-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QjWknBSVgJqQBeAGt8LJArCmhnq0AFqC43tHcAQYx9U/tVC9NeD2djX/RourxfMX TxztbDyqxwlF152TW2+MOQ== 0000805583-98-000006.txt : 19980511 0000805583-98-000006.hdr.sgml : 19980511 ACCESSION NUMBER: 0000805583-98-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19980328 FILED AS OF DATE: 19980508 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DONNELLY CORP CENTRAL INDEX KEY: 0000805583 STANDARD INDUSTRIAL CLASSIFICATION: GLASS PRODUCTS, MADE OF PURCHASED GLASS [3231] IRS NUMBER: 380493110 STATE OF INCORPORATION: MI FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09716 FILM NUMBER: 98613215 BUSINESS ADDRESS: STREET 1: 414 E FORTIETH ST CITY: HOLLAND STATE: MI ZIP: 49423 BUSINESS PHONE: 6167867000 MAIL ADDRESS: STREET 1: 424 EAST 40TH STREET CITY: HOLLAND STATE: MI ZIP: 49423 10-Q 1 FORM 10-Q FOR THE PERIOD ENDING MARCH 28, 1998 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarter ended March 28, 1998 Commission File Number 1-9716 DONNELLY CORPORATION (Exact Name of Registrant as Specified in its Charter) Michigan 38-0493110 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 49 West Third Street, Holland, Michigan 49423 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (616)786-7000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / 5,689,570 shares of Class A Common Stock and 4,358,505 shares of Class B Common Stock were outstanding as of April 30, 1998. 2 DONNELLY CORPORATION INDEX Page Numbering --------- PART 1. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Combined Consolidated Balance Sheets - March 28, 1998 and June 28, 1997 3 Condensed Combined Consolidated Statements of Income - Three months and nine months ended March 28, 1998 and March 29, 1997 4 Condensed Combined Consolidated Statements of Cash Flows - Nine months ended March 28, 1998 and March 29, 1997 5 Notes to Condensed Combined Consolidated Financial Statements 6-8 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 9-15 PART II. OTHER INFORMATION Item 1. Legal Proceeding 16 Item 6. Exhibits and Reports on Form 8-K 16 Signatures 17 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA DONNELLY CORPORATION AND SUBSIDIARIES CONDENSED COMBINED CONSOLIDATED BALANCE SHEETS March 28, June 28, In thousands 1998 1997 - ------------------------------------------------------------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 6,679 $ 8,568 Accounts receivable, less allowance of $881 and $879 75,137 67,850 Inventories 43,384 42,484 Prepaid expenses and other current assets 24,042 33,738 -------- -------- Total current assets 149,242 152,640 Property, plant and equipment 295,409 286,451 Less accumulated depreciation 127,892 121,327 -------- -------- Net property, plant and equipment 167,517 165,124 Investments in and advances to affiliates 18,988 15,487 Other assets 24,051 25,042 -------- -------- Total assets $359,798 $358,293 -------- -------- -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts and notes payable $ 68,166 $ 76,392 Other current liabilities 41,952 39,257 -------- -------- Total current liabilities 110,118 115,649 Long-term debt, less current maturities 118,606 122,798 Deferred income taxes and other liabilities 31,323 25,674 -------- -------- Total liabilities 260,047 264,121 -------- -------- Minority interest 732 345 Preferred stock 531 531 Common stock 1,002 991 Other shareholders' equity 97,486 92,305 -------- -------- Total shareholders' equity 99,019 93,827 -------- -------- Total liabilities and shareholders' equity $359,798 $358,293 -------- -------- -------- --------
The accompanying notes are an integral part of these statements. 4 DONNELLY CORPORATION AND SUBSIDIARIES CONDENSED COMBINED CONSOLIDATED STATEMENTS OF INCOME Three Months Ended Nine Months Ended In thousands March 28, March 29, March 28, March 29, except share data 1998 1997 1998 1997 - ------------------------------------------------------------------ Net sales $ 193,658 $ 181,681 $ 553,634 $ 483,118 Cost of sales 161,009 148,360 459,432 391,878 -------- -------- -------- -------- Gross profit 32,649 33,321 94,202 91,240 OPERATING EXPENSES: Selling, general and administrative 17,380 18,514 50,057 47,324 Research and development 8,595 9,404 28,003 24,971 -------- -------- -------- -------- Operating income 6,674 5,403 16,142 18,945 NON-OPERATING (INCOME) EXPENSES: Interest expense 2,017 2,663 6,711 7,654 Royalty income (180) (135) (452) (1,216) Interest income (204) (135) (481) (549) Gain on sale of equity investment --- --- (4,598) --- Other (income) expense, net (641) (370) (629) (1,345) -------- -------- -------- -------- Income before taxes on income 5,682 3,380 15,591 14,401 Taxes on income 1,408 1,226 5,156 5,369 -------- -------- -------- -------- Income before minority interest and equity earnings 4,274 2,154 10,435 9,032 Minority interest in net (income) loss of subsidiaries (3) 490 231 (104) Equity in earnings (losses) of affiliated companies (898) 314 (1,138) (331) -------- -------- -------- -------- Net income $ 3,373 $ 2,958 $ 9,528 $ 8,597 -------- -------- -------- -------- -------- -------- -------- -------- PER SHARE OF COMMON STOCK: Basic net income per share $ 0.34 $ 0.30 $ 0.96 $ 0.87 Diluted net income per share $ 0.34 $ 0.30 $ 0.95 $ 0.86 Cash dividends declared $ 0.10 $ 0.10 $ 0.30 $ 0.26 Average common shares outstanding 9,963,706 9,848,733 9,932,265 9,822,335
The accompanying notes are an integral part of these statements. 5 DONNELLY CORPORATION AND SUBSIDIARIES CONDENSED COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended March 28, March 29, In thousands 1998 1997 - ------------------------------------------------------------------ OPERATING ACTIVITIES Net income $ 9,528 $ 8,597 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FROM (FOR) OPERATING ACTIVITIES: Depreciation and amortization 18,013 15,291 Gain on sale of property and equipment (54) (596) Gain on sale of affiliate stock (4,598) (872) Deferred pension cost and postretirement benefits 4,043 3,916 Deferred income taxes 1,248 (1,587) Minority interest income (loss) (546) 312 Equity in losses of affiliated companies 1,138 786 CHANGES IN OPERATING ASSETS AND LIABILITIES: Sale (repayment) of accounts receivable (884) 38,777 Accounts receivable (9,093) (12,738) Inventories (3,943) (4,289) Prepaid expenses and other current assets 3,827 (2,457) Accounts payable and other current liabilities (1,441) 9,008 Other (3,773) (2,366) -------- -------- Net cash from operating activities 13,465 51,782 -------- -------- -------- -------- INVESTING ACTIVITIES Capital expenditures (33,050) (20,194) Proceeds from sale of property and equipment 608 3,248 Investments in and advances to equity affiliates (653) (4,589) Proceeds from sale of affiliate stock 11,067 974 Change in unexpended bond proceeds --- 142 Cash increase due to consolidation of subsidiary --- 9,963 Other (295) (781) -------- -------- Net cash for investing activities (22,323) (11,237) -------- -------- -------- -------- FINANCING ACTIVITIES Proceeds from long-term debt 9,452 --- Repayments on long-term debt (429) (33,369) Common stock issuance 1,110 863 Dividends paid (2,578) (2,592) Other (218) --- -------- -------- Net cash from (for) financing activities 7,337 (35,098) -------- -------- -------- -------- Effect of foreign exchange rate changes on cash (368) (680) (Decrease) increase in cash and cash equivalents (1,521) 5,447 Cash and cash equivalents, beginning of period 8,568 1,303 -------- -------- Cash and cash equivalents, end of period $ 6,679 $ 6,070 -------- -------- -------- --------
The accompanying notes are an integral part of these statements. 6 DONNELLY CORPORATION NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS March 28, 1998 NOTE A---BASIS OF PRESENTATION The accompanying unaudited condensed combined consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended March 28, 1998, should not be considered indicative of the results that may be expected for the year ended June 27, 1998. The combined consolidated balance sheet at June 28, 1997, has been taken from the audited combined consolidated financial statements and condensed. The accompanying condensed combined consolidated financial statements and footnotes thereto should be read in conjunction with the Company's annual report on Form 10-K for the year ended June 28, 1997. Certain reclassifications have been made to current and prior year, previously released, data to conform to the current presentation and had no effect on net income reported for any period. The Company's fiscal year is the 52 or 53 week period ending the Saturday closest to June 30. Accordingly, each quarter ends on the Saturday closest to the calendar quarter end. Both the quarters ended March 28, 1998, and March 29, 1997, included 13 weeks. NOTE B---INVENTORIES Inventories consist of: March 28, June 28, (In thousands) 1998 1997 - ------------------------------------------------------------------ FIFO and average cost: Finished products and work in process $ 17,531 $ 16,675 Raw materials 25,853 25,809 -------- -------- $ 43,384 $ 42,484 -------- -------- -------- --------
Note C---Earnings Per Share Effective December 27, 1997, the Company has adopted the provisions of Statement of Financial Accounting Standards No. 128, Earnings per Share. Statement No. 128 replaces 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 and convertible securities. Diluted earnings per share is computed similarly to fully diluted earnings per share. All earnings per share amounts for all periods presented have been restated to conform to the requirements of Statement No. 128. 7 The following table sets forth the computation of basic and diluted earnings per share for each period reported: Three Months Ended Nine Months Ended March 28, March 29, March 28, March 29, 1998 1997 1998 1997 - ----------------------------------------------------------------- Net income $3,373,000 $2,958,000 $9,528,000 $8,597,000 Less: Preferred stock dividends (9,959) (9,959) (29,877) (29,877) --------- --------- --------- --------- Income available to common stockholders 3,363,041 2,948,041 9,498,123 8,567,123 --------- --------- --------- --------- --------- --------- --------- --------- Weighted-average shares 9,963,706 9,848,733 9,932,265 9,822,335 Plus: Effect of dilutive stock options 135,196 161,962 143,976 154,263 --------- --------- --------- --------- Adjusted weighted-average shares 10,098,902 10,010,695 10,076,241 9,976,598 ---------- ---------- ---------- --------- ---------- ---------- ---------- --------- Basic earnings per share $ 0.34 $ 0.30 $ 0.96 $ 0.87 ---------- ---------- --------- --------- ---------- ---------- --------- --------- Diluted earnings per share $ 0.33 $ 0.29 $ 0.94 $ 0.86 ---------- ---------- --------- --------- ---------- ---------- --------- ---------
NOTE D---SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Nine Months Ended March 28, March 29, (In thousands) 1998 1997 - ----------------------------------------------------------------- Cash paid during the period for: Interest $ 6,269 $ 7,437 Income taxes $ 751 $ 8,575 Non-Cash investing activities: Transfer of non-cash net assets to equity-method affiliate (See Note E) $ 7,845 $ ---
8 NOTE E---INVESTMENTS IN AND ADVANCES TO AFFILIATES On November 3, 1997, the Company formed Lear-Donnelly Overhead Systems, L.L.C. ('Lear-Donnelly'), a 50% owned joint venture with Lear Corporation ('Lear'), based in Southfield, Michigan, one of the world's largest independent automotive suppliers. Lear- Donnelly is engaged in the design, development and production of overhead systems for the global automotive market, including complete overhead systems, headliners, consoles and lighting components, vehicle electrification interfaces, electronic components, visors and assist handles ('products'). The Company and Lear each contributed certain technologies, assets and liabilities for the creation of the joint venture. The Company transferred net assets of $7.8 million associated with its interior trim and lighting businesses, including $10 million of debt, to the joint venture for its 50% interest. Lear-Donnelly manufactures products for sale to both the Company and Lear, who are responsible for the customer sales efforts to the original equipment manufacturers. Because existing and certain future contracted sales have been retained by the Company, the existence of the joint venture does not significantly impact the comparability of net sales or net income of the Company from period to period. However, due to the supply agreement between Lear- Donnelly and the parent companies and the related net earnings of the joint venture being accounted for under the equity method, the Company's gross profit and operating margins are expected to be unfavorably impacted. In the second quarter of 1998, the Company sold its 50% interest in Applied Films Corporation ('AFC') located in Boulder, Colorado. As a result of this sale, the Company received $7.9 million in net proceeds, after taxes and related out of pocket fees, and recognized a one-time pretax gain of approximately $4.6 million, or $0.22 per share after tax. AFC is primarily a manufacturer of thin-film glass coatings and related production equipment used in the production of liquid crystal displays. The Company sold all of its shares in AFC during an initial public offering that was completed in November. NOTE F---GLOBAL REVOLVER In September 1997, the Company entered into an unsecured $160 million multi-currency global revolving credit agreement to meet the financing needs of Donnelly Corporation and its majority owned, controlled subsidiaries. This multi-currency revolving credit agreement replaces the Company's previous unsecured $80 million domestic credit agreement and its 75 million Deutsche Mark revolving Eurocredit loan agreement. Borrowings under this agreement bear interest, at the election of the Company, at a floating rate equal to (i) the Federal Funds Funding rate plus .385% to .875% or (ii) the Eurodollar rate plus .185% to .675% based on specific financial ratios of the Company. The Company's initial borrowings under the agreement bear interest at a floating rate of approximately 3.5-4.0% per annum when borrowed in Deutsche Marks and 5.7-6.0% per annum when borrowed in U.S. Dollars. This new revolving credit agreement terminates in September 2004, with an opportunity for the Company to extend for one year periods with the consent of all the revolver banks. 9 Item 2. DONNELLY CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THIRD QUARTER REPORT FOR THE NINE MONTHS ENDED MARCH 28, 1998 On November 3, 1997, the Company formed Lear-Donnelly Overhead Systems, L.L.C. ('Lear-Donnelly'), a 50% owned joint venture with Lear Corporation ('Lear'), based in Southfield, Michigan, one of the world's largest independent automotive suppliers. Lear- Donnelly is engaged in the design, development and production of overhead systems for the global automotive market, including complete overhead systems, headliners, consoles and lighting components, vehicle electrification interfaces, electronic components, visors and assist handles ('products'). The Company and Lear each contributed certain technologies, assets and liabilities for the creation of the joint venture. The Company transferred net assets of $7.8 million associated with its interior trim and lighting businesses, including $10 million of debt, to the joint venture for its 50% interest. Lear-Donnelly manufactures products for sale to both the Company and Lear, who are responsible for the customer sales efforts to the original equipment manufacturers. Because existing and certain future contracted sales have been retained by the Company, the existence of the joint venture does not significantly impact the comparability of net sales or net income of the Company from period to period. However, due to the supply agreement between Lear- Donnelly and the parent companies and the related net earnings of the joint venture being accounted for under the equity method, the Company's gross profit and operating margins are unfavorably impacted. On February 3, 1998, the Company reached a final settlement with Happich Fahrzeug-Innausstaltung GmbH ('Happich') regarding Happich's withdrawal from Donnelly Happich Technology, Inc. ('DHT'), a joint venture for the production of interior trim components, see Part II, Item 1 for a more detailed discussion. As a result of the settlement, the Company now owns 100% of DHT (rather than 60%), resulting in increased charges against earnings from start-up costs of DHT. However, the Company also received payments from Happich for past and future damages and for costs incurred as a result of Happich's withdrawal from DHT which offset the additional start-up costs, resulting in a positive impact on net income in the first and second quarters. The settlement had no impact on the Company's net income in the third quarter. In the second quarter of 1997, the Company acquired a controlling interest in the general partner of Donnelly Hohe, and therefore, began consolidating the financial statements of Donnelly Hohe with those of the Company. Prior to acquiring control of the general partner, the Company's investment in Donnelly Hohe was accounted for using the equity method. Because the Company's limited partnership interest has remained unchanged, the impact on net income has remained unchanged for each period reported. The Company's fiscal year ends on the Saturday nearest June 30, and its fiscal quarters end on the Saturdays nearest September 30, December 31, March 31 and June 30. Donnelly Hohe's fiscal year ends on May 31, and its fiscal quarters end on August 31, November 30, February 28 and May 31. Accordingly, the Company's Combined Consolidated Financial Statements as of or for a period ended on a particular date include Donnelly Hohe's financial statements as of or for a period ended approximately 10 one month before that date. Accordingly, the Company's financial statements for the period ended March 28, 1998, consolidate Donnelly Hohe's financial statements for the period ended February 28, 1998. The Company's net sales and net income are subject to significant quarterly fluctuations attributable primarily to production schedules of the Company's major automotive customers. These same factors cause quarterly results to fluctuate from year to year. The comparability of the Company's results on a period to period basis may also be affected by the Company's formation of new joint ventures, alliances, acquisitions, and substantial investment in new product lines. RESULTS OF OPERATIONS Net sales were $193.7 million in the third quarter of 1998 compared to $181.7 million for the third quarter of 1997. For the nine month period, net sales were $553.6 million and $483.1 million for 1998 and 1997, respectively, an increase of 14.6% which is primarily attributed to the consolidation of Donnelly Hohe. Excluding the consolidation of Donnelly Hohe, consolidated net sales for the first nine months of 1998 increased by approximately 5% compared to 1997. Net sales for the Company's North American operations increased by approximately 10.8% and 9.9% in the third quarter and for the first nine months of 1998 compared to 1997, respectively. The increase was primarily due to programs launched in 1997 running at full production volumes and new product introductions in the modular window, door handle and interior trim product lines. North American car and light truck build was flat in the third quarter and increased only moderately for the nine-month period. Net sales for the Company's European operations, as reported in the local currencies for these operations were slightly higher in the third quarter of 1998 compared to 1997 and increased moderately in the first nine months of 1998, compared to the same period in 1997, excluding the impact of the consolidation of Donnelly Hohe. However, due to the increased strength of the dollar to the Deutsch Mark, Irish Punt and French Franc for the third quarter and first nine months of 1998 as compared to the third quarter and first nine months of 1997, the reported consolidated net sales in dollars for the Company's European operations were flat quarter to quarter and down slightly compared to the first nine months of 1997, excluding the impact of the consolidation of Donnelly Hohe. Gross profit margin for the third quarter of 1998 was 16.9% compared to 18.3% for the third quarter of 1997 and 17.0% and 18.9% for the nine month periods of 1998 and 1997, respectively. The Company's North American gross profit margins for the three and nine month periods were lower compared to the same periods in 1997 primarily due to the formation of the Lear-Donnelly joint venture and relatively greater revenue growth of products with lower profit margins. The Company's North American operations have experienced a more rapid rate of revenue growth in modular window net sales, relative to the net sales growth of other products, such as mirrors, that have higher profit margins. The Company may experience a change in gross profit margin from period to period based on the sales growth or change in mix of higher or lower margin products. The favorable arbitration award associated with DHT offset excess costs on the visor program in the first and second quarters and improved margins slightly for the first nine month of 1998. Some of the excess costs are expected to continue in the future. The Company's European gross profit margin in the third quarter was stronger than 1997 due to higher volumes at the Company's German operations, strong performance in Spain and France and operational improvements in Ireland. For the nine month period, the Company's European gross profit margin, as a percent to sales, was down slightly. 11 Selling, general and administrative expenses decreased to 9.0% of net sales in the third quarter of 1998 from 10.2% of net sales in the third quarter of 1997, primarily due to the formation of the Lear-Donnelly joint venture. These costs are lower as a percent to sales due to certain general and administrative expenses to support the interior trim and lighting business transferring to the joint venture, which is accounted for under the equity method. Selling, general, and administrative expenses were 9.0% of net sales for the first nine months of 1998 compared to 9.8% for the same period last year. Discount fees of $1.7 million associated with asset securitization entered into in November 1996 are also included in selling, general and administrative expenses for the first nine months of 1998, compared to $1.0 million of discount fees for the first nine months of 1997. Research and development expenses for the third quarter of 1998 were 4.4% of net sales compared to 5.2% of net sales for the third quarter of 1997 and were 5.1% and 5.2% of net sales for the first nine months of 1998 and 1997, respectively. The Company expects future research and development expenses to be lower than in the past, primarily due to the transfer of direct expenses to support the interior trim and lighting business to the Lear-Donnelly joint venture, which is being accounted for under the equity method and due to the consolidation of Donnelly Hohe. The Company's operating income was $6.7 million in the third quarter of 1998, up from $5.4 million in the third quarter of 1997 and for the nine month period was $16.1 million, down from $18.9 million in 1997. The Company's North American operating income was lower as a percent to sales for the three and nine months periods primarily due to losses associated with the start-up of Donnelly Optics and an unfavorable product mix. A favorable arbitration award associated with DHT offset excess costs on the visor program in the first and second quarters and improved margins for the nine month period slightly. Some of the excess costs are expected to continue in the future. The formation of the Lear-Donnelly joint venture did not have a significant impact on the Company's North American operating income. The Company's European operating income was favorably impacted for the quarter due to higher volumes at the Company's German operations, strong performance in Spain and France and operational improvements in Ireland. Operating Income for the Company's European operations, as a percent to sales, was flat for the nine month period compared to 1997. In Germany, plans for restructuring the operations have been delayed due to the change in management at Donnelly Hohe. A modified restructuring plan is in the process of being implemented in the fourth quarter of 1998. Interest expense was $2.0 and $6.7 million in the third quarter and first nine months of 1998, respectively, compared to $2.7 and $7.7 million for the third quarter and first nine months of 1997, respectively. Interest expense was lower primarily due to lower average debt during the quarter compared to the same period last year and favorable interest rates. In the second quarter of 1997, the Company entered into an agreement to sell an interest in a defined pool of trade accounts receivable. As of the Company's Consolidated Balance Sheet, dated March 28, 1998, a $41.5 million interest in accounts receivable was sold under this agreement, with proceeds used to reduce revolving lines of credit. The discount expense associated with this transaction is included in selling, general and administrative expenses. Royalty income was $0.2 million and $0.1 million for the third quarter of 1998 and 1997, respectively, and $0.5 million and $1.2 million for the nine month periods, respectively. Royalty income is lower due to the completion of various licensing agreements with companies in Asia. Other income was $0.6 million and $0.4 million for the third quarter of 1998 and 1997, respectively, and $0.6 million and $1.3 million for the nine month periods, respectively. Other income is slightly higher in the third quarter of 1998, compared to the previous year, due to the sale of certain operating assets, as well as a favorable 12 gain on foreign currency transactions. In the second quarter of 1997, the Company sold 2.5% of its holding in Vision Group plc ('Vision Group'), resulting in a $0.9 million gain. In the second quarter of 1998, the Company recognized a one-time pretax gain of approximately $4.6 million, or $0.22 per share after tax, from the sale of its 50% interest in Applied Films Corporation ('AFC') located in Boulder, Colorado. The Company sold all of its shares in AFC during an initial public offering that was completed in November 1997. As a result of this sale, the Company received $7.9 million in net proceeds, after taxes and related fees. The Company's effective tax rate was 24.8% and 33.1% for the three and nine month periods ended March 28, 1998, respectively. This compares to 36.3% and 37.2% for the respective comparable periods for 1997. The lower effective tax rate for the quarter is due to a tax benefit recognized on trade income taxes in the period at the Company's German operations. Minority interest in net (income) loss of subsidiaries was $0.0 million in the third quarter of 1998 compared to $0.5 million in the third quarter of 1997 and $0.2 million and ($0.1) million in the first nine months of 1998 and 1997, respectively. Equity in earnings (losses) of affiliated companies was ($0.9) million in the third quarter of 1998 compared to $0.3 million for the same period in 1997 and ($1.1) million and ($0.3) million in the first nine months of 1998 and 1997, respectively. Equity earnings were also lower in the third quarter and nine month periods due to losses incurred at Vision Group. The losses were incurred due to slower than anticipated consumer acceptance for Vision Group's integrated camera microchip products. In the first quarter of 1997, the Company accounted for its investment in Donnelly Hohe under the equity method of accounting. The formation of the Lear-Donnelly joint venture did not have a significant impact on the Company's equity earnings for the three or nine month periods. Net income was $3.4 million in the third quarter of 1998, compared to $3.0 million for the third quarter of 1997 and $9.5 million and $8.6 million for the first nine months of 1998 and 1997, respectively. Net income for the nine month periods included a $2.2 million net gain after taxes associated with the sale of AFC. The Company recognized a net gain of approximately $0.7 million in the second quarter of 1998, and $1.2 million in the first half of 1998, associated with the cash settlement following a favorable interim DHT arbitration award granted to the Company on July 31, 1997. This expected cash settlement was based upon recovery of past and future losses and the recovery of litigation costs. The consolidation of Donnelly Hohe did not impact the comparability of net income from 1997 to 1998 for the third quarter or the nine month periods. The Company continues to focus on implementing plans during 1998 to improve financial performance. However, the delays in implementing improvements Europe and the investments required for Donnelly Optics are making it difficult to improve the financial performance of the Company. Donnelly Optics continues to experience major losses due to slower-than-expected consumer acceptance of digital imaging products. The Company is currently evaluating options for responding to the market conditions. LIQUIDITY AND CAPITAL RESOURCES In September 1997, the Company entered into a new unsecured $160 million multi-currency global revolving credit agreement to meet the financing needs of Donnelly Corporation and its majority owned, controlled subsidiaries. This multi-currency revolving credit agreement replaces the Company's previous unsecured $80 million domestic credit agreement and its 75 million Deutsche Mark revolving 13 Eurocredit loan agreement. Borrowings under this agreement bear interest, at the election of the Company, at a floating rate equal to (i) the Federal Funds Funding rate plus .385% to .875% or (ii) the Eurodollar rate plus .185% to .675% based on specific financial ratios of the Company. The Company's initial borrowings under the agreement bear interest at a floating rate of approximately 3.5- 4.0% per annum when borrowed in Deutsche Marks and 5.7-6.0% per annum when borrowed in U.S. Dollars. This new revolving credit agreement terminates in September 2004, with an opportunity for the Company to extend for one year periods with the consent of all the revolver banks. The Company's $160 million multi-currency global revolving credit agreement had borrowings against it of $41.1 million in the Company's Combined Consolidated Balance Sheet dated March 28, 1998, compared to no borrowings against the Company's $80 million bank revolving credit agreement and borrowings of $33.4 million against the Company's 75 million Deutsche Mark (approximately $41 to $44 million) credit agreement in the Company's Combined Consolidated Balance Sheet dated June 28, 1997. These credit agreements were replaced by the $160 million revolver in September 1997. The Company's long-term borrowing decreased by $4.2 million from June 28, 1997, to March 28, 1998, primarily due to lower working capital requirements for the period, proceeds associated with the sale of the Company's investment in AFC and the transfer of debt to the Lear-Donnelly joint venture, offset by borrowing to support capital expenditures. The Company's current ratio was 1.4 and 1.3 at March 28, 1998 and June 28, 1997, respectively. Working capital was $39.1 million at March 28, 1998, compared to $37.0 million at June 28, 1997. The increase in working capital at March 28, 1998, was primarily due to a decrease in accounts payable combined with an increase in accounts receivable, compared to June 28, 1997, offset by a decrease in prepaid tooling for the same period. Accounts payable at June 28, 1997, was higher than normal due to timing of payments on account at this date. Capital expenditures for the first nine months of 1998 and 1997 were $33.1 and $20.2 million, respectively. Capital spending in 1998 is expected to be higher compared to the previous year due to the consolidation of Donnelly Hohe for the entire twelve month period, business in diffractive optics and electrochromic mirrors and implementation of new manufacturing, distribution and administrative systems in North America and Europe. 1998 capital spending includes expenditures on assets for the interior lighting and trim business through November 3, 1997. The Company believes that its long term liquidity and capital resource needs will continue to be provided principally by funds from operating activities, supplemented by borrowings under the Company's existing credit facilities. The Company also considers equity offerings to properly manage the Company's total capitalization position. The Company considers, from time to time, new joint ventures, alliances and acquisitions, the implementation of which could impact the liquidity and capital resource requirements of the Company. Except for Mexico, the value of the Company's consolidated assets and liabilities located outside the United States and income and expenses reported by the Company's foreign operations may be affected by translation values of various functional currencies. Translation gains and loss adjustments are reported as a separate component of shareholders' equity. For the Company's subsidiary in Mexico, whose functional currency is the United States Dollar, transaction and translation gains or losses are reflected in net income for all accounts other than intercompany balances of a long- term investment nature, for which the translation gains or losses are reported as a separate component of shareholders' equity. 14 The Company utilizes interest rate swaps and foreign exchange contracts, from time to time, to manage exposure to fluctuations in interest and foreign currency exchange rates. The risk of loss to the Company in the event of nonperformance by any party under these agreements is not material. 'Safe Harbor' Provisions This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that any forward-looking statements, including statements regarding the intent, belief, or current expectations of the Company or its management, are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those in forward-looking statements as a result of various factors including, but not limited to (i) general economic conditions in the markets in which the Company operates, (ii) fluctuation in worldwide or regional automobile and light truck production, (iii) changes in practices and/or policies of the Company's significant customers and (iv) other risks and uncertainties. The Company does not intend to update these forward-looking statements. Recently Issued Accounting Standards SFAS No. 130, 'Reporting Comprehensive Income,' establishes standards for reporting and display of comprehensive income, its components and accumulated balances in a financial statement that is displayed with the same prominence as other financial statements. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. SFAS No. 131, 'Disclosures about Segments of an Enterprise and Related Information,' which supersedes SFAS No. 14, 'Financial Reporting for Segments of a Business Enterprise,' establishes standards for the way that public enterprises report information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. SFAS Nos. 130 and 131 are effective for financial statements for fiscal years beginning after December 15, 1997, and require comparative information for earlier years to be restated. Management has not yet fully evaluated the impact, if any, they may have on future financial statement disclosures. However, results of operations and financial position will be unaffected by implementation of these new standards. SFAS No. 132, 'Employer's Disclosures about Pensions and Other Postretirement Benefits,' an amendment of FASB Statements No. 87, 88, and 106, revises the standards for employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or the recognition of those plans. This Statement is effective for fiscal years beginning after December 15, 1997, and requires comparative information for earlier periods to be restated. Results of operations and financial position of the Company will be unaffected by implementation of this new standard. SOP 98-1, 'Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,' provides guidance on accounting for the costs of computer software developed or obtained for internal use and requires certain costs incurred to be expensed or capitalized depending on the stage of its development and nature. This Statement of Position is effective for fiscal years beginning after December 15, 1998. The Company's current accounting policy complies with this Statement. Results of operations and financial position of the Company will be unaffected by this new standard. 15 SOP 98-5, 'Reporting on Costs of Start-Up Activities,' requires costs of start-up activities and organization costs to be expensed as incurred. This Statement of Position is effective for fiscal years beginning after December 15, 1998. Management has not fully evaluated the impact of this standard on results of operations and financial position of the Company. No other recently issued accounting standards are expected to have a material impact on the Company. Year 2000 Date Conversion The Company has established an ongoing process to identify and resolve the business issues associated with the Year 2000. The Year 2000 problem is the result of computer programs being written using two digits (rather than four) to define the applicable year. Any of the Company's programs, and programs at the Company's customers or suppliers, that have time-sensitive software may recognize a date using '00' as the year 1900 rather than the year 2000, which could result in miscalculations or system failures. A global team of professionals has been assigned responsibility for addressing the business issues and monitoring progress toward their resolution. In addition, executive management regularly monitors the status of the Company's Year 2000 remediation plans. Based on preliminary information, costs of addressing the Year 2000 issues are not currently expected to have a materially adverse impact on the Company's financial position, results of operations or cash flows in future periods. However, if the Company, its customers or vendors are unable to complete critical Year 2000 compliance efforts in a timely manner, it could result in a material financial risk. Management believes it is devoting the necessary resources to resolve all known significant Year 2000 issues in a timely manner. The Company will expense any maintenance or modification costs incurred to resolve this issue while the costs of new software will be capitalized and amortized over the software's useful life. 16 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On January 21, 1997, Midwest Manufacturing Holdings, L.L.C. ('Midwest') filed a lawsuit against the Company in Cook County, Illinois Circuit Court with respect to terminated discussions regarding the possibility of Midwest's acquisition of the Company's Information Products business. The litigation has been removed to the Federal District Court for the Northern District of Illinois. Midwest alleges that a verbal agreement to purchase the Information Products business had been reached, and has filed its lawsuit in an attempt to compel the Company to proceed with the sale or to pay Midwest damages. On August 28, 1997, the court granted the Company's motion to dismiss one of three counts and on February 5, 1998, the court granted the Company's motion for summary judgment on the remaining two counts. Midwest has appealed the court's decision to the U.S. Seventh Circuit Court of Appeals. Management believes that the claim by Midwest will be resolved without a material effect on the Company's financial condition or results of operations and liquidity. In June 1994, the Company entered into a joint venture with Happich Fahrzeug-InnausstaHung GmbH of Germany ('Happich') to manufacture and sell sun visors, grab handles and other interior parts in North America. In 1995, when the joint venture was at an early stage of its development, Happich expressed its desire to terminate the joint venture. The parties had been engaged in arbitration over the terms of the joint venture termination since July 29, 1996. On July 31, 1997, the Company was granted an interim arbitration award favorable to the Company. On February 3, 1998, the Company reached a final settlement with Happich on all outstanding issues. As a result of the settlement, the Company owns 100% of the former joint venture, received payment for damages and costs incurred and entered into other agreements with respect to certain technology and the supply of parts. The Company and its subsidiaries are involved in certain other legal actions and claims, including environmental claims, arising in the ordinary course of business. Management believes that such litigation and claims will be resolved without material effect on the Company's financial position, results of operations and liquidity, individually and in the aggregate. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS Exhibit 10.1 An English language translation of an Amendment dated March 23, 1998, amending the Acquisition Agreement between the Registrant, Donnelly Holding GmbH, Donnelly Hohe GmbH & Co. KG and the other parties thereto, dated May 25, 1995. Exhibit 27 Financial Data Schedules 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunder duly authorized. DONNELLY CORPORATION Registrant Date: May 7, 1998 /s/ J. Dwane Baumgardner J. Dwane Baumgardner (Chairman, Chief Executive Officer, and President) Date: May 7, 1998 /s/ Ronald L. Winowiecki Ronald L. Winowiecki (Chief Accounting Officer) EX-10.1 2 1 EXHIBIT 10.1 [TRANSLATION] AGREEMENT between Donnelly Holding GmbH seated in Collenberg, registered in the Commercial Register of the local court Aschaffenburg under No. HRB 6031, represented by the Managing Director Dr. Dwane Baumgardner, who has sole power of representation (Hereinafter referred to as 'Donnelly') and Mr. Paul Hohe, Mrs. Elisabeth Hohe, Mr. Peter Hohe, Dr. Maria Hohe-Schramm, Mrs. Margarete Meyer (Hereinafter jointly referred to as the 'Hohe Family' and individually referred to as 'Member of the Hohe Family' or 'Family Member') 2 Preamble The parties to this Agreement are parties to the Acquisition Agreement made and entered into (with the participation of further persons) on 25th May 1995 (hereinafter referred to as the 'Acquisition Agreement') in relation to Donnelly Hohe GmbH & Co. KG seated in Collenberg and registered in the Commercial Register at the local court of Aschaffenburg under number HRA 1546 (hereinafter referred to as the 'Company'). Donnelly set forth warranty claims against the Hohe Family under the Acquisition Agreement. The parties disagree on whether and up to which amount such claims are justified. In view of a settlement of the differences in opinion the parties hereto agree to make the following modifications and add the following supplemental provisions to the Acquisition Agreement, particularly in regard to the mutually granted call options and put options. The remaining provisions of the Acquisition Agreement remain unchanged unless modified in the following. (1) In derogation of the call option granted to Donnelly in Section 1.5 lit. B) subsection (2) and the terms agreed in this section for a purchase, the parties hereto hereby agree as follows: The date of March 31st, 1998 is (due to the change of the fiscal year) replaced by May 31, 1998 which is the date on which the exercise of a call option under Section 1.5 lit. B) subsection 2 can become effective for the first time. The minimum price of DM 1.5 million fixed in Section 1.5 lit. B) subsection (2) payable to each Member of the Hohe Family as consideration for the entire limited partnership interest held by the Members including al shareholders' accounts and all earlier payments to the individual Member of the Hohe Family is replaced by a minimum price of DM 1 million payable to each member of the Hohe Family, which makes the price total DM 5 million. (2) As to the put options granted to the Members of the Hohe Family in Section 1.5 lit. A) (Put-Option) the parties hereto agree as follows: The minimum price of DM 500,000 fixed in Section 1.5 lit. A) as price payable to each Member of the Hohe Family is replaced by a minimum price of DM 600,000 if the put option is exercised to take effect on a date later than May 31, 1999. (3) In derogation of Section 1.5 lit. D) sentence 1 of the Acquisition Agreement the transfer of the individual limited partner interest becomes effective upon the exercise of the option and the registration of the change in the limited partnership in the Commercial Register. (4) In view of a possible increase of taxes (income tax and church tax) payable by the 3 Hohe Family on account of the cause that the Members of the Hohe Family's are limited partners of the company, the parties hereto agree as follows: (a) If the following extraordinary depreciations and reserves for galvonics in the annual financial statement of March 31, 1995 - depreciation DM 1,400,000 for galvonics (Cf. Audit report explanatory narrative Tz 7). - threatening losses for galvonic orders DM 130,000 (Cf. Audit report explanatory narrative Tz 48). - reorganization costs for galvonics DM 300,000 (Cf. Audit report explanatory narrative Tz 48 - part of the amount of DM 2,143,000) should qualify as inappropriate and therefore, be reversed and lead to an increase of taxes payable by the Hohe Family, the Members of the Hohe Family are entitled to draw Company funds for this increase without any effect on the purchase price upon the exercise of the put options or call options; this provision also applies in case an eventual reverse is effected for fiscal years other than 1994/95. If a Member of the Hohe Family is no longer shareholder at the point of time when the tax increase accrues and falls due, the option price is subsequently increased by the required amount; the increase of the option price falls due as son as the accrual and maturity of the tax increase is proven to Donnelly. Article 13 (2) lit. A) of the Partnership Agreement applies mutatis mutandis to the computation and evidence of such tax increases. The amounts in question are limited to a total of DM 500,000 and to DM 100,000 for each Member of the Hohe Family. (b) The foregoing paragraph a) applies mutatis mutandis to possible tax increases payable by the Members of the Hohe Family in consequence of the tax audits for the years 1988/89 to 1991/92 provided that only 50% of such tax increases are taken into account and on condition that it is proven to Donnelly that the losses carried forward for tax purposes for each Member of the Hohe Family as per 31st March 1995 come to at least DM 500,000. (c) The parties hereto agree that it follows from the foregoing reference to 13 (2) a) of the Partnership Agreement that tax increases under this paragraph 4 can only be taken into account as far as increases in profits cannot be compensated by losses carried forward resulting from interest held in the Company. (5) The Hohe Family assures to have paid in the DM 500,000 liability amount for each 4 Member of the Hohe Family (except for the amount paid by Paul Hohe) and that no repayments have been or will made before the registration of Donnelly in the commercial Register upon the exercise of the options. Furthermore, the Hohe Family guarantees that no property takeover liability pursuant to 419 BGB will be triggered off for the Members of the Hohe Family by the sale effected by the exercise of the options. (6) The Members of the Hohe Family signed the Powers of Attorney attested by a public notary and attached as Annex 1 to this agreement. The Powers of Attorney authorize Donnelly Hohe Verwaltungs-GmbH seated in Collenberg and registered in the Commercial Register of the local court of Aschaffenburg under No. HRB 4438, to apply for registration of the change in the limited partnership in the Commercial Register. (7) The Hohe Family is released from any and all warranty liabilities under the Acquisition Agreement. (8) The non-competition clause 4.2 of the Acquisition Agreement is relaxed as follows for the period following the withdrawal from the Company. Peter Hohe and Dr. Maria Hohe-Schramm shall be entitled to become active in business areas of the Company other than the manufacture of car mirrors in the event that they do now longer hold an interest in the Company and that their employment with the Company is terminated by the Company and has effectively ended. (9) All other provisions of the Acquisition Agreement remain unchanged and in full force and effect unless already implemented. Collenberg, (Date) March 20, 1998 /s/Dwane Baumgardner Donnelly Holding GmbH /s/Paul Hohe /s/Elisabeth Hohe /s/Dr. Maria Hohe-Schramm /s/Peter Hohe /s/Margarete Meyer 5 Read and approved: Collenberg March 23, 1998 /s/Dwane Baumgardner Place/Date Donnelly Corporation, Michigan /s/Hans Huber Collenberg March 23, 1998 /s/Peter Turzer Place/Date Donnelly Hohe GmbH & Co. KG /s/Hans Huber Collengerg March 23, 1998 /s/Peter Turzer Place/Date Donnelly Hohe Verwaltungs-GmbH EX-27 3
5 This schedule contains summary financial information extracted from the March 28, 1998 Donnelly Corporation financial statements and is qualified in its entirety by reference to such financial statements. 9-MOS JUN-27-1998 MAR-28-1998 6679 0 75137 881 43384 149242 295409 127892 359798 110118 118606 0 531 1002 97486 359798 553634 553634 459432 459432 0 0 6711 15591 5156 10435 0 0 0 9528 0.96 0.94
EX-27 4
5 This schedule contains summary financial information extracted from the March 29, 1997 Donnelly Corporation financial statements and is qualified in its entirety by reference to such financial statements. 9-MOS JUN-28-1997 MAR-29-1997 6070 0 69138 879 45310 154233 287537 130377 347518 110242 117017 0 531 991 93942 347518 483118 483118 391878 391878 0 0 7654 14101 5369 9032 0 0 0 8597 0.87 0.86
EX-27 5
5 This schedule contains summary financial information extracted from the December 27, 1997 Donnelly Corporation financial statements and is qualified in its entirety by reference to such financial statements. 6-MOS JUN-27-1998 DEC-27-1997 5783 0 69647 949 43226 151327 290028 124699 358590 102041 128343 0 531 998 96079 358590 359976 359976 298423 298423 0 0 4694 9909 3748 6161 0 0 0 6155 0.62 0.61
EX-27 6
5 This schedule contains summary financial information extracted from the December 28, 1996 Donnelly Corporation financial statements and is qualified in its entirety by reference to such financial statements. 6-MOS JUN-28-1997 DEC-28-1996 10794 0 86048 939 47142 176592 295968 133876 372666 117681 135045 0 531 790 94270 372666 301437 301437 243518 243518 0 0 4991 11021 4143 6878 0 0 0 5639 0.57 0.56
EX-27 7
5 This schedule contains summary financial information extracted from the September 27, 1997 Donnelly Corporation financial statements and is qualified in its entirety by reference to such financial statements. 3-MOS JUN-27-1998 SEP-27-1997 9462 0 57580 959 45020 147614 288563 122799 360243 97119 142509 0 531 994 91258 360243 165176 165176 137203 137203 0 0 2404 712 15 697 0 0 0 986 0.10 0.10
EX-27 8
5 This schedule contains summary financial information extracted from the September 28, 1996 Donnelly Corporation financial statements and is qualified in its entirety by reference to such financial statements. 3-MOS JUN-28-1997 SEP-28-1996 5652 0 80426 571 27040 139966 160865 60902 288870 67313 113366 0 531 789 87744 288870 113400 113400 90252 90252 0 0 1957 3149 1171 1978 0 0 0 1722 0.18 0.17
EX-27 9
5 This schedule contains summary financial information extracted from the June 28, 1997 Donnelly Corporation financial statements and is qualified in its entirety by reference to such financial statements. 12-MOS JUN-28-1997 JUN-28-1997 8568 0 67850 1064 42484 152640 286451 121327 358293 115649 122798 0 531 991 92305 358293 671297 671297 544629 544629 0 0 9530 12005 2786 9219 0 0 0 10020 1.01 1.00
EX-27 10
5 This schedule contains summary financial information extracted from the June 29, 1996 Donnelly Corporation financial statements and is qualified in its entirety by reference to such financial statements. 12-MOS JUN-29-1996 JUN-29-1996 1303 0 73123 571 24228 126695 157161 57397 271492 63213 101757 0 531 787 87534 271492 439571 439571 357830 357830 0 0 8102 12349 4191 8158 0 0 0 8454 0.86 0.85
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