvements were
realized during the year as a result of a proactive cross-functional team
structure. Capital investment in high technology CMM laser scanning, upgraded
roughing mills and expansion and integration of internal CAD abilities improved
production capability and efficiency.
Testing Services
- ----------------
Defiance Testing Services remained a preferred supplier of testing services to
both Ford and Chrysler during the year. Marketing and operating alliances were
established with a number of other firms to enhance and increase Defiance's
array of service offerings to its customers. Demand also increased from
first-tier suppliers to the automotive original equipment manufacturers ("OEMs")
for Defiance's testing capabilities as the OEMs now require more of this work be
done by their first-tier supplier base before their products are provided to the
OEMs. Marketing efforts geared towards automotive first-tier suppliers have been
increased to take advantage of the opportunities caused by this change in the
marketplace. Capital spending focused on enhanced simulation testing, data
acquisition and noise and vibration testing capabilities.
<PAGE> 3
Precision Products
- ------------------
Precision Products attained both the QS-9000 and ISO-9001 certifications during
the year at all three production facilities. Production and sales volume
increased substantially from new business started last year for General Motors'
light truck engine applications and increased business from Eaton Corporation
for existing Ford and new Chrysler automotive requirements. Production start-up
issues, equipment problems and training personnel at the new production facility
in Upper Sandusky, Ohio, occurred during the year, though notable improvement in
cycle times and efficiencies were made by fiscal year end. Capital spending
during the year included the remaining equipment for the new Upper Sandusky
facility, upgrades of existing grinding equipment and manufacturing process
improvements.
Vaungarde
- ---------
Vaungarde, Incorporated ("Vaungarde") molded plastic parts using reaction
injection molding processes and painted parts of various polymers produced
internally or provided by other molders. The company primarily served original
equipment and after-market manufacturers in the automotive, heavy truck,
agricultural and recreational vehicle industries. All of the common shares of
Vaungarde were sold August 19,1996. Additional information relating to this sale
is contained in Note C to the Consolidated Financial Statements.
Sales by business unit as a percentage of the Company's total sales during the
three most recent fiscal years were as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
1997 1996 1995
------------------------------------
<S> <C> <C> <C>
Precision Products 49% 35% 38%
Testing Services 28% 25% 23%
Tooling Systems 22% 31% 27%
Vaungarde 1% 9% 12%
------------------------------------
100% 100% 100%
====================================
</TABLE>
MARKETING
Substantially all the Company's sales are to domestic OEMs and their suppliers.
Each of the Company's subsidiaries maintains an internal sales force and engages
independent sales representatives who work closely with existing customers and
solicit new customers. Sales are made under various types of long and short term
arrangements, generally under purchase orders received from customers, which
include fixed price contracts, cost plus fixed fee contracts, and time and
material contracts.
PATENTS, TRADEMARKS AND LICENSES
Patents, trademarks and licenses are not generally significant for the Company
or the industry in which it competes.
RAW MATERIALS
Raw materials used in the Company's operations are generally available from
several sources and in the quantities needed. Multiple vendor sources for
critical raw materials and supplies have been established over the past several
years.
COMPETITION
The U.S. transportation industry, the principal market for the Company's
products and services, is highly competitive, and suppliers to OEMs and others
in the U.S. transportation industry operate under highly competitive conditions.
Competition is based on quality, price, service, and other factors, with the
relative importance of such factors varying among the Company's products and
services. In particular, the Company and its subsidiaries compete with many
suppliers to the automobile and truck manufacturers, including several U.S. and
Japanese suppliers that are larger and have substantially greater resources than
the Company.
SEASONALITY AND BACKLOG
Sales of the Company's products and services are not seasonal. The Company
believes its backlog, because of the nature of the business, is not indicative
of the level of its present or future business.
<PAGE> 4
WORKING CAPITAL PRACTICES
Owing to the nature of its business, the Company is not required to carry
significant amounts of inventories to meet rapid delivery requirements of its
customers, or assure itself of a continuous allotment of goods from suppliers.
The Company's manufacturing processes are generally performed with a short
turnaround time, and the scheduling of manufacturing activities from customer
orders generally includes enough lead time to assure delivery of adequate
supplies of raw materials. The Company does not generally provide extended
payment terms to its customers; however, like many of its competitors, the
Company sells a substantial amount of goods and services to other OEM suppliers.
It is common for these other OEM suppliers to delay payment for goods and
services to their suppliers until payment is received by them from the OEMs. The
Company generally allows its customers to return merchandise for failure to meet
certain pre-agreed quality standards; however, the Company employs quality
assurance practices that minimize such returns.
PRINCIPAL CUSTOMERS
The Company's principal customers for its products and services are General
Motors Corporation, Ford Motor Company, Chrysler Corporation (the "Big Three")
and their respective suppliers. Direct sales to principal customers as a
percentage of the Company's total sales during the three most recent fiscal
years were as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
1997 1996 1995
--------------------------------------
<S> <C> <C> <C>
Big Three:
----------
General Motors Corporation 22% 30% 22%
Ford Motor Company 14% 14% 17%
Chrysler Corporation 11% 11% 5%
--------------------------------------
47% 55% 44%
Others over 10% of consolidated sales:
--------------------------------------
Eaton Corporation 11% 10% 12%
</TABLE>
EMPLOYEES
As of June 30, 1997, the Company employed 729 persons. All production personnel
of Precision Products located in Defiance, Ohio, are represented by the United
Auto Workers ( the "UAW"). The current contract between Precision Products and
the UAW was signed in May 1994 and expires in November 1998. Production
personnel at Vaungarde, which was sold August 19, 1996, were also represented by
the UAW.
GOVERNMENT REGULATION
Management of the Company believes that compliance with applicable Federal,
state, and local environmental laws and regulations has not had nor should have
any material affect upon the capital expenditures, net income, or competitive
position of the Company.
<PAGE> 5
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Thomas H. Roulston II 64 Chairman of the Board and Director (1)
Jerry A. Cooper 58 President, Chief Executive Officer and Director (2)
Michael J. Meier 43 VP-Finance, Chief Financial Officer, Secretary and Treasurer
James L. Treece 59 Chief Accounting Officer and Assistant Treasurer
Carl A. Rispoli 52 Corporate Controller and Assistant Secretary
<FN>
(1) Term as director expires in 1999
(2) Term as director expires in 1998
</TABLE>
Thomas H. Roulston II has served as Chairman of the Board since in 1990. Mr.
Roulston has been the chairman of the board of Roulston & Company, Inc. of
Cleveland, Ohio since 1990, and served as president of Roulston & Company, Inc.
from 1963 until 1990. Roulston & Company, Inc. is a registered investment
advisor.
Jerry A. Cooper joined the Company in 1992 as President and Chief Executive
Officer. From 1990 until joining the Company, Mr. Cooper was president and chief
executive officer of Bettcher Manufacturing Corporation. Bettcher is a metal
forming company serving various industries, located in Cleveland, Ohio. From
1977 to 1990 he was president and general manager of Mather Seal Company, a
subsidiary of Federal-Mogul Corporation. Mather Seal is a manufacturer of
Teflon(tm) seals and specialty products for industry, located in Milan,
Michigan.
Michael J. Meier joined the Company in 1988 as Corporate Controller, and in 1990
was named VP-Finance, Chief Financial Officer, Secretary, and Treasurer. Prior
to joining the Company, Mr. Meier held various positions in both public
accounting and private industry accounting and finance.
James L. Treece joined the Company in 1990 as Corporate Controller and in 1992
was named Chief Accounting Officer and Assistant Treasurer. Prior to joining the
Company, Mr. Treece was assistant treasurer of HCR Corporation, a publicly-held
health care company, from 1981 until 1989, and from 1977 until 1981 was
controller of Wolfe Industries Construction Company, which became part of HCR
Corporation.
Carl A. Rispoli joined the Company in 1997 as Corporate Controller and Assistant
Secretary. Since 1996 Mr. Rispoli had been self employed as a management
consultant. From 1984 to 1995 Mr. Rispoli held various financial and operating
positions with Brush Wellman, Inc., including divisional controller, divisional
director of materials and planning, plant director of operations, and most
recently as director of corporate information systems. Brush Wellman is a
supplier of high performance materials with a focus on beryllium-based
materials.
No executive officer has any family relationship to any other executive officer
or director of the Company, except Thomas H. Roulston who is the father of Scott
D. Roulston, a director of the Company. Each executive officer holds office
until the first meeting of the Board of Directors of the Company following the
annual meeting of stockholders of the Company and his successor shall have been
elected and qualified, or until his earlier resignation or removal from office.
<PAGE> 6
ITEM 2. PROPERTIES
The following are the principal properties of the Company as of June 30, 1997:
<TABLE>
<CAPTION>
Approximate area Owned /
Location in Square Feet Leased Primary use
- -------- -------------- ------- -----------
<S> <C> <C> <C>
Defiance, Inc. Corporate Headquarters
1111 Chester Ave., Cleveland, OH 2,800 Leased Corporate offices
Defiance Precision Products, Inc.
1125 Precision Way, Defiance, OH 90,000 Owned Manufacturing plant and offices
1190 Precision Way, Defiance, OH 40,000 Owned Manufacturing plant
1815 Baltimore Rd., Defiance, OH 6,000 Leased Product development facility
250 Commerce Way, Upper Sandusky, OH 78,000 Leased Manufacturing plant
Hy-Form Products, Inc.
35588 Veronica Drive, Livonia, MI 19,200 Owned Production facility and offices
35572 Veronica Drive, Livonia, MI 12,400 Leased Production facility
35569 Industrial Drive, Livonia, MI 12,400 Leased Production facility
35684 Veronica Drive, Livonia, MI 12,400 Leased Production facility
Defiance Testing & Engineering Services, Inc.
1960 Ring Drive, Troy, MI 42,000 Leased Offices and testing facilities
5859 Executive Drive, Westland, MI 29,000 Leased Offices and testing facilities
5950 Executive Drive, Westland, MI 7,800 Leased Offices and testing facilities
5717 Executive Drive, Westland, MI 9,663 Leased Offices and testing facilities
5727 Executive Drive, Westland, MI 20,000 Leased Offices and testing facilities
5770 Hix Road, Westland, MI 24,600 Leased Offices and testing facilities
Binderline Development, Inc.
Draftline Engineering Company
33100 Freeway Dr., St. Clair Shores, MI 42,500 Owned Production facility and offices
</TABLE>
The Company considers its properties to be suitable and adequate for its present
needs. The properties are being fully utilized, though utilization can vary with
production levels.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
<PAGE> 7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The principal market in which the Company's Common Stock is traded is the Nasdaq
National Market (Nasdaq Symbol DEFI). The following table indicates the high and
low sales price of the Company's Common Stock traded on the Nasdaq National
Market and the cash dividends declared per share for each full quarterly period
within the two most recent fiscal years:
<TABLE>
<CAPTION>
Market Price Dividends
---------------------- Declared
High Low ------------
---- ---
Fiscal 1997
- -----------
<S> <C> <C> <C>
First quarter (July 1, 1996 - September 30, 1996) $6.8750 $5.3750 $0.04
Second quarter (October 1, 1996 - December 31, 1996) $6.8750 $6.2500 0.04
Third quarter (January 1, 1997 - March 31, 1997) $8.0000 $6.3750 0.04
Fourth quarter (April 1, 1997 - June 30, 1997) $8.1250 $6.1250 0.04
------------
Total $0.16
============
Fiscal 1996
- -----------
First quarter (July 1, 1995 - September 30, 1995) $7.5000 $6.5000 $0.04
Second quarter (October 1, 1995 - December 31, 1995) $8.0000 $5.3750 0.04
Third quarter (January 1, 1996 - March 31, 1996) $6.2500 $5.1250 0.04
Fourth quarter (April 1, 1996 - June 30, 1996) $6.3750 $5.3750 0.04
------------
Total $0.16
============
</TABLE>
As of July 31, 1997 the Company had 258 stockholders of record. This figure does
not include those persons who hold the Company's stock through nominee accounts,
otherwise known as "street name" shareholders. Including street name
shareholders, the Company estimates it has between 2,500 and 3,000 stockholders.
The Company expects its practice of paying quarterly dividends on its Common
stock will continue, although future dividends will continue to depend upon the
Company's earnings, capital requirements, financial condition and other factors.
<PAGE> 8
<TABLE>
<CAPTION>
ITEM 6. SELECTED FINANCIAL DATA
DEFIANCE, INC. AND SUBSIDIARIES
FIVE YEAR SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
Year Ended June 30,
1997 1996 1995 1994 1993
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 92,123 $103,975 $ 92,532 $ 81,645 $ 79,217
Earnings before cumulative effect of
accounting change (1) $ 4,335 $ 1,598 $ 6,594 $ 5,437 $ 3,432
Cumulative effect of accounting change -- -- -- 564 --
--------------------------------------------------------------------
Net earnings $ 4,335 $ 1,598 $ 6,594 $ 6,001 $ 3,432
====================================================================
Earnings per common share before cumulative
effect of accounting change (1) $ 0.67 $ 0.24 $ 0.98 $ 0.81 $ 0.54
Cumulative effect per common share of
accounting change -- -- -- 0.09 --
--------------------------------------------------------------------
Net earnings per common share $ 0.67 $ 0.24 $ 0.98 $ 0.90 $ 0.54
====================================================================
Working capital $ 11,781 $ 9,537 $ 12,149 $ 10,112 $ 9,569
Cost in excess of net assets of acquired
companies (goodwill) -- net of amortization $ 4,871 $ 5,122 $ 6,769 $ 7,085 $ 7,400
Total assets $ 73,819 $ 74,768 $ 77,341 $ 54,535 $ 51,737
Short-term interest bearing obligations $ 4,829 $ 5,051 $ 4,299 $ 2,933 $ 2,343
Long-term interest bearing obligations $ 14,968 $ 18,134 $ 17,182 $ 9,346 $ 13,685
Stockholders' equity $ 38,391 $ 35,438 $ 36,296 $ 30,174 $ 24,081
Dividends paid $ 1,029 $ 1,045 $ 523 -- --
Dividends per common share $ 0.16 $ 0.16 $ 0.08 -- --
</TABLE>
<TABLE>
<CAPTION>
UNAUDITED QUARTERLY INFORMATION
(In thousands, except per share amounts)
First Second Third Fourth
Fiscal 1997 Quarter Quarter Quarter Quarter Total
- ----------- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 22,067 $ 22,794 $ 22,314 $ 24,948 $ 92,123
Gross profit $ 4,438 $ 5,601 $ 4,502 $ 4,863 $ 19,404
Net earnings $ 710 $ 1,509 $ 753 $ 1,363 $ 4,335
Earnings per share $ 0.11 $ 0.23 $ 0.12 $ 0.21 $ 0.67
Fiscal 1996
- -----------
Net sales $ 26,966 $ 24,636 $ 25,724 $ 26,649 $103,975
Gross profit $ 5,727 $ 4,201 $ 4,265 $ 5,263 $ 19,456
Net earnings (1) $ 1,538 $ 665 $ 474 ($ 1,079) $ 1,598
Earnings per share (1) $ 0.23 $ 0.10 $ 0.07 ($ 0.16) $ 0.24
<FN>
(1) See Note C to the Consolidated Financial Statements.
</TABLE>
<PAGE> 9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth certain items from Defiance, Inc.'s Consolidated
Statement of Income as a percentage of net sales for the fiscal years ended June
30, 1997 ("1997"), June 30, 1996 ("1996") and June 30, 1995 ("1995"):
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------
<S> <C> <C> <C>
Net sales 100.0 100.0 100.0
Cost of goods sold 79.0 81.3 74.2
--------------------------------------
Gross profit 21.0 18.7 25.8
Selling and administrative expenses 11.6 10.8 13.4
Other charges 0.7 2.5 0.3
--------------------------------------
Operating earnings 8.7 5.4 12.1
Interest expense - net 1.8 1.7 1.1
--------------------------------------
Earnings before income tax provision 6.9 3.7 11.0
Income tax provision 2.2 2.2 3.9
--------------------------------------
Net earnings 4.7 1.5 7.1
======================================
</TABLE>
Net sales
- ---------
Net sales for 1997 decreased $11,852,000, or 11.4%, from 1996. Sales in 1996
included $22,726,000 from the former hard tooling and Vaungarde businesses,
compared with $1,307,000 in 1997. All hard tooling operations ended in May 1996
and Vaungarde was sold in August 1996. Sales for the remaining core units
increased 11.8% over the prior year. Sales of gasoline engine cam follower
rollers and axles were up significantly due to new business started in 1996 for
General Motors' light truck engine applications and increased sales to Eaton
Corporation for existing Ford and new Chrysler automotive requirements. Sales of
diesel engine rollers and axles were also up for the year, consistent with the
overall heavy-duty truck market. Sales of testing services were down slightly
from the prior year, reflecting a slowdown in OEM demand for product validation
testing. Tooling revenues (not including the former hard tooling business) were
ahead of last year primarily due to a stronger prototype market that helped
increase demand from automotive OEMs for soft tooling work.
Net sales for 1996 increased $11,443,000, or 12.4%, from 1995. Sales of gasoline
engine cam follower rollers and other precision machined metal components were
up slightly, primarily from new business with General Motors for their light
truck series engine. This increase was partially offset by lower shipments of
diesel engine rollers resulting from lower industry-wide heavy-duty truck build
rates. Sales of testing services increased significantly as the result of
additional capacity from the new light truck simulator installed late in 1995
combined with increased testing work for Chrysler Corporation. Tooling revenues
also increased significantly primarily from a contract with General Motors to
supply hard tooling for the 1997 Chevrolet Malibu. This contract began during
the second half of 1995 and was completed April 1996. Sales of molded and
painted plastic parts were down due to decreased demand from original equipment
manufacturers and after-market automotive and recreational vehicle customers.
Gross profit percentage
- -----------------------
Gross profit for 1997, as a percentage of net sales, increased to 21.0% from
18.7% in the prior year. Not considering the sales and related gross profit from
the former hard tooling and Vaungarde units, gross profit margins decreased to
21.2% from 23.3% in the prior year. Production start-up issues, equipment
problems and training personnel at the cam follower roller facility in Upper
Sandusky, Ohio, affected margins in 1997. Soft demand for product validation
testing by OEMs held back testing margins, though tooling margins improved from
stronger OEM demand for soft tooling work. Cost of goods sold in 1997 also
included $914,000 for the amortization of preoperating costs.
Gross profit for 1996, as a percentage of net sales, decreased to 18.7% from
25.8% in the prior year. Profit margins expected on the General Motors hard
tooling contract were not achieved due to equipment problems and personnel
shortages. In addition, the new cam follower roller facility in Upper Sandusky,
Ohio, began limited production in the second quarter of 1996 and experienced low
productivity and start-up issues related to equipment transfers and the training
of new personnel. Cost of goods sold also included $525,000 for the amortization
of preoperating costs.
<PAGE> 10
Selling and administrative (S&A) expenses
- -----------------------------------------
S&A expenses in 1997 decreased $580,000, or 5.1%, from 1996 primarily from the
effect of the sale of the Vaungarde business unit in early 1997 and ending all
hard tooling operations in late 1996.
S&A expenses in 1996 decreased $1,160,000, or 9.3%, from 1995 primarily due to
lower incentive compensation costs associated with lower earnings and cost
control programs initiated in 1995.
Interest income and expense
- ---------------------------
Interest expense, net of interest income, for 1997 decreased $7,000, or less
than 1%, from 1996 on similar levels of average net borrowings and effective
interest rates.
Interest expense, net of interest income, for 1996 increased $692,000, or 70%,
from 1995 from higher average net borrowings at similar effective interest
rates. Also, $293,000 of interest was capitalized during 1996.
Income taxes
- ------------
The effective income tax rate for 1997 was 32.3%, compared to 59.0% in 1996 and
35.6% in 1995. The significant difference in the effective rate for 1996 was due
to a $2,600,000 non-cash charge for the sale of a business which was not
deductible for income tax purposes. Also contributing to the difference between
the statutory rate and the effective rate in each year is amortization of cost
in excess of net assets of acquired companies (goodwill), which is not
deductible for income tax purposes.
Trends in operations
- --------------------
The domestic automobile and light truck industry has been relatively stable
since calendar year 1994, with total vehicle sales between 15.1 and 15.5 million
units per year. Total vehicle sales are expected to remain at 15.1 million units
in calendar year 1997 and decline slightly to 14.9 million units in calendar
year 1998, according to estimates by industry analysts.
Trends in the domestic automobile and light truck industry are driven by
automakers' needs, causing the actions of their suppliers to be reactive to
automakers' demands, rather than proactive. The Big Three are increasing
outsourcing as they focus on being assemblers of vehicles rather than
manufacturers of vehicles. In addition, consolidation of the supplier base is
causing increased customer selectivity by the automakers among a more limited
supplier group to simplify purchasing and improve quality. In response to these
trends, suppliers are finding it necessary to distinguish themselves from others
by providing higher quality products and services at lower prices.
Management expects the Company to continue to benefit from these industry
trends. Automobile and truck producers are increasingly outsourcing design and
testing work previously done in-house. Shorter production cycles and the need to
improve quality has created increased demand for design and testing services. As
automotive companies reduce the number of suppliers they use, established
suppliers such as the Company will have opportunities for additional work.
The Company's core subsidiaries are organized into three strategic business
units: Tooling Systems, Testing Services and Precision Products. Each of these
units seeks to create a competitive advantage through technological and
manufacturing niches utilizing research, development, engineering and design
capabilities to differentiate it from its competitors. In addition, each
business unit stresses systems capabilities as compared to supplying only
individual components, thereby saving its customers time and money. The
Company's long-term strategy is to continue improving operating margins through
productivity improvement programs and prudent capital investment and expand the
Company's already strong position in these niche markets through global
marketing efforts and acquisitions that fit this strategic direction.
The Company expects earnings to improve in fiscal 1998 if new testing and
tooling programs are released as expected, CFR and axle production for Eaton
Corporation (for its Chrysler requirements) ramp up to anticipated levels, and
efficiencies continue to improve at the Upper Sandusky, Ohio, facility.
The preceding discussion includes forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. These statements are
based on management's current expectations, which are subject to a number of
risks and uncertainties that could materially affect demand for the Company's
products and services, thereby affecting future results of operations, financial
condition or cash flows. Demand for the Company's products and services is
affected by consumer demand in the domestic automotive, light truck and
heavy-duty truck industries and the resulting levels of production, as well as
competition from other suppliers to these industries. Demand is also affected by
the level of new model development at OEMs and the resulting need for
prototyping, tooling and testing services. Demand is also sensitive to general
economic conditions, such as growth, inflation, interest rates and unemployment
levels, and can also be affected by labor disputes involving the
<PAGE> 11
Company or its significant customers.
Inflation over the past three years has affected the Company's cost of raw
materials while selling prices have remained relatively constant under pricing
pressures from the Big Three. Most of these cost increases have been offset,
however, through process improvements, gains in productivity and arrangements
with some customers to share cost increases.
All production personnel of Precision Products located in Defiance, Ohio, are
represented by the United Auto Workers (the "UAW"). The current contract between
Precision Products and the UAW was signed in May 1994, and expires in November
1998. Production personnel at Vaungarde, which was sold August 19,1996, were
also represented by the UAW.
The Company will begin reporting earnings per share differently as of the second
quarter of fiscal 1998. The Financial Accounting Standards Board issued
Statement of Accounting Standards No. 128 which must be adopted by the Company
for all financial statements issued after December 15, 1997. This new standard
requires a "basic" earnings per share figure to be presented, which does not
include the dilutive effect of outstanding stock options. This will be in
addition to the current methodology, which includes the dilutive effect of
outstanding stock options. The difference between the new "basic" earnings per
share and diluted earnings per share is expected to be between one and two
percent, and therefore not material.
FINANCIAL CONDITION (LIQUIDITY AND CAPITAL RESOURCES)
The following table includes certain items and analyses derived from Defiance,
Inc.'s Consolidated Statement of Cash Flows and Consolidated Balance Sheet for
the fiscal years 1997, 1996 and 1995.
<TABLE>
<CAPTION>
Operating activities and working capital (All dollar amounts in thousands)
- ---------------------------------------- 1997 1996 1995
----------------------------------------
<S> <C> <C> <C>
Net earnings $4,335 $1,598 $6,594
Items not affecting cash 7,204 9,435 4,467
Changes in working capital components (5,981) 1,044 (2,067)
----------------------------------------
Cash provided by operating activities 5,558 12,077 8,994
Increase (decrease) over prior year (6,519) 3,083 (492)
Current assets $28,974 $27,716 $33,481
Current liabilities 17,193 18,179 21,332
----------------------------------------
Working capital 11,781 9,537 12,149
Current ratio 1.69 1.52 1.57
</TABLE>
Cash provided by operating activities was $5,558,000 in 1997, compared to
operating cash flows of $12,077,000 in 1996 and $8,994,000 in 1995. Items not
affecting cash in all years include depreciation and amortization of property,
plant and equipment and amortization of goodwill. Items not affecting cash in
1997 and 1996 also include amortization of preoperating costs of $914,000 and
$525,000, respectively, and a $2,600,000 charge for the sale of a business in
1996. Net cash used for working capital components in 1997 of $5,981,000 was
primarily due to increased accounts receivable related to higher than normal
sales levels at the end of the fiscal year combined with slightly higher
inventories and lower accounts payable. Net cash provided by working capital
components in 1996 of $1,044,000 was primarily due to lower inventories and
accounts receivable related to the end of a major hard tooling contract,
partially offset by lower trade payables, incentive bonus accruals and Federal
income tax accruals. Net cash used for working capital in 1995 of $2,067,000 was
primarily due to increased inventory levels related to a major hard tooling
contract, increased receivables in response to higher sales levels and increased
prepaid expenses from the recording of preoperating costs, partially offset by
increases in trade payables and accruals related to increased production levels,
incentive bonus accruals and amounts owed for fixed assets purchased in June
1995.
The most significant item affecting the Company's working capital is accounts
receivable, which generally average between sixty and seventy days outstanding.
This is not unusual for the industry in which the Company operates. Many of the
Company's customers are also suppliers to the major automotive companies, and
these suppliers are often not in a position to pay the Company until they have
received payment from their customers. While the investment in accounts
receivable is significant, the risk of non-collection is low owing to the
Company's emphasis on credit policies and collections. Uncollectible accounts
charged against the reserve for bad debts for the past three fiscal years
totaled $154,000, representing less than one-tenth of one percent of sales.
<PAGE> 12
<TABLE>
<CAPTION>
Financing activities and banking facility (All dollar amounts in thousands)
- ----------------------------------------- 1997 1996 1995
------------------------------------------
<S> <C> <C> <C>
Total short and long term obligations (funded debt) $ 19,797 $ 23,185 $ 21,481
Increase (decrease) from prior year (3,388) 1,704 9,202
Total capitalization (funded debt above plus equity) $ 58,188 $ 58,623 $ 57,777
Debt to total capitalization ratio 34.0% 39.5% 37.2%
Cash received from exercise of employee stock options
(excluding tax benefit of $215 in 1997) $ 1,103 $ 71 $ 51
Purchase of common shares for treasury $ 2,262 $ 891 --
Dividends paid $ 1,029 $ 1,045 $ 523
Additional borrowing capacity under lines of credit at year end $ 4,335 $ 6,000 $ 4,000
</TABLE>
Total funded debt decreased $3,388,000 in 1997 from scheduled payments of term
debt and increased $1,704,000 in 1996 and $9,202,000 in 1995 from borrowings to
support the purchase of equipment. The Company received $1,225,000 over the past
three years from the sale of common stock pursuant to the exercise of employee
stock options, paid a total of $2,597,000 in dividends and paid $3,153,000 to
repurchase common shares in 1996 and 1997.
The Company's banking arrangement with its primary lender includes a $6,000,000
unsecured revolving line of credit to support working capital needs which
expires October 1999. Borrowings under this facility are at rates below prime.
Additional borrowing capacity under this facility was $4,335,000 at the end of
1997.
<TABLE>
<CAPTION>
Investing activities (All dollar amounts in thousands)
- -------------------- 1997 1996 1995
-------------------------------------
<S> <C> <C> <C>
Capital expenditures, including assets acquired under capitalized leases $4,208 $9,994 $16,294
Depreciation and amortization of property, plant and equipment 5,990 5,206 4,126
</TABLE>
Capital spending in 1997, 1996 and 1995 included approximately $2,000,000,
$6,000,000 and $9,000,000, respectively, for equipment in support of expanded
production capacity for gasoline engine cam follower rollers and axles. Capital
spending in 1995 also included approximately $3,000,000 for the purchase and
installation of equipment supporting expanded capacity in full-vehicle road
simulation testing. The remainder of capital spending in 1997, 1996 and 1995 was
for upgrades to existing equipment, manufacturing process improvements, asset
replacements and expenditures to support other new or increased business.
<PAGE> 13
Trends in liquidity and capital resources
- -----------------------------------------
Liquidity in fiscal 1998 is expected to continue to be adequate to meet
operating needs through profitability and the resulting cash flows combined with
borrowing capacity under the revolving line of credit. Liquidity is defined as
the ability of an enterprise to mobilize cash to support operating needs.
Based on currently expected levels of business, the Company plans to spend
between $5 million and $6 million in capital expenditures in fiscal 1998
relative to asset replacements, cost reduction, and productivity improvement
programs. Additional capital expenditures relating to new or increased sales are
currently estimated at $1 million.
At June 30, 1997, the Company has noncancelable outstanding commitments for
capital expenditures of approximately $70,000. The Company expects to fund its
planned fiscal 1998 capital expenditures through operating cash flow. In
addition, the Company's status as an unsecured borrower from its primary lender
and modest debt to total capitalization ratio reflect favorably on the Company's
ability to generate additional sources of capital in the future, should they be
required.
In January 1996, the Company adopted a stock repurchase plan. This program is
flexible, and the board of directors and management implemented it without
detracting from the Company's business strategies or investment opportunities.
Stock repurchases have been funded from operating cash flow or loans from
Comerica Bank under the existing revolving credit facility. Any such borrowings
have been made in accordance with the Company's loan covenants with Comerica
Bank and have not hindered the Company's ability to fund capital expenditures,
acquisitions, or its business operations. A total of 504,400 common shares were
repurchased in open market transactions for $3,153,000 during 1996 and 1997. The
Company anticipates it will continue to repurchase shares in fiscal 1998.
In March 1995, the Company paid its first cash dividend to holders of its common
stock since it became publicly owned in 1985. A quarterly cash dividend of four
cents per share has been paid each quarter since that time. The Company
anticipates future quarterly dividends, and does not expect its liquidity or
capital resources to be materially affected by the payment of dividends.
Certain credit agreements of the Company contain various warranties and
covenants. As of June 30, 1997, the Company is in compliance with all of these
covenants, and expects to remain in compliance with these covenants in fiscal
1998.
The preceding discussion includes forward-looking statements. See "Trends in
Operations."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
<PAGE> 14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements of Defiance, Inc. and Subsidiaries Page
- ---------------------------------------------------------------- ----
Report of Independent Auditors 15
Consolidated Balance Sheet at June 30, 1997 and 1996 16
Consolidated Statement of Income for the years ended
June 30, 1997, 1996 and 1995 18
Consolidated Statement of Stockholders' Equity for the years ended
June 30, 1997, 1996 and 1995 19
Consolidated Statement of Cash Flows for the years ended June 30, 1997,
1996 and 1995 20
Notes to Consolidated Financial Statements 21
<PAGE> 15
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Defiance, Inc.
We have audited the consolidated balance sheet of Defiance, Inc. and
subsidiaries as of June 30, 1997 and 1996 and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended June 30, 1997. Our audits also included the financial
statement schedule for the years ended June 30, 1997, 1996 and 1995 listed in
the Index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Defiance, Inc. at
June 30, 1997 and 1996 and the consolidated results of their operations and
their cash flows for each of the three years in the period ended June 30, 1997
in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Ernst & Young LLP
Cleveland, Ohio
August 4, 1997
<PAGE> 16
<TABLE>
<CAPTION>
DEFIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(All dollar amounts in thousands)
ASSETS
June 30,
1997 1996
----------------------
<S> <C> <C>
CURRENT ASSETS:
Cash $188 $1,240
Accounts receivable, less allowance for doubtful accounts
of $192 - 1997 and $191 - 1996 21,492 16,615
Inventories 3,761 3,312
Deferred and refundable income taxes 565 1,058
Prepaid expenses and other current assets 2,968 2,383
Net assets of business to be sold 3,108
-----------------------
Total current assets 28,974 27,716
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land 394 394
Buildings and leasehold improvements 11,784 11,831
Machinery and equipment 54,194 49,102
Office equipment 1,563 1,522
Construction in process 1,343 4,741
-----------------------
69,278 67,590
Accumulated depreciation and amortization (31,456) (28,074)
-----------------------
37,822 39,516
OTHER ASSETS:
Cost in excess of net assets of acquired companies, less accumulated
amortization of $2,504 - 1997 and $2,253 - 1996 4,871 5,122
Other 2,152 2,414
-----------------------
7,023 7,536
-----------------------
Total assets $73,819 $74,768
=======================
</TABLE>
<PAGE> 17
<TABLE>
<CAPTION>
DEFIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(All dollar amounts in thousands except par value)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30,
1997 1996
---------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long term obligations $4,829 $5,051
Accounts payable 4,060 4,908
Accrued payroll and employee benefits 3,833 3,578
Accrued expenses 4,471 4,642
---------------------------
Total current liabilities 17,193 18,179
LONG TERM OBLIGATIONS 14,968 18,134
DEFERRED INCOME TAXES 3,267 3,017
CONTINGENCIES - Note L
STOCKHOLDERS' EQUITY:
Preferred shares, par value $.05, 2,000,000 shares authorized,
no shares outstanding
Common shares, par value $.05, 15,000,000 shares authorized,
shares issued 6,920,996 - 1997 and 6,573,450 - 1996 346 328
Additional paid-in capital 23,347 22,047
Common shares in treasury, at cost, 504,400 shares - 1997
and 157,700 shares - 1996 (3,153) (891)
Minimum pension liability (591)
Retained earnings 17,851 14,545
---------------------------
38,391 35,438
---------------------------
Total liabilities and stockholders' equity $73,819 $74,768
===========================
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 18
<TABLE>
<CAPTION>
DEFIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(All amounts in thousands, except per share amounts)
Year Ended June 30,
1997 1996 1995
----------------------------------------
<S> <C> <C> <C>
Net sales:
Products $65,099 $76,447 $69,544
Services 27,024 27,528 22,988
----------------------------------------
92,123 103,975 92,532
----------------------------------------
Cost of goods sold:
Products 53,087 65,468 52,985
Services 19,632 19,051 15,630
----------------------------------------
72,719 84,519 68,615
----------------------------------------
Gross profit 19,404 19,456 23,917
Selling and administrative expenses 10,699 11,279 12,439
Other charges (Note C ) 632 2,600 250
----------------------------------------
Operating earnings 8,073 5,577 11,228
Interest expense - net 1,673 1,680 988
----------------------------------------
Earnings before income tax provision 6,400 3,897 10,240
Income tax provision 2,065 2,299 3,646
----------------------------------------
Net earnings $4,335 $1,598 $6,594
========================================
Net earnings per common share $0.67 $0.24 $0.98
========================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 19
<TABLE>
<CAPTION>
DEFIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(All amounts in thousands, except per share amounts)
Common Shares
----------------------- Additional Minimum
Number Paid-in Treasury Pension Retained
of Shares Amount Capital Shares Liability Earnings Total
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
July 1, 1994 6,516 $326 $21,927 $7,921 $30,174
Stock options exercised 28 1 50 51
Net earnings 6,594 6,594
Dividends ($0.08 per share) (523) (523)
------------------------------------------------------------------------------------------
June 30, 1995 6,544 327 21,977 13,992 36,296
Stock options exercised 30 1 70 71
Shares purchased for treasury (158) ($891) (891)
Net earnings 1,598 1,598
Dividends ($0.16 per share) (1,045) (1,045)
Adjustment for minimum pension
liability, net of deferred taxes ($591) (591)
------------------------------------------------------------------------------------------
June 30, 1996 6,416 328 22,047 (891) (591) 14,545 35,438
Stock options exercised 347 18 1,300 1,318
Shares purchased for treasury (346) (2,262) (2,262)
Net earnings 4,335 4,335
Dividends ($0.16 per share) (1,029) (1,029)
Adjustment of minimum pension
liability, net of deferred taxes 591 591
------------------------------------------------------------------------------------------
June 30, 1997 6,417 $346 $23,347 ($3,153) $0 $17,851 $38,391
==========================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 20
DEFIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(All amounts in thousands)
<TABLE>
<CAPTION>
Year Ended June 30,
1997 1996 1995
----------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings $4,335 $1,598 $6,594
Adjustments to reconcile net earnings to cash provided by
operating activities:
Depreciation and amortization of property, plant and equipment 5,990 5,206 4,126
Amortization of other assets 1,165 776 315
Charge for sale of business 2,600
(Gain) on sale of assets (87) (17) (5)
Deferred income taxes 136 870 31
Changes in assets and liabilities:
Accounts receivable (4,877) 1,439 (3,963)
Inventories (449) 3,491 (4,233)
Accounts payable and accrued expenses (595) (2,331) 6,916
Income taxes 114 (246) 154
Net assets of business sold (645) (1,061)
Prepaid expenses and other 471 (248) (941)
--------------------------------------
Cash provided by operating activities 5,558 12,077 8,994
--------------------------------------
FINANCING ACTIVITIES:
Payments of long term obligations (5,053) (4,296) (3,037)
Additions to long term obligations 1,665 6,000 12,000
Issuance of common shares from exercise of employee stock options 1,318 71 51
Purchase of common shares for treasury (2,262) (891)
Dividends paid (1,029) (1,045) (523)
--------------------------------------
Cash provided by (used for) financing activities (5,361) (161) 8,491
--------------------------------------
INVESTING ACTIVITIES:
Capital expenditures (4,208) (9,994) (16,055)
Cash and assigned liquid assets received from sale of business 2,803
Preoperating costs (1,774) (960)
Other - net 156 (74) (245)
--------------------------------------
Cash used for investing activities (1,249) (11,842) (17,260)
--------------------------------------
CASH:
Increase (decrease) (1,052) 74 225
Beginning of year 1,240 1,166 941
======================================
End of year $188 $1,240 $1,166
======================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 21
DEFIANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997 ("1997"), JUNE 30, 1996 ("1996"),
AND JUNE 30, 1995 ("1995")
(All amounts in thousands, except share and per share amounts)
A - ACCOUNTING POLICIES
Description
- -----------
The Company operates in a single industry segment as an integrated supplier of
precision machined metal components, testing services and tooling systems,
primarily to the United States transportation industry.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company and
all its subsidiaries. All significant intercompany transactions and balances
have been eliminated.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Stock Options
- -------------
The Company applies the intrinsic value based method to account for employee
stock options. Under this method, no compensation expense is recognized on the
grant date since on that date the option price equals the market price of the
underlying shares. Net income and earnings per share for 1997 and 1996 would not
have been materially different from reported amounts if compensation expense had
been determined based on the fair value method in Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
Inventories
- -----------
Inventories are valued primarily at the lower of cost (first in, first out
method) or market.
Depreciation and Amortization
- -----------------------------
Depreciation is calculated using the straight line method over the estimated
useful lives of the assets ranging from 3 to 30 years. Leasehold improvements
and capital lease property are amortized over the lesser of the lease life or
useful lives of these items.
Capitalized Interest
- --------------------
Interest costs of $293 were capitalized in property, plant and equipment in
1996. No interest costs were capitalized in 1997 or 1995.
Intangible Assets
- -----------------
Cost in excess of net assets of acquired companies (or goodwill) is amortized
using the straight line method over 30 years. The carrying value of goodwill
will be reviewed if the facts and circumstances suggest that it may be impaired.
If this review indicates that goodwill will not be recoverable, as determined
based on the undiscounted cash flows of the entities acquired over the remaining
amortization period, the Company's carrying value of the goodwill will be
adjusted accordingly. This is in accordance with Financial Accounting Standards
Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of," which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amounts. Statement 121 also addresses
the accounting for long-lived assets that are expected to be disposed of. The
Company adopted Statement 121 in the first quarter of 1997. The adoption of this
statement had no material affect on the Company's financial condition or results
of operations.
<PAGE> 22
Preoperating Costs
- ------------------
Certain preoperating costs of a new manufacturing facility were deferred prior
to the plant beginning production in December 1995. These costs are being
amortized over a thirty-six month period due to the long-term (over thirty-six
months) nature of the customer contracts to be performed at this facility. The
unamortized portion totaled $1,295 and $2,209 at June 30, 1997 and 1996,
respectively.
Revenue Recognition
- -------------------
Sales of products are recognized when goods are shipped. Revenues from fixed
price contracts are recognized on the percentage of completion method. Revenues
from cost plus fixed fee and time and material contracts are recognized on the
basis of direct labor hours at a predetermined rate or markup. Accounts
receivable include $4,061 and $3,367 of unbilled costs related to contracts at
June 30, 1997 and 1996, respectively. Changes in estimated job profitability are
recognized in the period in which the revisions are determined. Provisions are
made for the full amount of anticipated future losses on contracts when they are
identified.
Net Earnings Per Common Share
- -----------------------------
Net earnings per common share is computed by dividing net earnings by the
weighted average number of common shares outstanding during the year, adjusted
for the dilutive effect of outstanding stock options. In February 1997, the
Financial Accounting Standards Board issued Statement of Accounting Standards
No. 128, "Earnings Per Share," which must be adopted by the Company for all
financial statements issued after December 15, 1997. At that time, the Company
will be required to change the method used to compute earnings per share and to
restate all prior periods. Under the new requirements for calculating basic
earnings per share, the dilutive effect of stock options will be excluded. The
impact of Statement 128 on the presentation of earnings per share is not
expected to be material.
Reclassifications
- -----------------
The Company has reclassified certain prior year financial information to conform
with the current year's presentation.
B - CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------
<S> <C> <C> <C>
Cash payments:
Interest $2,040 $1,873 $1,258
Federal income taxes 1,600 1,675 3,461
Noncash transactions excluded from the consolidated statement of
cash flows:
Assets acquired under capital lease $239
C - OTHER CHARGES
<CAPTION>
A description of other charges included in the Consolidated Statements of Income
is as follows:
1997 1996 1995
------------------------------------
<S> <C> <C> <C>
Charge to terminate pension plan and settle obligations $632
Charge for sale of business $2,600
Charge to curtail pension plan benefits $250
</TABLE>
The Company terminated a previously curtailed defined-benefit pension plan at
one of its subsidiaries in 1997. In accordance with Statement of Financial
Accounting Standards No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination of Benefits,"
a one-time charge was made in 1997 of $632 when the plan was terminated and all
obligations were settled. In 1995, a one-time charge of $250 was made when
benefits were curtailed. See Note G to the Consolidated Financial Statements for
further information.
On August 19, 1996 the Company sold all the common shares of its Vaungarde,
Incorporated ("Vaungarde") subsidiary as part of its long-term strategic plan to
increase the focus on its core operating capabilities. The Company received
$2,513 in cash, $290 of certain assigned liquid assets and $950 of notes
receivable, totaling $3,753 and equal to the net assets of Vaungarde on the
Company's books on that date.
<PAGE> 23
The net assets of Vaungarde as of June 30, 1996 are presented in the
consolidated balance sheet as a current asset. The Company's carrying value of
this business as of June 30, 1996 exceeded the proceeds expected from the sale,
therefore the Company recorded a non-cash charge of $2,600 in the fourth quarter
of 1996 to reflect the anticipated loss on the sale of the business as follows:
<TABLE>
<CAPTION>
<S> <C>
Write-down of assets due to anticipated net proceeds being less than carrying value:
Excess of cost over net assets of acquired company (write-off of goodwill) $1,332
Other assets, principally property, plant and equipment 949
Expenses of sale accruable at June 30, 1996 319
-------------
$2,600
=============
The effect on 1996 earnings per share of the above charge is as follows:
Before charge for business to be sold $0.63
Effect of charge for business to be sold ($0.39)
-------------
Earnings per share as reported $0.24
=============
</TABLE>
This transaction does not meet the criteria for discontinued operations
treatment for accounting purposes. Therefore, the sales and results of
operations of this business are included in continuing operations in 1996 and in
continuing operations through the date of sale in the fiscal year ended June 30,
1997.
Sales and operating losses of this business for 1997, 1996 and 1995 were as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------
<S> <C> <C> <C>
Sales $1,203 $9,887 $11,257
Operating loss $74 $834 $240
<CAPTION>
D - INVENTORIES
June 30,
1997 1996
---------------------------
<S> <C> <C>
Raw materials $1,264 $784
Work in process 1,300 1,417
Finished goods 491 315
Stores and supplies 706 796
---------------------------
Total inventories $3,761 $3,312
===========================
E - LONG TERM OBLIGATIONS
<CAPTION>
June 30,
1997 1996
---------------------------
<S> <C> <C> <C>
Revolving credit borrowings due 1999 $1,665
Variable rate term loan to bank due 2004 5,286 $6,000
Variable rate term loan to bank due 2003 8,714 $10,429
7% term loan to bank due 1999 1,780 3,172
9.5% Industrial Development Revenue Refunding Bond Series 1991 due 1999 453 897
7.35% Urban Development Action Grant due 2002 669 720
7.5% Ohio Development term loan due 1998 22 225
---------------------------
Total long term debt 18,589 21,443
Capitalized lease obligations (Note I) 1,208 1,742
---------------------------
Total long term obligations 19,797 23,185
Less current maturities of long term obligations (4,829) (5,051)
---------------------------
Total long term obligations less current maturities $14,968 $18,134
===========================
</TABLE>
At June 30, 1997, the Company had $4,335 in additional borrowing capacity under
a revolving credit agreement expiring October 1998. Subsequent to year end, this
agreement was renewed through October 1999. Borrowings under this facility carry
interest at the prime interest rate less 100 basis points. The Company is
required to pay a fee of 1/8% on the unused portion of the facility. No
revolving credit borrowings were outstanding on June 30, 1996. The prime
interest rate at June 30, 1997 was 8.50%.
The variable rate term loans to bank due 2004 and 2003 carry interest at the
Euro dollar rate plus 115 basis points. The effective interest rate for the
variable rate term loans as of June 30, 1997 and 1996 was 6.84% and 6.59%,
respectively.
<PAGE> 24
All borrowings from the Company's primary lender, Comerica Bank, including
revolving credit borrowings, variable rate term loans, 7% term loan and 9.5%
Industrial Revenue Bonds are unsecured. The Company is restricted from pledging
any of its assets without the prior consent of the bank.
The Urban Development Action Grant and Ohio Development term loan remain secured
by certain assets of one of the Company's subsidiaries with a net book value of
$6,556 at June 30, 1997. Capitalized lease obligations are secured by the
specific assets to which the leases apply.
The Company's financing arrangements also contain various warranties and
covenants. As of June 30, 1997 and 1996 the Company was in compliance with these
warranties and covenants.
Scheduled maturities of long term debt are as follows: 1998 -- $4,829, 1999 --
$5,022, 2000 -- $3,002, 2001 -- $2,804, 2002 -- $2,645, and $1,496 thereafter.
F - STOCKHOLDERS' EQUITY
The 1985 Stock Option Plan, adopted by the shareholders in August 1985, and the
1989 Stock Option Plan, adopted by the shareholders in February 1989 and amended
in November 1992, provide for the grant of options to employees of the Company
to purchase up to 300,000 and 800,000 shares of common stock, respectively.
Grants of options are made at no lower than the market price on date of grant,
are exercisable after between one and three years, and expire after either five
or ten years. Option activity during 1997 and 1996 was as follows:
<TABLE>
<CAPTION>
Number of shares Average
---------------------------------------- Option
1985 Plan 1989 Plan Total Price
----------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding at June 30, 1995 45,200 505,314 550,514 $4.49
Options issued in 1996 4,000 104,548 108,548 $6.50
Options exercised in 1996 (7,500) (22,000) (29,500) $2.42
Options canceled in 1996 (2,000) (4,500) (6,500) $6.46
----------------------------------------------------
Options outstanding at June 30, 1996 39,700 583,362 623,062 $4.92
Options issued in 1997 24,000 24,000 $6.23
Options exercised in 1997 (10,000) (309,000) (319,000) $3.45
Options canceled in 1997 (3,000) (3,000) $6.38
----------------------------------------------------
Options outstanding at June 30, 1997 26,700 298,362 325,062 $6.44
====================================================
Available for future years 95,138 95,138
========================================
</TABLE>
When an employee exercises a nonqualified stock option, the difference between
the market price and option price of the stock on the date of exercise is
considered taxable income to the employee and deductible compensation expense to
the Company. A total of 211,113 nonqualified stock options were exercised in
1997, creating a tax benefit of $215 which was recognized as additional paid-in
capital as required under Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes."
The 1994 Nonemployee Directors Stock Option Plan, adopted by the shareholders in
November 1994, provides for the automatic annual grant each July 1st of 2,000
options to each nonemployee director of the Company to purchase shares of common
stock. Grants of options are made at the market price on date of grant, are
exercisable after one year, and expire after ten years. In 1997 each nonemployee
director voluntarily surrendered, for no consideration, his automatic grant of
options to purchase 2,000 common shares. Option activity during 1997 and 1996
was as follows:
<TABLE>
<CAPTION>
Number Average
of Option
Shares Price
---------------------------
<S> <C> <C>
Options outstanding at June 30, 1995 12,000 $7.13
Options issued in 1996 12,000 $6.88
---------------------------
Options outstanding at June 30, 1996 24,000 $7.00
---------------------------
Options issued in 1997 12,000 $6.25
Options canceled in 1997 (12,000) $6.25
===========================
Options outstanding at June 30, 1997 24,000 $7.00
===========================
Available for future years 176,000
==============
</TABLE>
<PAGE> 25
G - BENEFIT PLANS
Future benefits under a defined-benefit pension plan covering approximately
fifty salaried employees at a subsidiary were curtailed in October 1994. The
Company received approval from the PBGC and IRS in September 1996 to terminate
this plan and distribute all the plan's assets. In January 1997 the Company
terminated the plan and settled all its obligations. Amounts presented below for
1997 reflect the one remaining pension plan, while amounts for 1996 and 1995
reflect both plans. See Note C to the Consolidated Financial Statements for
further information.
The Company's Defiance Precision Products, Inc. subsidiary has a defined benefit
pension plan covering substantially all its collective bargaining employees.
Pension benefits for these employees are based on years of credited service. It
is the Company's policy to fund this plan to meet the projected benefit
obligation and the requirements of ERISA.
The components of pension expense were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------
<S> <C> <C> <C>
Service cost, benefits earned during the year $125 $126 $139
Interest cost on projected benefit obligation 329 511 516
Loss (gain) on plan assets (1,066) (168) (497)
Net amortization and deferral 741 (364) 50
----------------------------------------
Net pension expense $129 $105 $208
========================================
</TABLE>
The expected long term rate of return on plan assets was 9.0% for 1997, 1996 and
1995. Each new prior service cost is amortized over the average remaining
service period of employees using the straight line method.
Assets of the plan at June 30, 1997 consisted primarily of cash equivalents,
corporate stocks and corporate bonds, including common stock of the Company with
a market value of approximately $525.
The following reconciles the funded status of the plan to amounts included in
the Company's balance sheet:
<TABLE>
<CAPTION>
June 30,
1997 1996
---------------------------
<S> <C> <C>
Actuarial present value of benefit obligations -- accumulated and projected
benefit obligation, $4,608 vested in 1997 and $6,868 vested in 1996 $4,803 $7,150
Market value of plan assets 5,270 6,949
---------------------------
Excess (shortfall) of plan assets compared with
projected benefit obligation 467 (201)
Unrecognized net obligation 439 486
Prior service cost not recognized in net periodic pension cost 16 (139)
Minimum funding liability (914)
Unrecognized net loss (gain) (53) 1,086
---------------------------
Prepaid pension cost $402 $519
===========================
</TABLE>
In determining the projected benefit obligation, the weighted average assumed
discount rate was 7.25% for 1997, 7.5% for 1996 and 8.0% for 1995.
On July 1, 1993 the Company adopted a voluntary deferred compensation plan under
Section 401(k) of the Internal Revenue Code (the "401(k) Plan") for all
employees who are not subject to a collective bargaining agreement and satisfy
the age and service requirements under the 401(k) Plan. Each participant may
elect to contribute up to the maximum permitted under federal law, and the
Company is obligated under the plan to contribute annually an amount equal to
50% of the participant's contribution up to 2% of that participant's annual
compensation. Additionally, the Company can make discretionary contributions
based on the profitability of the Company. The Company recorded compensation
expense for discretionary contributions of $427, $490 and $464 in 1997, 1996,
and 1995, respectively. Employees contributed $1,411, $1,175, and $1,121 in
1997, 1996 and 1995, respectively, to the 401(k) Plan. In accordance with the
provisions of the 401(k) Plan, the Company matched employee contributions in the
amount of $362, $324, and $320 during 1997, 1996 and 1995, respectively.
H - INCOME TAXES
The Company accounts for income taxes using the liability method under Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). Under SFAS 109, deferred tax liabilities and assets are recognized for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based upon the difference between the financial
statement and tax bases of assets and
<PAGE> 26
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
The income tax provision in the Consolidated Statement of Income is comprised of
the following:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------
<S> <C> <C> <C>
Current expense - Federal $1,929 $1,429 $3,615
Deferred expense - Federal 136 870 31
----------------------------------------
Income tax provision $2,065 $2,299 $3,646
========================================
<CAPTION>
Significant components of deferred tax assets and liabilities as of June 30,
1997 and 1996 are as follows:
Deferred tax assets: 1997 1996
---------------------------
<S> <C> <C>
Accruals and reserves:
Accounts receivable $65 $66
Employee benefits 438 777
Inventories 25 34
Other 37 100
---------------------------
Total deferred tax assets 565 977
Deferred tax liabilities:
Depreciation 2,782 2,238
Preoperating costs 440 751
Employee benefits 109 313
Other 46 28
---------------------------
Total deferred tax liabilities 3,377 3,330
---------------------------
Net deferred tax liability $2,812 $2,353
===========================
A reconciliation of income taxes at the United States statutory rate to the
effective income tax rate is as follows:
<CAPTION>
1997 1996 1995
------------------------------------------
<S> <C> <C> <C>
Federal statutory tax rate 34.0% 34.0% 34.0%
Amortization of cost in excess of net assets of acquired companies 1.3% 1.2% 1.3%
Goodwill and other charges for sale of business -0.3% 23.7%
Other -2.7% 0.1% 0.3%
==========================================
Effective tax rate 32.3% 59.0% 35.6%
==========================================
I - LEASES
The Company leases machinery and equipment used in its manufacturing operations
under capital leases with terms extending to the year 2000. The Company also
leases buildings and equipment under operating leases with terms ranging from
one to nine years. Certain operating leases have renewal options for additional
years and purchase options, both at fair market value.
At June 30, 1997, future minimum lease payments under noncancelable lease
obligations are as follows:
<CAPTION>
Capital Operating
Fiscal Year Leases Leases
---------------------------
1998 $460 $2,827
1999 406 2,264
2000 407 1,353
2001 169 687
2002 200
---------------------------
Total minimum lease payments 1,442 $7,331
=============
Amount representing interest 234
--------------
Present value of net minimum lease payments 1,208
Less current maturities 346
--------------
Long term obligations under capital leases $862
==============
</TABLE>
<PAGE> 27
Property, plant and equipment includes the following property under capital
leases:
<TABLE>
<CAPTION>
June 30,
1997 1996
---------------------------
<S> <C> <C>
Machinery and equipment $3,651 $3,871
Accumulated amortization (2,061) (2,150)
---------------------------
Net book value of assets under capital leases $1,590 $1,721
===========================
</TABLE>
Rent expense under operating leases was $3,189, $3,647 and $3,514 in 1997, 1996
and 1995, respectively.
J - SIGNIFICANT CUSTOMERS
Customers with sales representing over 10% of consolidated sales are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------
<S> <C> <C> <C>
General Motors Corporation 22% 30% 22%
Ford Motor Company 14% 14% 17%
Chrysler Corporation 11% 11% 5%
Eaton Corporation 11% 10% 12%
</TABLE>
Since substantially all the Company's sales are to domestic original equipment
manufacturers (OEMs) and their suppliers, the Company's trade accounts
receivable are largely with firms in the United States transportation industry.
K - COMMITMENTS
The Company has made commitments to purchase approximately $70 of equipment as
of June 30, 1997 and has sufficient funds available to meet these commitments
L - CONTINGENCIES
The Company is involved in various litigation arising in the normal course of
business. It is not possible to determine the ultimate liability, if any, in
these matters. In the opinion of management, such litigation will not have a
material adverse effect on the financial statements of the Company.
M - RELATED PARTY TRANSACTIONS
Four employees of a subsidiary of the Company each own a one-sixth interest in a
partnership which leases a facility to a subsidiary of the Company. The lease,
renewing a lease originally entered into prior to the Company's ownership of the
subsidiary, was dated March 1990 and expires August 1998 with monthly lease
payments of $23.
Two former members of the Board of Directors each owned a one-third interest in
a partnership which leased a facility to a subsidiary of the Company until
September 1995. The lease was dated March 1990 for a term of five years with
monthly lease payments of $10. At the end of the lease term in March 1995, the
subsidiary continued to lease the facility from the partnership on a month to
month basis at the same monthly rate. The subsidiary purchased this facility
from the partnership for $500 in September 1995. Prior to the execution of the
purchase agreement for this facility, the Board of Directors appointed an ad hoc
committee of two outside directors to evaluate the fairness of a potential
transaction between the Company and the partnership. The committee concluded a
purchase price of $500 for the facility was reasonable based upon their analysis
of the facts and circumstances. This subsidiary was sold August 1996.
SUPPLEMENTARY DATA
See Unaudited Quarterly Information included in Item 6.
<PAGE> 28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information required under this Item is included in a separate item
captioned "Executive Officers of the Registrant" contained in Item 1 of Part I
of this report. There is hereby incorporated by reference the information
contained in the Company's Proxy Statement for the 1997 Annual Meeting of
Stockholders under the caption "Election of Directors."
ITEM 11. EXECUTIVE COMPENSATION
There is hereby incorporated by reference the information contained in the
Company's Proxy Statement for the 1997 Annual Meeting of Stockholders under the
captions "Executive Compensation", "Election of Directors -- Compensation of
directors" and "Election of Directors -- Compensation committee interlocks and
insider participation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is hereby incorporated by reference the information contained in the
Company's Proxy Statement for the 1997 Annual Meeting of Stockholders under the
caption "Common Stock Ownership."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is hereby incorporated by reference the information contained in the
Company's Proxy Statement for the 1997 Annual Meeting of Stockholders under the
caption "Election of Directors -- Certain relationships and transactions."
<PAGE> 29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
------------------------
The following financial statements are filed as part of this
report under Item 8:
Consolidated Balance Sheet at June 30, 1997 and 1996
Consolidated Statement of Income for the years ended June 30,
1997, 1996, and 1995 Consolidated Statement of Stockholders'
Equity for the years ended June 30, 1997, 1996, and 1995
Consolidated Statement of Cash Flows for the years ended June 30,
1997, 1996, and 1995 Notes to Consolidated Financial Statements
2. Financial Statement Schedules
---------------------------------
The following financial statement schedules are filed as part of
this report at the pages indicated:
Page
----
Schedule II - Valuation and Qualifying Accounts 31
All financial statement schedules other than those listed above
have been omitted because they are not required or the information
required to be set forth therein is included in the Consolidated
Financial Statements or Notes thereto.
3. Exhibits
------------
The Exhibits listed on the accompanying Index to Exhibits
immediately following the financial statement schedules on page 32
are filed as a part of, or incorporated by reference into this
report.
(b) Reports on Form 8-K
--------------------
During the quarter ended June 30, 1997, no reports on Form 8-K
were filed with the Securities and Exchange Commission.
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
DEFIANCE, INC.
By: /s/ Jerry A. Cooper
---------------------
Jerry A. Cooper, President
Date: August 25, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Thomas H. Roulston II Chairman of the Board and Director August 25, 1997
- -------------------------
Thomas H. Roulston II
/s/ Jerry Cooper President, Chief Executive Officer and Director August 25, 1997
- ---------------- (Principal Executive Officer)
Jerry A. Cooper
/s/ Michael J. Meier Vice President-Finance and Chief Financial Officer August 25, 1997
- -------------------- (Principal Financial Officer)
Michael J. Meier
/s/ James L. Treece Chief Accounting Officer August 25, 1997
- ------------------- (Principal Accounting Officer)
James L. Treece
/s/ James E. Heighway Director August 25, 1997
- ---------------------
James E. Heighway
/s/ George H. Lewis III Director August 25, 1997
- -----------------------
George H. Lewis III
/s/ Richard W. Lock Director August 25, 1997
- -------------------
Richard W. Lock
/s/ John D. Ong Director August 25, 1997
- ---------------
John D. Ong
/s/ Hector R. Ortino Director August 25, 1997
- --------------------
Hector R. Ortino
/s/ Scott D. Roulston Director August 25, 1997
- ---------------------
Scott D. Roulston
</TABLE>
<PAGE> 31
<TABLE>
<CAPTION>
DEFIANCE, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(All dollar amounts in thousands)
Column A Column B Column C Column D Column E
- -------- -----------------------------------------------------
Balance at Additions Retire- Balance at
beginning charged to ments end of
Description of period expense (1) period
- ----------- -----------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1997
Allowance for doubtful accounts $191 $1 $192
YEAR ENDED JUNE 30, 1996
Allowance for doubtful accounts $316 ($18) $107 $191
YEAR ENDED JUNE 30, 1995
Allowance for doubtful accounts $357 $6 $47 $316
<FN>
(1)Uncollectible accounts charged against the reserve, net of recoveries
</TABLE>
<PAGE> 32
DEFIANCE, INC. AND SUBSIDIARIES
Annual Report on Form 10-K
Fiscal Year Ended June 30, 1997
Index to Exhibits - Item 14(a)(3)
Exhibit no. Description
- ----------- -----------
3(f) Certificate of Incorporation of the Company, as amended December 15,
1994 (Filed as Exhibit 3-f to the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1996)
3(g) By-Laws of the Company, as amended July 26, 1989 (Filed as Exhibit
3-g to the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1996)
10(v) Defiance, Inc. 1989 Stock Option Plan, as amended January 20, 1993
(Filed as Exhibit A to the Company's Proxy Statement for the February
1, 1990 Annual Meeting of Shareholders, with amendment filed as
Exhibit A to the Company's Proxy Statement for the November 18, 1992
Annual Meeting of Shareholders)
10(ac) Defiance, Inc. Executive Incentive Plan, effective July 1, 1992
(Filed as Exhibit 10-ac to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1993)
10(ad) Letter of employment for Jerry A. Cooper, President and CEO, dated
February 28, 1992 (Filed as Exhibit 10-ad to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1993)
10(af) Defiance, Inc. Retirement Savings Plan, effective July 1, 1993 (Filed
as Exhibit 10-af to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1994)
10(ag) Amendment #1 to Defiance, Inc. Executive Incentive Plan, effective
May 19, 1994 (Filed as Exhibit 10-ag to the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 1994)
10(ah) Second Amended and Restated Loan Agreement by and between Defiance,
Inc. and Comerica Bank dated July 29, 1994 (Filed as Exhibit 10-ah to
the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1994)
10(ai) Revolving Credit Note, Term Note, and Equipment Note by and between
Defiance, Inc. and Comerica Bank dated July 29, 1994 (Filed as
Exhibit 10-ai to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1994)
10(aj) Defiance, Inc. Directors' Deferral Plan, effective September 21, 1994
(Filed as Exhibit 10-aj to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1995)
10(ak) Defiance, Inc. Change of Control Policy, effective September 22, 1994
(Filed as Exhibit 10-ak to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1995)
10(al) Defiance, Inc. 1994 Nonemployee Director Stock Option Plan, effective
November 16, 1994 (Filed as Exhibit A to the Company's Proxy
Statement for the November 16, 1994 Annual Meeting of Shareholders)
10(am) Defiance, Inc. Supplemental Savings and Deferred Compensation Plan,
effective July 1, 1994 (Filed as Exhibit 10-am to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1995)
10(an) Defiance, Inc. Supplemental Executive Retirement Plan, effective July
1, 1995 (Filed as Exhibit 10-an to the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1995)
10(ao) Defiance, Inc. Limited Supplemental Executive Retirement Plan,
effective July 1, 1995 (Filed as Exhibit 10-ao to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1995)
10(ap) First Amendment to Amended and Restated Loan Agreement by and between
Defiance, Inc. and Comerica Bank dated May 31, 1995 (Filed as Exhibit
10-ap to the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1995)
<PAGE> 33
10(aq) Equipment Note by and between Defiance, Inc. and Comerica Bank dated
May 31, 1995 (Filed as Exhibit 10-aq to the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 1995)
10(ar) Term Note-B by and between Defiance, Inc. and Comerica Bank dated
July 12, 1995 (Filed as Exhibit 10-ar to the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 1995)
10(as) Second Amendment to Amended and Restated Loan Agreement by and
between Defiance, Inc. and Comerica Bank dated August 2, 1995 (Filed
as Exhibit 10-as to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1995)
10(at) Revolving Credit Note and Equipment Note by and between Defiance,
Inc. and Comerica Bank dated August 2, 1995 (Filed as Exhibit 10-at
to the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1995)
10(au) Revolving Credit Note by and between Defiance, Inc. and Comerica Bank
dated October 25, 1995 (Filed as Exhibit 10-au to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1996)
10(av) Third Amendment to Amended and Restated Loan Agreement by and between
Defiance, Inc. and Comerica Bank dated October 25, 1995 (Filed as
Exhibit 10-av to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1996)
10(aw) Fourth Amendment to Amended and Restated Loan Agreement by and
between Defiance, Inc. and Comerica Bank dated December 31, 1995
(Filed as Exhibit 10-aw to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1996)
10(ax) Fifth Amendment to Amended and Restated Loan Agreement by and between
Defiance, Inc. and Comerica Bank dated June 30, 1996 (Filed as
Exhibit 10-ax to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1996)
10(ay) Letter to modify February 28, 1992 letter of employment for Jerry A.
Cooper, President and CEO, dated July 2, 1996 (Filed as Exhibit 10-ay
to the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1996)
10(az) Term Note-C by and between Defiance, Inc. and Comerica Bank dated
August 1, 1996 (Filed as Exhibit 10-az to the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 1996)
10(ba) Definitive agreement between Defiance, Inc. and Quoin, Inc. for
purchase of all outstanding common shares of Vaungarde, Incorporated
by Quoin, Inc. dated August 6, 1996 (Filed as Exhibit 10-ba to the
Company's Annual Report on Form 10-K for the fiscal year ended June
30, 1996)
10(bb) August 15, 1996 letter from Comerica Bank consenting to sale of all
outstanding common shares of Vaungarde, Incorporated to Quoin, Inc.
(Filed as Exhibit 10-bb to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1996)
10(bc) Sixth Amendment to Amended and Restated Loan Agreement by and between
Defiance, Inc. and Comerica Bank dated August 19, 1996 (Filed as
Exhibit 10-bc to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1996)
10(bd) Revolving Credit Note by and between Defiance, Inc. and Comerica Bank
dated August 19, 1996 (Filed as Exhibit 10-bd to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1996)
10(be) Defiance, Inc. Stock Repurchase Plan dated January 24, 1996 (Filed as
Exhibit 28.1 to the Company's Current Report on Form 8-K dated
January 24, 1996)
10(bf) Seventh Amendment to Amended and Restated Loan Agreement by and
between Defiance, Inc. and Comerica Bank dated June 30, 1996 (*)
10(bg) Amendment #1 to Defiance, Inc. Supplemental Savings and Deferred
Compensation Plan, effective July 1, 1996 (*)
<PAGE> 34
10(bh) Amendment #1 to Defiance, Inc. Supplemental Executive Retirement
Plan, effective July 24, 1997 (*)
10(bi) Amendment #1 to Defiance, Inc. Limited Supplemental Executive
Retirement Plan, effective July 24, 1997 (*)
10(bj) Eighth Amendment to Amended and Restated Loan Agreement by and
between Defiance, Inc. and Comerica Bank dated August 18, 1997 (*)
10(bk) Revolving Credit Note by and between Defiance, Inc. and Comerica Bank
dated August 18, 1997 (*)
11 Statement re computation of per share earnings (*)
21 Subsidiaries of the Registrant (*)
23 Consent of Independent Auditors (*)
27 Financial Data Schedule (*)
--------------------------------------------------------------------
(*) Filed herewith
All exhibits not marked with an asterisk are incorporated by reference to the
previously filed documents indicated above.
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
Included in the preceding list of exhibits are the following management
contracts or compensatory plans or arrangement:
10(v) Defiance, Inc. 1989 Stock Option Plan, as amended January 20, 1993
10(ac) Defiance, Inc. Executive Incentive Plan, effective July 1, 1992
10(ad) Letter of employment for Jerry A. Cooper, President and CEO, dated
February 28, 1992
10(af) Defiance, Inc. Retirement Savings Plan, effective July 1, 1993
10(ag) Amendment #1 to Defiance, Inc. Executive Incentive Plan, effective
May 19, 1994
10(ak) Defiance, Inc. Change of Control Policy, effective September 22, 1994
10(am) Defiance, Inc. Supplemental Savings and Deferred Compensation Plan,
effective July 1, 1994
10(an) Defiance, Inc. Supplemental Executive Retirement Plan, effective July
1, 1995
10(ao) Defiance, Inc. Limited Supplemental Executive Retirement Plan,
effective July 1, 1995
10(ay) Letter to modify February 28, 1992 letter of employment for Jerry A.
Cooper dated July 2, 1996
10(bg) Amendment #1 to Defiance, Inc. Supplemental Savings and Deferred
Compensation Plan, effective July 1, 1996
10(bh) Amendment #1 to Defiance, Inc. Supplemental Executive Retirement
Plan, effective July 24, 1997
10(bi) Amendment #1 to Defiance, Inc. Limited Supplemental Executive
Retirement Plan, effective July 24, 1997
<PAGE> 1
Exhibit 10(bf)
SEVENTH AMENDMENT TO SECOND AMENDED
AND RESTATED LOAN AGREEMENT
-----------------------------------
This Amendment dated as of June 30, 1996, between Defiance, Inc., a
Delaware corporation, ("Company"), and Comerica Bank, a Michigan banking
corporation, successor in interest by reason of merger to Manufacturers Bank,
N,A. ("Bank"),
RECITALS:
A. Company and Bank entered' into a Second Amended and Restated Loan
Agreement dated July 29, 1994, which was amended by a First Amendment to Amended
and Restated Loan Agreement dated May 31, 1995, a Second Amendment to Amended
and Restated Loan Agreement dated as of August 2, 1995, a Third Amendment to
Amended and Restated Loan Agreement dated October 25, 1995, a Fourth Amendment
to Amended and Restated Loan Agreement dated December 31, 1995, a Fifth
Amendment to Amended and Restated Loan Agreement dated June 30, 1996, and a
Sixth Amendment to Amended and Restated Loan Agreement dated as of August 19,
1996 ("Agreement").
B. Company and Bank desire further to amend the Agreement.
NOW, THEREFORE, the parties agree as follows:
1. Section 9.13 of the Agreement is amended to read in its entirety
as follows:
"9.13 Maintain at all times an Interest Ratio of not less
than the following amounts during the periods specified below:
June 30, 1996 through September 30, 1996 2.4 to 1.0
October 1, 1996 through June 29, 1997 3.0 to 1.0
June 30, 1997 and thereafter 4.0 to 1.0"
2. Section 9,15 of the Agreement is amended to read in its entirety
as follows:
"9.15 Maintain at all times a Consolidated Tangible Net
Worth of not less than the following amounts during the periods
specified below:
June 30, 1996 through September 30, 1996 $28,000,000
October 1. 1996 through December 31, 1996 $29,000,000
January 1, 1997 and thereafter $30,000,000"
3. Upon execution hereof by Company and Bank and execution of the
Acknowledgment below by each of the Guarantors (as defined in the Agreement),
this Amendment shall be effective as of June 30, 1996.
<PAGE> 2
4. Company hereby represents and warrants that, after giving effect
to the amendments contained herein, (a) execution, delivery and performance of
this Amendment and any other documents and instruments required under this
Amendment or the Agreement are within Company's corporate powers, have been
duly authorized, are not in contravention of law or the terms of Company's
Certificate of Incorporation or Bylaws, and do not require the consent or
approval of any governmental body, agency, or authority, and this Amendment
and any other documents and instruments required under this Amendment or the
Agreement, will be valid and binding in accordance with their terms; (b) the
continuing representations and warranties of Company set forth in Sections 8.1
through 8.5 and 8.7 through 8.14 of the Agreement are true and correct on and
as of the date hereof with the same force and effect as made on and as of the
date hereof; (c) the continuing representations and warranties of Company set
forth in Section 8.6 of the Agreement are true and correct as of the date
hereof with respect to the most recent financial statements furnished to the
Bank by Company in accordance with Section 9.1 of the Agreement; and (d) no
event of default, or condition or event which, with the giving of notice or
the running of time, or both, would constitute an event of default under the
Agreement, has occurred and is continuing as of the date hereof.
5. Except as expressly modified hereby all of the terms and
conditions of the Agreement remain in full force and effect.
WITNESS the due execution hereof on the day and year first written
above.
COMERICA BANK DEFIANCE, INC.
By: /s/ Timothy Griffin By: /s/ Michael F. Meier
------------------------ ----------------------
Its: Vice President Its: Treasurer
------------------------ -----------------------
<PAGE> 3
Acknowledgement
---------------
The undersigned guarantors acknowledge and consent to the foregoing
Amendment and waiver and ratify and confirm their respective obligations under
the Guaranty Agreements dated February 5, 1993, which Guaranty Agreements
remain in full force and effect.
DEFIANCE TESTING & ENGINEERING DEFIANCE PRECISION PRODUCTS,
SERVICES, INC., F/K/A SMTC INC.
CORPORATION
By: /s/ Michael F. Meier By: /s/ Michael F. Meier
------------------------ --------------------------
Its: Treasurer Its: Treasurer
------------------------ --------------------------
DRAFTLINE ENGINEERING COMPANY HY-FORM PRODUCTS, INC.
By: /s/ Michael F. Meier By: /s/ Michael F. Meier
------------------------ --------------------------
Its: Treasurer Its: Treasurer
------------------------ --------------------------
BINDERLINE DEVELOPMENT, INC.
By: /s/ Michael F. Meier
------------------------
Its: Treasurer
------------------------
<PAGE> 1
Exhibit 10(bg)
DEFIANCE, INC.
SUPPLEMENTAL SAVINGS AND DEFERRED COMPENSATION PLAN
Amendment #1
December 30, 1996
Article I, Section 1.3 is added as follows:
1.3 The Plan is intended to be an unfunded plan which provides benefits
to a select group of management and highly compensated employees as
such group is described under Sections 201(2), 301(a)(3), and 401
(a)(1) of the Employee Retirement Security Act of 1974, as amended.
The Plan is not intended to be a plan described in Section 401(a)
of the Internal Revenue Code of 1986 as amended.
Article II, Section 2.1, item (I) is amended in its entirety as follows:
(i) "Participant" shall mean an Employee who is a member of the select
group of management or highly compensated employees as such group is
described in Section 201(2), 301(a)(3) and 401(a)(1) of ERISA, who
has become a Participant in accordance with Section 3.2.
Article II, Section 2.1, item (n) is added as follows:
(n) "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.
Executed at Cleveland, Ohio this 30th day of December, 1996, effective as
of July 1, 1996.
ATTEST: DEFIANCE, INC.
/s/ Michael F. Meier By: /s/ Jerry A. Cooper
------------------------ -------------------------
Title: PRESIDENT AND C.E.O.
-------------------------
<PAGE> 1
Exhibit 10(bh)
DEFIANCE, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Effective July 1, 1995
Amendment # 1
--------------
Article IV, Item 4.3 is amended to add the following language at the end
of the paragraph:
"Notwithstanding the foregoing, for any given fiscal year beginning
with the fiscal year ended June 30, 1998, an amount relating to such
fiscal year shall be credited to the Account of each Participant
employed by the Company on the last day of such fiscal year, in
accordance with the schedule of contributions set forth in Appendix
B hereto without regard as to whether or not Threshold Performance
is attained."
Executed at Cleveland, Ohio this 24th day of July, 1997.
ATTEST: DEFIANCE, INC.
/s/ Michael F. Meier By /s/ Jerry A. Cooper
------------------------- -------------------------
Title President/C.E.O.
-------------------------
<PAGE> 1
10(bi)
DEFIANCE, INC.
LIMITED SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Effective July 1, 1995
Amendment #1
------------
Article IV, Item 4.3 is amended to add the following language at the end
of the paragraph:
"Notwithstanding the foregoing, for any given fiscal year beginning
with the fiscal year ended June 30, 1998, an amount relating to such
fiscal year shall be credited to the Account of each Participant
employed by the Company on the last day of such fiscal year, in
accordance with the schedule of contributions set forth in Appendix
B hereto without regard as to whether or not Threshold Performance
is attained."
Executed at Cleveland, Ohio this 24th day of July, 1997.
ATTEST: DEFIANCE, INC.
/s/ Michael F. Meier By /s/ Jerry A. Cooper
- -------------------------- ---------------------------
Title President/C.E.O.
----------------------------
<PAGE> 1
Exhibit 10(bj)
EIGHTH AMENDMENT TO AMENDED
AND RESTATED LOAN AGREEMENT
---------------------------
This Amendment dated as of August 18, 1997, between Defiance, Inc., a
Delaware corporation, ("Company"), and Commerce Bank, a Michigan banking
corporation, successor in interest by reason of merger to Manufacturers Bank, NA
("Bank").
RECITALS:
A. Company and Bank entered into a Second Amended and Restated Loan
Agreement dated July 29, 1994, which was amended by a First Amendment to Amended
and Restated Loan Agreement dated May 31, 1995, a Second Amendment to Amended
and Restated Loan Agreement dated as of August 2, 1995, a Third Amendment to
Amended and Restated Loan Agreement dated October 25, 1995, a Fourth Amendment
to Amended and Restated Loan Agreement dated December 31, 1995, a Fifth
Amendment to Amended and Restated Loan Agreement dated June 30, 1996, a Sixth
Amendment dated August 19, 1996 and a Seventh Amendment dated June 30, 1996
("Agreement").
B. Company and Bank desire further to amend the Agreement.
NOW, THEREFORE, the parties agree as follows:
1. The definition of "Revolving Credit Maturity Date" set forth in
Section 1 of the Agreement is amended to read in its entirety as follows:
"'Revolving Credit Maturity Date' shall mean October
1, 1999."
2. Exhibit "E" to the Agreement is hereby deleted and attached
Exhibit "E" is substituted thereafter.
3. The above amendment shall be effective upon execution hereof by
Company and Bank, delivery by Company to Bank of an executed Note in the form of
attached Exhibit "E" and execution of the Acknowledgment below by each of the
Guarantors (as defined in the Agreement).
4. Company hereby represents and warrants that, after giving effect
to the amendment contained herein, (a) execution, delivery and performance of
this Amendment and any other documents and instruments required under this
Amendment or the Agreement are within Company's corporate powers, have been duly
authorized, are not in contravention of law or the terms of Company's
Certificate of Incorporation or Bylaws, and do not require the consent or
approval of any governmental body, agency, or authority, and this Amendment and
any other documents and instruments required under this Amendment or the
Agreement, will be valid and binding in accordance with their terms; (b) the
continuing representations and
<PAGE> 2
warranties of Company set forth in Sections 8.1 through 8.5 and 8.7 through 8.14
of the Agreement are true and correct on and as of the date hereof with the same
force and effect as made on and as of the date hereof; (c) the continuing
representations and warranties of Company set forth in Section 8.6 of the
Agreement are true and correct as of the date hereof with respect to the most
recent financial statements furnished to the Bank by Company in accordance with
Section 9.1 of the Agreement; and (d) no event of default, or condition or event
which, with the giving of notice or the running of time, or both, would
constitute an event of default under the Agreement, has occurred and is
continuing as of the date hereof.
5. Except as expressly modified hereby all of the terms and
conditions of the Agreement remain in full force and effect.
WITNESS the due execution hereof on the day and year first written
above.
COMERICA BANK DEFIANCE, INC.
By:___________________________ By: __________________________
Its: _________________________ Its: _________________________
Acknowledgment
--------------
The undersigned guarantors acknowledge and consent to the foregoing
Amendment and waiver and ratify and confirm their respective obligations under
the Guaranty Agreements dated February 5, 1993, which Guaranty Agreements remain
in full force and effect.
DEFIANCE TESTING & ENGINEERING DEFIANCE PRECISION PRODUCTS,
SERVICES, INC., F/K/A SMTC INC.
CORPORATION
By: __________________________ By: __________________________
Its: _________________________ Its: _________________________
2
<PAGE> 3
DRAFTLINE ENGINEERING COMPANY HY-FORM PRODUCTS, INC.
By: __________________________ By: __________________________
Its: _________________________ Its: _________________________
BINDERLINE DEVELOPMENT, INC.
By: _____________________________
Its: ____________________________
3
<PAGE> 4
EXHIBIT "E"
REVOLVING CREDIT NOTE
---------------------
Detroit, Michigan
$6,000,000 August 18, 1997
On or before October 1, 1999 FOR VALUE RECEIVED, Defiance, Inc., a
Delaware corporation (herein called "Company") promises to pay to the order of
COMERICA BANK, a Michigan banking corporation (herein called "Bank") at its Main
Office at 500 Woodward Avenue, Detroit, Michigan, in lawful money of the United
States of America the indebtedness or so much of the sum of Six Million Dollars
($6,000,000) as may from time to time have been advanced and then be outstanding
hereunder pursuant to the Second Amended and Restated Loan Agreement dated as of
July 29, 1994, made by and between Company and Bank (as amended, herein called
"Agreement"), together with interest thereon as hereinafter set forth.
Each of the Advances hereunder shall bear interest at the Applicable
Interest Rate from time to time applicable thereto under the Agreement or as
otherwise determined thereunder, and interest shall be computed, assessed and
payable as set forth in the Agreement.
This Note is a note under which advances, repayments and readvances may
be made from time to time, subject to the terms and conditions of the Agreement.
This Note evidences borrowing under, is subject to, is secured in accordance
with, and may be matured under, the terms of the Agreement, to which reference
is hereby made. As additional security for this Note, Company grants Bank a lien
on all property and assets including deposits and other credits of the Company,
at any time in possession or control of or owing by Bank for any purpose.
Company hereby waives presentment for payment, demand, protest and
notice of dishonor and nonpayment of this Note and agrees that no obligation
hereunder shall be discharged by reason of any extension, indulgence, release,
or forbearance granted by any holder of this Note to any party now or hereafter
liable hereon or any present or subsequent owner of any property, real or
personal, which is now or hereafter security for this Note. Any transferees of,
or endorser, guarantor or surety paying this Note in full shall succeed to all
rights of Bank, and Bank shall be under no further responsibility for the
exercise thereof or the loan evidenced hereby. Nothing herein shall limit any
right granted Bank by other instrument or by law.
4
<PAGE> 5
This Note is replacement for and extension of a Revolving Credit Note
dated August 19, 1996 in the principal amount of $6,000,000 by Company payable
to Bank.
All capitalized terms used but not defined herein shall have the
meanings ascribed to them in the Agreement.
DEFIANCE, INC.
By:________________________
Its: _________________________
5
<PAGE> 1
Exhibit 10(bk)
REVOLVING CREDIT NOTE
---------------------
Detroit, Michigan
$6,000,000 August 18, 1997
On or before October 1, 1999 FOR VALUE RECEIVED, Defiance, Inc., a Delaware
corporation (herein called "Company") promises to pay to the order of COMERICA
BANK, a Michigan banking corporation (herein called "Bank") at its Main Office
at 500 Woodward Avenue, Detroit, Michigan, in lawful money of the United States
of America the indebtedness or so much of the sum of Six Million Dollars
($6,000,000) as may from time to time have been advanced and then be outstanding
hereunder pursuant to the Second Amended and Restated Loan Agreement dated as of
July 29, 1994, made by and between Company and Bank (as amended, herein called
"Agreement"), together with interest thereon as hereinafter set forth.
Each of the Advances hereunder shall bear interest at the Applicable
Interest Rate from time to time applicable thereto under the Agreement or as
otherwise determined thereunder, and interest shall be computed, assessed and
payable as set forth in the Agreement.
This Note is a note under which advances, repayments and readvances may be
made from time to time, subject to the terms and conditions of the Agreement.
This Note evidences borrowing under, is subject to, is secured in accordance
with, and may be matured under, the terms of the Agreement, to which reference
is hereby made. As additional security for this Note, Company grants Bank a lien
on all property and assets including deposits and other credits of the Company,
at any time in possession or control of or owing by Bank for any purpose.
Company hereby waives presentment for payment, demand, protest and notice
of dishonor and nonpayment of this Note and agrees that no obligation hereunder
shall be discharged by reason of any extension, indulgence, release, or
forbearance granted by any holder of this Note to any party now or hereafter
liable hereon or any present or subsequent owner of any property, real or
personal, which is now or hereafter security for this Note. Any transferees of,
or endorser, guarantor or surety paying this Note in full shall succeed to all
rights of Bank, and Bank shall be under no further responsibility for the
exercise thereof or the loan evidenced hereby. Nothing herein shall limit any
right granted Bank by other instrument or by law.
This Note is replacement for and extension of a Revolving Credit Note dated
August 19, 1996 in the principal amount of $6,000,000 by Company payable to
Bank.
<PAGE> 2
All capitalized terms used but not defined herein shall have the meanings
ascribed to them in the Agreement.
DEFIANCE, INC.
By: /s/ MICHAEL J. MEIER
----------------------------------
MICHAEL J. MEIER
Its: VICE PRESIDENT, CFO & TREASURER
---------------------------------
2
<PAGE> 1
Exhibit 11. STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
Defiance, Inc. and Subsidiaries
(All dollar amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended June 30,
1997 1996 1995
----------------------------------------
<S> <C> <C> <C>
Common shares:
Shares outstanding - beginning of period 6,415,750 6,543,950 6,516,038
Shares issued during period 347,546 29,500 27,912
Shares purchased for treasury (346,400) (157,700)
----------------------------------------
Shares outstanding - end of period 6,416,896 6,415,750 6,543,950
========================================
Average shares outstanding per above 6,423,420 6,532,285 6,533,156
Average common share equivalents:
Outstanding options and warrants 82,036 174,793 175,465
----------------------------------------
Weighted average common shares outstanding 6,505,456 6,707,078 6,708,621
========================================
Net earnings $4,335 $1,598 $6,594
========================================
Primary and fully diluted net earnings per common share $0.67 $0.24 $0.98
========================================
</TABLE>
<PAGE> 1
Exhibit 21. SUBSIDIARIES OF THE REGISTRANT
Defiance, Inc.
June 30, 1997
<TABLE>
<CAPTION>
Percentage of
State in which voting securities
Name incorporated owned by Company
- ---- ------------ ----------------
<S> <C> <C>
Defiance Precision Products, Inc. Ohio 100%
Hy-Form Products, Inc. Michigan 100%
Defiance Testing & Engineering Services, Inc. Michigan 100%
Binderline Development, Inc. Michigan 100%
Draftline Engineering Company Delaware 100%
</TABLE>
All the subsidiaries listed above are included in the Consolidated Financial
Statements of the Company.
<PAGE> 1
EXHIBIT 23.
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-92504, No. 33-44505 and No. 33-25753) pertaining to the 1994
Nonemployee Director Stock Option Plan, the 1989 Stock Option Plan and the 1985
Stock Option Plan, respectively, of Defiance, Inc. of our report dated August
4, 1997, with respect to the consolidated financial statements and schedule of
Defiance, Inc. for the year ended June 30, 1997, included in the Annual Report
(Form 10-K) for the year ended June 30, 1997.
Cleveland, Ohio
August 25, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 188
<SECURITIES> 0
<RECEIVABLES> 21,684
<ALLOWANCES> 192
<INVENTORY> 3,761
<CURRENT-ASSETS> 28,974
<PP&E> 69,278
<DEPRECIATION> 31,456
<TOTAL-ASSETS> 73,819
<CURRENT-LIABILITIES> 17,193
<BONDS> 19,797
<COMMON> 346
0
0
<OTHER-SE> 38,045
<TOTAL-LIABILITY-AND-EQUITY> 73,819
<SALES> 92,123
<TOTAL-REVENUES> 92,123
<CGS> 72,719
<TOTAL-COSTS> 72,719
<OTHER-EXPENSES> 11,331
<LOSS-PROVISION> 1
<INTEREST-EXPENSE> 1,673
<INCOME-PRETAX> 6,400
<INCOME-TAX> 2,065
<INCOME-CONTINUING> 4,335
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,335
<EPS-PRIMARY> .67
<EPS-DILUTED> .67
</TABLE>
