<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, 1998
-------------
[ ] 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 31,1998, 6,161,449 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 $39,271,710.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Proxy Statement for Defiance, Inc.'s 1998 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, manufactures specialty anti-friction bearings and metal prototype dies and
parts and provides testing and tooling development services to the U.S. motor
vehicle industry. The Company has its headquarters in Cleveland, Ohio.
The Company's operating subsidiaries, described below, specialize in highly
engineered products and services where value is added by developing imaginative
solutions to customers' challenges.
Products
- --------
Defiance Precision Products, Inc. ("Precision Products") was established in 1905
and was the Company's original operating subsidiary. 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 industries. 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.
Hy-Form Products, Inc. ("Hy-Form") was established in 1977 and acquired by the
Company in 1986. Hy-Form applies state-of-the-art technology and manufacturing
processes to the production of prototype dies and metal parts for automotive
components such as fenders, hoods, doors and chassis components. Hy-Form's
customers use these parts for physical testing, pre-production engineering and
constructing production tooling. In addition, special or limited production runs
of stamped parts are produced for various customers. In August 1994, Hy-Form
received a contract from General Motors to supply hard production tooling for
the 1997 Chevrolet Malibu. An additional facility was leased on a short-term
basis in which this tooling was produced. The contract was completed in May
1996.
Services
- --------
Defiance Testing & Engineering Services, Inc. ("Testing Services"), formerly
known as SMTC Corporation, was established in 1976 and acquired by the Company
in 1986. Testing Services 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. motor vehicle industry.
Physical testing services include product durability testing, experimental
stress analysis, product validation testing, environmental testing, noise and
vibration testing, data acquisition 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, crash analysis, experimental
dynamics, variation simulation analysis and vehicle development programs for
vehicle bodies, chassis, and powertrain components. Computer aided engineering
techniques such as computer-simulated testing of prototypes are used to help in
the design process of new products at an early stage in the product development
cycle.
Binderline Draftline, Inc., formerly two separate corporations, Binderline
Development, Inc., established in 1953, and Draftline Engineering Company,
established in 1966, were both acquired by the Company in 1987. These two
corporations were merged on July 1, 1998, becoming Binderline Draftline, Inc.
("Binderline-Draftline"). Binderline-Draftline offers a complete tooling
development service that includes die design, models, foam molds, patterns,
tooling aids, fixtures and computer-generated tooling cutter paths, primarily
serving the U.S. motor vehicle industry. Typical automotive parts for which
these services are furnished include structural, suspension, inner panels, frame
components and powertrain sheet metal parts.
Vaungarde, Incorporated
- -----------------------
Vaungarde, Incorporated ("Vaungarde"), sold in August 1996, molded plastic parts
using reaction injection molding processes and painted parts of various polymers
produced internally or provided by other molders, serving original equipment and
after-market manufacturers in the automotive, heavy truck, agricultural and
recreational vehicle industries.
<PAGE> 3
Sales by subsidiary 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
1998 1997 1996
-----------------------------------
<S> <C> <C> <C>
Precision Products 57% 49% 35%
Hy-Form 10% 12% 21%
Testing Services 24% 28% 25%
Binderline-Draftline 9% 10% 10%
Vaungarde 1% 9%
-----------------------------------
100% 100% 100%
===================================
</TABLE>
All of the Company's operating facilities have achieved ISO-9000 registration.
All of Precision Products' facilities have also achieved QS-9000 compliance.
MARKETING
Substantially all the Company's sales are to domestic original equipment
manufacturers ("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 for several years.
COMPETITION
The U.S. motor vehicle industry, the principal market for the Company's products
and services, is highly competitive, and suppliers to OEMs and others in the
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's subsidiaries compete with many suppliers to automobile and truck
manufacturers, including several U.S., European and Pacific Rim 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.
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.
<PAGE> 4
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
1998 1997 1996
------------------------------------
<S> <C> <C> <C>
Big Three:
General Motors Corporation 19% 22% 30%
Ford Motor Company 12% 14% 14%
Chrysler Corporation 10% 11% 11%
------------------------------------
41% 47% 55%
Others over 10% of consolidated sales:
Eaton Corporation 21% 11% 10%
</TABLE>
EMPLOYEES
As of June 30, 1998, the Company employed 691 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.
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
a 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 65 Chairman of the Board and Director (1)
Jerry A. Cooper 59 President, Chief Executive Officer and Director (2)
Michael J. Meier 44 VP-Finance, Chief Financial Officer, Secretary and Treasurer
James L. Treece 60 Chief Accounting Officer and Assistant Treasurer
Carl A. Rispoli 53 Corporate Controller and Assistant Secretary
Clifford Schumacher 46 VP-Marketing and Corporate Development
</TABLE>
(1) Term as director expires in 1999
(2) Term as director expires in 1998, nominee for director with
term expiring in 2001
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. He is also a director of American Stone Industries, Inc., Continental
Managed Pharmacy Services, Inc., MJM Industries, Inc., University Club of
Cleveland and R.B. Mfg. Co.
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 director of
corporate information systems. Brush Wellman is a supplier of high-performance
materials with a focus on beryllium-based materials.
Clifford Schumacher joined the Company in 1998 as VP-Marketing and Corporate
Development. Prior to joining the Company, Mr. Schumacher was responsible for
marketing and business development for ACMI, Inc., a manufacturer of aluminum
automotive components located in Southfield, Michigan. Prior to joining ACMI in
1995 he worked for Alcan Aluminum for seven years, which included two years as
business development manager and three years as business manager for
subsidiaries of Alcan. Earlier in his career he was with E.I. Du Pont de
Nemours, Himont Plastics and Ford Motor Company.
No executive officer has any family relationship to any other executive officer
or director of the Company, except Thomas H. Roulston II, 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
has been elected and qualified, or until his earlier resignation or removal from
office.
<PAGE> 6
ITEM 2. PROPERTIES
Following are the principal properties of the Company as of June 30, 1998:
<TABLE>
<CAPTION>
Approximate area Owned or
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
High Low Declared
---- --- -------------
Fiscal 1998
<S> <C> <C> <C>
First quarter (July 1, 1997 - September 30, 1997) $8.75 $6.63 $0.04
Second quarter (October 1, 1997 - December 31, 1997) $8.75 $7.13 0.04
Third quarter (January 1, 1998 - March 31, 1998) $10.25 $7.88 0.04
Fourth quarter (April 1, 1998 - June 30, 1998) $9.00 $8.13 0.04
----------
Total $0.16
==========
Fiscal 1997
First quarter (July 1, 1996 - September 30, 1996) $6.88 $5.38 $0.04
Second quarter (October 1, 1996 - December 31, 1996) $6.88 $6.25 0.04
Third quarter (January 1, 1997 - March 31, 1997) $8.00 $6.38 0.04
Fourth quarter (April 1, 1997 - June 30, 1997) $8.13 $6.13 0.04
----------
Total $0.16
==========
</TABLE>
As of July 31, 1998 the Company had 232 stockholders of record. This figure does
not include those persons who hold the Company's stock through nominee accounts,
otherwise known as "street name" stockholders. The Company estimates it has
2,500 stockholders, including those persons holding stock in street name.
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
ITEM 6. SELECTED FINANCIAL DATA
DEFIANCE, INC. AND SUBSIDIARIES
FIVE YEAR SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended June 30
1998 1997 1996 1995 1994
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 89,251 $ 92,123 $ 103,975 $ 92,532 $ 81,645
Earnings before cumulative effect of accounting change $ 4,516 $ 4,335 $ 1,598 $ 6,594 $ 5,437
Cumulative effect of accounting change -- -- -- -- 564
---------------------------------------------------------------
Net earnings $ 4,516 $ 4,335 $ 1,598 $ 6,594 $ 6,001
===============================================================
Earnings per common share before cumulative effect of
accounting change $ 0.73 $ 0.67 $ 0.24 $ 0.98 $ 0.81
Cumulative effect per common share of accounting change -- -- -- -- 0.09
---------------------------------------------------------------
Basic and diluted net earnings per common share $ 0.73 $ 0.67 $ 0.24 $ 0.98 $ 0.90
===============================================================
Working capital $ 12,622 $ 11,781 $ 9,537 $ 12,149 $ 10,112
Cost in excess of net assets of acquired companies (goodwill)
net of accumulated amortization $ 4,619 $ 4,871 $ 5,122 $ 6,769 $ 7,085
Total assets $ 67,942 $ 73,819 $ 74,768 $ 77,341 $ 54,535
Short term interest bearing obligations $ 3,353 $ 4,829 $ 5,051 $ 4,299 $ 2,933
Long term interest bearing obligations $ 9,955 $ 14,968 $ 18,134 $ 17,182 $ 9,346
Stockholders' equity $ 40,103 $ 38,391 $ 35,438 $ 36,296 $ 30,174
Dividends paid $ 986 $ 1,029 $ 1,045 $ 523 --
Dividends per common share $ 0.16 $ 0.16 $ 0.16 $ 0.08 --
</TABLE>
UNAUDITED QUARTERLY INFORMATION
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
First Second Third Fourth
Fiscal 1998 Quarter Quarter Quarter Quarter Total
- ----------- --------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 20,601 $ 21,772 $ 23,236 $ 23,642 $ 89,251
Gross profit $ 3,624 $ 4,092 $ 5,487 $ 5,329 $ 18,532
Net earnings $ 262 $ 916 $ 1,629 $ 1,709 $ 4,516
Basic and diluted net earnings per common share $ 0.04 $ 0.15 $ 0.26 $ 0.28 $ 0.73
Fiscal 1997
- -----------
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
Basic and diluted net earnings per common share $ 0.11 $ 0.23 $ 0.12 $ 0.21 $ 0.67
</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, 1998 ("1998"), June 30, 1997 ("1997") and June 30, 1996 ("1996"):
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------
<S> <C> <C> <C>
Net sales 100.0 100.0 100.0
Cost of goods sold 79.2 78.9 81.3
------------------------------------------
Gross profit 20.8 21.1 18.7
Selling and administrative expenses 11.9 11.6 10.8
Other charges 0.7 2.5
------------------------------------------
Operating earnings 8.9 8.8 5.4
Interest expense - net 1.3 1.9 1.7
------------------------------------------
Earnings before income tax provision 7.6 6.9 3.7
Income tax provision 2.5 2.2 2.2
------------------------------------------
Net earnings 5.1 4.7 1.5
==========================================
</TABLE>
Net sales - products
- --------------------
Net product sales increased by $2,001,000, or 3.5 percent, in 1998 from 1997.
Product sales in 1997 included $1,307,000 from the former hard tooling (which
ended operations in May 1996) and Vaungarde (which was sold in August 1996)
businesses. Product sales from ongoing operations, therefore, increased by
$3,308,000, or 5.9 percent, in 1998 from 1997. Sales of cam follower rollers
("CFRs") and axles were up 13 percent due to increased sales to Eaton
Corporation for its Chrysler automotive requirements and increased sales of
diesel engine CFRs resulting from a strong heavy-duty truck market. This
increase was partially offset by 22 percent lower sales of prototype dies and
parts as a result of delays in the release of new prototype programs from both
Ford and Chrysler during the first half of 1998. These delays were due to
engineering design changes and changes in the scope of these projects. Sales of
prototype dies and parts returned to more normal levels in the second half of
1998 with the release of these projects.
Net product sales decreased by $10,280,000, or 15.1 percent, in 1997 from 1996.
Product sales in 1996 included $23,068,000 from the former hard tooling and
Vaungarde businesses, compared with $1,307,000 in 1997. Product sales from
ongoing operations, therefore, increased by $11,481,000, or 25.5 percent, in
1997 from 1996. Sales of CFRs and axles were up 26 percent due to new General
Motors business started in 1996 for light truck engine applications, increased
sales to Eaton Corporation for existing Ford and new Chrysler automotive
requirements and increased demand for diesel engine CFRs. Sales of prototype
dies and parts were up 22 percent due to a stronger prototype market in 1997 as
compared with 1996.
Net sales - services
- --------------------
Net service revenues decreased by $4,873,000, or 14.2 percent, in 1998 from
1997. Revenues from tooling development services were down 15 percent as a
result of delays in the release of new tooling programs from both Ford and
Chrysler during the first half of 1998. These delays were due to engineering
design changes and changes in the scope of these projects. Revenues from tooling
development services returned to more normal levels in the second half of 1998
with the release of these projects. Revenues from testing services were down 14
percent as a result of scaled-back testing demand from automotive original
equipment manufacturers ("OEMs") and their Tier One suppliers, which had
stabilized by the end of 1998.
Net service revenues decreased by $1,572,000, or 4.4 percent, in 1997 from 1996.
Revenues from tooling development services declined 10 percent from 1996, which
included a significant amount of tooling development work in support of the hard
tooling project discussed above in "Net sales - products". Revenues from testing
services were consistent between 1997 and 1996.
Gross profit - products
- -----------------------
Gross profit from products, as a percentage of sales, increased from 17.1
percent in 1997 to 19.0 percent in 1998. The former hard tooling and Vaungarde
businesses did not have a material impact on margins in 1997. The improvement in
margins was primarily due to higher sales combined with increased CFR and axle
production levels and improved operating efficiencies at the Upper Sandusky,
Ohio facility, which suffered start-up inefficiencies after beginning operations
in late 1996.
<PAGE> 10
Gross profit from products, as a percentage of sales, increased from 12.4
percent in 1996 to 17.1 percent in 1997. Not considering the former hard tooling
and Vaungarde businesses, margins were 17.6 percent of sales in 1996 and 17.2
percent in 1997. Margins from ongoing operations were held back in 1997 from
production start-up inefficiencies and training of personnel at the Upper
Sandusky, Ohio CFR facility.
Gross profit - services
- -----------------------
Gross profit from services, as a percentage of sales, declined from 30.7 percent
in 1996 to 27.7 percent in 1997, and to 24.4 percent in 1998, primarily the
result of lower sales in 1998 and 1997 as compared with the respective prior
years.
Selling and administrative (S&A) expenses
- -----------------------------------------
S&A expenses in 1998 decreased $130,000, or 1.2 percent, from 1997, primarily
from lower accruals for profit-based incentive plans and cost control efforts.
S&A expenses in 1997 decreased $597,000, or 5.3 percent, 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.
Interest income and expense
- ---------------------------
Interest expense, net of interest income, for 1998 decreased $513,000, or 30.7
percent from 1997 on lower levels of average net borrowings and effective
interest rates.
Interest expense, net of interest income, for 1997 decreased $7,000, or less
than 0.1 percent, from 1996 on similar levels of average net borrowings and
effective interest rates.
Income taxes
- ------------
The effective income tax rate for 1998 was 33.6 percent, compared to 32.3
percent in 1997 and 59.0 percent in 1996. The significant difference in the
effective rate for 1996 was due to a $2,600,000 non-cash charge for the sale of
Vaungarde that 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
- --------------------
Sales of domestic automobiles and light trucks have been relatively stable since
calendar year 1994, with vehicle sales totaling between 15.1 and 15.5 million
units each year through calendar year 1997. Prior to the General Motors labor
strike which began in June 1998, industry analysts estimated total vehicle sales
at 15.2 million units in calendar year 1998 and 15.0 million units in calendar
year 1999. Analysts now estimate total vehicle sales in calendar year 1998 will
be 15.0 million units.
Trends in the domestic automobile and light truck industry are driven by
automakers' needs, causing the action of their suppliers to be reactive. Ford,
General Motors and Chrysler (the "Big Three") have increased outsourcing as they
focus on being assemblers of vehicles rather than manufacturers of vehicles.
They are relinquishing many non-core functions to their suppliers to trim their
operations and reduce costs. As a result, automotive suppliers are being asked
to perform and integrate more aspects of the automotive manufacturing process,
do them better, and accomplish them in a coordinated fashion with the global
direction of the Big Three.
To win future business, suppliers are looking for additional resources. In many
cases, mergers and acquisitions offer suppliers the means of integrating systems
and achieving the size demanded by increasingly global automakers. The resulting
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 other suppliers by providing higher quality
products and services and lower prices.
Management expects the Company to benefit from these industry trends. Automobile
and truck producers are increasingly shifting the responsibility for the
manufacture of vehicle components to their suppliers. This shift, combined with
the emphasis on attaining shorter production cycles and development, engineering
and improving quality, is expected to increase long term demand for design and
testing services from large automotive suppliers. As the automakers reduce the
number of suppliers they use, established suppliers will have opportunities for
additional work. Each of the company's subsidiaries 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 subsidiary stresses systems capabilities
as compared with
<PAGE> 11
supplying only individual components, thereby savings its customers time and
money. The Company's long-term strategy is to strengthen margins through
improved productivity and prudent capital investment, and to expand the
Company's already strong position in these niche markets through global
marketing efforts and acquisitions that fit this strategic direction.
The General Motors labor strike, resolved in late July, affected earnings in the
fourth quarter of fiscal 1998 by approximately 2 cents per share, and is
expected to negatively affect earnings in the first quarter of fiscal 1999 by
approximately 6 to 8 cents per share. The Company normally ships $1 million a
month in cam follower rollers to Delphi for General Motors' automotive and light
truck applications. Including the effect of the General Motors labor strike,
sales in fiscal 1999 are expected to increase modestly. No new CFR programs are
currently expected in fiscal 1999, but modest sales growth is anticipated for
prototype dies and parts, testing services and tooling development services,
leading to higher earnings in fiscal 1999, barring labor disruptions and
assuming the economy and automotive industry remain stable.
Inflation over the past three years has affected the Company's cost of materials
and labor 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. The Company does not anticipate any difficulties relative to the renewal
of this contract.
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 Company or its
significant customers.
Year 2000
- ---------
The Company has completed its assessment of Year 2000 implications and has put
an action plan in place with the necessary resources dedicated to resolution.
This assessment included a review at each location of all business,
manufacturing, diagnostics, inspection, modeling, forecasting, spreadsheet and
engineering applications, as well as all equipment that has a microprocessor
which can accept or distribute a date. The Big Three, acting through the
Automotive Industry Action Group ("AIAG"), has taken a pro-active stance
regarding the readiness of its supplier base by requesting that each supplier
complete and return a self-assessment checklist. The Company has completed this
checklist and is registered in the AIAG database. In addition, an independent
firm hired by General Motors has assessed the Company's Year 2000 program and
gave the Company a "low risk" rating relative to the Company's Year 2000
readiness.
Although the entire project is not yet complete, the Company believes with
modifications to existing software, conversions to new software, and in some
cases the purchase of new hardware, the Year 2000 issue will not pose
significant operational problems for its computer systems. Management believes
work to address the Year 2000 issue will be completed in a timely fashion and
estimates the out-of-pocket cost to become 2000 compliant will not exceed
$300,000. Management also believes the Year 2000 issue will not materially
affect future financial results or cause reported financial information not to
be indicative of future operating results or the future financial condition of
the Company. As part of this plan, the Company has also made inquiries of its
critical products and services suppliers regarding their Year 2000 readiness,
and continues to follow up these inquiries to ensure, to the best of its
ability, that these suppliers will also be Year 2000 compliant. Nonetheless,
there can be no assurance that the systems used by these suppliers will be
remediated in a timely manner, which, if not remediated, may have an adverse
affect on the Company.
The preceding discussion includes forward-looking statements. See "Trends in
Operations."
<PAGE> 12
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 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Operating activities and working capital (All dollar amounts in thousands)
- ----------------------------------------
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
Net earnings $4,516 $4,335 $1,598
Items not affecting cash 7,103 7,204 9,435
Changes in working capital components 2,968 (5,981) 1,044
----------------------------------------
Cash provided by operating activities 14,587 5,558 12,077
Increase (decrease) over prior year 9,029 (6,519) 3,083
Current assets $27,297 $28,974 $27,716
Current liabilities 14,675 17,193 18,179
----------------------------------------
Working capital 12,622 11,781 9,537
Current ratio 1.86 1.69 1.52
</TABLE>
Cash provided by operating activities was $14,587,000 in 1998, compared to
operating cash flows of $5,558,000 in 1997 and $12,077,000 in 1996. Items not
affecting cash in all years include depreciation and amortization of property,
plant and equipment, amortization of goodwill and amortization of preoperating
costs of $914,000, $914,000 and $525,000, respectively, and a $2,600,000 charge
for the sale of Vaungarde in 1996. Net cash provided by working capital
components in 1998 of $2,968,000 was primarily due to decreased accounts
receivable related to higher than normal sales levels at the end of the prior
fiscal year offset by higher inventories and lower accounts payable. 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 end
of the fiscal year. 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.
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 $146,000, representing less than one-tenth of one percent of sales.
<TABLE>
<CAPTION>
Financing activities and banking facility (All dollar amounts in thousands)
- -----------------------------------------
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
Total short and long term obligations (funded debt) $ 13,308 $ 19,797 $ 23,185
Increase (decrease) from prior year (6,489) (3,388) 1,704
Total capitalization (funded debt above plus equity) $ 53,411 $ 58,188 $ 58,623
Debt to total capitalization ratio 24.9% 34.0% 39.5%
Cash received from exercise of employee stock options
(excluding tax benefit of $141 in 1998 and $215 in 1997) $ 658 $ 1,103 $ 71
Purchase of common shares for treasury $ 2,617 $ 2,262 $ 891
Dividends paid $ 986 $ 1,029 $ 1,045
Additional borrowing capacity under line of credit at year end $ 6,000 $ 4,335 $ 6,000
</TABLE>
Total funded debt decreased $6,489,000 in 1998 and $3,388,000 in 1997, and
increased $1,704,000 in 1996. The Company received $1,832,000 over the past
three years from the sale of common stock pursuant to the exercise of employee
stock options, paid a total of $3,060,000 in dividends and paid $5,770,000 to
repurchase common shares.
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 2000. Borrowings under this facility are at rates below prime.
All $6,000,000 was available for borrowing at the end of 1998.
<PAGE> 13
<TABLE>
<CAPTION>
Investing activities (All dollar amounts in thousands)
- --------------------
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
Capital expenditures, including assets acquired under capitalized leases $ 2,988 $ 4,208 $ 9,994
Depreciation and amortization of property, plant and equipment 6,093 5,990 5,206
</TABLE>
Capital spending over the past three years included a total of approximately
$9,000,000 for equipment in support of expanded production capacity for gasoline
engine cam follower rollers and axles, approximately $6,000,000 of which was for
the Upper Sandusky, Ohio facility. The remaining capital spending during the
past three years was for upgrades to existing equipment, manufacturing process
improvements, asset replacements and expenditures to support other new or
increased business.
Trends in liquidity and capital resources
- -----------------------------------------
Liquidity in fiscal 1999 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
$5,000,000 in capital expenditures in fiscal 1999 relative to asset
replacements, cost reduction, and productivity improvement programs, of which
approximately $1,500,000 relates to projects started in fiscal 1998. Additional
capital expenditures relating to new or increased sales are currently estimated
at $2,000,000.
From time to time the Company has evaluated and intends to continue to evaluate
possible acquisitions. The Company does not anticipate any difficulty in
obtaining the funds required to make such possible acquisitions.
At June 30, 1998, the Company had noncancelable outstanding commitments for
capital expenditures totaling approximately $1,105,000. The Company expects to
fund its planned fiscal 1999 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 has not detracted 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
864,100 common shares were repurchased in open market transactions for
$5,770,000 during 1996, 1997 and 1998. The Company anticipates it will continue
to repurchase shares in fiscal 1999.
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, 1998, the Company is in compliance with all of these
covenants, and expects to remain in compliance with these covenants in fiscal
1999.
The preceding discussion includes forward-looking statements. See "Trends in
Operations."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's only financial instruments with market risk exposure are revolving
credit borrowings and variable rate term loans, which total $11,430,000 at June
30, 1998. Based on this balance, a change of one percent in the interest rate
would cause a change in interest expense of approximately $114,000, or $0.01 per
share, on an annual basis.
These instruments are non-trading in nature (not entered into for trading
purposes) and carry interest at a pre-agreed upon percentage point spread from
either the prime interest rate or 30-day Eurodollar interest rate. The Company's
objective in maintaining these variable rate borrowings is the flexibility
obtained regarding early repayment without penalties and lower overall cost as
compared with fixed-rated borrowings.
<PAGE> 14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Index to Financial Statements of Defiance, Inc. and Subsidiaries Page
- ---------------------------------------------------------------- ----
<S> <C>
Report of Independent Auditors 15
Consolidated Balance Sheet at June 30, 1998 and 1997 16
Consolidated Statement of Income for the years ended June 30, 1998, 1997 and 1996 18
Consolidated Statement of Stockholders' Equity for the years ended June 30, 1998, 1997 and 1996 19
Consolidated Statement of Cash Flows for the years ended June 30, 1998, 1997 and 1996 20
Notes to Consolidated Financial Statements 21
</TABLE>
<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, 1998 and 1997 and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended June 30, 1998. Our audits also included the financial
statement schedule for the years ended June 30, 1998, 1997 and 1996 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 audits.
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. and
subsidiaries at June 30, 1998 and 1997 and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1998 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 5, 1998
<PAGE> 16
DEFIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(All dollar amounts in thousands)
ASSETS
<TABLE>
<CAPTION>
June 30
1998 1997
---------------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 2,916 $ 188
Accounts receivable, less allowance for doubtful accounts
of $216 - 1998 and $192 - 1997 16,679 21,492
Inventories 3,801 3,055
Deferred income taxes 590 565
Prepaid expenses and other current assets 3,311 3,674
---------------------
Total current assets 27,297 28,974
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land 394 394
Buildings and leasehold improvements 11,934 11,784
Machinery and equipment 54,095 54,194
Office equipment 1,608 1,563
Construction in process 2,230 1,343
---------------------
70,261 69,278
Accumulated depreciation and amortization (35,539) (31,456)
---------------------
34,722 37,822
OTHER ASSETS:
Cost in excess of net assets of acquired companies, less accumulated
amortization of $2,756 - 1998 and $2,504 - 1997 4,619 4,871
Other 1,304 2,152
---------------------
5,923 7,023
---------------------
Total assets $ 67,942 $ 73,819
=====================
</TABLE>
<PAGE> 17
DEFIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(All dollar amounts in thousands except par value)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30
1998 1997
-----------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long term obligations $ 3,353 $ 4,829
Accounts payable 4,967 5,881
Accrued payroll and employee benefits 3,707 3,833
Accrued expenses 2,648 2,650
-----------------------------
Total current liabilities 14,675 17,193
LONG TERM OBLIGATIONS 9,955 14,968
DEFERRED INCOME TAXES 3,209 3,267
CONTINGENCIES - Note M
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
7,025,549 - 1998 and 6,920,996 - 1997 351 346
Additional paid-in capital 24,141 23,347
Common shares in treasury, at cost, 864,100 shares - 1998 and 504,100 shares - 1997 (5,770) (3,153)
Retained earnings 21,381 17,851
-----------------------------
40,103 38,391
-----------------------------
Total liabilities and stockholders' equity $ 67,942 $ 73,819
=============================
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 18
DEFIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(All amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended June 30
1998 1997 1996
---------------------------------
<S> <C> <C> <C>
Net sales:
Products $ 59,806 $ 57,805 $ 68,085
Services 29,445 34,318 35,890
---------------------------------
89,251 92,123 103,975
---------------------------------
Cost of goods sold:
Products 48,453 47,908 59,646
Services 22,266 24,811 24,856
---------------------------------
70,719 72,719 84,502
---------------------------------
Gross profit 18,532 19,404 19,473
Selling and administrative expenses 10,569 10,699 11,296
Other charges - Note B 632 2,600
---------------------------------
Operating earnings 7,963 8,073 5,577
Interest expense - net 1,160 1,673 1,680
---------------------------------
Earnings before income tax provision 6,803 6,400 3,897
Income tax provision 2,287 2,065 2,299
---------------------------------
Net earnings $ 4,516 $ 4,335 $ 1,598
================================
Basic and diluted net earnings per common share - Note A $ 0.73 $ 0.67 $ 0.24
================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 19
DEFIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(All amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
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, 1995 6,544 $ 327 $ 21,977 $ 13,992 $ 36,296
Stock options exercised 30 1 70 71
Treasury shares purchased (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
Treasury shares purchased (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
STOCK OPTIONS EXERCISED 104 5 794 799
TREASURY SHARES PURCHASED (360) (2,617) (2,617)
NET EARNINGS 4,516 4,516
DIVIDENDS ($0.16 PER SHARE) (986) (986)
----------------------------------------------------------------------------------------
JUNE 30, 1998 6,161 $ 351 $ 24,141 ($ 5,770) $ 0 $ 21,381 $ 40,103
========================================================================================
</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
1998 1997 1996
----------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 4,516 $ 4,335 $ 1,598
Adjustments to reconcile net earnings to cash provided by operating activities:
Depreciation and amortization of property, plant and equipment 6,093 5,990 5,206
Amortization of other assets 1,165 1,165 776
Charge for sale of business 2,600
(Gain) on sale of assets (5) (87) (17)
Deferred income taxes (150) 136 870
Changes in assets and liabilities:
Accounts receivable 4,813 (4,877) 1,439
Inventories (746) (449) 3,491
Accounts payable and accrued expenses (1,269) (595) (2,331)
Income taxes 295 114 (246)
Net assets of business sold (645) (1,061)
Prepaid expenses and other (125) 471 (248)
----------------------------------
Cash provided by operating activities 14,587 5,558 12,077
----------------------------------
INVESTING ACTIVITIES:
Capital expenditures (2,988) (4,208) (9,994)
Cash and assigned liquid assets received from sale of business 275 2,803
Preoperating costs (1,774)
Other - net 147 156 (74)
----------------------------------
Cash used for investing activities (2,566) (1,249) (11,842)
----------------------------------
FINANCING ACTIVITIES:
Payments of long term obligations (6,489) (5,053) (4,296)
Additions to long term obligations 1,665 6,000
Issuance of common shares from exercise of employee stock options 799 1,318 71
Purchase of common shares for treasury (2,617) (2,262) (891)
Dividends paid (986) (1,029) (1,045)
----------------------------------
Cash used for financing activities (9,293) (5,361) (161)
----------------------------------
CASH:
Increase (decrease) 2,728 (1,052) 74
Beginning of year 188 1,240 1,166
----------------------------------
End of year $ 2,916 $ 188 $ 1,240
===================================
Cash paid during the period for:
Interest $ 1,128 $ 1,636 $ 1,752
Income taxes 2,000 1,600 1,675
</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, 1998 ("1998"), JUNE 30, 1997 ("1997"),
AND JUNE 30, 1996 ("1996")
(All amounts in thousands, except share and per share amounts)
A - ACCOUNTING POLICIES
Description
- -----------
The Company, operating in a single industry segment, manufactures specialty
anti-friction bearings and metal prototype dies and parts and provides testing
and tooling development services to the U.S. motor vehicle 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.
Reclassifications
- -----------------
The Company has reclassified certain prior year financial information to conform
it to the current year's presentation.
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 $3,640 and $4,061 of unbilled costs related to contracts at
June 30, 1998 and 1997, 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
- -----------------------------
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share." Statement 128 replaced the previously reported primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share is
calculated in a manner that is very similar to the previously reported fully
diluted earnings per share. The average number of shares outstanding used in the
calculation of basic earnings per share were 6,170,884 in 1998, 6,423,420 in
1997 and 6,532,285 in 1996. The average number of shares outstanding used in the
calculation of diluted earnings per share were 6,211,338 in 1998, 6,505,456 in
1997 and 6,707,078 in 1996. All earnings per share amounts for all periods have
been presented and where necessary, restated to conform to the requirements of
Statement 128.
Inventories
- -----------
Inventories are valued primarily at the lower of cost (first in, first out
method) or market.
Capitalized Interest
- --------------------
Interest costs of $293 were capitalized in property, plant and equipment in
1996. No interest was capitalized in 1998 or 1997.
<PAGE> 22
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.
Preoperating Costs
- ------------------
Preoperating costs of a new manufacturing facility in Upper Sandusky, Ohio, were
deferred prior to the start of production in December 1995. These costs were
primarily for labor, rent, utilities and other similar costs required to prepare
the facility for production. Production at this facility relates to a contract
with Eaton Corporation to provide cam follower rollers and axles which runs
through 2001. These costs are being amortized over a thirty-six month period due
to the long-term (over thirty-six month) nature of the contract being performed
at this facility. The unamortized portion totaled $381, $1,295 and $2,209 at
June 30, 1998, 1997 and 1996, respectively. The current portion is included in
"Prepaid expenses and other current assets" and the long term portion is
included in "Other Assets - other" in the Consolidated Balance Sheet. In April
1998, the American Institute of Certified Public Accountants (the "AICPA")
issued SOP 98-5, "Reporting the Costs of Start-up Activities". The SOP requires
start-up costs that were capitalized prior to January 1, 1999 be written off at
that time, and any future start-up costs to be expensed as incurred. Since the
unamortized balance as of June 30, 1998 will be fully amortized before that
date, the adoption of this SOP will have no effect on the Company's financial
position or results of operations.
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, 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 SFAS 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 fiscal quarter of 1997. The adoption of this statement had no material
affect on the Company's financial condition or results of operations.
Stock-Based Compensation
- ------------------------
As allowed under the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company continues to apply APB No. 25, "Accounting for Stock
Issued to Employees," to account for stock options awarded to employees.
Accordingly, no compensation expense is recognized on the date of grant since
the option price equals the market price of the underlying shares on that date.
Additional disclosures required under Statement 123 are included in Note G.
Accounting Pronouncements
- -------------------------
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which require the disclosure of total comprehensive income and
change the method for determining and reporting business segment information.
The Company's components of comprehensive income have historically included
adjustments to shareholders' equity for the impact of minimum pension
liabilities. The FASB's new guidelines for determining business segments will
require the disclosure of certain additional financial information. The adoption
of these new standards is required in fiscal 1999. In February 1998, the FASB
issued SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" which improves and standardizes disclosures about
pensions and other postretirement benefits. Statement 132 addresses disclosure
issues only and does not change the measurement or recognition provisions
specified in those statements.
B - OTHER CHARGES
Other charges included in the Consolidated Statement of Income are $632 to
terminate a pension plan and settle obligations in 1997 and $2,600 for the sale
of a business in 1996.
The Company terminated a defined-benefit pension plan at one of its subsidiaries
in 1997. Benefits under this plan had been curtailed during the fiscal year
ended June 30, 1995. In accordance with SFAS No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination of Benefits," a one-time charge of $632 was made in 1997 when the
plan was terminated and all obligations were settled. See Note H for further
information.
<PAGE> 23
In August 1996 the Company sold all the common shares of its Vaungarde,
Incorporated ("Vaungarde") subsidiary 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, which totaled $3,753. On
June 30, 1996, the Company's carrying value of this business exceeded the
proceeds expected from the sale by $2,600, and the Company recorded a non-cash
charge of $2,600 (representing $0.39 per share on a pro forma basis) in 1996 to
reflect the anticipated loss on the sale of the business. This charge consisted
of the following: write-off excess of cost over net assets of acquired company
(goodwill) - $1332, write-down other assets, principally property, plant and
equipment - $949 and expenses of sale accruable at June 30, 1996 - $319.
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 of this business were $1,203 and $9,887 in 1997 and 1996,
respectively, and operating losses were $74 and $834 in 1997 and 1996,
respectively.
<TABLE>
<CAPTION>
C - INVENTORIES
June 30
1998 1997
------------------
<S> <C> <C>
Raw materials $1,628 $1,264
Work in process 1,164 1,300
Finished goods 1,009 491
------------------
Total inventories $3,801 $3,055
==================
<CAPTION>
D - PREPAID EXPENSES AND OTHER CURRENT ASSETS
June 30
1998 1997
------------------
<S> <C> <C>
Pension $ 795 $ 854
Factory and production supplies 761 706
Preoperating costs 381 914
Insurance 243 220
Other 1,131 980
------------------
Total prepaid expenses and other current assets $3,311 $3,674
==================
<CAPTION>
E - ACCRUED EXPENSES
June 30
1998 1997
------------------
<S> <C> <C>
Taxes $ 944 $ 808
Insurance 499 676
Rent 255 253
Interest 186 169
Other 764 744
------------------
Total accrued expenses $2,648 $2,650
==================
<CAPTION>
F - LONG TERM OBLIGATIONS
June 30
1998 1997
------------------
<S> <C> <C>
Revolving credit borrowings $1,665
Variable rate term loan to bank due through 2004 $4,430 5,286
Variable rate term loan to bank due through 2003 7,000 8,714
7% term loan to bank due through 1999 388 1,780
7.35% Urban Development Action Grant due through 2002 619 669
Other 9 475
------------------
Total long term debt 12,446 18,589
Capitalized lease obligations - Note J 862 1,208
------------------
Total long term obligations 13,308 19,797
Less current maturities of long term obligations (3,353) (4,829)
------------------
Total long term obligations less current maturities $9,955 $14,968
==================
</TABLE>
<PAGE> 24
At June 30, 1998, the Company had $6,000 in additional borrowing capacity under
a revolving credit agreement expiring October 1999. Subsequent to year end, this
agreement was renewed through October 2000. 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. The prime
interest rate at June 30, 1998 and 1997 was 8.50%.
The variable rate term loans to bank carry interest at the Euro dollar rate plus
115 basis points. The effective interest rate for these loans as of June 30,
1998 and 1997 was 6.78% and 6.84%, respectively.
All borrowings from the Company's primary lender, Comerica Bank, comprised of
revolving credit borrowings, variable rate term loans and the 7% term loan are
unsecured. The Company is restricted from pledging any of its assets without the
prior consent of the bank.
The Urban Development Action Grant loan is secured by certain assets of one of
the Company's subsidiaries with a net book value of $5,409 at June 30, 1998.
Capitalized lease obligations are secured by the specific assets to which the
leases apply.
See Note J.
The Company's financing arrangements also contain various warranties and
covenants. As of June 30, 1998 and 1997 the Company was in compliance with these
warranties and covenants.
Scheduled maturities of long term debt are as follows: 1999 - $3,353, 2000 -
$2,997, 2001 - $2,800, 2002 - $2,639, 2003 - $1,073, and $446 thereafter.
G - STOCK OPTIONS
As allowed under the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company continues to apply APB No. 25 to account for stock
options awarded to employees. Had compensation expense been determined in
accordance with the fair value method under Statement 123, net earnings and
earnings per share, on a pro forma basis, would have been as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
Net earnings:
As reported $ 4,516 $ 4,335 $ 1,598
Pro forma 4,468 4,312 1,447
Basic and diluted earnings per share:
As reported $ 0.73 $ 0.67 $ 0.24
Pro forma 0.72 0.66 0.22
</TABLE>
The fair value of each option grant has been estimated on the date of grant
using the Black-Scholes option pricing model with weighted-average assumptions
for expected volatility of 37.4%, dividend yield of 2.0% and expected option
lives of 5 years for 1998, 1997 and 1996. The assumed risk-free interest rate
was 5.8% for 1998 and 6.3% for 1997 and 1996. The resulting weighted-average
fair value of options granted in 1998, 1997 and 1996 was $2.85, $2.18 and $2.29
per share, respectively. For pro forma disclosure purposes, the estimated fair
value of options has been amortized to expense over each option's vesting
period.
The Black-Scholes model was developed to estimate the fair value of traded
options with no vesting restrictions that are fully transferable, using highly
subjective assumptions, including expected stock price volatility. In the
opinion of management, this model does not necessarily provide a single reliable
measure of the fair value of the Company's employee stock options because they
have characteristics significantly different from those of traded options, and
because changes in these subjective assumptions can significantly affect the
fair value estimate.
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 less than the market price on date of grant,
are exercisable after between one and four years, and expire after either five
or ten years. Option activity during 1998 and 1997 was as follows:
<PAGE> 25
<TABLE>
<CAPTION>
Number of shares Average
-------------------------------------- Option
1985 Plan 1989 Plan Total Price
-----------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding at June 30, 1996 39,700 583,362 695,610 $ 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
OPTIONS ISSUED IN 1998 134,100 134,100 $ 8.12
OPTIONS EXERCISED IN 1998 (16,533) (89,581) (106,114) $ 6.40
OPTIONS CANCELED IN 1998 (1,667) (51,567) (53,234) $ 6.78
-----------------------------------------------------
OPTIONS OUTSTANDING AT JUNE 30, 1998 8,500 291,314 299,814 $ 7.15
=====================================================
Available for future years 0 12,605 12,605
========================================
</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 45,796 and 211,113 nonqualified stock options were
exercised in 1998 and 1997, creating tax benefits of $141 and $215,
respectively, which were recognized as additional paid-in capital as required
under SFAS 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 1 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 1998 and 1997
was as follows:
<TABLE>
<CAPTION>
Number Average
of Option
Shares Price
-----------------------
<S> <C> <C>
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
OPTIONS ISSUED IN 1998 14,000 $ 7.88
OPTIONS EXERCISED IN 1998 (4,000) $ 7.00
OPTIONS CANCELED IN 1998 (2,000) $ 7.88
-----------------------
OPTIONS OUTSTANDING AT JUNE 30, 1998 32,000 $ 7.33
=======================
Available for future years 164,000
========
</TABLE>
H - BENEFIT PLANS
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.
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
1998 and 1997 reflect the one remaining pension plan, while amounts for 1996
reflect both plans. See Note B for further information.
The components of pension expense were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
Service cost, benefits earned during the year $ 127 $ 125 $ 126
Interest cost on projected benefit obligation 325 329 511
Loss (gain) on plan assets (675) (1,066) (168)
Net amortization and deferral 281 741 (364)
---------------------------------------
Net pension expense $ 58 $ 129 $ 105
=======================================
</TABLE>
<PAGE> 26
The expected long term rate of return on plan assets was 9.0% for 1998, 1997 and
1996. Prior service costs are amortized over the average remaining service
period of employees using the straight-line method.
Assets of the plan at June 30, 1998 consisted primarily of cash equivalents,
corporate stocks and corporate bonds, including common stock of the Company with
a market value of approximately $567.
The following reconciles the funded status of the plan to amounts included in
the Company's balance sheet:
<TABLE>
<CAPTION>
June 30
1998 1997
----------------------
<S> <C> <C>
Actuarial present value of benefit obligations - accumulated and projected
benefit obligation, $4,653 vested in 1998 and $4,608 vested in 1997 $ 4,884 $ 4,803
Market value of plan assets 5,571 5,270
----------------------
Plan assets in excess of projected benefit obligation 687 467
Unrecognized net obligation 392 439
Prior service cost not recognized in net periodic pension cost 16
Unrecognized net (gain) (284) (68)
----------------------
Prepaid pension cost $ 795 $ 854
======================
</TABLE>
In determining the projected benefit obligation, the weighted average assumed
discount rate was 7.00% for 1998, 7.25% for 1997 and 7.5% for 1996.
The Company provides 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 $375, $427 and $490 in 1998, 1997, and 1996, respectively.
Employees contributed $1,380, $1,411, and $1,175 in 1998, 1997 and 1996,
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 $353,
$362, and $324 during 1998, 1997 and 1996, respectively.
I - INCOME TAXES
The Company accounts for income taxes using the liability method under SFAS No.
109, "Accounting for Income Taxes". 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
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>
1998 1997 1996
----------------------------------
<S> <C> <C> <C>
Current expense - Federal $ 2,437 $ 1,929 $ 1,429
Deferred expense - Federal (150) 136 870
----------------------------------
Income tax provision $ 2,287 $ 2,065 $ 2,299
==================================
</TABLE>
<PAGE> 27
Significant components of deferred tax assets and liabilities as of June 30,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable $ 73 $ 65
Employee benefits 381 438
Inventories 25 25
Other 111 37
--------------------
Total deferred tax assets 590 565
Deferred tax liabilities:
Depreciation 3,056 2,782
Preoperating costs 129 440
Employee benefits 42 109
Other 25 46
--------------------
Total deferred tax liabilities 3,252 3,377
--------------------
Net deferred tax liability $ 2,662 $ 2,812
====================
</TABLE>
A reconciliation of income taxes at the United States statutory rate to the
effective income tax rate is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------
<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 1.2% 1.3% 1.2%
Other charges for sale of business 23.7%
Other -1.6% -3.0% 0.1%
---------------------------------
Effective tax rate 33.6% 32.3% 59.0%
=================================
</TABLE>
J - LEASES
The Company leases machinery and equipment used in its manufacturing operations
under capital leases with terms extending into fiscal 2001. 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, 1998, future minimum lease payments under noncancelable lease
obligations are as follows:
<TABLE>
<CAPTION>
Capital Operating
Fiscal Year Leases Leases
----------- -------------------------
<S> <C> <C> <C>
1999 $ 406 $3,061
2000 407 2,208
2001 169 1,164
2002 469
2003 75
------------------------
Total minimum lease payments 982 $6,977
==========
Amount representing interest 120
---------
Present value of net minimum lease payments 862
Less current maturities 330
---------
Long term obligations under capital leases $ 532
=========
</TABLE>
Property, plant and equipment includes the following property under capital
leases:
<TABLE>
<CAPTION>
June 30
1998 1997
------------------------
<S> <C> <C>
Machinery and equipment $ 2,555 $ 3,651
Accumulated amortization (1,428) (2,061)
------------------------
Net book value of assets under capital leases $ 1,127 $ 1,590
========================
</TABLE>
Rent expense under operating leases was $2,958, $3,189 and $3,647 in 1998, 1997
and 1996, respectively.
<PAGE> 28
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 October 1997 and expires September 2002 with monthly lease
payments of $23.
K - SIGNIFICANT CUSTOMERS
Customers with sales representing over 10% of consolidated sales are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------
<S> <C> <C> <C>
General Motors Corporation 19% 22% 30%
Ford Motor Company 12% 14% 14%
Chrysler Corporation 10% 11% 11%
Eaton Corporation 21% 11% 10%
</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.
L - COMMITMENTS
The Company has made commitments to purchase approximately $1,105 of equipment
as of June 30, 1998 and has sufficient funds available to meet these
commitments.
M - 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 Company's financial position or results of
operations.
SUPPLEMENTARY DATA
See Unaudited Quarterly Information included in Item 6.
<PAGE> 29
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 1998 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 1998 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 1998 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 1998 Annual Meeting of Stockholders under the
caption "Election of Directors - Certain relationships and transactions" and
"Election of Directors - Compensation committee interlocks and insider
participation."
<PAGE> 30
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, 1998 and 1997
Consolidated Statement of Income for the years ended June 30,
1998, 1997, and 1996
Consolidated Statement of Stockholders' Equity for the years
ended June 30, 1998, 1997, and 1996
Consolidated Statement of Cash Flows for the years ended June 30,
1998, 1997, and 1996
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:
<TABLE>
Page
----
<S> <C>
Schedule II - Valuation and Qualifying Accounts 32
</TABLE>
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 33
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, 1998, no reports on Form 8-K
were filed with the Securities and Exchange Commission.
<PAGE> 31
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, 1998
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, 1998
- -------------------------
Thomas H. Roulston II
/s/ Jerry Cooper President, Chief Executive Officer and Director August 25, 1998
- ----------------
Jerry A. Cooper (Principal Executive Officer)
/s/ Michael J. Meier Vice President-Finance and Chief Financial Officer August 25, 1998
- --------------------
Michael J. Meier (Principal Financial Officer)
/s/ James L. Treece Chief Accounting Officer August 25, 1998
- --------------------
James L. Treece (Principal Accounting Officer)
/s/ James E. Heighway Director August 25, 1998
- ---------------------
James E. Heighway
/s/ George H. Lewis III Director August 25, 1998
- -----------------------
George H. Lewis III
/s/ Richard W. Lock Director August 25, 1998
- -------------------
Richard W. Lock
/s/ John D. Ong Director August 25, 1998
- ---------------
John D. Ong
/s/ Scott D. Roulston Director August 25, 1998
- ---------------------
Scott D. Roulston
</TABLE>
<PAGE> 32
DEFIANCE, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(All dollar amounts in thousands)
<TABLE>
<CAPTION>
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, 1998
Allowance for doubtful accounts $192 $63 $39 $216
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
</TABLE>
(1)Uncollectible accounts charged against the reserve, net of recoveries
<PAGE> 33
DEFIANCE, INC. AND SUBSIDIARIES
Annual Report on Form 10-K
Fiscal Year Ended June 30, 1998
Index to Exhibits - Item 14(a)(3)
<TABLE>
<CAPTION>
Exhibit no. Description
- ----------- -----------
<S> <C>
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)
</TABLE>
<PAGE> 34
<TABLE>
<S> <C>
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)
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)
</TABLE>
<PAGE> 35
<TABLE>
<S> <C>
10(bf) Seventh Amendment to Amended and Restated Loan Agreement by and between Defiance, Inc. and Comerica Bank
dated June 30, 1996 (Filed as Exhibit 10-bf to the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 1997)
10(bg) Amendment #1 to Defiance, Inc. Supplemental Savings and Deferred Compensation Plan, effective July 1, 1996
(Filed as Exhibit 10-bg to the Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1997)
10(bh) Amendment #1 to Defiance, Inc. Supplemental Executive Retirement Plan, effective July 24, 1997 (Filed as
Exhibit 10-bh to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1997)
10(bi) Amendment #1 to Defiance, Inc. Limited Supplemental Executive Retirement Plan, effective July 24, 1997
(Filed as Exhibit 10-bi to the Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1997)
10(bj) Eighth Amendment to Amended and Restated Loan Agreement by and between Defiance, Inc. and Comerica Bank
dated August 18, 1997 (Filed as Exhibit 10-bj to the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 1997)
10(bk) Revolving Credit Note by and between Defiance, Inc. and Comerica Bank dated August 18, 1997 (Filed as
Exhibit 10-bk to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1997)
10(bl) Amendment #1 to Defiance, Inc. Stock Repurchase Plan, effective October 24, 1997 (*)
10(bm) Defiance, Inc. Change of Control Policy, revised July 24, 1998 (*)
10(bn) Ninth Amendment to Amended and Restated Loan Agreement by and between Defiance, Inc. and Comerica Bank
dated August 19, 1998 (*)
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.
</TABLE>
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
Included in the preceding list of exhibits are the following management
contracts or compensatory plans or arrangement:
<TABLE>
<S> <C>
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
10(bm) Defiance, Inc. Change of Control Policy, revised July 24, 1998
</TABLE>
<PAGE> 1
Exhibit 10(bl)
DEFIANCE, INC.
STOCK REPURCHASE PLAN
AMENDMENT #1
This amendment has been adopted and approved by the Board of Directors of
DEFIANCE, INC., a Delaware corporation (the "Company"), on October 24, 1997 to
be effective as of October 24, 1997.
Item 2(a) is replaced in its entirety as follows:
2. PLAN.
a. MAXIMUM PURCHASES. The Company, from time to time, as the
Stock Repurchase Committee of the Board of Directors
(described at Section 4 below), in its sole discretion deems
appropriate, may purchase up to One Million Five Hundred
Thousand (1,500,000) shares of its outstanding common stock in
accordance with this Plan.
Executed at Cleveland, Ohio this 24th day of October, 1997.
/s/ Michael J. Meier
- --------------------
Michael J. Meier, Corporate Secretary
<PAGE> 1
Exhibit 10(bm)
DEFIANCE, INC.
CHANGE OF CONTROL POLICY
This policy is set forth by the Board of Directors to ensure certain key
executives of Defiance, Inc. (the "Company") are afforded a continuing income to
facilitate the change in their lives resulting from termination from the Company
due to a Change of Control. This policy obligates the Company accordingly to
these executives subject to changes in applicable law and further actions of the
Board of Directors. The Board of Directors reserves the right, at its
discretion, to alter, amend or even terminate this policy, however, any such
change in the policy shall only take effect two (2) years after the date upon
which the Board of Directors institutes said change of the policy.
If an executive is terminated due to a Change of Control, the executive's base
salary (immediately before said termination), incentive bonuses (which bonuses
shall be the average of the incentive bonuses paid to the executive for the two
years preceding said termination), all insurance, medical benefits and company
car or car allowance (provided to the executive immediately prior to said
termination), will be continued for a period of two years from date of
termination, and all stock options outstanding will be immediately vested as
well as all contributions to the Defiance, Inc. Retirement Savings Plan (401(k)
Plan), the Defiance, Inc. Supplemental Executive Retirement Plan (SERP) and the
Defiance, Inc. Supplemental Savings and Deferred Compensation Plan (make-whole
SERP).
A "Change of Control" shall be deemed to have taken place if, as the result of a
tender offer, exchange offer, merger, consolidation, sale of assets, contested
election, or any combination of the foregoing or other similar extraordinary
transactions, the persons, who are directors one year prior to the first of any
such events to occur, shall cease to constitute a majority of the board of
directors of the Company or any parent or successor to the Company.
Termination due to a Change in Control is deemed to occur if, within two years
after the Change of Control, without the executive's written approval: (1) the
executive's employment is terminated; (2) the executive experiences any
reduction in aggregate direct remuneration, position, responsibility or duties
from those enjoyed by the executive immediately prior to the Change of Control;
(3) the executive experiences any reduction in the aggregate of employee
benefits, prerequisites, or fringe benefits from those enjoyed by the executive
<PAGE> 2
immediately prior to the Change of Control; (4) the Company requires that the
executive's principal place of work is more than twenty-five (25) miles from the
executive's principal place of work immediately prior to the Change of Control
or the executive is required to travel in connection with the executive's
employment to a greater degree than was customary during the year prior to the
Change of Control; or (5) there is a liquidation, dissolution, consolidation or
merger of the Company, or transfer or all or a significant portion of its assets
unless the successor(s) assume all the duties and obligations to the executive
set forth in this policy.
This policy updates and supercedes the Change of Control policy adopted by the
Board of Directors on September 22, 1994.
The key executives to whom this policy applies as of July 24, 1998 are as
follows:
Michael Meier
- -------------
VP Finance and Chief Financial Officer, Defiance, Inc.
Cliff Schumacher
- ----------------
VP Marketing and Corporate Development, Defiance, Inc.
Benjamin Scherschel
- -------------------
President, Defiance Precision Products, Inc.
Fred Burke
- ----------
President, Hy-Form Products, Inc. and Binderline Draftline, Inc.
Michael Madden
- --------------
President, Defiance Testing & Engineering Services, Inc.
<PAGE> 1
Exhibit 10(bn)
NINTH AMENDMENT TO AMENDED
AND RESTATED LOAN AGREEMENT
This Amendment dated as of August 19, 1998, 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 eight amendments (as
amended, "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, 2000."
2. The definitions of "Eurodollar Margin" and "Prime Margin" in Section 1
of the Agreement are amended to read in their entirety as follows:
"'Eurodollar Margin" shall mean nine tenths of one percent (9/10%)."
"'Prime Margin' shall mean one and one quarter percent (1 1/4%) with
respect to Advances under the Revolving Credit Note and shall mean one
percent (1%) with respect to Term Note-B and Term Note-C."
3. Section 9.14 of the Agreement is amended to read in its entirety as
follows:
"9.14 Maintain at all times a Debt Service Coverage Ratio of not less
than 2.5 to 1.0"
4. Section 9.16 of the Agreement is amended to read in its entirety as
follows:
"9.16 Maintain at all times a Leverage Ratio of not more than 1.15 to
1.0."
<PAGE> 2
5. The above amendment shall be effective upon execution hereof by Company
and Bank and execution of the Acknowledgement below by each of the
Guarantors (as defined in the Agreement).
6. 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 power,
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 Section 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.
7. 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
By: /s/ Timothy Griffin
-------------------
Its: Vice President
DEFIANCE, INC.
By: /s/ Michael J. Meier
--------------------
Its: Vice President - Finance, CFO, Secretary and 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 SERVICES, INC., F/K/A SMTC CORPORATION
By: /s/ Michael J. Meier
--------------------
Its: Secretary and Treasurer
DEFIANCE PRECISION PRODUCTS, INC.
By: /s/ Michael J. Meier
--------------------
Its: Secretary and Treasurer
BINDERLINE DRAFTLINE, INC. (successor by reason of merger of Draftline
Engineering Company and Binderline Development, Inc.)
By: /s/ Michael J. Meier
--------------------
Its: Secretary and Treasurer
HY-FORM PRODUCTS, INC.
By: /s/ Michael J. Meier
--------------------
Its: Secretary and Treasurer
<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,
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
Common shares outstanding:
Beginning of period 6,416,896 6,415,750 6,543,950
Shares issued during period 104,553 347,546 29,500
Shares purchased for treasury (360,000) (346,400) (157,700)
----------------------------------------
End of period 6,161,449 6,416,896 6,415,750
========================================
Numerator:
Net income for basic and diluted net earnings per common share $4,516 $4,335 $1,598
========================================
Denominator:
Average shares outstanding - used for basic net earnings per common share 6,170,884 6,423,420 6,532,285
Effect of dilutive securities - employee stock options 40,454 82,036 174,793
----------------------------------------
Average shares outstanding - used for diluted net earnings per common share 6,211,338 6,505,456 6,707,078
========================================
Basic net earnings per common share $0.73 $0.67 $0.24
========================================
Diluted net earnings per common share $0.73 $0.67 $0.24
========================================
</TABLE>
<PAGE> 1
Exhibit 21. SUBSIDIARIES OF THE REGISTRANT
Defiance, Inc.
June 30, 1998
<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.
On July 1, 1998, Binderline Development, Inc. and Draftline Engineering Company
were merged, becoming Binderline Draftline, Inc., a Michigan corporation.
<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
5,1998, with respect to the consolidated financial statements and schedule of
Defiance, Inc. for the year ended June 30, 1998, included in the Annual Report
(Form 10-K) for the year ended June 30, 1998.
/s/ Ernst & Young, LLP
- ----------------------
Cleveland, Ohio
August 25,1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 2,916
<SECURITIES> 0
<RECEIVABLES> 16,895
<ALLOWANCES> 216
<INVENTORY> 3,801
<CURRENT-ASSETS> 27,297
<PP&E> 70,261
<DEPRECIATION> 35,539
<TOTAL-ASSETS> 67,942
<CURRENT-LIABILITIES> 14,675
<BONDS> 13,308
0
0
<COMMON> 351
<OTHER-SE> 39,752
<TOTAL-LIABILITY-AND-EQUITY> 67,942
<SALES> 89,251
<TOTAL-REVENUES> 89,251
<CGS> 70,719
<TOTAL-COSTS> 70,719
<OTHER-EXPENSES> 10,506
<LOSS-PROVISION> 63
<INTEREST-EXPENSE> 1,160
<INCOME-PRETAX> 6,803
<INCOME-TAX> 2,287
<INCOME-CONTINUING> 4,516
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,516
<EPS-PRIMARY> .73
<EPS-DILUTED> .73
</TABLE>
